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Market Wrap

It is not the Economy, Stupid.

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       2-08-2000           High     Low     Volume Advance Decline
DOW    10957.60 + 51.81 11022.75 10904.26 1,052,863k 1,588  1,438
Nasdaq  4427.50 +105.73  4428.48  4370.01 1,981,522k 2,385  1,842
S&P-100  782.21 +  9.32   783.69   774.19    Totals  3,973  3,280
S&P-500 1441.75 + 18.75  1441.83  1424.24            54.7%  45.3%
$RUT     537.49 +  5.10   539.15   532.39
$TRAN   2582.80 + 10.59  2598.58  2562.81
VIX       22.10 -  1.60    22.96    21.99
Put/Call Ratio      .56

It is not the Economy, Stupid.

The worker productivity report this morning showed no hint of inflation for the fourth quarter with worker productivity rising a huge +5% while unit labor costs declined by 1%. It was a case of news too good to be true. The report defused fears that the Fed would react again soon to raise rates. Investors went on a shopping spree and tech stocks were on the top of the list. The Nasdaq posted another record high, the third in three days, at 4427. The Nasdaq winning streak has now stretched to seven days and +13% from its low of 3750 on Monday of last week. The Nasdaq showed no signs of resting and closed at the high of the day. Tomorrow is likely to start out in rally mode as well after Cisco announced record earnings and a 2:1 stock split after the bell. As a major component of the Nasdaq the +$8.00 CSCO gained in after hours will jump start the Nasdaq at the open. Nasdaq futures are up +$25 at 6:15

The Nasdaq volume today at 1,972,320K shares was the second largest on record. Coupled with the strong volume on the NYSE of 1,052,863K it was just another three billion share Tuesday. This is almost twice the daily volume from just one year ago. Unfortunately the Dow did not really take part in the tech rally again. The Dow is setting up for a test of stamina between the bulls and bears as the current lower high scenario is coming even closer to the current support of 10850. With the Nasdaq stretching the current string of positive days to the breaking point the Dow will have to contribute to the rally soon or we could be in trouble. The Nasdaq closed over 4400 for the first time while the Dow was not able to even close over 11000 on good numbers. As the Nasdaq races higher the Dow will become an increasingly heavy handicap. How many flights of stairs can you climb before collapsing if you had to pick up another 20lbs of luggage on each landing?

Part of the drag on the Dow today came in the form of earnings warnings and news of new court battles for tobacco. Nike warned they would miss their earnings this year due to store closings and the loss of retail space in several of their larger outlets. Foot Locker, Just for Feet and others are giving less retail exposure to Nike as they try to cram more brands and different merchandise into their stores. NKE dropped -18% or -8.56 in heavy trading.

In the "it can't get any worse" category, the tobacco industry came under fire again with news that there was going to be a landmark suit alleging price fixing among the major players. With a potential fine or settlement in the billions of dollars this news was just another blow to already depressed tobacco stocks. Phillip Morris (MO) dropped under $20 to a price not seen since 1994. Nabisco closed at $30.38 which was a four year low. Add this to the $3000 fine for every teenager that smokes by 2004 and the new +.25 per pack proposed Federal youth tax and their future profits are literally going up in smoke.

The health care sector also took a major hit today after Aetna announced results that displeased analysts. Although technically AET beat estimates, analysts were quick to point out that a large portion of the profits were made from one time events like reduced tax rates and capital gains. Actual profits from continuing operations of $.99 missed estimates by a long shot. AET lost -9.75 and drug the entire sector with it as investors feared the higher drug prices would reduce others profits as well.

The economy is not broken, stupid. Cisco announced record profits after the close and proclaimed the Internet economy alive, well, shrinking costs and increasing productivity at every turn. After announcing a 2:1 split the resulting jump in the CSCO share price powered Cisco from the third largest market cap company in the U.S. to the number two company behind Microsoft and displacing GE as the previous second largest. Not bad for a ten year old startup! This was the ninth split announced by Cisco. CSCO beat analysts estimates with a +.25 cent profit and a +49% profit increase. Cisco claimed almost no Y2K damage saying their calls that Friday were less than any regular day. The next big name to announce is Dell after the close on Thursday but the report is not likely to be a barn burner like CSCO. Dell has previously warned they would miss estimates so expectations are not very high. Dell is suffering from the dog pile mentality as big name firms try to capture the spotlight by downgrading the stock. Today Warburg Dillon Reed cut their recommendation to a hold from a buy saying Dell was now too big to react quickly to changing markets.

The big news this week appears to be the hacker attacks on all the big name websites. Yesterday hackers shut down Yahoo for over three hours with a "denial of service" (DOS) attack. Today the high visibility target was Buy.com which went public today. They also were shut down for several hours after the CEO appeared on CNBC. It appears the price of fame is high. The Ebay CEO was scheduled to be on CNBC this morning and cancelled giving no reason. Does she think the hackers are stupid? As if to say we know why you cancelled, EBAY was shutdown around 5:PM tonight by the same DOS attack. The attackers seem to have escalated the war to a new level. Each site reported access attempt data rates in excess of 800MB per second to their portal pages. This would equate to clicking on your Yahoo.com bookmark over 40 million times per minute. Obviously the attempt is not something that one high school student on his parents PC could accomplish. This is a coordinated attack by numerous people, employing "spoofing" software to hide their identities. For their sake they better hope they hid them well since the FBI is working with the various websites to trap the origination addresses and you can bet the cops will show up soon. One thing about the Internet, contrary to what you see in spy/thriller shows on TV, everything is traceable eventually. The FBI said it had already narrowed the search to less than 50 addresses but until they could physically check each address they could not identify the hackers.

On Sunday I said Monday and Tuesday would be the key. Unfortunately it is a combination lock. With the Nasdaq up seven days in a row in breakout mode the tech buyers are celebrating. The Dow has still failed to join the party but this may be a symptom of the falling Dow theory I also mentioned. The new Internet economy is not driven by Walmart, McDonalds, Minnesota Mining, International Paper or Alcoa. These stocks are under pressure as investors flee to the tech stocks powering the Internet. It is entirely possible we could see the Nasdaq and the Dow diverge for some time. The problem is the historical convergence of the two indexes. While they have never run equally they at least ran in the same direction more often than not. If we are going to see this trend continue at this rate the odds of the Nasdaq surpassing the Dow will be much sooner than anyone previously expected. Simply projecting the gains from the last three months, including corrections, for the balance of the year would put the Nasdaq real close to 10,000. Can't happen you say? The Nasdaq is now up +100% in just the last 14 months and the trend is accelerating. Two billion share days will soon be common. 100 point gains are becoming common place. If the Nasdaq only equaled the last twelve months performance it would be over 9000. This is not your fathers market. Why do you think Dow Jones added Intel and Microsoft to the Dow? Self defense! At this rate of divergence maybe they need to add YHOO, JDSO and QCOM as well just to stay ahead. With oil prices falling and the rally extending into biotechs, telecoms and Internets everything appears to be lining up in our favor. Just remember what happens when everybody stands up on the same side of the boat. You think we are having fun now, just wait until later in the year when we can trade all night as well. Get to know you pizza delivery boy soon. He may be your lifeline in the future.

Good Luck, Sell too Soon

Jim Brown

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