Greenspan & Meyer, the tag-team tandem
If it's not the one, it's the other. In the past, we have always had Alan Greenspan to contend with but now it seems there is a new nemesis in town with the power to crush investor optimism. I am, of course, referring to Fed Governor Laurence Meyer. We are used to having comments from time to time from the governors of each Fed district but it appears Alan may have recruited Mr. Meyer to help in his recent crusade against the markets. His comments have mirrored that of Chairman Greenspan and his timing has been impeccable. Today was a perfect example. The market was focused on Alan Greenspan's comments at the Ford Museum Millennium Lecture Series at Grand Valley State University in Grand Rapids, Mich. Here he praised the economy and the technological advances made by "free peoples operating in free markets." He talked of the increased value of information and ideas in propelling the economy forward. It was a positive and well received speech that didn't tell us a darn thing about the future direction of interest rates. It was no matter though as his B-2 bombers were already in the air with Mr. Meyer speaking only an hour after Mr. Greenspan.
Gov. Laurence Meyer's speech was given in Philadelphia addressing the National Association of Business Economics. His mission was precise and used the most common and perhaps the most feared of economic bombs, the tight U.S. jobs market. This would undoubtedly fuel inflation if wages do begin to rise. He said that he saw hints both in recent data as well as anecdotal evidence that "wage pressures may be building" and that the Federal Reserve should be as pre-emptive as possible in curbing inflation. As you may have guessed, the fallout on Wall Street flattened the 2nd day of any post-Labor Day rally. Mission accomplished.
Flying in support to help dampen the markets was the Bank of England's surprise interest rate hike today. The BoE choose to raise their short term interest rates up 0.25% to 5.25%. The London FTSE closed down almost 56 points today in response.
Here is the damage report...The NASDAQ appeared the hardest hit as it fell 28.52, down to 2808.74. Unfortunately it closed right at the day low. The Dow Jones Industrials managed to avoid severe damage by closing up 2.21 at 11036.34. The S&P 500 closed off of its lows at 1344.15, down 6.30. It was the Dow Jones Transports that took a direct hit and lost 28.34 to close below the psychologically important 3100 level at 3081.15 or a new low for the year. This can also be attributed to higher oil prices but technical analysts will always point out that the markets don't usually rise while the Transports are falling.
I guess one positive note we can cite is the return of volume as the NASDAQ traded over a billion shares today (too bad it was on a down day). The volume on the New York was better as well at 783 million shares. It is a well known fact that volume usually picks up after Labor Day as investors and institutional traders return from their summer break. But we didn't see that on Monday, probably due Fed Chairman Greenspan and Fed Governor Meyer's comments pending on Tuesday. This could explain the Brokers stand -on-the-sideline and hold-up-the-wall attitude on Monday. There was no repeat today though as heavy volume is welcome. Unfortunately we might expect big volume to curb the volatility and there were no signs of that today. Even though this is a start, we want to see a stronger sign of commitment that stems from big volume, not just decent volume.
Let's map out today's activity for a better understanding. The Dow opened lower (down 70 points on the low) before trending higher right through Alan Greenspan's comments and topped out (up 80 on the high) on Fed. Gov. Meyers comments. Within 2 hours we were right back at the low for the day before mounting the final 30 minute rally. This was a similar trend for the S&P 500. The NASDAQ also had a similar trend minus the late day comeback. Here is a look at the charts.
While sometimes the daily charts can look ugly... Fear not, for Goldman Sach's Abby Cohen continued to soothe her clients fears that as long as labor costs remained stable, the market should see 11,500 on the Dow and 1385 on the S&P. She also increased her earnings estimates for both 1999 and 2000.
Another issue on Wall Street was the increase of earnings warnings that is typical of this time of year. Ingram Micro (IM) was probably the biggest as they warned profits would be between .10 and .12 cents compared to an estimate of .40 cents. They cited pressures on domestic gross margins and announced they will be replacing their CEO. IM closed down $6.00 (or 31%) at $13.31. Others in the herd of black sheep today included VF Corp (VFC) who expect a .15 cent shortfall. The jeans and apparel maker, home of Lee, Wrangler and Vanity Fair, cited slow traffic, poor sales comparisons and weak European jean sales as damaging factors. VFC closed at $31.06, down $3.69 (10.5%). Another was the Pharmaceutical contract research organization, Covance (CVD) who warned that slowing revenues in its Phase III clinical trial business and a large contract cancellation will cause them to miss estimates by .05 cents. First Call expects .26 cents. The company also said it will shed 150 workers. CVD ended at $10.63, down $4.88 (31%). And one final one to prove that if you offer an earnings warning on Sep 8, 1999 your stock will likely fall by 31%, IMRS said it expects third-quarter profits to fall below expectations due to a longer sales cycle and delays in starting up large projects. Consequently, IMRS ended down $5.19 to $11.25 which is 31%.
On a more positive note, Global Crossing (GBLX) announced a joint venture with Microsoft and Japan's Softbank to build a $1.3 billion broadband network in Asia. This pushed GBLX up $5.25 to $25.56 while MSFT went lower with the NASDAQ to close down $2.00 at $92.25.
SUN Micro introduced their latest product today named Sun Ray 1. It will make computing for enterprise users "as friendly and reliable as picking up and using a telephone handset." SUNW closed down $0.88 to $85.44. Also today, Red Hat (RHAT) was a big winner on news of alliances with Gateway and V-One. They also said they would be pushing into the Japanese marketplace. The stock is on a two-day surge which topped out at $134 today before retreating with the NASDAQ. RHAT closed at $116.75, bringing its 2-day total to $31.81 or over 37%. CHINA.com was a winner again today. After Tuesday's announcement with AOL to set up a Hong Kong ISP, Bear Sterns initiated a Buy rating on CHINA which sent the stock up $6.13 to $62.69. Their 2-day total equals $14.81 or 31%. This is proof enough for me that the bulls aren't done yet.
In merger news, Dell announced after the close Wednesday that they will purchasing ConvergeNet Technologies for $340 million. ConvergeNet is a storage company focused on enterprise data-storage technologies for storage area networks (SAN). This will help Dell towards achieving its goal of becoming one of the top 3 storage venders in the world. Also Lycos (LCOS) announced they would be purchasing online financial data provider Quote.com for $78.3 million in stock.
We also had some smaller economic reports out today. U.S. consumer credit $8.8 billion, outpacing forecasts of a $5.2 billion rise. This report is taken with a grain of salt though as it typically has wide fluctuations and doesn't measure all aspects of credit, like loans secured by real estate. We also had July Wholesale sales which fell for the first time since January. U.S. Wholesale sales dipped 0.2 percent in July to a seasonally adjusted $227.3 billion. This report indicates that consumer spending is slowing. Neither one was a major market mover as investors are eagerly awaiting Friday's PPI report.
So just when we thought we were making some headway, the tech- heavy NASDAQ is now rolling back down the hill after Friday's mad dash to the top. The good news is: we should see strong support at the NASDAQ's 50 dma at 2700. The bad news is that is about 100 points away. But there are reasons to be optimistic. The 30-year bond yield closed unchanged at 6.07% suggesting that today's interest rate comments weren't that startling. The Dow also performed a bullish technical maneuver by bouncing off the morning lows around 10,970 to rally towards the close. And don't forget those tech stocks. Sure, a lot of them took the brunt of the sell-off today; but they have been hotter-than-hot lately and beginning down the earnings runway. Don't be scared out of your positions needlessly. The PPI on Friday is the real catalyst for stocks and bonds not the seemingly endless line of speaking arrangements by the Fed governors. Remember Meyer's remarks indicate that he has not yet made up his mind about whether the Fed will need to raise rates. Instead he will let the numbers decide. In fact, this week is shaping up a lot like last week and we all remember what happened on Friday.
Sell too soon.