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Market Wrap

Rising interest rates good for stocks?

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        8-24-99          High     Low     Volume   Advances Decline
DOW    11283.30 - 16.46 11365.93 11194.01  732,740k  1,285   1,692
Nasdaq  2752.37 + 32.80  2777.00  2708.06 1035,709k  1,752   2,136
S&P-100  713.56 +  3.63   719.50   707.98   Totals   3,037   3,828
S&P-500 1363.50 +  3.28  1373.32  1353.74            44.2%   55.8%
$RUT     437.12 -  0.13   437.34   435.60
$TRAN   3234.90 + 36.48  3234.90  3194.08
VIX       22.29 -  0.73    24.12    21.76
Put/Call Ratio      .54

Rising interest rates good for stocks?

Lets see, stocks rallied +650 points in the two weeks before the Fed meeting. The Fed announced a raise in rates and the Dow drops -60 points in a heartbeat. Expected? Yes, but... Immediately after the initial reaction, the market then soars +130 points on the language of the bias statement. All is well on Wall Street, right? Sorry! In the next 15 min the Dow then drops -172 points. Seasick yet? Cautious traders then bought the dip and the Dow slowly climbed back up another +90 points to close almost even for the day with a -16 photo finish.

Hopefully this will be the last market wrap that we have to dissect the Fed meeting for at least a week or two. Actually some are already talking about the October meeting.

Okay, here is the blow by blow in explicit detail. For those bored with Fed notes you can skip to the next paragraph. The Fed did raise rates +.25% to 5.25% as expected. No news here. The hidden wild card was the raise in the discount rate by +.25% to 4.75% as well. What is the difference? The Fed funds rate (5.25%) is the rate banks charge other banks to borrow money. The Fed Discount Rate is the interest the Fed charges banks to borrow from the Fed. This rate is almost meaningless since very few banks ever borrow direct from the Fed. Only banks in trouble with no interbank credit available will go the Fed discount window to borrow, but that is another story. Take my word for it, we don't care. I do think however that the discount rate hike is the reason for the big swings in the Dow after the announcement. Traders did not realize the insignificance of the event. The big news in our mind is the bias announcement. In June the Fed said they would be alert to the continuing dynamics of the economy and the signs of coming inflation and would react swiftly to changing conditions. Sounds like a continued warning. Today the Fed statement was designed to put investors minds at ease for the coming quarter. The firming of the markets over the last month, the June rate increase and the current increase would markedly diminish any inflation worries moving forward. (not an exact quote but close) This was taken by many analysts as an all clear signal for no more rate increases this year. The next meeting in October is far too close to Y2K to take a chance of tanking the markets unless inflation soars next month. The bias is neutral but it was neutral when they raised rates today as well. 25 of 28 Wall Street firms surveyed after the announcement said they see no more rate hikes in 1999. That and $2.50 will buy you a cup of coffee at Starbucks.

So what happens now? As several traders put it today, "the Fed meeting is over, now we are going on vacation." The +800 points we gained on an intraday basis in the last two weeks now has a softened Fed stance to support it but we are still two weeks ahead of Labor Day. Anything can happen and the evidence of possible profit taking was there today. The fact that the market only pulled back -16 points after gaining +199 yesterday is very encouraging. Still one should not go skipping down that yellow brick road with no cares in the world. The Nasdaq is holding its own and is only 112 points from a new high, the Dow only -16. Can you spell "overbought"? Lest you forget to watch, the advance/decline was negative on the NYSE again today by about 400 stocks but the Nasdaq was positive by 400.

The bond markets reacted strongly to the "no more rate increases" news and yields dropped to 5.93% and are expected to go lower. This is a good thing for stocks as sub 6% yields are not as attractive as possible equity gains.

Somebody got overly optimistic about the future of the stock market today and offered their seat on the NYSE for $10,000,000. A record offer and only one day after the record sale of a seat for $2.65 mln. Talk about a bid and ask spread! The current bid is $2 mln and the ask dropped to $8.5 mln on Instinet after the close. Shorting this anybody?

Consumer goods closed positive today after research showed that these defensive stocks normally did well after two consecutive rate hikes. Proctor & Gamble (PG) and Dial (DL) were both upgraded on this news.

Microsoft was the hero of the Nasdaq with a huge +5.75 gain after a federal appeals court overturned an order that forced MSFT to make changes in Windows98 and other software because of a lawsuit brought by SunMicro. This did not get MSFT out of the JAVA wars but did help level the field some. Microsoft had been wandering in the wilderness, stuck between $82-$86 for some time. It remains to be seen if the news will stick to the price.

Dell was up slightly, +$.63, on an upgrade by Smith Barney but after the big earnings spike and post earnings depression it may take several more upgrades to hold them at this level.

Gateway continues to outperform Dell and powered up +3.31 today on the heels of a DLJ upgrade and a 12 month price target of $120, +$23 from today's close. Gateway has a 2:1 split coming soon.

IBM got an upgrade today with a 12 month price target of $160, +$38 from today's close, but it was not enough to overcome rumors that IBM will not make estimates in October. Please, no earnings warnings this far in advance!!!

Intel also posted a small gain, +.19, but it was enough to score a new high. Intel was rumored to be planning a pre- announcement of better than expected earnings the first week of September but the news was not enough to make a difference. We do expect Intel to be firm and continue upward from here.

With volume on the NYSE weak today at 719 mln shares we do not expect much in the way of volume for the rest of August. No volume on a high news day is not a good sign. Not a bad sign, just not good. The Nasdaq did over 1 bln shares in posting the +32 gain. As long as we have weak volume we can expect wide swings in prices. Futures are down -2.20 at press time and it is entirely possible we could see some profit taking on the "buy the rumor, sell the news" concept. Historically the day after a Fed meeting the market is down but with a blessing from the Fed anything is possible. Don't fight the tape. The market rules and it is our job to determine direction every day and try to plan our trades accordingly. With the Dow only -16 from a new high, we need to see some confirmation with a positive day or we could be doomed to several days of consolidation. Yes, I am speaking out of both sides of my mouth but it is hard to be bullish (Fed blessing) and bearish (+650 points with no profit taking) at the same time. These are the facts, conflicting but still the facts.

Please, pick your entry points carefully.

Good Luck, Sell too soon.

Jim Brown
Editor

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