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Market Wrap

Extra! Extra! Bond Yield Rises to 6.02! Yawn.

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        6-09-99          High     Low     Volume   Advances Decline
DOW    10690.29 - 75.35 10790.02 10672.56  662,040k  1,376   1,527
Nasdaq  2519.56 + 45.00  2519.57  2491.71  845,997k  2,079   1,836
S&P-100  667.39 +  1.89   671.17   665.00   Totals   3,455   3,363
S&P-500 1318.65 +  1.32  1325.95  1314.73            50.7%   49.3%
$RUT     445.19 -  1.43   445.24   443.41
$TRAN   3380.57 - 44.26  3424.28  3366.32
VIX       24.16 +  0.69    24.73    23.24
Put/Call Ratio      .69

Extra! Extra! Bond Yield Rises to 6.02! Yawn.

Somebody please wake us up if they hear something definite out of Fed members' collective mouths. It seems lately that not a day goes by without a Fed Board Member making a comment. Today, live from the International Monetary Committee meeting in Philadelphia, Minneapolis Fed Chief, Sterns noted on one hand that just because the Fed tightens its bias doesn't mean that it will raise rates, while on the other hand, he hopes rapid productivity growth could continue. He added that a competitive, non-inflationary environment would encourage businesses to continue to cut costs (paraphrase courtesy of briefing.com). Huh? Talk about walking the fence. Well it didn't take long for investors to begin prattling about their same old fears of inflation and a rate hike. If you stop to think, it sounds a lot like the monster under your 5-year-old-kid's bed. To them the threat is real, even after nights of constant reassurance, explanation, and all the reason you can muster. Just like a kid after hearing that thing that goes "bump" in the night, investors too equate that spiked CPI figure from April to an inflation monster hiding under their bed.

We're not saying that the possibility of rate hike is non- existent. That would be bucking the current sentimental trend. However, we state again that the case for inflation is extremely weak. Want evidence? August gold futures are now priced at $261 - 20 year plus low. A barrel of oil is now fluctuating between $16-$19. Brent Crude closed today at $16.25 per barrel on the spot market. Need more? PPI last month was .1% at the core rate, right on target. The CPI to date, including the spike last month is at 2.4% annual rate, exactly where it was the last 2 years.

Here's some fresh news that seems unrelated on the surface but we think is pointing to the future. Maybe this is just GM related, however GM announced today that they were cutting lease factors (thus monthly payments) for new SUVs because sales are a little slow! We thought this was a hot market sector for manufacturers. There's more. Though we'll reference this in a minute, Warburg Dillon Read downgraded the entire Airline sector this morning citing continuing slow traffic - not enough passengers! It appears transportation is getting cheaper. No inflation here folks.

Finally, here's the kicker. On CNBC just after the close, Robert Froehlich, Chief Investment Strategist with Scudder Kemper Funds stopped just short of predicting, but strongly suggested the Fed would do NOTHING at the next meeting (a.k.a. NO RATE HIKE). Frankly, yours truly happens to support that position personally (hope that crow is tasty if I have to eat it), but supporting it doesn't make us any money in the meantime. Even if that theory is correct, the market doesn't care what we think and will likely continue to show a choppiness with a slight upward bias until we get some direction from the PPI on Friday and CPI next week (see Trading Rule #9). Remember, the trend is our friend (see trading Rule #7).

Our apologies for the incessant table pounding on the issue. Even so, that's the cloud that threatens a market parade. With that in mind, let's look more at today's action. In an unusual display of divergence, the DOW and the NASDAQ went noticeably in opposite directions. . .lots in the news that made that happen.

First Proctor and Gamble announced a major restructuring that will cut 15,000 jobs and close 10 manufacturing facilities worldwide over the next 5 years. The market did not cheer. P&G, a DOW component lost $2.56 to close at $92.25 on twice its normal volume. American Express caught the 6% flu and dropped $3.88 to $125.12. GM was taken out for a $3.25 loss to $64.50. MMM and UTX were whacked for over $2 each too. Boeing drifted on to a $1.56 rock pile that sank it to $42.25. In short, that's why the DOW finished the day down 75 points at 10,690. Who says cyclicals are the place to be? Volume, which keep in mind is a reflection of investors' inflation anxiety, was anemic at 662 mln. shares, just slightly better than yesterday's third slowest day of the year. Decliners edged advancers 15 to 14.

NASDAQ, on the other hand, had a different idea of how to trade. Bolstered by a Semiconductor Industry Association report wherein industry-wide sales were revised upward from 9.1% anticipated 1999 growth to 12.1%, and an Intel upgrade by Morgan Stanley Dean Witter, the tech industry took off like a rocket, especially chip related issues, pulling everything else along with it. Added bonus from Rockwell's former semiconductor unit before they spun it off, Conexant (CNXT) announced that they would "significantly exceed" analyst expectations of $0.11. Five major brokerages revised earnings upward to between $0.18-$0.20 and raised margin outlooks by 200 basis points. At the end of the day with volume over 3 times the norm, CNXT finished up $6.19 at $51.50. Another almost previously unknown cable modem manufacturer, Terayon, made a big splash, as a popular newsletter gave TERN a big thumbs up (new CDMA technology invented by Qualcomm is the heartbeat of this manufacturer). Volume almost 6 times the norm drove the issue up $9 to $41.50.

With TERN on the brain, we'll take this opportunity to plug CDMA technology. Invented by Qualcomm (frequent visitor to our pick list), it's the new standard of electronic packet delivery. Sprint PCS phones and communication devices, as well as other communication systems under development throughout the world are using this technology to accommodate the bandwidth revolution that will you allow you cheap, battery saving, "always on" unlimited access to information. It blows TDMA (currently used by countless cellular providers, including AT&T) into the weeds. We bring it up because part of good trading is learning which horse to ride. We'll save the details for another day. Let us know if you are interested. Now, back to the Wrap.

Technology gave us some other winners today too. On the semiconductor upgrade, Micron, Applied Materials and Texas Instruments posted solid gains. QWST was up on news in an SEC disclosure that BellSouth (already with a 10% interest) may buy the rest of Qwest, a fiber based national local exchange carrier. Sprint announced it would buy $520 mln. worth of phone equipment from Northern Telecom over 3 years for its continuing wireless rollout. The whole telecom sector generally enjoyed a good day, including PMC Sierra (+6.31 to 60.81), Tellabs (+3 to 60.94), Uniphase (+4 to 152.88), Level3 (+5.53 to 77.53) and Metromedia Fiber Network (+3.56 to 47.50). Vodafone, Motorola, Ericsson, AirTouch, Nokia and Nextel had fractional coattail gains too. Volume is looking pretty good here. We're definitely keeping our eye on this sector for some plays if rotation takes hold of the telecom sector.

Internets fared well today, though volume was notably absent. Perhaps that volume is manifesting itself in Telecoms? Just a thought. Nonetheless, AMZN tacked on $2.44, YHOO hollered up $3.06, NSOL converged for $4.25, and BCST signaled up $3.62. Even AOL eked out $0.62. Low volume plus rising prices equals no sellers. Our expectation is that most of the Internet damage is done unless we get an unexpected surprise from the Fed or other source. Keep your eyes on CMGI, a bellwether representing many different segments of the Internet. They have quietly moved up $12 in the last 3 days in anticipation of earnings, which will be released tomorrow. That gain is net of some selling today, as investors are getting wise to the earnings sell-off, and now begin to bail out of positions earlier. On a side note, the Internet deal of the day belongs to E*Trade and Earthlink, who reached agreement that any ELNK subscriber who signs up with EGRP will get 6 months of free Internet service.

Of course no NASDAQ rise would be complete without the 5 generals. Though they weren't leading today's charge, they comprise 30% +/- of the NASDAQ 100 index. Microsoft rose almost $3 to $82.31. Intel (on semiconductor news) rose $1.44 to $53.13. Dell naturally gained $1.50 with the group to close at $35.50. Cisco switched up $2.06 to $113.75. Last but not least, MCIWorldcom dialed up $1.94 to $90.94. All told, NASDAQ gained 45 points to close up at 2519 on light volume (at least for NASDAQ anyway) of 846 mln. shares. Advancers beat decliners 21 to 18.

Newsworthy honorable mentions go to American Airlines, who was awarded a sell rating; Philip Morris, who gained $1.81 on a Morgan Stanley Dean Witter upgrade to outperform; Lockheed Martin, who wins the samurai award for cutting their earnings estimate by about half for FY99, wherein $5.56 was lopped from their share value; and Allstate Insurance, who agreed to acquire CNA Insurance's auto and homeowner policy business for $1.2 bln.

Enough already! What about the rest of the week? There is a slight uptrend, but it will be tempered by investor skittishness until PPI and CPI show their faces. It may even take until the Fed meets at the end of the month if these 2 indexes are inconclusive. But a rate hike already appears priced in. Imagine how the market will react if there is no rate hike (hey, we can dream can't we?). We are unlikely to see any major moves in either direction without volume, that reflection of investor conviction.

Wait for a clear market entry and use stops to protect gains in this excitable market. As always, sell too soon!

Buzz Lynn
Research Analyst

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