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Market Wrap

You want DOW 11,000? You got it!

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        5-3-99          High     Low     Volume   Advances Decline
DOW    11014.69 +225.65 11014.69 10756.11  980,349k  1,369   1,670
Nasdaq  2535.58 -  7.27  2549.10  2512.37 1149,400k  2,057   1,943 
S&P-100  685.08 +  9.43   685.08   671.67   Totals   3,426   3,613
S&P-500 1354.63 + 19.45  1354.63  1329.83            48.7%   51.3%
$RUT     433.28 +   .47   434.59   432.43
$TRAN   3696.59 + 49.30  3697.11  3642.10
VIX       24.75 -   .68    27.16    24.60
Put/Call Ratio      .58    

You want DOW 11,000? You got it!

As long as you are not in the tech sector, you've got to take off your hat and cheer on a day like this. Irrational exuberance? It doesn't look that way to us. Let's review the play-by-play action that got us there.

First, we started the day with the National Association of Production Managers (NAPM) voting 52.8% (neutral view = 50%) that the economy would continue to expand. Though it's more of a touchy-feely indicator based on subjective judgement of objective factors, like how managers feel about oil prices, interest rates, consumer spending, etc., it still carries notable sentimental weight. The number was actually lower than expected, but bond traders still nervous that the worldwide economic recovery may spark inflation fears, didn't immediately think this was good news. The rest of the market thought otherwise.

Second, that construction spending was up .5% for the month didn't raise a single eyebrow.

Third, personal income was up .4%, which was in line with expectations. The translation for equity investors was "let's buy" since consumers are spending, and the economy is growing without signs of inflation. And buy, they did with a steady stair-step of activity all day long.

The DOW closed for the first time ever above 11,000 at 11,014, up 225 points on 812 mln. shares, which is considered average volume. Following similar breadth figures over the last 30 days, gainers squashed decliners 1999 to 992, a 2:1 margin, which is very bullish. We'd be really worried if the DOW closed with more losers. In terms of trading volume, the positive volume trades beat out negative volume trades convincingly by over a 3:1 margin. The S&P, like the DOW, finished up 19 points, closing at 1354 for the day. The NASDAQ didn't fare as well. While putting up a good struggle at day's end, the tech and Internet-rich index lost 7 points on 871 mln. shares and finished the day at 2535. More on that in a minute.

Cyclicals were again back in favor. Just look at some of the gains these "has been, smokestacks" made today: GM, +$4.69; 3M (MMM), +$4.88; Sears (S), +$3.56; United Technologies (UTX), +$3.50; Goodyear (GT), +$3.56; Boeing (BA), +2.38; Allied Signal (ALD), +$2.50; American Express (AXP), +$2.69. Check out IBM - up $3.06 today, but up over $30 in the last 30 days, lending 15% to the DOW's gain during the same period! You get the general idea. Not only did we see strength in the DOW, different sectors including gaming, energy, healthcare and financials scored well too. For you DOW theorists out there, we even confirmed a new high in the Transportation Index (DJT), which portends that this bull market is for real and will last much longer. It closed at 3696, up 49 points, a level not seen since April, 1998. The Russell 2000 was up today too, though only fractionally.

Adding fuel to the fire, Trim Tabs reported more that $5 bln. flowed into mutual funds last week signaling that liquidity is alive and well. Possibly putting a big sponge on that liquidity is Goldman Sachs' IPO due out tomorrow, which as of this writing is priced at $53 per share, and expected to garner $3 bln. for the partners. A couple of Internet IPO's are due out this week too, including Mapquest (MQST) and Flycast (FCST), the financial values of which really pale in comparison to the collective total $$$ available for investment.

The day wouldn't be complete without a tidbit of wisdom and mention of that Oracle of Omaha and Investment Wizard, Warren Buffet, Chairman of Berkshire Hathaway. At the shareholders' meeting today as the attendees whipped out the American Express card to purchase their cans of Coca- Cola (just kidding), Mr. Buffet let it be known that stock prices are high and that he and Berkshire are sitting on $15 bln. cash looking for new investments. When queried on his view of the Internet as an investment, Buffet, who has never been afraid to stay away from a hot sector if he doesn't understand the income stream proffered "just like the automobile business in the early 1900's had only a couple of winners that survive today,. . .shares [of the Internets] will likely disappoint".

While we have the utmost respect for his ability to sniff out great value in great brands, even Mr. Buffet claims he cannot time the market, as evidenced by his selling McDonald's before its recent run-up, and holding Gillette and Coke through their recent down-turns. To his credit, he'd never make this claim anyway. But, it helps to remember this when trades go against us, as they sometimes do. Perhaps his comments had some psychological, if not conscious influence on the Internet sector today.

Now, let's turn our attention to the NASDAQ and the Internets, since the new battle cry from the market seems to be "Internets go home (but leave your technology behind)!" The day didn't start well as Baron's wrote a weekend piece that prominently mentioned Amazon.com was worth "only $25 per share, perhaps as low as $10". Gee thanks! This would have been laughable 6 months ago. But with earnings season just about over, and not even a good story on the horizon, Baron's poke-in-the-eye may carry a bit more sharpness with traders who recently began to play the big moves in cyclicals like the Internets of yesterday.

Take a look at some of the Internet biggies that got hit today: Amazon (AMZN), -$21; Yahoo! (YHOO), -$12; eBay (EBAY), -$17; CMGI, -19; Priceline (PCLN), -$23; RealNetworks (RLWK), -$21; and AOL, -$9 following an announcement they were bowing out of a possible partnership with ComCast in preparing a bid for MediaOne. The landscape here isn't pretty. Normally, drops like this would have been greeted mid-day with trader enthusiasm taking over to pop the price in a good old-fashioned short squeeze. Not today. Excepting RNWK and AMZN, volumes were mercifully low - at least no panic selling.

Contrarians would say now's the time to buy this sector. While we're not ready to make that pronouncement just yet, we certainly have a nice wall of worry for investors to climb. Plus, in the next 2 weeks, we have a few Internet splitters including RNWK, NITE, NTBK and TGLO which could give life again to the sector, Buffet/Barron's/Bears or not.

While we are generally bullish with a new DOW and transportation highs, liquidity, and great breadth among all major indexes, NASDAQ stocks are likely to remain skittish until investors figure out that 50% price gains over 30 days in cyclicals sound just as outlandish as those same gains in tech and Internet from which they ran, or some great news comes out of the sector. Let's hear it for Dell & HP! In the meantime, we must play or stand aside from the market we're given.

Only 2 known items which could trip up the rally (stampede?): Greenspan speaks on Thursday and Unemployment figures are released Friday. Until then, drill down, confirm market direction, target shoot, use stops and sell too soon.

Buzz Lynn
Research Analyst

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