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The name's "Bond", Treasury "Bond"

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        6-28-99          High     Low     Volume   Advances Decline
DOW    10655.15 +102.59 10692.51 10555.88   647,599k  1,863   1,124
Nasdaq  2599.13 + 49.79  2602.45  2554.95   764,744k  2,203   1,699
S&P-100  679.76 +  8.47   681.23   671.29    Totals   4,066   2,823
S&P-500 1331.35 + 16.04  1338.43  1315.31             59.4%   41.0%
$RUT     448.61 +  5.50   448.64   443.11
$TRAN   3397.17 + 81.06  3406.85  3317.77
VIX       22.56 +  0.40    23.03    22.04
Put/Call Ratio      .42

The name's "Bond", Treasury "Bond"

Thank you Mr. Bond for your input today. And Thank you President Clinton for reassuring words about using the treasury surpluses to eliminate the national debt in the next 15 years. Never mind that the "surpluses" are smoke and mirrors. They don't really exist since they are born of excess withholding of Social Security taxes from our paychecks, then borrowed from the Social Security fund and lumped in with general revenues. Excuse us, but now that the money has been borrowed from the Social Security kitty to create a phantom surplus, doesn't the money have to be repaid to fund retiring baby boomers' social security withdrawals? Of course, but this sleight of hand is grossly under reported by the mainstream press. In regular accounting, we call this fraud. No matter, that didn't stop the bond market from taking notice of "eliminating the deficit", which helped the bond rally today. The 30-year treasury yield closed down today at 6.10% on good spin.

Of course, this is a reflection of bond investors feeling a bit better today that inflation at current levels is priced into the market. This had a positive impact on the equity markets as well. We are as tired of hearing about the Fed meeting as you are, so let's keep this brief tonight. Here goes.

It's a foregone conclusion that the Fed will act to raise interest rates Wednesday, June 30 at 2:15 ET, following the FOMC meeting. The general consensus is that rates will go up 25 basis points. While some will argue that it will be more than that (or that rates will rise again in August at the next Fed meeting), Wall Street veterans' will cast their gaze on any change to the bias. If the bias remains toward "tightening", it is possible that we could see another rate hike before the end of the year. If they change their bias back to "neutral", then it's party hats and horns, as the Fed will in essence be saying "no inflation on the horizon". It's been the same story for weeks, but investors are of a herd mentality in general, or will just sit out if they don't know which way to lean when analyzing positive or negative sentiment among other investors. Today, sentiment leaned to the positive. But as evidenced by trading volume, very few investors are willing to put their money where their mouth is with any conviction.

Yes we had a rally today, which we always appreciate if we're playing calls. However, in periods of uncertainty (like now), small changes in sentiment can send the market in either direction by significant amounts. If last week is any indication, the market may be down again tomorrow on any news item if blown up to point of absurdity. That's the herd mentality. Witness the low volume again today. That's investors sitting on the sidelines waiting for direction from the Fed meeting outcome. It really represents few sellers and slightly greater buyers, but no conviction.

Let's exaggerate for a minute to see what we mean. Suppose there were only 3000 (yes, three thousand) shares traded the whole day on the NYSE - 100 shares each of the DOW 30 stocks, yet few people wanted to sell. Those who bought had to pay slightly higher prices to shake those 3000 shares loose from white- knuckled owners. Here's a case of the DOW rising on low volume, but would you really consider this a meaningful rally? Of course not! Now in not quite so exaggerated form, can you see why low volume isn't very convincing? Tomorrow, it could just as easily be owners getting spooked to sell into slightly fewer buyers, but still on low volume. Again, not meaningful. The point is don't let the rallies or sell-offs accompanied by low volume convince you of a new trend. It's rarely for real. Keep this in mind as we review today's numbers.

The DOW for its part looked pretty strong in the early hours of trading, as it rose 135 points +/- from the opening bell. Range- bound until the end of the day, it dropped back to a double-digit rise. Just before the close, it came back for a total gain of 102 point on the day, closing at 10655. Again, volume was the second lowest for the year at just 648 mln. shares traded. Normal volume is considered 850 mln. shares. The advance/decline line sure looked good though at roughly 3:2.

NASDAQ had a slightly different trend, as it remained range-bound at 2555-2575 most of the day. However, paced by the Internets (more on the backbone equipment side than the concept/application side) beginning mid-day, 4 of the 5 generals began to follow and spiked up nicely with strong volume as the close neared. Intel was already up with a strong semiconductor sector. It almost looked almost like a buy program as MSFT, WCOM, DELL, and CSCO all spiked north on sizable volume with just 15 minutes to go before the close. The last minute buying carried the NASDAQ up 49 points for a close at 2599, 78 points away from an all-time high. Again, meaningless without volume to represent investors' conviction. Just 765 mln. shares traded hands. Average is (used to be) 950 mln. - 1 bln. A/D ration was about 4:3.

A quick mention on Internets. . .as we noted last week, Internets appear to be entering Phase II of their growth, which means lots of consolidation in order to show increased revenue. It happened to cars 70 years ago and to computers over the last 20 years. Within this sector shift, investors are taking a keener interest in the builders of Internet equipment like DSL hardware (Covad, Redback), DSP chips (Texas Instruments, Motorola) and routers/switches (Cisco, Juniper). Compared to rest of the market, these are all showing good volume and price movement. TXN and MOT are already plays. We are keeping our eye on CSCO. AMZN, AOL, and though they have earnings due on July 7, even YHOO (today excepted) hasn't yet packed the same punch as the overall earnings season approaches. This isn't going to change the Internet's perception overnight, but it looks like the beginning of a trend worth noting.

Ok, so what about the rest of the week? Here's the lineup.

Tuesday: nothing.
Wednesday at 2:15 p.m. ET: Fed announcement on rates.
Thursday at 10:00 am ET: NAPM index/sentiment release.
Friday at 8:30 am ET: Employment report.

If the Fed isn't definite on their intent Wednesday, investors will go nuts in the "round room" looking for the corner until Thursday or Friday. It could be flat with continued slow volume. If the Fed gives a clear direction of its intent Wednesday, no matter what the outcome, as long as uncertainty is eliminated, we'll likely see a rally. Folks, We've been pounding the table that there is no inflation and that in essence, the Fed is inoculating for a disease that doesn't exist. In our view, the rate hike isn't necessary, but the Fed will issue one anyway, though minor in scope. The heightened anticipation may cause some downdrafts tomorrow. If your risk profile allows, it may also be a good day to buy from fearful minions getting out at the last minute.

In short, more rate fear tomorrow on low volume, rally on Wednesday's news. Play according to your risk tolerance and remember the rules - use stops and sell too soon! Good luck!

Buzz Lynn
Research Analyst

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