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Compaq threw a party and very few came!

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        4-12-99           High     Low    Volume  Advances Decline
DOW    10339.51 +165.67 10340.62 10096.69  813,124k  1,670   1,306
Nasdaq  2598.81 +  5.76  2606.24  2526.84 1158,400k  1,945   2,107 
S&P-100  685.45 +  4.11   685.95   672.48   Totals   3,615   3,413
S&P-500 1358.64 + 10.29  1358.69  1333.07            51.4%   48.6%
$RUT     412.32 +  6.46   413.02   400.38
$TRAN   3335.89 - 34.51  3368.32  3314.35
VIX       23.66 +   .75    25.33    23.27
Put/Call Ratio      .51

Compaq threw a party and very few came!

In the wake of Compaq's Friday announcement of their $0.15 estimated earnings shortfall, traders prepared for a market-wide panic, speculating on "the beginning of the end". Remarkably, an early morning sell-off was greeted with a tidal wave of liquidity, lifting the DOW (+166 at 10,339), NASDAQ (+5 at 2,598) and the S&P (+10 at 1,358) to new closing highs. Even the Russell 2000 continued its reversal from support at the 400 mark (+6 at 412). More amazing was the scope of the recovery: The Dow was down -77, but came back 243 points; NASDAQ was -67, rebounding 72 points; the S&P -15 rallied 25 points! In our book, this is good news. Dow 10.5K anyone?

While other box makers and related technology issues got a spanking, Compaq was hauled to the woodshed for a whipping, and deservedly so. Compaq was off $6.88 to $24.13 in today's trading. 7 analyst downgrades ensued in the first hour. The rationale was that CPQ should have known and warned much earlier those earnings would be so poor as to necessitate a 50% haircut. They cited revenue shortfall and increased competitive pressure. No kidding! Come on Mr. Feiffer (CPQ chairman), why delay news like that? You didn't know? You had to wait just one more week in hopes that your corporate clients would make up that $0.15 shortfall you'd already seen? Get real!! That egg on his face from slamming Dell on "only 38% revenue growth" won't wash off easily. In short, Compaq now has a real credibility problem that won't be overcome anytime soon. Salomon Smith Barney swiftly summed up their new 12-month price target - $25. Of course, this put an early scare into traders of Dell, Gateway, Hewlett Packard (who later offered comment that their sales were just fine), IBM, Seagate and related businesses, as these babies were thrown out with Compaq's bath water. Fortunately, most parents remember their children, and in similar fashion, the group recovered substantially from their morning lows, though still down slightly on the day.

Liquidity, Liquidity, Liquidity. When Compaq failed to bring the party indoors, mutual funds awash in retirement cash put some of it to work. Though we don't have exact figures, there are estimates that $16 bln. flowed into mutual funds last week thanks to the April 15 tax deadline. Even more amazing is that $105 bln. of 30-year government bonds are maturing this week, with some of the cash also headed for equities. When all this cash piles up, fund managers have to buy something - anything, in order to produce a return for investors. Naturally, this sparks demand for stocks and the prices rise. Want confirmation? Today, many block trades crossed the tape and volume was high at 845 mln. shares on the Dow and 1.15 bln. on the NASDAQ. As long as the money flows in, probably at least through the end of the week, funds will be buying and dips will be greeted with bullish sentiment. Liquidity makes it happen.

Many of the liquidity beneficiaries are found no further away than you Internet-connected PC or computer network in the form of bandwidth providers and fiber network builders. Take a look at some of today's winners: Sprint (+$5.38), Global Crossing (+$6.31), Level Three (current pick, +$5.25), Williams Communications (+$3.50), PSI Network (+$8.38), Mindspring (+$10.38). Internets, including on-line brokers and bankers racked up more gains too: Schwab (current pick, +$9), E*trade (current pick +$5.88), Netbank (+$39) CMGI (current pick, +$37.63), Excite (+$21.19), Real Networks (current pick +$39.50). We are seeing rotation into these, which bodes well for the sector during rest of the week. Careful. Greed is our enemy. With so much profit, don't be complacent about setting stops thinking that the law of gravity has been repealed. It's fun now, but as one reader wrote, the most pain is caused by twisting your knee to kick yourself in the a-- (backside)!

That said, we are glad to see some of the technicals improving too. To wit, the advance/decline line, though ugly-negative this morning, recovered with 3502 issues up, 3287 down. Volume noted earlier is robust. The Russell 2000 held at 400 and is rising again. The troops are following the generals. Finally, new highs outpaced new lows, 277 to 197. This is really great news, but we are keeping our euphoria in check. Here's why.

We are not out of the woods yet. For your reading pleasure, we add to the wall a bit of worry over which stocks must scale. While liquidity and positive technicals are great for the market, let's look over the rest of the week, particularly tomorrow, when the CPI is reported, and Intel, Motorola, Seagate, Merrill Lynch and Paine Webber all report earnings.

For the CPI, remember oil prices have risen noticeably in light of OPEC and California refinery shutdowns. We think eyes will be watching the energy component of the index and subtracting it from the whole index number. If the result is low, expect no big market changes. If the index adjusted for energy is high, that will start the chain of inflation worries and rising interest rate speculation, which is never good for the market.

More importantly, if any one of those companies mentioned above has an unacceptable surprise, look out below. Most eyes will be watching Intel as it alone could bring down the whole technology sector. Though we suspect Intel will come in on target this quarter, that won't affect the stock too much. Instead, analysts will be most interested in "color" or spin put on Q2's anticipated results. In particular, we want to see what pricing pressure and revenue stream is expected. If that doesn't look so great, analysts expect margins to drop and/or sales to slow, tipping off the market that OEM component suppliers and box makers are in trouble too. KABOOM! It won't be pretty. Gloom and doom aside, Intel will likely tell us of their new strategy focus on networks, e-commerce and solutions. Remember, they recently announced their largest purchase ever of Level One Communications, a high-speed network component manufacturer.

Now, let's try to sum it up. A huge wave of liquidity overcame a potential Compaq disaster. We set new highs on the Dow, NASDAQ and S&P, while getting nice technical confirmation of investors overall bullish sentiment. The only storm clouds are the CPI index release and earnings announcements, especially Intel's. Keep your stops set. If the revised estimates are equaled or handily beaten (which is likely since lots of estimates have been talked down), and conference calls go well, we could see another surge upward as more cash comes off the sidelines with enthusiasm. If not, the damage will depend on whom, how many and by what amounts tomorrow's reporters disappoint. Profit taking can occur anytime along the way too as a regular course of business. Overall, we look for liquidity to overcome small bouts of bad news. Remember also that the Dow is up over +500 points without a serious pullback. Even after the big recovery from the lows of today there is still a profit taking day waiting in the wings.

Confirm market direction, set your stops, and sell too soon.

Buzz Lynn
Research Analyst

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