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Market Wrap

Dell, the Oracle and the Greater Fool

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       2-10-2000           High     Low     Volume Advance Decline
DOW    10643.60 -  55.60 10738.30 10606.40 1,050,510k 1,225  1,797
Nasdaq  4485.63 + 122.39  4485.67  4357.69 1,813,246k 2,189  2,002
S&P-100  768.98 +   3.51   771.68   762.21    Totals  3,414  3,799
S&P-500 1416.83 +   5.12  1422.10  1406.43            47.3%  52.7%
$RUT     542.21 +   6.21   542.21   536.01
$TRAN   2475.27 -  75.05  2556.64  2467.56
VIX       24.38 -   0.27    25.80    23.87
Put/Call Ratio       .51

Dell, the Oracle and the Greater Fool

Simply amazing! The Nasdaq continued to power forward to another new high even in the face of many negative factors. The records continue to fall as cash pours into the market at a record rate. The Nasdaq is now up +10% for the year and is now up +100% in just the last twelve months. The Dow however is now down -7% for the year. At this rate of divergence we are only 34 trading days from parity, the Nasdaq equaling the Dow, which would occur somewhere around 8500. While this would be extremely unlikely it does illustrates the rate of sentiment change between the two indexes.

The bond market tried to derail the markets again today after the 30 yr bond auction failed due to lack of interest. The new bonds, some going at a yield of 6.34%, only had a bid to cover ratio of 1.33:1. This means there were barely enough bidders to buy the total offering and there was no real competition in the bidding. Many large buyers simply did not show. With the government planning to buy back $30 billion in existing notes and bonds the bond yields have been on a roller coaster. After touching 6.12% last week the yields have now floated back to close at 6.43% today. The significance of the rising rates were lost on the Nasdaq.

So much for profit taking! The Nasdaq is rewriting the rules for investing. As I mentioned before, investors are not just buying tech stocks, they are fleeing from non-tech stocks in droves. Even the addition of MSFT and INTC to the Dow has not helped stop the bleeding. Today the Dow techs had a good day. MSFT +2, INTC +3, IBM +1.75, HWP +1.88 but they could not make up for drops in the old line materials stocks. Many of the older Dow stocks are at or near 52 week lows and dropping rapidly. There are just no buyers for non-techs.

Can you blame anyone for not wanting to be in techs? With the Nasdaq up +100% in the last twelve months and on track to beat that performance why would you want to own Alcoa or International Paper? The financial components in the Dow are responding to the current rise in interest rates as well as the expected future Fed hikes. No relief there. What we are seeing is simply sector rotation. Biotechs, Internets, Chips, software and computer stocks just keep astounding with record gains and record earnings. The previous benchmark for comparing your portfolio performance was the S&P-500. That trend is changing.

Fund managers who only equal S&P performance are in danger of losing their bonuses and their jobs. Value funds are hemorrhaging money. After getting their statements for last year and realizing their 21% returns were only one fourth what tech investors received, investors are not just readjusting their portfolios. They are cleaning house. Anything not in favor is history. What has been overvalued to most investors for years has now become undervalued every time we get a down day on the Nasdaq. Instead of advertising next year, "we beat the S&P by 3%" the really good funds will be advertising, "compared to the Nasdaq...".

The Nasdaq rally is also being powered by record inflows of new cash. Trimtabs.com estimates that almost $21 billion in new cash came into the market in just the first seven days of February. This is on track to be the highest month on record. The previous high month was Jan 1997 with $29 bln for the entire month. Almost all of this money went into tech funds according to Trimtabs.

One of the major drivers for the Nasdaq today was CSCO. After reporting record earnings this week they appear to have taken on a Qualcomm complex. With a +7.13 today CSCO is starting to act like the Internet stock it really is. Still gains by other Internet big names continue to astound. Network Solutions soared today after posting record earnings and saying good things about future business. NSOL gained +36. Other big gainers included VRSN +25, on computer security fears, JNPR +22, DCLK +15, ITWO +13, RNWK +13, BRCM +12. But before you start throwing money at just any Internet stock there is evidence of a rotation inside the Internet sector. Amazon, the poster child of Ecommerce last week has lost ground for two consecutive days, -$4 today. Ebay has also been trending down as well as CMGI and YHOO. This is encouraging. As long as rotation is taking place within the sector there is probably more upside.

Another of the big gainers on the Nasdaq was Dell. After warning on Jan 28th they would miss estimates the stock had plunged to an eight month low of $35. Assuming the worst was over and hoping for good news after the bell today, investors took positions and added +3.25 to the price. After the bell Dell announced no surprises and only met reduced estimates. The outlook, more important than the actual numbers was rosy. Dell said they had +50% growth in the quarter from their new services effort. Services produced $490 mln in revenue. The Gigabuys website also showed record growth and added $610 mln in revenue. Dell said sales in Asia/Pacific/Japan soared +56% compared to 33% for the Americas and only 8% for Europe. They view the Asian markets as their biggest growth area. Servers and workstations continue to be strong with +55% growth. Now that the chip shortage is easing Dell should be back on track for this quarter. Still several analysts downplayed the results as fighting the "law of large numbers" and claimed Dell would be just another PC maker soon. We are seeing this happen. Historically Dell's growth has been 50% overall. Last year it dropped to 40% and this year CFO Tom Meridith is forecasting 30% with only a 7% profit margin. It is a sad day when you are embarrassed by 30% growth.

So what can kill this tech rally and bring us all back to reality? 1. Higher interest rates. Got that, 6.43% and climbing. 2. Rising oil prices. Got that, $27 bbl and climbing. 3. Disruption in flow of money into stocks with a triple digit PE. Not yet. You have to wonder however, at what point does Alcoa, McDonalds and similar blue chip stocks start looking attractive. Many of these are already down to near single digit PE levels and there will come a time when they will provide such a bargain that investors will not be able to resist. Just look at a chart for PG, AA, IP, IR. There is a battle going on between historical methods of stock valuation and the new momentum investor model. Historically a company needed increasing earnings, solid growth and hard products. The new valuation is based on last weeks price. If it is higher this week then buy it. If the Nasdaq drops one day, buy more. If it drops for a week, wire another $27 bln and buy lots more. Buy, buy, buy. This game has been called the greater fool theory. As long as you can find somebody to pay more than you did, you win. They are the greater fool. The last fool holding when the game is over loses. We are not there yet or even close to hearing the music stop. As long as tech companies continue to post greater earnings based on the new Internet paradigm people will continue to buy tech stocks. This does not mean that we will not see some pullbacks along the way. Nothing goes up in a straight line. Well, almost nothing in the case of the Nasdaq.

The oracle of Omaha had been rumored to be sick recently. So many rumors had surfaced that Warren Buffet’s office finally issued a press release saying he was in perfect health. This is not true. We have it on good authority that Warren is going crazy. With all the old line stocks dropping so fast many people have reported him running in circles inside his office chanting, "so many stocks, so much value, so little time. More money, I need more money!" As a true value investor Warren must be overwhelmed at the bargains.

Where to from here? Don't look now but the Dow is now over -200 points below the 200DMA and showing no signs of slowing. If we don't get a bounce on Friday from the -62% retracement point which is exactly on the current trend line then the next chance is 10550 which would be a -10% correction. This may provide some temporary relief and produce a bear trap rally. Below 10550 is 10000 and that is a long drop. The Nasdaq is now up 8 of the last 9 days for over +700 points. It closed at the high of the day on strong volume. This would point to a carry through into Friday's trading. You want to be on the lookout Friday afternoon for profit taking. With the Nasdaq extended so far there may be a rush to the exits as traders lock in profits and wait for the next cycle.

Trade smart and sell too soon.

Jim Brown

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