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Productivity propels Dow but Cisco caution calms Nasdaq.

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        08-08-2000        High      Low     Volume Advance/Decline
DJIA    10976.90 +109.90 10988.30 10836.60  994 mln   1587/1256
NASDAQ   3848.55 - 14.44  3893.05  3839.58 1.46 bln   1843/2224
S&P 100   805.96 +  2.24   806.97   799.13   totals   3430/3480   
S&P 500  1482.81 +  3.49  1484.40  1472.53           49.6%/50.4%
RUS 2000  508.72 -  1.15   511.94   508.72
DJ TRANS 2892.19 -  2.02  2899.07  2870.05
VIX        20.83 -  0.72    21.43    20.67
Put/Call Ratio       .50

Productivity propels Dow but Cisco caution calms Nasdaq.

Corporate productivity increased +5.3% in the second quarter and unit labor costs fell -0.1% in the same period. The greater than expected numbers beat estimates of +4.3% gains and a +0.3% increase in labor costs. The report produced a mixed market with the Dow gaining +109 points but the Nasdaq dropped -14. The Nasdaq drop was prompted by the impending CSCO earnings announcement after the close today.

Analysts feel the productivity numbers are the icing on the cake and prove the Fed will not raise rates at the August meeting. As long as productivity goes up faster (+5.3%) than worker compensation costs (+4.7%) then there is no reason to panic. Workers compensation rose +4.8% last year so the current +4.7% is right in line with no sign of inflation. The productivity numbers rose on a year over year rate of +6.9% which is the fastest rate since 1971, or almost 30 years. With bond rates falling to 5.73% today it appears the door is all but shut for an August rate hike.

Cisco did announce earnings after the bell and upheld its half of the double trouble CSCO/DELL duo. CSCO beat the street by a penny with $.61 vs estimates of $.15 which was much greater than the $.10 they earned last year. Revenue rose to $5.72 billion up from $3.6 billion last year, a +61% increase. CSCO was optimistic about their prospects going forward but had expressed concern that shortages in their component supply chain could slow sales in the future. This is a continual warning from CSCO but they also have experience in working around the problems. CSCO traded up about $2.50 in after hours to $67.81. They have had trouble at the $70 level lately. On a negative front they did announce the resignation of the top vice-president. I doubt anyone will notice!

Next to play in the earnings Olympics is Dell which announces after the bell on Wednesday. Dell has been beaten up recently with earnings rumors and rumors of softer PC sales. Dell did gain +$.50 in after hours trading as a result of positive comments by CSCO. The market will be expecting Dell to meet the street but with the CSCO earnings and revenue numbers so strong the outcome may not hinge entirely on Dell. Nasdaq futures are up +40 at 7:30 tonight. It never hurts to have one of the biggest tech companies post record profits when the tech sector is hurting from tech rumors.

Shares of America Online Latin America Inc. rose 10 percent in their stock market debut on Tuesday following an initial public offering that raised $200 million, far below original expectations of $425 million. In its IPO, AOL-LA priced 25 million shares at $8 each, the bottom of a lowered price range. The shares were originally expected to be priced at $15 to $17 each, but the range was cut to $8 to $10 last week. Before the IPO, investor interest was expected to be lukewarm for several reasons, including overall tempered response to new issues and skepticism about how AOL will transfer the power of its U.S. brand to Latin America. Investors also were unwilling to pay the premium that a pricing of $15 to $17 a share would have given the company, which posted about $51.2 million in losses on revenue of $5.2 million for the nine months ended March 31. Critics of AOL-LA have said the company faces stiff competition from entrenched local players in Latin America, most of who staked out their territory much earlier than AOL and are backed by local media and telecommunications heavyweights.

Microsoft pulled another rabbit out of the hat today with a +$4.12 gain based on their announced plans to reinstate a share buyback plan and launch an electronic book initiative. The share buyback program is for a yet-to-be-determined number of shares.

Even though the productivity numbers were great this morning the Nasdaq rallied early but quickly lost steam and finished the day negative. The Dow however finished near the high of the day. The Nasdaq had posted gains for three days and I am sure was suffering from earnings worry over CSCO but since CSCO has never missed estimates it appears the worry was misplaced. The Dow however, even with the big gain, is more troublesome. Most of the gains came on the back of not techs but cyclicals. The biggest gainers other than the MSFT +4 were Alcoa +2.25, CAT +1.69, IP +1.69, Dupont +1.94, Eastman Kodak +2.38, GM +2, Home Depot +2, and Walmart +2.50. The other tech leader, no not INTC -1.31, was IBM which has a nice five day run in progress with a +2.56. I am always concerned when cyclicals like Alcoa, CAT, EK, IP and Dupont are the market leaders. These two day rallies never seem to last and traders often look at them as shorting opportunities. You choose, CSCO or Dupont? CSCO or IP? I would buy CSCO. Of course the reason behind the cyclical rally is the concept of a soft landing actually coming to pass. If the economy is still growing after six rate hikes then maybe there will not be a crash landing from an over active Fed as previously feared.

A reader sent me this sometime back and with all the CSCO interest tonight I thought you would find it interesting. "Just in case investors are feeling that the market has corrected itself and valuations are once again reasonable, consider the following," "For half a trillion dollars, an investor could theoretically buy either 1) Cisco Systems or 2) the entire gas and electric utility industry in the U.S. In the first case, the investor would be buying a company with trailing 12-month revenues of $15 billion. In the second case, he'd be getting an industry that is paying about $15 billion per year of cash dividends. Oh, and with option No. 2, he'd have about $100 billion left over to go buy something else." Yes, value is in the eye of the beholder!

The Dow has put together a string of seven positive closes and appears poised to break 11,000 again at the open tomorrow. Today's close was the highest since mid-April and we could be seeing the results of a short squeeze since institutions have been net short the S&P for several weeks. With the almost vertical Dow for almost +500 points, anybody short is bound to be reconsidering the fallacy of their ways. However in the same breath seven days is a long winning streak and we still have Retail Sales and PPI ahead of us this week. Advance declines were net negative today with the NYSE positive and Nasdaq negative. Other causes for concern were the Russell-2000 which lost -1.15 and the Wilshire Total Market Index up only +18 or only 0.13%. If the market is so bubbly why was there no movement in these broader market indexes?

I still assume it was fear that CSCO, the biggest tech company of all, might miss estimates or have a bad conference call and cautious traders took profits ahead of the event. Certainly if the futures hold we should see a strong open on Wednesday and that open could propel us over the key 11000 and 3900 benchmarks. How the market will close ahead of the Retail Sales and PPI reports on Friday is another story. The OEX has been bumping a top at 805 this week and finally surged ahead at the close. Next resistance is in the 810-813 area so we have room there. So where is the problem? I don't see a specific one other than the VIX which hit an eight month low today of 20.67. Currently in extreme danger territory but it appears we could break 20 before anybody will care. Just keep your eye on it when planning long plays this week. Shucks, everything just looks too good to be true.......could it be? DELL, we are counting on you. Don't mess this up!

Notice the chart above? When have you ever seen this meeting of all the averages in one place. We have either gotten a huge wet blanket to a future rally or the mother of all launch points if we breakout on the CSCO news tomorrow.

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Good luck and sell too soon.

Jim Brown

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