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Phantom Menace invades Wall Street

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        9-13-99          High     Low     Volume   Advances Decline
DOW    11030.33 +  1.90 11042.36 10982.20   657,900k  1,211   1,727
Nasdaq  2844.79 - 42.29  2883.36  2844.76   988,592k  1,672   2,204
S&P-100  708.76 -  4.03   712.79   707.87    Totals   2,890   3,931
S&P-500 1344.13 -  7.53  1351.66  1341.70             42.4%   57.6%
$RUT     439.65 -  1.54   441.26   439.57
$TRAN   3089.31 +  0.70  3132.21  3082.83
VIX       23.84 +  0.62    24.15    22.95
Put/Call Ratio      .56

Phantom Menace invades Wall Street

What does that mean? Black goo. . .Texas tea. . .dinosaur wine, or Oil of course. Yes, our old friend, the price of a barrel of oil is back in the news. While no slight to the $/Yen exchange ratio, which also gave investors a scare on Wall Street (the Dollar reached it's lowest level against the Yen in 3 years), a rising oil price bares most of the responsibility for the lackluster activity on the NYSE, and the downright sour mood in the tech sector today. Surprisingly, the oil sector, which we would expect to be up on the news had a bad day anyway. However, that was probably just profit taking in the wake of recent oil stock gains.

Why do we care about the price of oil? Simple. As we've noted before, oil is the economic engine that drives the Western world. Without it, the lights don't come on, our computers don't work, and we have nothing to power our means of production of goods and services. We need it and will pay whatever it costs in order to keep producing. No matter what it costs, we've "gotta" have it. That is why oil is so important. If that's the case, why hasn't this been an issue before? That's easy to answer too. First, oil prices had been dropping for the last 3 years until 6 months ago when they reached a low around $11 a barrel. In the course of daily business, it was a diminishing expense, silently helping drive earnings to higher levels. Since then, the price has more than doubled to just over $24 by today's market close. How do you think that will affect earnings? Right, it will apply some downward pressure. However, just like waiting for Jell-O to "gel", earnings pressure won't happen immediately. It's a process that could take from 6 to 18 months.

This is really uncharted territory for OPEC, as they have not adhered so rigidly to production quotas in over 20 years. Lo and behold, against all odds, the quotas are working this time, with no plans to let up until at least April 1, 2000. Estimates that the price will reach $26 in the near future seem to be coming true. It is supposed by investors that all this theory in action will culminate in (you guessed it) inflation, which won't go unnoticed or unaccounted for by Alan Greenspan. Before you jump out the window of the nearest high-rise, remember that this not only applies to the U.S., it applies to every oil dependant nation on Earth. It has no favorites, and is not controllable by even Alan Greenspan. To raise interest rates on the price of oil alone would put the U.S. at an economic disadvantage relative to other countries experiencing the same variety of inflation. Don't look for "Chainsaw Al" to act against the US's best interest in favor of world economic harmony.

The other item of news today, also raising the yellow investor caution flag was the Dollar's weakness against the Yen. It is presumed that we still buy a huge amount of products with a label reading, "made in Japan". This is true. The theory goes that the fewer Yen a Dollar buys, the more Dollars we have to spend to buy the same Japanese amount of goods and services. If you are now thinking, "uh oh, that sounds like inflation too", give yourself another gold star.

Between, these 2 items, oil and Yen, investors found enough reasons to still be fearful of inflation. It is interesting that the bond market really didn't participate in any oil or Yen related losses today, as rates remained relatively stable, closing up just .022% at 6.055%. Technology however had a much tougher day, the likes of which we'll get to in just a moment.

That's the long way of explaining that investor's are still nervous over perceived Fed interest rate raises at the next FOMC meeting in October. The bond market still seems rather ambivalent toward that prospect, but wait until tomorrow when the retail sales index is published at 8:30 am. The Street is expecting a hefty 0.7% increase. If it's any higher than that, look for fear and worry to grow in anticipation of Wednesday morning's release of the CPI figures. While consumers still seem to be in spending mode, which puts some Fed watchers on guard, the PPI as a precursor to CPI has shown no core signs of inflation. Thus our gut tells us that the CPI figures will allow the markets to temporarily breath a sigh of relief. Just don't place any big bets on Tuesday afternoon. There is no guarantee.

In the mindset currently gripping investors, we have lots of news to relay, especially in the tech sector. Starting thing out this morning, Qualcomm (QCOM), Motorola (MOT), General Instruments (GIC), Conexant (CNXT), Cisco (CSCO), Vodaphone (VOD), Bell Atlantic (BEL), and EMC (EMC) all shaped today's markets.

First, QCOM pulled out of an SC Cowan tech conference, causing investors to speculate that they might issue an earnings warning. That's a pretty big "uh oh" for a high flying bandwidth enabling company, which until 2 weeks ago was all the rage among traders and long term investors alike. QCOM has since lost about 25% of its value in 11 trading days. However two things that shouldn't be lost are that Qualcomm is now the number 2 seller of digital handsets in the U.S. market, behind Nokia and ahead of (yes, it's true) Motorola and Ericsson. CDMA technology is emerging as the world standard for digital transmission and outsold TDMA handsets for the first time in Q1, 1999. Not only that, but Sprint PCS had the highest percentage growth of new customers of any carrier in the U.S., adding 2.2 mln. so far this year, now totaling over 4 mln customers. Royalties, not just in the U.S., but internationally are huge and growing. QCOM is a long term winner and will likely be back on our call list as soon as it shows some stability and play potential. Anyway, QCOM will be holding analysts meeting of their own on Wednesday, wherein if true, the rumor of earnings shortcoming will likely be announced. Stay tuned folks.

Next, the Wall Street Journal reported that Motorola was planning a run at General Instruments, the 90% market share holder of cable set-top boxes. The Street frowned on this proposed marriage, since this deal would be dilutive to MOT earnings well into next year, while MOT has had earnings shortfalls in recent quarters.

Third, Vodafone and Bell Atlantic are in serious negotiation to form a JV with over 23.5 mln. subscribers. (Remember VOD bought Airtouch earlier this year) That would make the conglomeration the largest U.S. wireless carrier ahead of AT&T. There will be a vote on it this week. Both companies yielded stellar gains today, with BEL up $1.75 to $64.25, and VOD up $10.75 to $205.56. By the way, Airtouch also uses QCOM's CDMA protocol.

Rounding it out, CNXT, one of our call plays, announced a 2:1 split, but lost $4.25 anyway on profit taking, thanks to its recent gains, while CSCO, despite an upgrade to Buy and addition to Merrill Lynch's "focus one" group got pinched for a $0.06 loss.

Another notable winner among tech stocks today was EMC, which was upgraded by Banc of America Securities to Buy, who cited less Y2K uncertainty and EMC's addition of new customers at a faster pace than previously thought. It's not fashionable to dismiss Y2K fears anywhere else right now, but that may be a new trend, as perhaps other analysts and companies realize that in some cases, the problems won't be as severe as originally thought. B of A's new price target for EMC is $90.

Specifics aside, today's market action was without conviction by bears or bulls, but marked by interest rate fears, lack of leadership, and profit taking in the technology and oil sectors. Volume was light to moderate, depending on the exchange. In earnings this week, an old favorite, Solectron (SLR) announced profits of $0.33, a penny ahead of estimates. The big surprise came when they also announced they would buy Smart Modular Technologies (SMOD) in a stock deal valued at $2 bln., or about $38 per SMOD share. SMOD closed today just over $24, but was up over $6 in after hours trading. SMOD owners should be thrilled. Oracle, who has handily beaten estimates in the past 5 quarters reports tomorrow, followed by Jabil Circuits (JBL) on Wednesday. We focus on the techs here, because it is believed that as market leaders, techs will lead stocks higher if the news is good.

Here are the specifics.

The NYSE for its part traded light today on only 658 mln shares. The only other adjective we could use here is "flat", as the DJIA had a trading range of only 60 points. It closed up a measly 1 point at 11,030. Decliners outpaced advancers 17 to 12. 173 new lows were looking kind of ugly compared to 68 advancers. This doesn't look so hot because it shows a few winners hold up these "lofty" levels, while the rest of the market is sinking. Even so, it's often said on the Street, "never short a dull market".

NASDAQ looked like a bigger loser today than it really was. Yes, techs and Internets got pounded today as the index fell 42 points to close at 2844, with 22 decliners for every 17 advancers. However, new highs doubled new lows 121 to 60 on strong volume of 989 mln shares. That part is a plus in our book. Support is likely to remain good this week at around 2800, barring any catastrophe on the inflation front. We'd sure like to see advancers beating decliners again and the volume rise to over 1 bln shares though before we get happy with this market. Keep your fingers crossed.

So how does all this stack up for the rest of the week? Suffice it to say that in this triple witching week, which generally props up equities, we've already seen noticeable profit taking on the NASDAQ in front of tomorrow's retail sales figures and Wednesday's CPI figures. This happens to be earnings warning season too. In short, it's interest rates against earnings warnings. Fasten your seatbelts; it's likely to be bumpy. First and foremost, our job is to protect our capital. Don't force a trade just because you feel psychologically compelled to do so. Wait until the market gives you the sign that it's profitable to trade. You know the drill. Do the homework Janar-style; wait until the passing of amateur hour; watch for the market, the sector and your stock to be up (down in the case of puts); advancers beating decliners; make your move; use the stops in case the trade moves against you. Of course, sell too soon! Good luck!

Buzz Lynn
Research Analyst

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