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Market Wrap

Amazon bombs Internets and Merrill Lynch scuttles Internet brokers.

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        6-01-99          High     Low     Volume   Advances Decline
DOW    10596.30 + 36.60 10597.50 10409.10  685,304k  1,404   1,558
Nasdaq  2412.03 - 58.49  2470.53  2411.97  743,199k  1,674   2,211 
S&P-100  654.21 -  4.45   658.69   647.99   Totals   3,078   3,769
S&P-500 1294.26 -  7.58  1301.74  1281.49            44.9%   55.1%
$RUT     437.46 -  1.22   439.05   435.13
$TRAN   3466.60 + 50.90  3474.07  3414.04
VIX       27.60 +  1.22    29.32    27.42
Put/Call Ratio      .52    

Amazon bombs Internets and Merrill Lynch scuttles Internet brokers.

What a difference a day makes! Friday things were looking up and expectations were high for the Internet stocks and the market in general. Today was a nightmare for most investors as every sector was systematically destroyed with laser guided precision.

First, Barrons, not content with their previous slam article on Amazon two weeks ago, featured them in their new cover story as the "Amazon.bomb". Not only did they bomb the price of AMZN stock but all other Internet stocks as well. We all know that as a leader goes so goes the sector. The hatchet job was an in depth rebuttal to the heat they got two weeks ago with their last Amazon article. Seventeen of the twenty three brokers that follow Amazon rate it a strong buy or buy. Barrons had taken some heat dished out by these brokers as each reiterated their recommendations after the last article. Proving the pen is mightier than the recommendations they again clobbered Amazon and Amazon CEO, Jeff Bezos. Calling Amazon grossly overvalued and worth only $10 per share, they indirectly called into question the value of other Internet enterprises. AMZN dropped -13 to lead the entire sector lower. I guess slams like this is why they call the publication "Bear-ons" instead of "Bull-ons".

Second, Merrill Lynch, the 800lb gorilla of the brokerage sector, announced they were reversing a previous decision not to enter the Internet broker war. With commissions over $300 for a stock trade, the drop to discount broker status and $29 trades was strongly resisted. With Etrade now boasting over 1 mln accounts, and many of those accounts came from Merrill, and other web brokers doing the same, the handwriting was on the wall. Join the battle or continue with shrinking revenues. Now that the battle is joined the sector rankings are up for grabs. Merrill has vast resources and name recognition not available to the other web brokers. With $29 trades, or a $1500 annual trade all you want fee, they will be a tough competitor. Merrill has research and other services available that other Internet brokers can never hope to match. Merrill dropped -8.75 on downgrades related to revenue worries. Some analysts feared the drop from $300 commissions to $29 trades would put pressure on revenue and I can see why. The cannonball into the Internet broker pond swamped the rest of the brokers as the expected competition could hurt their growth as well. EGRP -5.19, AMTD -9.94, NDB -4.31.

On a side note, EGRP announced the purchase of Telebanc (TBFC) today for $1.8 bln to give them a foothold in the Internet banking arena. While this may be a good idea in their mind I question $1.8 bln for a bank with 60,000 customers. Wells Fargo for instance has almost 1 mln online customers and expects to have 3 mln by next year end. BancOne is moving fast to capture this market as well as dozens of others. While analysts feel Etrade will gain 6-9 months over its rivals, it had to give up 13% of its stock in the deal. We were going to drop EGRP tonight but after I read all the press back several weeks I think this may be a real buying opportunity. The Merrill announcement did cloud the water but it is entirely possible that EGRP will rise above the sector backlash simply because of their new acquisition. I would not start a new play on EGRP until it shows some strength but coming off a stock split last week and the Merrill whammy we could be near it's low. EGRP has strong support at $30 but I do not see it going that far if the market in general holds steady.

As if the above was not enough the same analyst that torpedoed Dell recently, took aim at Nasdaq heavyweight Intel. BancBoston analyst Niles, said that he feels the product mix is shifting at Intel and is being weighted toward the cheaper, lower margin, products. His estimate of $.53 for Q2 is already the lowest on the street and he is now contemplating something in the $.50 range. He feels Intel will miss their numbers next quarter and may even warn. Intel dropped -3.38 in heavy trading.

Banc America analyst, Kurt King, took aim at the tech sector today with downgrades on HWP and SUNW. He cut them to a hold from a buy. His basis was an internal survey of 50 executives in charge of information technology at a "cross-section" of U.S. companies. Half of these executives expected to spend less this year than in the last fourth quarter. His survey showed a fall off in spending for I.T. due to Y2K changes already completed or almost done. He also cut estimates for CPQ and DELL but maintained a "buy" rating on both.

But wait, we are not done yet! After the close today American Home Products kicked off the earnings warning cycle with a whopper. They said they would miss 2Q earnings by $.07 to $.11 and the stock took another -$4 dive after hours in addition to the -5.63 regular day trading loss. This warning may ripple the markets for several days as investors are shocked back to reality that real companies must still report real earnings next month to maintain the current rally.

Still not done with the bad news. Remember last week when the Chicago Purchasing Managers report showed lower prices paid and the market rallied on the hope that the NAPM (national) report today would also show slowing inflation? April fools became June fools today as the NAPM report showed the first rise in prices for raw materials in 16 months. The prices paid index jumped from 49.9 in April to 52.2 in May and sparked new worries that inflation and interest rate increases were right around the corner. If that was not bad enough two Fed heads spoke today and both alluded to an interest rate hike soon. Several strong rumors raced through the markets that the Fed may move in a pre-emptive strike BEFORE the next FOMC meeting on Jun-29th.

The interest rate worries drove the bond yields even closer to the 6% crisis level, closing today at 5.93%. The financial sector was not immune from downgrades today either. JP Morgan was downgraded on Y2K concerns with the analyst citing an expected drop off of business as the year progresses. The sector was rocked for losses across the board.

Not every sector suffered. Since we picked several cyclical stocks that had fallen out of favor for puts on Sunday, one enterprising analyst from PaineWebber upgraded Georgia Pacific to a buy and said good things about the sector. Cyclicals soared on the news with GP adding +8.44. Yes, $8.44, and not an Internet stock. The real question now is can they hold it. The cyclicals pulled the DOW back from a -145 loss at midday to a +36 gain at the close.

This was not a good day for our new recommendations. Almost every stock we recommended as a new play on Sunday was trashed by an unforeseen downgrade or news event. Fortunately they all happened before the open today and not tomorrow after everyone had a chance to start a new position. If you follow our advice and wait for a positive market with positive advancers and positive sectors then today was a non-event. Your cash should still be burning a whole in your pocket. While we are dropping MWD until the smoke clears, we are maintaining the cyclical puts. We do not feel the cyclical spike from today will hold. Do not start new plays until they actually roll over!

The markets in general look weaker today than Friday but I am not running for the hills yet. The Nasdaq got hammered by the Internet reaction to the Amazon.bomb and the Dow got hammered by the HWP downgrade, IBM following suit and the JPM downgrade. The cyclicals held it up to allow us to get over the initial reactions. The outcome tomorrow will be on the quantity of bargain hunters we see come into the market. If the interest rate worries continue then we could see some more weakness as traders wait on the sidelines. Many now think a rate increase at the June meeting is already priced into the market and they wish the Fed would just "do it" and get the uncertainty out of the way.

The wildcard is of course the earnings warning from AHP. If this sets the tone for tomorrow then look out below. We still have not hit my 10,300 bottom for the DOW but have now twice brushed the 10,400 level. Since we closed at almost 10,600 today I would hope 10,500 holds as new support and we do not retest below that again. Cash is good right now and I would not rush back into the market until we get confirmation of the rally continuing. Remember, the last two times we got multiple days of 200 points swings back to back, OCT/FEB, the next several weeks were not pleasant. Lessons should not have to be repeated over and over to be learned.

While the daily chart shows a definite slide the 10 day may be showing a new bottom forming at 10,500. Wait for confirmation above 10,600.

The Nasdaq has tested sub 2400 levels twice in the last three months. After closing at 2412 today we are right at the pivot point. If the Internets can recover then it should be up from here but the keyword is "IF".

The Internet drop today blunted the three day rally but we are sitting near the bottom of our recent trading range.

Definitely, pick your entry points carefully and sell too soon until a new direction is established.

Jim Brown
Editor

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