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Hey! There's the Beige Book! What's it say?

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        8-11-99          High     Low     Volume   Advances Decline
DOW    10787.80 +132.65 10795.72 10646.91   792,360k  1,870   1,127
Nasdaq  2564.44 + 74.87  2565.15  2490.11   915,027k  2,294   1,566
S&P-100  676.39 + 10.98   677.09   665.41    Totals   4,064   2,693
S&P-500 1301.93 + 20.50  1301.93  1281.43             60.1%   39.9%
$RUT     428.19 +  5.37   428.19   422.82
$TRAN   3130.53 -  7.01  3165.88  3112.57
VIX       26.03 -  1.99    28.51    25.94
Put/Call Ratio      .62

Hey! There's the Beige Book! What's it say?

Not missing a beat, the market picked up this morning where it left off yesterday - on the rise. Then very quickly it began to fade, giving the appearance of a technical-headfake-dead-cat- bounce rally. This was in part spawned by rumors of Alan Greenspan's retirement. Of course, there is no truth to the rumor whatsoever. But that didn't stop bond traders from increasing bond yields to 6.27% and scaring the bejeebers out of the equity market for a few minutes. Not to worry though. A reversal back to the upside was at hand. The 10-yr. treasury auctions went just fine and provided traders another measure of relief. While a small relief rally (and fade) were not unexpected following 3 days of losses, the late-morning strength carried into the afternoon on the coattails of the Fed's release of its Beige Book, providing solid underpinnings for sustaining the DOW rally back to 10,800, its current upper limit of resistance. After 3 down days, we needed some relief.

What is that Beige Book thing anyway? Normally, we wouldn't really care too much about it, except that is what the Fed uses as a guiding tool in determining its direction on interest rates. In that regard, it's a big deal. Now just for a second, step into OIN common sense closet. Do you really think there is anything in that report that Greenspan doesn't already know? Of course not. He knows everything in it, perhaps even before it's written. After all, it's a summary of already known data. Now staying in the common sense closet, knowing that just 2 weeks ago Greenspan all but guaranteed a rate hike, do you really think there is anything in the report that will cause Greenspan to eat his words from late July and forego a rate increase? If your answer is yes, we have some beautiful oceanfront property up here Denver that is just what you're looking for.

All kidding aside, here's what the report said (and we're paraphrasing here from briefing.com). There is no "broad-based" evidence of a pickup in inflation, however there were "widespread reports" in all Federal Reserve Districts of labor shortages and supply constraints. July retail sales slowed "somewhat", while the U.S. economy showed signs of "continued strength". Let's see. . .continued strength, no evidence of inflation, questionable pressure on wages. As your children might utter, "Duh!" Nonetheless, while the report did nothing to squelch the accepted idea of a 25 basis point rate hike, it significantly reduced the fear of a second rate hike. Right or wrong, that's what investors read into the report and that is, in our opinion, the reason we saw such a strong rally today. While it certainly saved a few bulls from the meat packer, giving them pause to think they may have found green pastures again, not everyone is convinced, including us.

We've noted since the weekend that we are likely to stay in a trading range (give or take a few adjustments, based on the PPI and CPI reports)of 10,650 to 10,800. Maybe we were a bit optimistic on the low side, since we went as low as 10,549 yesterday. However, despite today's rally, we're no better off today than we were last Thursday, Friday, or even Monday. Take a look at the graph of today's Industrial average. Notice how it couldn't get through 10,800 on 3 attempts this afternoon? There's that pesky resistance again.

Yes, the bounce off 10,646 looks good. . .can't take that away from it. The advance decline line was positive today (1870/1127) for the first time in a while. That looks good too. Even volume perked up, with 792 mln. shares traded. That still puts it on the low side of moderate. The point to be taken from this is that bears ran to the sidelines at 10,650 support, but bulls couldn't run it past 10,800, thanks to a re-emergence of sellers. Based on what we consider to be less than strong volume, we think today's rise was based on lack of selling, not abundance of buying. That's probably not strong enough to change the market's range-bound mind. We really need to see the money managers get back into the action and show us the volume before we become convinced this is real.

It's possible too that we could see a pop above 10,800 tomorrow during amateur hour that may carry through the morning. It's tough to say whether or not we'll break through convincingly. But our best educated guess is that by tomorrow afternoon, investors will have turned their focus to the PPI to be released Friday morning, which could spark another round of selling based on fear. Remember, we've been running on Beige Book sentiment, which is not an entirely reliable indicator in the face of Greenspan's comments 2 weeks ago. Friday's PPI and Tuesday's CPI are more real. Pay more attention to that - focus on Friday. If the CPI is going to be "bad", the PPI has to reflect it first.

Just so you know the final score, the DOW closed up 132 point to 10,787 on moderate volume. Still, there is no reason to get euphoric, since 240 new lows pounded 42 new highs. Financial issues were the big winners.

The NASDAQ had a pretty good day too, thanks in large part to the technology issues headed by PC's, semiconductors and telecoms. MSFT was up $1.25 to $84.19. INTC, with a new price target of $95, set a new high today, tacking on $4.25 for a $76 close. WCOM popped $2.69 to $77.75. DELL moved $1.81 to $42.25. And CSCO, whom we can partially thank for this rally, shot out of the cannon to $62.64, up $4.19 from yesterday's close - a reflection of a good conference call. All these companies exhibited strong volume today. Total index volume was respectable, but not entirely convincing at 915 mln. shares. Yes, we'd like to see 1 bln. But, that there was strong volume in the Generals today was reassuring. By the close, the NASDAQ had pierced 2550 to hold and close at 2564, its high of the day, but still no better than last Friday's numbers (only 2 points better than Monday). Remember, after 3 days of losses, an up day is called for. Like the DOW, we expect a bit of fear to grab the NASDAQ tomorrow before the close in front of the PPI numbers Friday. Final score here: up 74 points to 2564 on 915 mln. shares. In a nice show of relative strength, advancers trounced decliners 2294 to 1566. 101 new lows though still fought off just 48 winners; but that is an improvement.

In a brief tribute to Internets, we must point out that they finished mostly flat. If you were listening to the news, you may have got the false impression that they were up huge in today's trading. Not so, but they did bounce soundly with huge volume off their lows of the day. The pain was pretty bad until the reversal, which made a break-even day for this sector look stellar. The one standout was AOL, which held an analyst meeting with Morgan Stanley Dean Witter's Mary Meeker, Dealster Goddess of the Internet. That helped AOL gain $7.38 to close back above $90 at $92.38. Lehman Bros. too showed their confidence in AOL by raising their price target to $200 (!!!). Turning point? Maybe. But the emperor is still naked.

We don't have much time to get to IPO's, but 2 stand out. Red Hat Software, a Linux packager came out at $19 and finished at $52 - a winner. Blockbuster entertainment came out at $15 and closed at $15 - neither a winner, nor a loser. In headlines, Alcoa makes hostile bid for Reynolds- read about it online.

We've already touched on our prognosis for tomorrow. Now here's a summary. We have some reason to be temporarily happy after 3 down days. However we still have PPI and CPI numbers to weather. Our expectation is choppiness and range trading for the DOW and NASDAQ. We're at the top of the range now, so tomorrow looks to be down in front of the PPI release on Friday. For those convinced the market is back, if you are going to play calls that reflect your bullish judgement, wait for an absolute unconditional confirmation of an upward market. Buy after amateur hour; A/D = 2:1; positive sector; positive stock; big volume. We'll just have to wait and see which way she breaks tomorrow. It's still "sell too soon" season.

Buzz Lynn
Research Analyst

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