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Market Wrap

Last Friday continued. . .

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        6-14-99          High     Low     Volume   Advances Decline
DOW    10563.33 + 72.82 10606.39 10486.71  673,286k  1,302   1,683
Nasdaq  2398.31 - 49.57  2456.17  2397.12  838,554k  1,435   2,485
S&P-100  656.26 +  1.39   660.82   654.33   Totals   2,737   4,168
S&P-500 1294.00 +  0.36  1301.93  1292.20            38.6%   61.4%
$RUT     431.53 -  6.48   438.82   431.47
$TRAN   3350.69 +  6.22  3380.85  3345.16
VIX       27.39 +  0.13    28.07    26.34
Put/Call Ratio      .62

Last Friday continued. . .

No business reporters called it that, but today's action looked like a continuation of Friday's trend into the stock price abyss. Alan Greenspan was the only voice heard this morning for one solid hour on CNBC, as tribal investors dug, hashed through and dissected the Witch Doctor's comments hoping to answer the questions, "when will he raise rates and by how much?" Since today's testimony on Capitol Hill was to inform congressional economic committee members about productivity gains garnered from advancing technology, we received no answer. Alphonso the Great, long a proponent of technology's positive catalytic effect on our still booming economy, noted that the economy may not get any better and that productivity gains may be over. Hel-LO?!?! Does this sound like inflation to anybody? Perhaps this was just an off-handed comment by Greenspan, but the tealeaf readers found a message in it. The Atlanta Fed Chairman squawked too, only more hawkishly, doing nothing the smooth market feathers. All the speculative chatter now revolves not around whether he will raise rates or not, but by how much he will raise them, 25 or 50 basis points, 1 hike or 2? Again it seems a foregone conclusion that a rate hike is coming. So where is the surprise? No matter, investors think inflation is here, and were busy getting into cyclicals today at the expense of technology, especially Internets (more on that in a minute).

(A brief note, we don't normally comment on international currency stuff, but the Bank of Japan intervened today on behalf of the dollar by gobbling up $5 bil. worth. Why? In short, they appear serious about keeping their fledgling recovery on track. By increasing the value of the yen against the dollar, Japanese goods and services remain affordable to us in the U.S. If we quit buying their goods as the value of the yen increases, they can't keep their own recovery going. Hence, a trade deficit increase in their favor, which is bad for the U.S economy. This may have helped in some small part to rally bonds today, as the 30 year yield fell to 6.10% from its 6.14% close last Friday. Anyway, back to the Wrap.)

The day started looking like a typical merger Monday. In what is shaping up to be a good old-fashioned bidding war, Qwest Communications (QWST) announced an offer to buy Frontier (FRO) and U.S. West Communications (USW) for $55 bln., expecting to steal away with a better bid these 2 big telcos from Global Crossing (GBLX), an international fiber optic bandwidth provider and carrier. No love lost here as investors pounded QWST for a $10.75 loss, down to $34.13 (new symbol, OUCH). Worse off, Doubleclick (DCLK) made a stock swap offer to buy Abacus (ABDR). On general Internet weakness, DCLK's currency, (stock) had deflated $18 by the end of the day to $70 (new name, DoubleOUCH?). ABDR was reduced $7 to $67 in the process. Talk about a bad case of deflating currency! Last, Walmart (WMT) made a $10.8 bln. bid for AZDA Plc. of England, the third largest grocery chain in G.B., as part of their continuing growth by acquisition strategy. WMT was up $0.44 on the day.

Now, live from Wall Street, we bring you the tongue and cheek Merger de jour, e-loser.com! e-loser.com made what can only be described as a hostile bid for AOL (-$9), AMZN (-$13), YHOO (- $16), CMGI (-$14), DCLK (-$18), BCST (-$12), LCOS (-$14), SCH (- $10), AMTD (-$12) and EBAY (-$29), in hopes of combining them into 1 giant unprofitable company! There were others too. Investors intensely disliked the deal and handed all the acquisition targets double-digit losses (except AOL, -$9). In fact, if you owned any of these first tier Internet companies and lost less than $10 today, consider yourself lucky. All were pummeled on heavy volume. (Ok, just kidding on e-loser.com/merger thing. But the rest is true.) Three pieces of news today helped drive this overall sector loss.

First, a CS First Boston analyst made the statement that although the Internets are significantly off their 52 week highs, now is not the time to get back in. She said in essence, there is still further room to retreat. Even with today's trouncing, current prices still represent significant gains over their 52-week lows.

Second, EBAY (the one with the biggest bruise on its forehead, down $29.88 to $136) warned they would suffer a $3-$5 mln. revenue shortfall, thanks to its server failures last week. Mary Meeker of Morgan Stanley Dean Witter still likes the business model and the company, but that comment, intended to help, actually fell on deaf ears. The market definitely hears what it wants to.

Last, Charles Schwab (SCH), largest broker to the on-line masses, reported a 28% decrease in e-volume in May compared to April, and is now back to conducting just over 150,000 trades per day, the same level they did in January. Volumes have dried up as a result of just 3% of the 8.5 mln. on-line traders, who make up 15% of NASDAQ volume, exiting the game beginning in April. While we don't have a crystal ball, it won't take many days like this to get others leaving the table too. Fewer traders = fewer trades.

With that in mind, let's talk about volume. In short, within the overall market, it stinks. The above lack of traders and trading volume at Schwab may be indicative of the shortfall of market volume overall. However, volume on these Internets was way above average today. Investors in Internets are exiting en masse. The really tough part some of us will have to deal with is the "margin call", just another word for pain, as your broker calls you to say "you need to bring in some money or we're going to sell your stock so you can repay us your debt". Because lots of folks won't be able to come in with the money, more selling will ensue, driving prices still lower, creating perhaps more margin calls. It's a viscous circle where we likely haven't seen the end. When Amazon.com falls below its 200 DMA (like it did today for the first time ever), it's hard to remain bullish on the sector, let alone the stock. Take heart though, the sector has been down for a few days and may get a technical bounce in the scheme of things. It also helps that earnings season is coming up again, a time of rising expectations and results from this sector, which may help stage a recovery.

Because the Internets play such a large part of the NASDAQ market, without a lengthy explanation, you now know the basic reason why the NASDAQ took such a big hit today. Just so you know, it lost 49 points to close at 2398 near its low of the day (negative red flag. Careful!) on volume of 839 mln. shares. Advancers lost to decliners 14:25.

Conversely, the DOW closed up almost 73 points to 10,563. We have the old smokestacks or cyclicals to thank for the rise in the DOW 30 index, even though decliners edged advancers 17:13 on (no surprise) low volume of 673 mln. shares. It prompts us to wonder, with so many consistently low volume days and a slacking off from day trading at home, perhaps this is Y2K fear sneaking insidiously into the market already. We don't know and are not yet prepared to make that leap, but it's something to think about. Don't get lost in a conspiracy theory, we're just trying to get you to think.

So with all the doom and gloom, what about tomorrow and the rest of the week? Don't expect much volume (or rising prices) tomorrow with CPI figures to be released Wednesday morning. Investors are waiting to see the results. We may even see jitters pick up some, along with increased selling activity. Internets may get a bit of a technical bounce, but most likely, we may have to wait until Thursday after Greenspan takes Wednesday's CPI numbers to Capitol Hill and pontificates. In short, this is a high-risk week with the immediate future up for grabs, dependant on inflation winds. If you must play, you may want to look at some spreads, puts or Sky Box. Or better yet, stand aside 'til the smoke clears. We're serious about the last one. Our job as we've said before is to protect our capital first and foremost. It's pretty tough to find a trend to play in this kind of sideways market.

Maybe this will sum it up. We recently offered it in response to a subscriber. Here it is. "Only trade when it is profitable to do so." It's synonymous with "confirm market direction". Both mean:

1. Positive market after 10:30 a.m. EST.
2. Advancers beating decliners (w/ increasing ratio is better)
3. Positive sector
GTW (DELL, IBM, HWP, CPQ should be positive too)
MRK (SGP, ABT, LLY, PFE should be positive)
4. positive direction for your stock

These are the conditions you need to help insure a profitable trade. While it's no guarantee of profitability, they substantially improve the likelihood of a positive outcome. Trades can still be profitable if 1 or more of these elements is missing, however, your potential for loss increases. 85% of a stocks movement is related to the sector/market, hence the trend is your friend and "when in doubt, stay out".

Enough said. Oh yes. . .sell too soon!

Buzz Lynn
Research Analyst

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