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Market Wrap

A beloved wall of worry for investors to scale

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        7-12-99          High     Low     Volume   Advances Decline
DOW    11200.98 +  7.28 11230.74 11149.69   672,110k  1,370   1,631
Nasdaq  2790.68 -  2.63  2812.35  2774.77   985,650k  2,071   1,933
S&P-100  721.89 -  1.02   725.05   718.40    Totals   3,441   3,564
S&P-500 1395.86 +  7.74  1395.86  1384.99             49.1%   50.9%
$RUT     459.30 +  1.32   459.83   457.88
$TRAN   3431.89 +  4.57  3438.39  3419.85
VIX       19.84 +   .75    
Put/Call Ratio      .55

A beloved wall of worry for investors to scale

Let's not waste any time. Today was Monday. There were mergers. Right out of the chute, IBM announced an agreement to buy Sequent Computer Systems for $18 cash, which neutralized the price at $17.25 all day. This is one of the flattest charts you'll ever see. The almost uniform variations of just $0.06 are the difference between bid and ask. What's even more amazing is that almost 9 times the average daily volume of 1.1 mln. shares traded hands today, or 9.9 mln. shares.

The flatness is a result of the cash deal fixing the price at $18 (So why didn't it settle at $18? The unknown factors. . .what if the deal is delayed, what if it doesn't happen, what if there are glitches or re-adjustments, what if ad infinitum.), rather than a share tender in a stock deal where the acquired company's shares float based on the value of the acquiring company's shares, similar to say MFNX's acquisition of ABOV (a current play). Compare these 2 on the following charts

Though the price of each stock floats, note the parity at which they trade.

So if you ever wondered how an acquisition for cash looks compared to an acquisition for stock, we hope you find this graphical representation helpful and educational.

Back to merger Monday, though there were others in the oil/energy sector, the only other merger of notoriety was Disney's (DIS) announcement that they would acquire the balance of Infoseek (SEEK) not already owned, and merge it into their Internet division, broadly known as go.com. They will issue 1.15 shares of go.com for every SEEK share tendered. Investors hated the deal, knocking SEEK shares down to $45.96 for a loss of $5.56. Disney's CEO, Michael Eisner defended the deal, citing a long term streaming media strategy that will pay off handsomely in the future. He's probably right, but right or wrong, short- term reward on this deal is lacking. In short, more patience required.

With all the boredom that cloaked the market today, you'd almost think everyone forgot about earnings season. Nope. Just the opposite. Investors and traders seemed to be watching and waiting in front of some big announcements tomorrow, where Intel (INTC), Motorola (MOT), International Paper (IP) and Merrill Lynch (MER) will all report earnings. Ameritrade reported today with earnings of $0.05, beating street estimates by $0.02. Revenue, individual accounts, and trades per account were all up across the board. That didn't matter to investors though. True to the reason why we never recommend holding a position over earnings (even with the expectancy of good news), investors lopped off over $2 in value on almost 3 times its average daily. Ouch.

As if investors aren't blue enough from holding their breath over tomorrow's earnings announcements, PPI numbers (assumed to reflect any signs of inflation on the wholesale level) will be released on Wednesday. Not only that, the CPI numbers (representing consumer levels of inflation) follow on Thursday. Even with positive earnings results tomorrow, investors want some confirmation that inflation is in check, and the Fed will not adjust interest rates in August. Just so you know our position, we still think inflation is benign, with nothing to worry about. If the rest of the market wants to worry, that's OK with us. If nobody worries, we could easily to call a contrarian market top. The good news is that investors have this stuff to worry about, so we are not looking for any major correction until after earnings season, barring a complete surprise in the PPI and CPI. Still, more conservative types may want to hold off on any new positions until some of the smoke clears. If the Fed isn't enough to worry about, how about Argentina? Today, rumors were floating that their Finance Minister planned to ask the Pope to support a 1-year grace period on repayment of their foreign debt (really, we don't make this stuff up!). It's this kind of talk that leads to speculation that a country may devalue its currency. The same talk caused markets in Mexico Brazil and Venezuela to drop 2.0%, 2.6% and 1.2%, respectively. For its part as the lead duck, Argentina's Merval index was winged for a 9% loss today.

All the hubbub had investors on a "flight to safety" into U. S. bonds. Not only that, but bond "shorties" were surmised to be covering their position because of this development. Add to that a slight down-tick in the price of oil, and whalla. . .you have a bond rally that brings the 30-year Treasury Notes down to a yield of 5.91%. Some will say that this is confirmation that bonds topped out at 6.15% 2 weeks ago, while other curmudgeonly types said all this was a fluke and rates will rise again. One thing is for sure, we can be fairly certain that rates will not rise on the bond and the Fed will not act anytime soon to raise the discount rate again as long as there is turmoil (or reasonable facsimile thereof) in Central and South America.

There is however, one storm brewing way out to sea. We now take you back to the price of oil. Today's little downward blip aside, one analyst in the midst of explaining the recent strong showing of the CBOE Oil Index, cited 3 factors contributing to the rise: 1) With the Asian recovery beginning to show some vigor, oil demand is rising. 2) Production declines in non-OPEC nations from a lack of recent investment. 3) Roughly 90% compliance of the quotas established by OPEC members. Perhaps #3 is gaining perceived validity just from the number of times it gets repeated, but we still find it hard to believe, given members' propensity to cheat in the past. Not to worry. If this storm hits shore, we'll have plenty of warning, and it certainly won't interfere with any of our current plays during this Summer's earnings season.

In an effort to keep it short tonight, let's get to the numbers. First, the DOW traded in an 80-point range from an opening level of 11,193. A steady decline gripped the market for the first 2.5 hours, taking the index down to about 11,150, wherein it bounced nicely. Following 2 more tests of the 11,150 to 11,160 levels, north she went to establish a new closing record high of 11,200 on the money. A 7 point gain on lack of volume (only 685 mln. shares) isn't anything to get excited about, but 3 intra-day bounces off 11,150 carries a bit more cache in our book. Decliners got the best of advancers 1631 to 1370.

Though it didn't set a record today (a real shocker, we know), the NASDAQ lost only 2.63 points, mostly on Internet weakness. YHOO lost another $9.75 (this is turning out to be an outstanding put play, though we may be nearing a bottom). INKT lost $8. CMGI, -$8. AMZN, -$8. EBAY, -$8. Conversely, NASDAQ's strength came from DELL, up as high as $44 today, but which ultimately closed with an $0.81 gain, and MSFT which closed up $0.94 at $94.19, after making a stretch to reach its previous all-time high of $95. CSCO did some consolidating and INTC, in front of earnings sold off $0.81. Anyway, NASDAQ closed down 2.63 at 2790, but only after making a good effort of staying above a new watermark of 2800. Volume was pretty good at 986 mln. shares. Advancers won out today 2077 to 1933 over decliners.

What about tomorrow? With earnings at the forefront, and PPI/CPI not far behind, we think investors are pining to get back in, but slightly afraid of a major commitment, a fear which may become greater if the PPI is scarier than anticipated. Barring a complete earnings meltdown and PPI/CPI surprises, look for buying opportunities (a.k.a., dips) in this bit of anticipated choppy water over the next few days. After all, it IS earnings season and profits have been good in the big caps so far. Use good discipline. Sell before earnings, and lest you forget, sell too soon. Good luck!

Buzz Lynn
Research Analyst

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