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Is it a dip or is it something else?

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        1-12-98         High     Low     Volume   Advances Decline
DOW     9474.68 -145.21 9620.15  9451.77  794,492k    882   2,171
Nasdaq  2320.70 - 63.80 2396.30  2320.21 1109,400k  1,648   2,474 
S&P-100  616.49 - 12.93  630.04   616.02   Totals   2,530   4,645
S&P-500 1239.51 - 24.37 1264.45  1238.25            35.2%   64.8%
$RUT     427.36 -  5.77  434.72   427.22
$TRAN   3206.65 - 79.67 3286.32  3203.80
VIX       29.68 +  3.30   29.82    27.22
Put/Call Ratio      .61

Is it a dip or is it something else?

That is the way the argument went around the office tonight. It happens everytime the market makes a u-turn. Those of us that feel the overall market is just resting and taking a much needed profit taking siesta are beleaguered by the bears beating on the desk.

It is so seldom that the bears get to come out of their cages around here that they tend to take every chance to warn about the coming (in their mind) market correction.

So what is it? Dip or beginning of a correction? In my humble opinion it is a dip. I have been wrong before and will be wrong again. You as investors must consider the facts and make your own decision.

The growing weight of the declining stocks in the major averages finally snow balled into a full fledged rout today. The decliners beat advancers almost 2:1. But in doing so a good thing happened. The leaders, who have been immune to the recent weakness, finally capitulated. MSFT -5.31, IBM -4.19, INTC -4.19. Until the leaders give up some of their profits the corrections are not complete.

Other leaders also suffered but there was a story behind the loss. Lucent -5.06 has fallen for two days on news that it may be paying a stiff premium for Ascend. Investors are worried about dilution caused by Lucent's buying spree. Cisco also lost -6.56 because of Lucent/Ascend deal. Investors have substantial profits in CSCO and concerns that Lucent is now going to be a stronger competitor has them selling to lock in those profits.

The Internets gave back some gains today but in view of the huge profits they generated in the last three weeks a -5.00 (CMGI) loss or a -13.00 (YHOO) is chump change. It is amazing how the media can make a big thing out of any change. +71 Monday for CMGI and it is all hype, -5.00 today and it is "big" losses. I guess if it is sensational it sells. The tip of the real iceberg for the Internet related stocks may have started to appear. An analyst at Morgan Stanley downgraded BRCM on "extreme valuations" and the stock took a severe hit. I know this is not a real Internet stock but in your wildest imagination do you not think some real Internet stocks are huge targets for impending "extreme valuation" downgrades? If a brokerage or two, trying to make a name for themselves, suddenly start downgrading these stocks then the bubble may burst. Just be careful if you continue trading these time bombs.

Giving substance to my dip view is the strong performance by some consumer and cyclical stocks today. Eastman Kodak rose +4.81 after saying sales of film over the holidays was stronger than expected. Disney added +2.31 after launching it's GO web portal site and Gillette tacked on +2.44 on stronger sales. What is significant here is these guys could have been considered possible for the Dogs of the Dow list. They have been shunned for some time and now the strengthening economy are giving them new life.

Every where you look there is increased evidence of a stronger economy, a recovering Asia, a global warming of sorts. But then when you least expect it, a fly in the soup. Brazil. The excuse for the sinking market today was the sinking Brazil economy. Two Brazilian states have said they can't pay their taxes and traders are worried Brazil will not be able to make good on it's IMF promises. The Bovespa dropped -7% on the bleak outlook. Does this really concern us? Yes, but only if they devalue their currency. Now I am not a global economist but it seems that the view is Brazil will do what it has to do to make good. There has been several warnings for some time that a devaluation is possible but Cardosa always does something to reassure the world. Eventually this may bite us but I think it is priced into the current market and only an outright devalue will impact us further.

So, if the world is recovering, as evidenced by stronger commodity prices and increasing consumption, and the U.S. economy is picking up speed then where is the problem. Why should the market crash? The only valid point is over valuation. Compared to what? The current market rally is being fueled by enormous inflows of cash. The tidal wave of currency is the result of the low unemployment and strong consumer spending. Consumer confidence is very high. Interest rates are low. Home buying is setting records. Now before I start sounding like Elaine Garzarelli, Abbey Joseph Cohen or Joe Battaglia I will get off the runaway bull market express. But give me a reason for a correction. I don't see any.

You probably already heard that the Producer Price Index numbers were accidentally released on the Internet again for the second month in a row. The market was "shocked" at the runaway inflation as evidenced by the +.4% increase. The estimates were for +.3%. Runaway?? The core rates skyrocketed to +1.0% in stead of the +.6% expected. Oh what will Greenspan do! The markets will surely react tomorrow! (CNBC rhetoric) S&P futures that had been +1.50 suddenly dropped to -1.50. BUT! Shortly thereafter the real inside numbers revealed that one component caused the huge catastrophic move. Tobacco! Hardly a crisis. Tobacco prices soared a whopping +31% and when taken out of the core rate the rate DROPPED to -.1%. Far below the +.6% expected. Now where was that inflation again? Put down that red phone. No need to call Greenspan just yet.

Now if you ignore the CNBC hype about the huge loss today, who are you going to call? Floor traders maybe? Floor traders were completely UNCONCERNED. Normal, expected, no rush to the exits. Simply normal profit taking. Sure there was not a rush to buy the dip in the last 30 minutes but there was not a rush to sell either. There was two tests of 9500 during the day but the barrier was not really broken until a large sell program came through around 3:PM. The sell program took us down to -166 but only for a brief period. We immediately bounced back up and then rested as if to see if there would be another round of selling. Didn't happen. The day closed quietly, no panic, no screaming.

Positive signs abound. Intel announced earnings after the bell and beat the whisper numbers by a wide margin. They announced +1.19 and the estimates were only +1.07. Intel cited strong high end product sales and new high end products coming to market. INTC traded up strongly after hours. Yahoo also announced better than expected earnings and a 2:1 split. Yahoo had been expected by the retail crowd to maybe announce a 3:1 split so there was some disappointment. Yahoo traded down in after hours and could go either way tomorrow. Which way YHOO goes will determine the sector direction. They are expecting an additional 35 million Internet users next year alone. Their forecast for 1999 revenue is an astounding $2.7 bln. This is a huge increase from this year. The positive forecasts given by Yahoo in the conference call could cover a multitude of sins. Also there is an Internet investor conference the next three days and analysts will be treated to every manner of positive press designed to convince them that the current valuations are cheap. Good trick if they can do it. We expect this to help the Internet sector as well.

After realization that the PPI numbers are not that bad, the S&P futures are now back up +1.00. As I have said repeatedly this does not mean we are destined for a positive open tomorrow. What it does tell us is that investors are not running for the exits yelling fire. There is still complacency and good feelings under the market. I bought the dip today. Until there is a reason to turn bearish I remain a bull. What is does not make me is right. We will not know fore sure until the week is over. My recommendation is as always, look for stocks that did not go down today or went down very little. These are the leaders when the market returns. SUNW, T, SLR, UTX, LOW, MYG, would be good choices.

Good Luck

Jim Brown

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