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Market Wrap

Yahoo! Is that what you yell as the cliff crumbles below you?

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        12-7-99            High     Low    Volume Advances Decline
DOW    11106.60 - 118.40 11253.40 11106.60 1,085,860k 1,046  2,025
Nasdaq  3586.92 +  40.91  3589.06  3532.41 1,564,357k 1,992  2,138
S&P-100  756.10 -   6.65   765.09   755.82    Totals  3,071  4,163
S&P-500 1409.17 -  14.17  1426.81  1409.17            42.4%  57.6%
$RUT     465.70 -   0.05   467.29   463.63
$TRAN   2886.16 -  19.36  2929.93  2886.16
VIX       21.38 +   0.32    22.33    21.14
Put/Call Ratio       .51

Yahoo! Is that what you yell as the cliff crumbles below you?

The only story today if you were long Nasdaq stocks was the incredible run by Yahoo. Closing up +67.19 it was trading after hours down -10.44 at $337. The driving force of course was the addition of YHOO to the S&P-500 after the close today. In just the last week YHOO has gone from $210 on Nov-30th to as high as $353 today. A tremendous +$143 in one week. If you were in this play you are probably sipping champagne and getting ready to celebrate Christmas early. I hope you sold today as this type of hype is totally unsustainable in the real world. The market cap of YHOO rose over 50% in one week to $90 billion yet not one new product or service was added. While YHOO would be a tempting short target for tomorrow it could be several days before the slide begins. Many funds will wait until the hype dies down before opening their positions. Nothing requires a fund to buy before the inclusion date. Over 1.7 mln shares were traded after hours.

When a stock is added to the S&P it impacts the weighting of all the other stocks in the index. Essentially, fund managers must sell some of the other 499 stocks as they buy YHOO in order to balance their holding to match the S&P weighting. MSFT and GE, the two biggest S&P components will have millions of shares sold across all the funds. The S&P may see some pressure due to the selling for rebalancing and any pullback on YHOO from the +$143 gain. In reality part of the market weakness today was due to funds selling stocks in advance of the YHOO event. YHOO is now trading at a multiple of 117 to sales and each Yahoo visitor is valued at over $2500. Next time you hit their site, you decide if your visit was worth $2500. If your 60 second visit is not worth $2500 then what is it worth? $50, $100, $250? If you picked the high number of $250 then YHOO should only be worth $33.80 per share. But of course my math may not count. Schoeder analyst Arthur Newman raised his price target on YHOO today to $350 claiming that YHOO was worth a premium in the Internet portal market but "the only question is how much". He left his "outperform" rating on the stock, which is only barely a recommendation.

While YHOO was exploding off the charts the rest of the market was very mixed. Some other Internet big name stocks were down as investors took profits. AMZN -1.69, EBAY -12.74, PHCM -8.13, ATHM -4.50, SUNW -2.44. There were some big winners on the other end of the scale. RHAT +$52, JNPR +$43, CMRC +34.50, EXDS +20.69, ARBA +17, SFE +14.63, VRSN +12.39, RNWK +10.75, CMGI +9.97. It was a mixed market as traders seemed to run from stock to stock as each rose and fell dozens of points intraday. A little frothy here at the top? The four pillars of the Nasdaq, DELL, CSCO, INTC, MSFT only managed a total of +.75 for a gain today. Could it be that the Nasdaq string of records is tiring?

The NYSE lost -118 points on over 1 bln shares of volume. This is not a good sign. Volume precedes price and high volume on a down day could be an omen. The Dow leaders all led down today with KO, GM, MMM, CAT, PG, JNJ, MRK all posting solid losses. Advancers beat decliners by 2:1 on the NYSE and were flat on the Nasdaq. We are obviously seeing two markets here. The stock market and the tech market.

The Dow weakness today came after great economic numbers were announced this morning which should have propelled the Dow upward, not downward. The productivity numbers were revised upward to +4.9% from +4.2% and were the strongest in seven years. The unit labor costs actually went down -0.2%, the biggest decline in two years. With economic reports so favorable the Fed may as well cancel their meeting scheduled for 12/21 and just take a long holiday break. The odds of a rate hike this year are zero. The PPI on Friday would have to be a blow out for the Fed to take any action.

The continued Nasdaq rally has silenced even the noted bear, Barton Biggs. He said today that the rally was a bubble and now officially a mania but was so strong it could continue for some time. When Barton says the market can go up for some time to come, we must be close to the top. He has been wrong for so long that a change in attitude could be the capitalization the market has been expecting.

With the Nasdaq up +63.6% YTD every Nasdaq stock must have had huge gains for the year, right? Did you know that only 2221 of the 4500 Nasdaq stocks have gone up this year? 2371 have actually gone down YTD. The S&P looks the same with only 43% up compared to 57% down. So if only 48% of the Nasdaq has gone up this year how can the Nasdaq be up +63%? The answer is the way the index is weighted. Only ten stocks make up 34% of the entire index. The biggies of course are CSCO, MSFT, DELL, INTC and in ninth and tenth place are YHOO, up +178% for the year and QCOM, +1439% for the year. With 100% to 1400% gainers in the top ten it is amazing to think it is only up +63%.

The PC sector took a hit today with a downgrade of Gateway. Analysts said slow delivery of chips from Intel would impact earnings and cause them to only meet estimates. Rumors that employees were grumbling at the Christmas party that they were not going to make bonuses due to slow sales did not help either. After the close today International Data Corp lowered its growth forecast for the entire sector for the fourth quarter. DELL, IBM, GTW, CPQ, HWP are all being hurt by chip shortages and memory shortages caused by the earthquake and the Intel problems. They lowered the growth forecast to +17% from +20%. They also claimed that 4th qtr PC orders were slowing due to a freeze on new purchases until after Y2K. This is not going to set well with the tech sector tomorrow.

Where do we go from here? I wish I had a crystal ball. There is a lot of support under the Nasdaq. Every dip is met with strong buyers waiting in the wings. We will probably see some post-YHOO let down but who knows how far down will be. I would watch the market breadth and look for any pullback to be a buying opportunity. Just wait for it to bounce before starting a new position. We still have the Y2K uncertainty which could be contributing to the bad breadth and until the Dow recovers the Nasdaq will not be stringing many more records together. The Dow and Nasdaq may disconnect from time to time but they always come back together. Patience is the key word today.

Pick your next entry point very carefully!
Good Luck, Sell Too Soon.

Jim Brown

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