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Market Wrap

Goldilocks chased by four bears, vultures circling.

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	 5-6-99           High     Low    Volume  Advances Decline
DOW    10946.82 -  8.59 10980.04 10852.32  878,521k  1,473   1,479
Nasdaq  2472.28 - 62.17  2546.36  2464.57  910,708k  1,920   2,061
S&P-100  674.54 -  7.80   684.31   668.33   Totals   3,393   3,540
S&P-500 1332.05 - 15.26  1348.35  1322.56            49.0%   51.0%
$RUT     433.38 -  0.89   435.96   432.16
$TRAN   3735.78 +   .52  3729.15  3682.84
VIX       29.27 +  3.29    31.06    16.43
Put/Call Ratio      .53

Goldilocks chased by four bears, vultures circling.

Three FED bears all took aim at the bull market today. The market, which has been fueled by the Goldilocks economy, had been waiting for Fed chief Greenspan to speak and speak he did. While his actual comments were not as strong as they could have been the impact was still felt. He said that the high tech gains in productivity could not continue on forever and eventually the shrinking pool of trained workers would exert pressure on wages and create inflation. In making the carefully worded pronouncement today Greenspan stepped out of the neutral rut the Fed chief had been following and started the lean into a future interest rate hike posture.

Alice Rivlin, another Fed member, said today that in the Fed's opinion the stock market was too high and was giving a false impression of the U.S. economic health. Citing the "wealth effect" that a constantly rising stock market has created she said the Fed was on watch for the real impact to the economy.

Robert Terry, San Francisco Fed Chairman, said the economy was much stronger than desired and could not continue to grow at a plus four percent rate without inflation. He did say there were no signs of inflation at present and the Fed did not view the rise in oil prices as a current problem.

Richard McCabe with Merrill Lynch, said today that the market was clearly showing signs of topping and he expected a 10-15% correction soon. In all fairness McCabe has been calling for the correction for about 1500 points now and eventually he will be right.

Back from the dead?

Pummeled for two days now from negative comments and inflation fears the Dow has rebounded both days from triple digit losses in the last hour of trading. Advances which had been trailing declines by as much as 500 during the day surged back at days end to close down only six stocks under decliners at 1473 to 1479. The miraculous recovery on both days in spite of the impending doom of the non-farm payrolls on Friday is remarkable. The Dow is only 89 points below it's record high. The Dow's recovery from the -102 low at 3:PM was remarkable. Some analysts think a strong employment number is already factored into the market and the two major dips this week have already taken all the profit out and the market is poised to move upward unless there is a blowout jobs report in the 350,000 range.

Nasdaq funeral not scheduled yet.

While the Dow has been remarkable in it's rebounds this week, the Nasdaq has been moved to intensive care. With the sector rotation being defined as "sell tech and buy anything else", the Nasdaq has been sinking deeper and deeper into the summer doldrums abyss. After peaking at 2677 on April 27th the slide has been interrupted by only momentary signs of life to our current 2473. The 2500 level had managed to provide some support but the last two days of selling proved too much. With Internets dropping like a rock as their prices head toward their January lows their appears to be no Internet bottom in sight. Of course as soon as I or anyone else proclaims them dead and starts playing puts on the sector, new life will rush in on the back of numerous upgrades on the sector by noted analysts.

Even the giants of the Nasdaq cannot over come the concentrated selling onslaught. CSCO, MSFT, INTC, DELL have all suffered at the hands of the sector flight. Big funds that can remember past summer tech sell offs have been liquidating positions left and right. Fidelity has dropped its stake in DELL by 59% and AOL by 43% to name a couple. Multiply this by hundreds of funds and you see the problem. Even the coming earnings of Dell and CSCO have not been able to sustain their prices. Dell sank to $39.44 at the close today. I may be in Dell denial but I have to believe that the Dell faithful will see this as a last entry point before any Dell earnings run back to $45 and add to their positions Friday and Monday. When the Dow recovered at the close today and Dell had risen to over $40 from its bottom at $39.31 I bit the bullet and bought some Dell options myself. It promptly sank back to the sub $40 level. CSCO which announces on May 11th, has been severely beaten up and may not be able to mount any earnings run at all.

One of the reason these stocks are having so much trouble is the number of shares outstanding. Dells recent split resulted in total outstanding shares now being over 2.4 bln. If a fund like Fidelity held 20 mln shares three years ago, and that would not have been a lot for the bigger funds, then today, after splits, they would own over 320 mln shares at an average cost of $6. As we all know, it is not profit until you sell and funds do not like to have huge positions in ANY one stock. A Dell buyer today would be like a fish swimming upstream against the current. Eventually these funds will run out of Dell stock to sell and the stock should reverse course but who knows when. Anybody taking a position in Dell now should plan to be out by May 18th unless you are planning to hold for a long time. If we don’t get a major move by Dell before earnings a contrarian play would be to hold over with thoughts of capturing any bounce from the lack of an earnings run if they announce outstanding earnings. This would of course be VERY HIGH RISK. Dell is already down -29% off its recent $55 high.

Microsoft buys AT&T

Not really but Bill probably could if he felt extravagant. MSFT did invest $5 bln in AT&T today but it was more a bribe than an investment. The lure here is the millions of set top boxes that AT&T will deploy on it's way to being the biggest cable vendor on the planet. AT&T already has a deal with SunMicro to use the Java platform in some of these boxes and a deal with MSFT to use WindowsCE in others. The deal today adds several million to Microsoft's contract and puts them in front of SUNW. Michael Armstrong said they were still in bed with SUNW but the MSFT deal was simply a matter of using software that was already available and not in development. Sure !!

Nose ring anyone?

With the stock market being led around this week by the bond market it was like a bull with a ring in it's nose. The bonds sank on the inflationary comments by the Fed heads to a 10 month low. The yield rose to 5.79% and at this level it is becoming a problem. At 6.0% we could see a significant flight from the stock market and into bonds as a safe haven from the Y2K problem coming later in the year. A 6% rate would just accelerate the process. Bond analysts say a +.25% rate hike in August is already priced into the bonds and the only uncertainty now is will we make it till August before a hike. The Fed FOMC meeting is not for two more weeks and nobody expects a hike then unless the non-farm payrolls and unemployment numbers really surprise the market tomorrow. The consensus estimates for jobs is 225,000 with estimates as low as 185K and as high as 375K. A number on the high end would be a problem but any number under 250K should result in a relief rally. The unemployment number is expected to be 4.2%, only a +.3% increase. Any increase over that would be welcomed by the market and any significant drop would set off a stampede for the exits.

VIX rockets to six week high!

The market volatility as measured by the VIX has skyrocketed this week. Traders are acting like timid movie goers in a Friday the 13th sequel. Everyone knows there is a scare coming but nobody is leaving the theater. Traders are expecting the big scare and are pulling the sell trigger at every sudden shout. As soon as they look around and see it was not the mother of all drops they ante back up for another play. As long as traders keep buying the dip we will keep moving up. When that last drop does occur the ones holding the last ticket will get a shock they will not forget any time soon.

Fearless Friday Forecast

About the only thing I can fearlessly forecast for Friday is that the market will open and trading will occur. Other than that the fate of the market lies squarely in the jobs numbers in the morning. The up volume and down volume tied today, advancers on the NYSE tied decliners and we are only 89 points below the Dow closing record. Market sentiment is still very bullish and we do have the required number of bears to keep a rally going. I just don't see a big sell off on reasonable numbers. Good numbers could propel us to a new record. I only hope the Nasdaq gets caught in the updraft if it occurs.

Wait for an entry point, sell too soon.

Jim Brown

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