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Market Wrap

No Investor Commitment Keeps Prices in Flat to Down Mode

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              6-12-2000           High     Low     Volume Advance Decline
DOW    10564.20 -  49.90 10652.60 10564.20   758,275k 1,402  1,481
Nasdaq  3767.91 - 106.96  3892.05  3767.88 1,280,486k 1,530  2,563
S&P-100  774.25 -   5.45   774.25   774.25    Totals  2,932  4,044
S&P-500 1446.00 -  10.95  1462.95  1446.00            42.0%  58.0%
$RUT     508.51 -  14.55   523.79   508.20
$TRAN   2781.50 -   8.67  2815.90  2779.40
VIX       25.37 +   0.18    25.94    24.82
Put/Call Ratio       .48

No Investor Commitment Keeps Prices in Flat to Down Mode

Not a day for the record books, but certainly one for the hammock, investors sent stocks mostly lower today as earnings warnings sounded in the technology, raw materials, and retailing sectors. Today's losers include one of Jim's "big ones that got away", MSTR, not to mention CTXS, BCC, HD, HLIT, and INKT . The price of oil surging over $31 per barrel and the Justice Department's refocus of its anti-trust guns from Microsoft to MasterCard didn't help either. The latter isn't as big of a deal in the immediate picture. Still, what the heck happened?

Starting with MSTR (-23.31, $38.88), Merrill Lynch submarined this recently re-floated boat by blasting last week's financing hype and noting that it sees no change in the fundamentals or the financing of the company. It noted too that customers were holding back from purchases pending more clarity on their accounting issues. Ouch! Recall that it was news of MSTR receiving a new round of financing that popped the stock back over $60 last week.

Not to be outdone, CTXS delivered the Street its biggest disappointment by announcing before the markets opened today that they would not come close to meeting estimates of $0.21. Instead look for $0.09-$0.11. The announcement certainly helps explain why their CFO didn't show for a Paine Webber Tech and Growth conference last week. Short sellers moved on his no show. Even if he'd attended, it would have been tough to dodge the hard questions in that environment. Prudential downgraded the issue from Accumulate to Hold with a price target of $20. While no honor to hold the title, CTXS was the most heavily traded issue today on the NASDAQ at nearly 95 mln shares. It may be ugly for them, but those of you in put plays should be partying hardy after today.

And speaking of conferences, HLIT too sank its own battleship by noting at a CBIC Open Markets conference that AT&T, one of its largest customers was spending less money on its cable products as a percentage of revenues. Wait a minute, isn't growing revenues and less reliance on a single customer a good thing? Maybe so, but apparently HLIT did not drive home the point to investors' satisfaction. It might not have mattered anyway as investors lately are prone to shoot first and ask questions later. (Aside from HLIT, it bolsters the notion that T has an execution problem that it isn't likely to fix soon.) The buzz also had current earnings estimates coming down as a result of its Divicom purchase from CUBE. HLIT said there is no news from their end to warrant or justify the drop. Nonetheless, shares finished down $18.69 at $38.75 on volume of 28 mln shares, more that 12 times their ADV.

OPEC too chimed in, sending oil traders running straight to the bank. Oil inventories are still sinking despite a reported production increase. The trouble is nobody knows how much extra production is going on just yet, and based on the stockpile decrease along with OPEC's refusal to announce a boost in production until their June 21st meeting, we are witnessing a short-term spike in the price of oil. The perceived effect is that it's inflationary and may keep the scales tipped in favor of more interest rate hikes by the Fed. That's great news for oil traders, but lousy for those looking for signs that the Fed won't hike rates again at the next FOMC meeting. Paying over $2 per gallon of gas in the Midwest isn't good either.

Also on the natural resource front, Boise Cascade warned last Friday that it would fall short of earnings too - $0.76 rolled back to less than $0.52. It cited slowing wood product and paper sales. While you might think "big deal, it's just a wood and paper company", think of the implications. The Office Max's and Staples of the world are buying less paper. Not only that, with home sales slowing, builder's aren't buying as much raw material; neither are home improvement outlets like Home Depot or Lowe's (HD was downgraded by ING Baring and another brokerage today on softer sales fears). Retailers like TGT, KMT, CC and WMT have already been punished in anticipation of a slowdown. Hello? The slowdown is here! And with raw material suppliers just starting to report weaker earnings, it will take some time to work to the top levels of the economy.

So while investor's mistakenly focus on the Fed's next interest rate move, the bigger picture is that a slowdown is in place and we aren't looking yet for a return to the robust markets of February and March, as earnings will likely continue to come in weak throughout more sectors. Fiber optics may escape punishment now and may pay less of a price later on, but that sector too will be like Atlas shrugging the weight of the investment world on their collective shoulders.

If you doubt it, just fast forward in your mind to June 29th after the next FOMC meeting. Any increase in rates will be a negative for the economy as we still have four of the last six rate hikes left to filter through, plus the new one Alphonso the Great (Greenspan) announced yesterday (remember, in your mind). Voila' - reduced profits.

Next scenario. . .it's June 29th again, and Alphonso pronounces "no rate increase". Party hats and horns? Don't bet on it. That lack of action will likely also come with an implied statement that while inflation is under control, recent hikes are slowing the economy. Voila' - again, reduced profits.

The common element here is reduced profits, which is never good for equity prices. This will be redundant from the weekend Wrap, but it bares repeating. If profits are falling, equities cannot rise. Perhaps that's why Merrill Lynch advised clients today that they were moving their model portfolio from 5% cash allocation to 0%, and placing that cash in bonds, not equities. While we would all like earnings season to prop up the prices, it didn't work last quarter and likely won't this quarter either. Therefore it behooves us to become good stock pickers looking for good entry points. If you missed Jim's Options 101 titled "Entry Point, Entry Point, Entry Point" from yesterday, we strongly urge you to review it again. That is your best defense against Mr. Market, and in determining your financial future.

That's the big picture. How about the immediate trading future?

Lest we sound like growling bears, it was not all bad news today. GLW lit up traders' screens with a bunch of green (+$18, $230) after it pre-announced earnings that would exceed the Street's estimate of $0.69 with a whopping $0.78 to $0.80 figure. No longer casserole-dish maker to the world (that division purchased by Borden in 1998), GLW holds the majority of fiber optic cable market share now. To say that business is growing like a weed would be an understatement. Other stocks including JDSU (+$5, $115.56), SDLI (+$11.97, $261.97), NEWP ($+5.75, $85.50), and FIBR (+$9.39, $68.15) all moved up in sympathy. Because this sector is in the sweet spot in the Internet/bandwidth revolution, it is not seeing the slowdown that is clearly visible in the B2C Internet sector.

Barely noticed by the mainstream press, we were also glad to see an old favorite QCOM, finally get a foothold in China. China's number three wireless company, China Unicom will adopt QCOM's third generation CDMA technology - to which we say smart move. QCOM gained $2.63 to close at $81.69. Anyone notice that QCOM has been climbing steadily over the last seven days, whereas the rest of the market has declined slightly? The sellers appear to be gone. Keep this one on your radar - we will too.

Oops, in all the excitement, we almost forgot to report the score. So here goes. The Dow finished down 49 at 10,564 on the second weakest volume day of the year - 774 mln shares. Advancers were about even with decliners (1404 and 1488, respectively) while 66 new highs edged out 47 new lows. Nonetheless, traders favored down volume today at 401 mln shares vs. 323 mln for up volume on the NYSE. Weak volume is indicative that traders and investors both lack any sort of conviction for raising prices. The compressing trading range between 10,800 and 10,300 is still compressing with lows staying flat at 10,300. We had hoped that the Dow might find some support today at 10,600, but the lack of it tends to make us think we'll test interim support at 10,400, then perhaps a bounce to 10,600 just based on the technicals. For what it's worth, the line connecting the highs meets the line connecting the lows on roughly (surprise!) June 28th at approximately the 10,500 to 10,600. Can you say sideways trading?

Speaking of sideways, despite a 107-point loss today, the NASDAQ has held a mere 163 point trading range for the last seven days trading between 3730 and 3893. Take out last Wednesday's morning dip and the range shrinks to just 133 points. We can't remember when that last happened, but it makes trading dull, dull, dull. On such a flat day, it's no surprise that new highs were almost dead even with new lows, 78 to 64. Still, for those who can't sit still without trading, this is a punishing time - just ask us! Anyway, the NASDAQ finished down 107 to close at 3761, its low of the day on under 1.3 bln shares. Weak volume and a declining finish aren't a good sign for tomorrow's open. We've been pretty vigilant about reminding ourselves of the possibility of testing the gap from two weeks ago as it was bound to happen soon. We just don't know when. So keep your eyes on the 3725 level. If we get a bounce from there, NAZ could move back up to retest 3875, but the stronger sentiment and technical picture point to a retest of 3600. Today's down volume smashing up volume by almost 3:1 lends support to that likelihood. Be ready.

In short, to us this feels like that weightless feeling you get as the roller-coaster car slows at the top of the track. It's likely investors will bide their time until the FOMC meeting despite retail numbers tomorrow and the CPI figures Wednesday, both of which should shoe a slowing economy. While we couldn't hazard a guess over the weekend which way the market will move, today's action has us leaning toward the downhill side. Of course, no sooner do we say that, then the market taps the low end of the range and begins to move upward again continuing the rangebound trading pattern. As I mentioned last week, while Jim is saying, "sell too soon", I'm sticking with "don't buy too soon" a bit longer.

Buzz Lynn
Research Analyst

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