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Mergers, Internet, PC's. . . Oh My!

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Mergers, Internet, PC's. . . Oh My!

We awoke this morning to the sound of normal Monday Merger noises as First Union agreed to buy Everen Securities for $1.1 bln. in stock, Fore Systems would be acquired by GE Plc., a British conglomerate with no relation to the General Electric we all know for $4.5 bln. EBAY announced it would buy Butterfield & Butterfield, an antique and fine art auction house for $260 mln. in stock, thus scuttling B&B's IPO which would have begun trading today (more on EBAY in a minute) and AT&T along with British Telecom will buy an interest in Japan Telecom. Monday Mergers were quickly disregarded like wallflowers at the high school dance as the PC and Internet group assumed prom queen status in pronouncing NASDAQ its new king, thus setting a new record high in the process.

The NASDAQ closed at a new record high of 2652, up 61 for the day. Advancers nosed decliners 2157 to 1933. New highs beat new lows 93 to 40, and 3 times as much share volume traded up than traded down on almost 1.1 bil. shares. The Big 5, MSFT, INTC, CSCO, WCOM and DELL all had impressive gains. As we've said in Sunday's write-up though, it feels good now, but with 44 million investors emptying their pockets to get that last share, who will be left to buy? The point is there is not yet 44 million +1, and when 44 million people decide there's a profit to take, there is going to be some pain. The Nasdaq can't comfortably rise 330+ points (the equivalent of 1500+ DOW points) in 5 trading days without some backing and filling.

Our point? Be satisfied to catch a part of the big trend on a daily basis, sell for a small profit and use stop orders in case, rightly or wrongly, someone yells "FIRE!" at the prom while you and your steady are caught up in a slow-dance moment.

Anyway, not to minimize their importance, other indices also closed up today, only marginally. First the S&P set another record today too, up 3 to 1360. The DOW closed up 29 at 10,718 on light volume of 710 mln. shares, 28 points shy of its all-time high. Without IBM's almost $11 gain today, the DOW would have finished down about 15 points. NYSE decliners beat advancers 1595 to 1394. Again, not to belabor the point, but 710 mln. shares are pretty paltry. While there was not a rush to sell there was not a flood of buyers either.

And that poor Russell 2000. . .it can't win for losing. Just when you think it's got nice gains for the year, the new scuttlebutt turns to removing CMGI, EGRP and 3 other Internets from the group because they no longer fit the small-cap criteria (market cap under $1 bln.). If this happens, which it likely will, the Russell will again be showing a loss for the year.

Back to the NASDAQ, what happened that fueled today's gain? First, as alluded to in our first comments, PC got a shot in the arm from 2 new data sources, Dataquest and IDC. Second, Internets are still on fire.

First, Dataquest reports PC sales grew at a 17% annual rate! Wait! It gets better. IDC reported that PC sales grew at an even higher rate of 19%! Remember back in January the concern of "only" 14% Growth?. The problem was that Compaq grabbed the spotlight by chalking their weaknesses up to "declines industry-wide". The whole industry caught a cold as a result. Not anymore. As it turns out, component prices are dropping faster than average selling prices causing margins to rise. While Compaq crawls back in its hole to nurse its wounds, IBM, as noted earlier gained almost $11; Hewlett Packard tacked on $2.38; Apple added $1.75; Gateway garnered another $2.94 and Dell, who reports earnings with HP in about 3 weeks peppered us with another $1.81, closing at $44.81. You thought IBM's earnings looked good? Please allow us to toot Dell's horn here as we uncover another interesting snippet from the surveys: Dell usurped IBM's #2 world-wide PC market share, and now leads IBM 9.2% to 8.4% Compaq is still #1 at 13%, but Dell is growing its share of an increasing market at a 50% annual clip! Hear that? 50%!! It makes us wonder if their 38% revenue growth expectation from last quarter is a little low. Furthermore, the U.S. market share comparison is even better with Compaq holding steady at 13.4% of the PC business and Dell coming on strong with 12.6%. Can Dell take the lead this quarter? Stay tuned and bet on the faster horse.

Second, Internets are on a racetrack of their own. EBAY brought in another $8.88 to close at $209 after they announced they would buy Butterfield and Butterfield, an upper-end, San Francisco-based auction house for $260 million in stock, or about $41 per B&B share. This came just hours before B&B was to go public at an initial offering price of $12 - a very nice day for those insiders who got their shares for $0.41. Want some icing on that cake? After the close, EBAY announced earnings of $0.05 per share! Estimates were for $0.02, whisper numbers ranged from 0.03 to $0.05. The Internet has legs folks! EBAY traded up +$5 after the close. Other on-line auctions did well today too.

Not to be outdone, the usual Internet starlets turned in impressive gains too. CMGI climbed $22 to close at $281; AOL +$15 to $162; Infospace +$18 to $135 (not optionable, darn it!); DCLK +24 to $171; MSGP +16 to $125; PCLN +33 to $121 (not optionable either).

We want to make a quick but important note that not all sectors fared as well today since nowadays, "sector rotation" seems to mean moving your money to a sector where it hasn't been for a week. That said rotation was alive and well as oil, drugs, financials and "cyclicals " keep getting "dear John" letters in favor of the techs and Internets. Look for more of the same in the next 2 days as the Hembrecht and Quist conference keeps its focus on the technology and Internet sectors. Even brighter lights yet, AT&T and AOL release earnings tomorrow. Veterans of the newsletter will recall that we rarely, if ever advise holding over earnings. The risks far outweigh the rewards.

OK. Let's review. Techs and Internets are hot; cyclicals - not! The breakout on NASDAQ over 2600 is a welcome event but remember we now have a string of five days up in a row and nothing goes up in a straight line. Keep your stops set in the pursuit of small daily gains and remember to sell too soon.

Buzz Lynn
Research Analyst

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