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Market Wrap

Deja Vu?

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       1-11-2000           High     Low     Volume    Advance Decline
DOW    11511.10 -  61.10 11663.10 11502.70 1,014,040k  1,013   2,083
Nasdaq  3921.19 - 128.48  4066.66  3904.82 1,682,735k  1,592   2,572
S&P-100  785.25 -   5.67   795.67   783.06    Totals   2,605   4,655
S&P-500 1438.56 -  19.04  1458.66  1434.42             35.8%   64.2%
$RUT     492.61 -   9.28   501.91   492.56
$TRAN   2949.56 -  30.94  3017.18  2948.44
VIX       23.93 +   1.42    24.36    22.19
Put/Call Ratio       .47

Deja Vu?

I hope this is not a repeat of January 1999. After setting a new high on the Dow yesterday, interest rate pressures finally caused investors to step back and reconsider the future. I hope we are not going to relive last January. Coincidentally, Yahoo! announced earnings after a big pre-earnings move, announced a 2:1 split for Feb-8th and then tanked, taking much of the Internet sector with it.

Maybe it is just the way things line up in January that makes the markets rocky. The Fed does not like to raise rates in December and the first meeting of the year is late January, early February. Before this important meeting is non-farm payrolls, CPI, PPI and Retail Sales. The market is in rally mode with all the new year retirement cash and earnings are on the way. With all the positive market events all leading up to a negative Fed event something has got to give. Add to that the +85% gains for the Nasdaq in the last twelve months and the Dow at new record highs and the possibility of profit taking is close to 100%.

After spending most of the day in record territory the Dow finally caved in to the soaring bond yields and coming CPI and PPI reports. It was a valiant effort but the selling on the Nasdaq and the rising interest rates proved too much to overcome.

The Nasdaq never had a chance today. Many tech and Internet stocks gapped down at the open and never saw positive ground. While the bears are painting pictures of gloom and doom the real picture is more likely just profit taking from the almost +400 point gain since last Friday's low. The Dow had held and even had some interest rate sensitive stocks were rebounding some until the fear of darkness descended on traders. As the Nasdaq plunged to the lows of the day just before closing many feared that the YHOO earnings could be a pivotal event. The expectations were so high that anything else would be a disappointment. Traders sold off anything Internet in the last 45 min of trading but both indexes came to a dead stop on their current support levels. 3900 on the Nasdaq and 11500 on the Dow were hit almost simultaneously and both came to a dead stop with only a slight rebound. There was no end of day rally or hordes of buyers coming in off the sidelines.

The event that prompted all the caution was of course the Yahoo earnings. YHOO was expected to earn $.15 but the whisper numbers were in the $.20 to $.22 cent range. Also rumored was a 4:1 split. Yahoo did announce record earnings posting a $.19 gain but they missed even the lowest whisper number and the split was only a 2:1. (my how traders today are fickle, only a 2:1?) Yahoo is now experiencing the Dell syndrome. More shares equal the need for exponentially more revenue to beat estimates and make the whisper number from quarter to quarter. Even stellar numbers like Yahoo turned in today, more than double the same quarter last year, were not enough for investors. In January last year Yahoo repeated almost exactly the same results with a stock split and still tanked from $240 to $130 before the split run began. The Internet sector followed YHOO down. CMGI dropped from a high of $77 prior to YHOO earnings to a low of $40 only two weeks later.

Another battle being waged by the Internet bulls and bears is the PE war. AOL successfully used its very high PE Internet stock to buy a real business with real earnings and a PE less than 10% of its own. On one hand, this is good. Time Warner felt like AOL stock was a good value and were willing to trade. The bad news, AOL is now not just an Internet company and there is a tug of war between traders as they try to decide how the new company should be valued. TWX had a PE of 12 and AOL a PE of 117. The combined entity will end up being valued somewhere in the middle. If the middle is 50-60 then AOL could be trading in the $50 range or less soon. Amazing how valuation math works. Is AOL worth less today just because it now has twice the hard assets and access to 100 million paying subscribers, than it was last week when it only had 21 million subscribers? Is it worth less now that it has its own cable/broadband network? In my mind it should be worth more. The combined entity will be a monster marketing machine. Couple that with the new AOL/TV product announced this week and look at the millions of new eyeballs who will be clicking and buying soon. Yet, because it now controls hard assets which can be valued by historical norms the Internet valuations are being called into question. This is putting pressure on the entire Internet sector as traders rethink the Internet Valuation model. I think when cooler heads prevail there will be a rush to buy AOL as a multimedia giant with a huge Internet footprint and a profit model that works.

The Fed is ahead and there is already trouble brewing. Last night a Fed head started the interest rate hike ball rolling with a hawkish speech and by doing so fired the first warning shot towards the markets. Normally the Fed heads go on a whirlwind speaking tour just before a rate hike to talk up the need for a hike. You can lock your doors and board up your windows but you cannot escape the coming events. As if the CPI/PPI was not enough trouble on Thr/Fri, Alan Greenspan is scheduled to give a speech on Thursday night and it may not be pretty. Many analysts think there is not enough votes on the committee to raise rates a full +.50% on Feb 2nd and they expect Greenspan to use his speaking events to pound the markets and therefore accomplish the same thing. The last time the Fed raised rates +.50% in one meeting was just before the Oct 97 crash. With the market extended so far recently there are several board members who think a +.50% hike could have the same result. We all know Greenspan can bring the markets to their knees if he wanted, so this will be a test of his restraint. Traders feel the market has already priced in a +.25% hike and feel that ONLY a +.25% hike now would be like firing a starter pistol on the road to Dow 13000. This wall of worry that is building could mean rocky and very volatile markets for the next two weeks.

That boomerang came back. I have been telling you that eventually the interest rates would appear to haunt the markets and today was the day. I think this is just another excuse for profit taking but with yields over 6.67% and forecasted for 7% soon the markets are beginning to leak some cash. Liquidity however is alive and well. Trimtabs.com reported that +$10 bln in cash poured into stock funds in the last week and that money will have to be put to work. If they see the market sliding, they may wait. If they see others buying the dip then we could see a rush of cash from the sidelines.

The breadth was terrible again today but about what you would expect on a down day. The bad news again was the volume. Strong volume on a down day is not a good omen. The Nasdaq posted 1.7 bln shares and the NYSE slightly over 1 bln. Traders would rather have seen light volume and lack of conviction.

Several Internet stocks I watch dropped back to strong support at the close and in checking after hours trading they had not moved more than a dollar or so. This is positive considering the -$20 than YHOO dropped in after hours trading. It is possible that we could see a dip at the open and then a slow recovery but we are at a very dangerous point. A break much under 3900 on the Nasdaq could start a slide to 3700 or even lower. The two days of record gains by the Nasdaq may have just needed a release day but the magnitude of some of the drops makes me cautious. I urge you to be cautious tomorrow until we see which way this market is really going.

Good Luck, Sell Too Soon.

Jim Brown

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