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Market Wrap

AOL finds a dance partner and the place goes nuts

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      1-10-2000           High     Low     Volume  Advance Decline
DOW    11572.20 +  49.64 11638.28 11532.48 1,064,850k 1,775  1,334
Nasdaq  4049.67 + 167.05  4072.36  3882.63 1,737,058k 2,586  1,607
S&P-100  790.92 +   7.43   794.16   783.49    Totals  4,361  2,941
S&P-500 1457.60 +  16.13  1464.36  1441.47            59.7%  40.3%
$RUT     501.89 +  13.58   505.96   488.31
$TRAN   2980.50 +  15.78  3002.03  2963.59
VIX       22.51 -   0.56    23.91    21.94
Put/Call Ratio       .40

AOL finds a dance partner and the place goes nuts

Ahh, just look at the happy couple. . .Fred Astaire and Ginger Rogers have nothing on AOL and Time Warner (TWX) who engaged in magic of their own as they took to the floor and danced their way into the history books by announcing the largest corporate merger ever. It's official. For the princely sum of $166 bln in AOL stock, TWX will become a part of AOL. In the details, TWX's Gerald Levin will stay on as CEO and AOL's Steven Case will be Chairman. TWX shareholders will own 45% of the new company, while AOL shareholders will retain 55%. Both companies gain substantially from the transaction - TWX because it will now have distribution to roughly 20 mln (and growing) AOL subscribers; and AOL because it will have new content to distribute, not to mention some cable properties of its own. Much like the rooster taking credit for the sunrise, AT&T's Michael Armstrong chimed in that the merger validates AT&T's commitment to cable as the broadband distribution method of choice for the future. The merger also gives AOL the cable access via TWX's system, but makes it tougher for AOL to continue to do battle against AT&T for free access rights to their cable properties. Let's see if AOL will now let other content delivery ISP's use TWX's cable system free of charge - not likely. When all was said and done, AOL gave up $1.25 to close at $71.13 (traded as high as $80 during amateur hour), while TWX closed up $25.31 at $90.13 (traded at $102 during amateur hour).

The marriage marks the first big Internet merge with big media. Internet chat rooms were rampant today with speculation about who would be next. "Who" doesn't really matter. Just know that consolidation amongst the ISP/Cable/Content companies will continue if those industries are to survive in the Internet revolution. With the ceremony out of the way, we can now focus on the reception - and Wow! Whatta party!

The attendance list was impressive. The first to arrive was "Bond", "30-year Bond". Traders have already priced in a 25 basis point increase in the February bond futures contract following the next FED meeting in February. Furthermore, they have also priced in a 62% probability of 50 basis point increase. That rates will rise at the next FED meeting is a foregone conclusion. It's now just a matter of how much, and the market seems resigned to it. Apparently, Mr. Bond isn't as popular as he used to be either. It seems even former "Bond" lovers were leaving in a return to equities today, which may have accounted for today's yield increase to 6.59%. Many more traders could be jilted as we get closer to the PPI and CPI index release later this week. Aren't we suppose to want to be in bonds when the rate gets too good for equity investors to pass up? Yes, but not until the returns approach 25%-80% per year (pick your favorite index)! Using the same logic, wouldn't the yields of the equity market get people to sell bonds to buy stocks? Bingo! Additional liquidity from selling bonds also sparks the volume, which raises stock prices. Even conservative bond investors have a greed factor.

Also at the party - a host of Internet companies (one of them makes headlines and they'll all be there in a show of support), including YHOO, who reports earnings and possibly a split tomorrow at the kickoff of earnings season (+28.81, 436.06); CMGI (+31.50, 306.50); INKT (+15.50, 104.88); NSOL (+21.88, 224.63); INSP, a recent splitter (+15.31, 114.50); DCLK (+13.19, 249.63); and EBAY (+7.50, 142.25). Were they not overshadowed by the AOL/TWX merger, Nextlink's (NXLK) agreement to buy Concentric Networks (an ISP; symbol - CNCX) might have made front-page news instead. CNCX was up $9.63 to $39.63 on the news while NXLK fell $1.44 to $77.06. News that GM was buying the 50% of Swedish carmaker, Saab, which it didn't already own failed to even register in today's news. Biotech companies also filled the guest list of active market participants. However Celera Genomics stole the show by gaining $55.06 to close at $242 on news that they had successfully mapped 90% of the human genome almost a year ahead of schedule.

Meanwhile, back on the dance floor, all this euphoria over a huge merger rubbed off on most other participants, which in the end, sent the DJIA to a new record high today and moved the NASDAQ within 82 points of a new high. Both the NYSE and the NASDAQ displayed stellar volume, telling us that liquidity is alive and well. DJIA 10,938 and NASDAQ 3711, which had the gloomsters out in full force predicting 20% correction are a distant memory. Tech stocks are back in vogue, and "cyclical rotation" has already cycled and rotated. What we're seeing here is the coining of a new phrase, "time compression". The theory is that the markets are moving in much faster cycles now. Corrections that used to take months or weeks now take only days. With increases in volume thanks to electronic trading, action and reaction to news takes place much more quickly than it used to. Remember when option prices were printed once a day in the newspaper only? Neither do we, but it really use to happen that way. Now we can react in seconds to news that happened just seconds before. If CMRC or YHOO were trading back in the 1970's, their wild gyrations would likely have been spread over months rather than minutes, thus we wouldn't have noticed the volatility. There is simply more information available on which to act and greater ability to act on it without delay than ever before in history. It's not so much that we're compressing time. It's that we're accelerating the arrival of new information in which to make new trading decisions. Decisions cause action. Action causes volume, and liquidity makes it possible. But we digress.

Here's the meat of the DJIA. It closed at 11,572, up 49 points on over 1-bln shares. Advancers beat decliners by a wide margin (1775:1334), telling us that the advance was broad-based and with conviction. For the first time in a while, new highs beat new lows by a wide margin (103:60). Thank the tech stocks in the DJIA for today's record. HWP was up $7.19; IBM up $4.50; INTC up $3.75 on a BBRS/Dan Niles price target upgrade to $112; and MSFT up $0.81. All of this is a strong positive in our book, but as we're fond of saying, nothing goes up forever in a straight line. To that end, the market may take a quick breather giving us a buying opportunity. Just be prepared to take advantage of it and remember those stops for a wake up call when you least expect it. The nearest support is at 11,525, though we got mild support this morning at 11,550. Resistance is up at 11,637.

The NASDAQ has been amazing too - a 300-point recovery in 2 trading days. Gaining 167 points today, its highest 1-day gain ever, the NASDAQ closed at 4049 on 1.74 bln shares. That volume would rank in roughly the top 5 of all time. 2586 advancers put the hurt on 1607 decliners, while new highs beat new lows by almost 5:1. That's huge. Tech stocks again ruled the day from the chip sector to Internets to biotech. (See dance floor above). Support was found in the morning at 3963, but 4000 held later in the afternoon. If it falls south of here, 3925, then 3875 is the next stop. Don't get complacent. Just when the market seems unstoppable, surprises happen. Remember earnings season begins tomorrow.

The first surprise could be if YHOO fails to announce a split or to blast the whisper number when it releases earnings after the close. It could also come as a piece of economic news causing equities to once again look for guidance from the bond markets - that means investors could lighten up on Thursday morning if the PPI numbers greet traders like a 2x4 on the side of the head. While all looks rosy thanks to liquidity, there are going to be some bumps in the road. Be ready to buy the dips, but don't catch the falling knife - it's tough on financial fingers. We should enjoy the AOL/WBX reception while it lasts, but we won't overstay our welcome. As always, sell too soon.

Buzz Lynn
Research Analyst

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