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Market Wrap

Eternal Mosque or Pet Rock?

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        8-16-99          High     Low     Volume   Advances Decline
DOW    11046.79 + 73.14 11046.79 10950.86   582,880k  1,395   1,550
Nasdaq  2645.27 +  7.47  2661.15  2623.05   784,154k  1,902   1,980
S&P-100  692.67 +  3.95   692.67   687.00    Totals   3,297   3,530
S&P-500 1330.77 +  3.09  1331.10  1320.79             48.3%   51.7%
$RUT     433.80 -  0.23   434.43   432.01
$TRAN   3212.17 + 33.10  3212.73  3172.05
VIX       22.95 -  0.17    23.84    22.61
Put/Call Ratio      .62

Eternal Mosque or Pet Rock?

You make the call. Of course, we are referring to the homage paid those 3 little letters, C-P-I. Based on the recent buzz, you might think that the CPI is the be-all, end-all of indicators that would influence Alan Greenspan and Company to raise interest rates. Well, it isn't, but it is all investors could focus on in today's trading, as they squared away positions and remained inactive in front of tomorrow's Consumer Price Index release.

The CPI is the indicator of how high prices rise on the consumer level, as opposed to the wholesale (PPI) level. If you want to gage this yourself, just look at the cost of your groceries, vacations, cars and houses since last year. While it's easy to bemoan how much everything costs, the reality is that inflation just isn't a problem in our economic growth system, based on efficiency and productivity gains. Yes, everyone can point to the increased cost of a plane ticket from New York to Los Angeles, or that over 2000 homes costing more than $1 mln. have changed hands so far this year in the San Francisco Bay Area. However, those have been offset by nationwide price rollbacks on Fruit of the Loom underwear at Wal-Mart, or the proliferation of sub-$1000 PC's. Widespread inflation just isn't out there folks.

So why the fear? Those two simple words, "pre-emptive strike" are the reason. The Fed is interested in controlling inflation before it sets in, and looks to the robust consumer spending and tight labor markets as indications that inflation might be rearing its ugly head. The truth is that the CPI is a reflection of history, not a crystal ball for the future. Whether we need it or not, we are all but assured of a quarter point rate hike on August 24 during the next FOMC meeting. Since this is now commonly accepted wisdom, it is by definition "priced in". What isn't priced in is the supposition that there will be another quarter point rate hike to follow. Nobody yet knows the suit or value of that wild card. Thus any little tidbit that might help investors and traders anticipate the next Fed move is carefully watched. That's why we see the CPI talked about with such great importance right now. Wednesday morning, it will be a distant memory, unless the numbers are truly a huge surprise - not very likely, but you never know.

Because we never really know, it causes us to exercise caution until the unknown becomes know. This manifests itself in investors eyes with that "dear in the headlights" look and ensuing lack of action indicated by today's low volume. Don't get us wrong we're not knocking caution at all. In fact, we've been encouraging it. It's not just us. Apparently others believe the same is true. Take a look at today's number for that confirmation. Note the volumes, in particular.

The DOW, following very mild appreciation to 11,000 at noon began to recede in the latter half of the day in front of tomorrow's CPI figures, and actually went negative into the final hour. That's when a "buy" program was reported to have kicked in, sending the index up in the final 45 minutes to close at +73 points, back above 11,000 at 11,046. Volume was relegated to 583 mln. shares, its lowest recording this year. The 2 issues holding the DOW up today would have to be Hewlett Packard (who reported earnings of $0.85, exceeding average estimates of $0.80 by a nickel after the close - a darn good performance) and IBM. These 2 tacked on $4.25 to $110.31 and $4.00 to $124.38, respectively, adding about 35 points to the total DOW score. Advancers failed to beat out decliners 1395 to 1550. New lows again trounced new highs 128 to 46.

NASDAQ actually took a hike to 2661 before descending back into negative territory. It too was saved in the last 45 minutes, allowing the index to close 7 points in the positive at 2645, but on only 784 mln. shares traded (a bit on the low side and not the kind of volume that sustainable bullish reversals are made of). 1980 decliners eked ahead of 1902 advancers. However, 102 new highs smoked past only 60 new lows. 4 of 5 generals, MSFT, INTC, CSCO, and WCOM all lost value today, while DELL finished unchanged at $41.44 on only 78% of its normal volume. Considering DELL reports earnings tomorrow, which is usually a big deal reflected in lots of volume, it becomes apparent that DELL's earnings aren't stimulating market-moving inspiration among other tech issues. Even HWP beat its average volume today. Let's hope DELL does so tomorrow. Even if the anticipation of DELL's numbers generate a buzz tomorrow, the CPI is going to hog the spotlight.

In the universe of stocks, PC's (excluding DELL), drugs, and disk drives (surprise!) were today's big winners. Internets had some gains but nothing stellar and no volume. Despite the consternation in equities, the 30-yr rate fell slightly to 6.09% today.

So, what's it all mean? Remember we noted that the devil known was better than the devil unknown? In short, investors are sitting on the sidelines anxiously awaiting inflation clues from tomorrow's CPI figures. The devil will then be known. Even if the numbers are perceived as "good", we aren't likely to see much more than a 1 day rally. In a repeat from Sunday's letter, "earnings season isn't until late September, and it's usually a weak quarter. To boot, we've still got that pesky oil price moving insidiously up, and 137 days remaining until Y2K. There just aren't any events on the horizon to cause much enthusiasm." The CBOE put to call ratio is at .62, reflecting (in our opinion) too much optimism in the face of this event horizon. We need to see the overall market turn really bearish before we could take a bullish contrarian point of view. We doubt that will happen following the CPI numbers.

To boot, the DOW has moved almost 400 points in 4 days on weak footing. We think a retracement back down is not far away if the CPI is "good", and immediate if the CPI is "bad". While we won't be so bold as to tell you forget calls, buy puts, we will tell you exercise caution still and begin to plan your plays for the downside when euphoria wanes, when only the reality of no upward-stimulating catalysts exists. Tomorrow's CPI will likely provide the basis for some fast trades. But beyond that, be prepared to change your thinking in a hurry. Stop losses are about to come in very handy. Plan to use them and remember to sell too soon.

Buzz Lynn
Research Analyst

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