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Market Wrap

"It's just a little flesh-wound"

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        5-19-99          High     Low     Volume   Advances Decline
DOW    10887.39 + 50.44 10891.81 10797.13  772,763k  1,729   1,264
Nasdaq  2577.40 + 19.04  2577.93  2540.38  968,771k  2,133   1,842 
S&P-100  678.96 +  5.95   678.96   669.58   Totals   3,862   3,106
S&P-500 1344.21 + 10.91  1344.23  1328.27            55.4%   44.6%
$RUT     446.14 +  3.69   446.77   442.45
$TRAN   3579.20 - 70.96  3651.40  3553.75
VIX       26.24 -  1.97    28.18    26.19
Put/Call Ratio      .54 

"It's just a little flesh-wound"

Remember this from the Monty Python comedy movie, "Holy Grail"? Fortunately, for us, the "killer-bunny" is benign. The bulls' flesh-wound from getting shot in the foot by the Fed yesterday had some market participants believing that the bull was turning to hamburger. It looks more like a paper cut to us. The market showed amazing resiliency by continuing its upward trend from the opening this morning. While taking a brief mid-day dip as low as 10,797, the bulls could not be stopped. The DOW sprinted higher to finish at 10,887, up 50 points, its high of the day. A bit more volume was evident as well - almost 773 mln. shares. Advancers had it over decliners by 17 to 13.

The NASDAQ stocks held up well too, despite investors' throwing in the towel on Dell and the other 4 generals (Microsoft, Intel, MCIWorldcom, and Cisco) taking the day off for a leisurely stroll through the park. With the exception of Dell that gave up -$4.25 right from the open, the other 4 finished from -$.38 to +$.63 at the close. NASDAQ's 19-point gain came on a nice jump in volume, nearing the 1 bln. share mark, to close at 2577. Advancers skated past decliners 21:18.

We should not be surprised that the market made an advance today, even though traditionally, the market falls after a Fed meeting. After all, we've stated that we think the case for sustained inflation (there's that "I-word" again) is overblown. The strength of the bond today, among other factors, is solid testimony to that theory, as the yield decreased to 5.80%. Greenspan had already succeeded at talking rates up. There was simply no need to raise them after yesterday's FOMC meeting.

But what are those other factors? We'll keep it straight forward so we can move on. But here it is quickly in a nutshell:

1. The Producers Price Index (PPI) core rate (minus energy) is on target.

2. The U.S. has full employment and steady wages.

3. Though it spiked in April, the Consumer Price Index data shows that we are tracking at a 2.3% annual rate - exactly where we were in the last 2 years.

4. New housing starts have fallen in the last 3 months (negative 10% this month).

5. Gold is hovering at its lowest level in 20 years (+/- $273 per ounce).

6. OPEC producers cheat on quotas. Funny that everyone acted surprised when we got a greater than expected increase in crude oil stockpiles in today's API report! Crude futures have fallen back $2 to the high-$16 range in the past 2 weeks.

7. Utilities index set another new high. Remember, we rhetorically asked on Monday if bonds could be far behind?

That said, can you why we think the case for inflation is overstated? Bonds are looking pretty darn good and received a well-deserved rally today. One news tidbit that we keep hearing is that of 26 "bias-tightening" comments, the Fed has made good on them only 1 time. Just because they say it doesn't mean they do it.

Now, let's get meaty! Anyone want to guess why we never recommend holding a position through an earnings report? Take a look at the action in Dell today. Despite hitting their earnings and revenue estimates, investors have grown so accustomed to Dell beating their numbers, that anything less is a disappointment. 65 million shares of Dell were jettisoned, thrown overboard, taken to the wood shed, etc. in the wake of yesterday's after hours earnings report. Dell immediately gapped down $3.44 this morning to $40.63 from yesterday's close of $44.06, and never came back. Today's close was at $39.81, down $4.25. OUCH!!! Stops would have been useless. If you are to preserve your capital, you must employ good money management techniques. That means trading with some insight on market sentiment and making an exit ahead of lofty expectation. Though there are plenty of analysts reiterating their current buy recommendation, there are also a good number who downgraded the company today, citing decreased margins. The fact is Dell warned last quarter that they would come under some margin pressure since they planned to produce sub-$1000 PC's. Even analysts have an ability to "forget" early warnings and "hope" a stock back up. No matter, Dell is now at the crossroads of deciding "if they will gather market share or be profitable" as one noted analyst, Ashok Kamur put it. A pretty tough characterization for a large- cap company growing over 40% per year. By the way, we still like Dell's business model and future prospects. It's just tough to make an option play out of it.

Let's not forget the gainers. Healtheon, a 1996 Jim Barksdale creation (founder of Netscape), announced today they would merge with Web MD in a deal valued at $5.7 bln. Both companies are in the healthcare data management business. Healtheon was up $24, or 43% to close at $84. Part of the hoopla stems from Microsoft and Intel taking a stake in the new entity. Perhaps not coincidentally, HMO stocks were up too, including Aetna, up $3 to $95.

In other real and rumored merger news, Tyco, the equipment and building systems manufacturer announced they would buy Raychem, an electronics firm for $2.9 bln. in cash and stock, valuing Raychem at a 19% premium, or $36. Tyco rose $4 to $93.50. Tyco's CEO believes they can double revenues, earnings, and cash flow in the next 3-4 years! Wow! Don't laugh, TYCO has purchased 110 companies for $128 bln. since he came on board! For the rumor part, IBM is said to be interested in Compuware. Neither company is commenting.

Others that did well today include Redback Networks, a $25 range IPO from yesterday, up another $6 to $90 today following yesterdays meteoric rise to $84; and Southwest Securities, which rose $12 to $81. Semiconductor equipment manufactures did well too in the wake of Applied Material"s earnings announcement yesterday. AMAT was up over $2 to $65; KLA Tencor, +3.63 to $56; and Etec, +4.69 to $36. Unfortunately, ETEC bit the dust in after-hours trading after reporting an earnings miss by 1 penny and negative earnings expectations next quarter. Nonetheless, the industry reports that the 3-year outlook is good.

A few stocks that didn't fare so well - Providian Financial ($117, -17), a consumer credit company who is now under investigation for consumer fraud; and 2500 employees of AT&T who will lose their jobs in a corporate streamlining move. The carnage in airlines didn't look so good either - UAL, U, AMR, CAL, LUV, and DAL were all clobbered with multi-point losses.

So what can we expect for the rest of the week? That's hard to answer. But with evidence of low inflation, a firming bond market, a nice bounce off 10,800 on increasing volume, followed with a strong close, we think "up". If you get to feeling euphoric, remember, there is still enough fear to cause mid-day sell-offs, and you still want to harvest many small profits. . . no swinging for the fences! We may still get some choppiness until the volume accompanies the rise in prices. Watch for positive market direction after 10:30, a positive advance/decline line, and a good trend for your specific play. Set your stops and sell too soon.

Buzz Lynn
Research Analyst

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