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Market Wrap

Earnings, Economy, Election, Energy, Euro!

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        11-21-2000        High      Low     Volume Advance/Decline
DJIA    10494.50 + 31.90 10569.00 10415.30 1.12 bln   1381/1464
NASDAQ   2871.45 -  4.19  2921.80  2845.17 1.75 bln   1431/2483
S&P 100   713.70 +  3.66   718.73   706.25   totals   2812/3947
S&P 500  1347.35 +  4.73  1355.87  1333.62           41.6%/58.4%
RUS 2000  466.79 -  3.45   472.41   465.49
DJ TRANS 2851.92 + 56.06  2851.92  2793.83
VIX        28.93 -  1.40    30.98    28.93
Put/Call Ratio      0.60

Factors beginning with an E are definitely in control of our market. The election that never ends is still causing some international investors to remain on the sidelines as well as some U.S. traders. While this horse has been dead for some time the analysts continue to beat it and claim a larger than life impact on the daily numbers. The market movers today had nothing to do with the election and will not be solved nearly as quickly. Earnings, earnings and more earnings continue to cause investors more indigestion than the election ever could.

While the Florida Supreme Court has not ruled on the various issues relating to the election the news channels continue to milk the news for all it is worth. Reminds me of the Iran hostage crisis which launched Nightline as regular program. Now over 20 years later Ted Koppel is still going strong. The Desert Storm event over 10 years ago brought new life back into the news only channels with icons like the "scud stud" now history but the channels still exist. This begs the question however over what will happen to MSNBC when "Decision 2000" is regulated to the history books and the army of reporters have to actually find new news to report. Will viewers still tune in or have they already deleted MSNBC from their favorite channel list?

The final election result is widely touted as the "be all, end all" for the market. The broad based year end rally is only waiting for the Florida certification to begin according to many analysts. Actually those claiming that we will have a rally at all are slowly dwindling. With each -50 point drop on the Nasdaq a few more faithful are converted to the realization that maybe there are more fundamental problems that the election is masking. While everyone, almost, still expects a relief rally upon the final announcement the possibility of it lasting more than 2-3 days is now coming into question.

The economy is giving signals that has veteran economy watchers worried. Without going into the boring details the prospect of a recession is looming larger every day. Inflation is still a problem as far as the Fed is concerned but the results of the last six rate hikes are still being felt in the economy. The U.S. Trade Balance for September came in at a record deficit of -$34.26 billion. This is a huge deterioration over the August revised deficit of -$29.81 billion. Economists had expected a decline as the cooling U.S. economy motivated consumers and producers to spend less. Imports surged by almost $4 billion as consumers continued to spend their higher wages. If consumers continue to spend like there is no tomorrow when the economy is supposed to be slowing then the Fed will hold off cutting rates until the opposing forces equalize. Already there is concern that the Fed will not lower rates in December or even change their bias. This would put off until next year any good news from the Fed. This is weighing on the market more than the election news. In another view the climbing trade deficit may actually benefit the cause by knocking as much as 0.8% off the GDP numbers to be reported on Nov-29th. Some analysts expect the 2.8% estimates to possibly drop under 2.0% as a result of this deficit. Should the GDP drop that far the Fed would then face more pressure to reduce rates. See what I mean? The economy is showing enough conflicting signals that Greenspan could turn gray. That is of course if he actually had hair.

The next E is energy and with oil still in the news and cold weather shutting down the north east we are seeing more upward pressure on oil prices. With prices hovering over $35 and world supplies still short there are those forecasting $40 oil before winter is over. With the impact to inflation by energy prices any further price hikes or shortages will be yet another Fed inflection point at the December meeting. Earnings for the manufacturing community will continue to come under pressure until prices ease.

That brings up earnings as the next E and in reality the major market mover. Heading our earnings parade today was Lucent, capturing the prize for the most warnings in a calendar year and the most investor depression. After trading near $85 in Jan-2000 the stock, which closed today at $17.56, is now at lows not seen since Apr-1997. Welcome to the world of "it can't get any worse." Just when you think it can't and it is probably a screaming buy, Lucent announced "revenue recognition" problems with their accounting. OOPS! Yep, the second most feared words behind "accounting irregularities." Just ask MicroStrategy investors from last March or Cendant investors from 1998. The amount in question, $125 million, is miniscule compared to their $9 billion in total revenue but is causes investors to wonder what else is hidden in the woodpile. Companies this size pay millions of dollars to accountants and auditors to prevent any "misstatement" of financial numbers and when something like this occurs it calls into question then entire integrity of their financials.

The positive news for this same sector came in the form of NT earnings. They reaffirmed guidance that matched Wall Street estimates and said positive things about strong growth through 2001. This eased investor fears that the telecom sector was going to reduce spending for fiber optic supplies. It also reduced fears that CIEN had stolen a large amount of NT sales from Qwest. If NT is affirming estimates and growth then things can't be all bad in the fiber sector. All the majors, JDSU, GLW, CIEN and SDLI were up on average volume.

NEON had its market cap cut in half today after WIT SoundView downgraded the firm to a hold. According to WS, NEON filed a 10Q that said $10 million of their $55 million total revenue was taken in shares of stock in closely held companies. Investors worried that if NEON software sales are so weak that they have to take stock instead of cash then there is a serious problem in that product. This type of event is a prime example for stop losses. A great short term chart but an event out of the blue cuts it in half.

CacheFlow, CFLO, announced earnings after the close and beat the estimates by two cents but got hammered to the tune of -$30 for the day on weaker than expected sequential revenue. The severity of the drop is just another example of the worry in the marketplace. ANY negative news is being met with very severe selling. This is evidence to many that there is still no bottom under the market and a preview of things to come.

The Internet sector suffered one of the worst blows in recent memory with the double whammy of the EBAY downgrade yesterday and the YHOO warnings today. Mary Meeker and Henry Blodget both warned today that the possibility of Yahoo warning or missing earnings estimates because of the slowdown in Internet ad revenue was growing. Mary said there was a 30% chance that YHOO would miss in the next three quarters. This rippled through the sector with YHOO closing at $41.69 a two year low and pushed CMGI perilously close to single digits at $11. AMZN, EBAY, ICGE, DCLK and ENGA all suffered as well.

The earnings picture for the multinationals continues to be pressured by the Euro as well as energy. There is no safe haven in the current markets with all sectors getting whacked routinely. The problems are only going to get worse according to some. I hate to break the news but earnings warning season starts again next week. It seems like we were just there and if you have been in the markets this week you probably feel like you were run over by warnings. We are not even there yet. With the prime season starting five weeks before earnings we are real close to finding out if the S&P earnings for the fourth quarter can hang onto double digits estimates. Down to 14% already from 29% six weeks ago, just another handful of warnings could push estimates below 10%. With the possibility of a recession and the S&P close to single digits the election result may produce only a trading rally. The market internals are still terrible with declines beating advances daily. The Nasdaq has only been positive two of the last twelve days and closed at a 52 week low today. Volume was light again at only 1.7 billion shares while volume on the NYSE was strong at 1.1B.

While the day before Thanksgiving is normally an up day the various market factors this year may keep volume very low. With Friday only a half day traders may elect to clear the tables early Wednesday and wait until Monday for a clearer direction. For those aggressive traders who bought the dip to 2850 yesterday and today things may not be looking very bright on the surface. With the Nasdaq closing dead flat at 2875 for two days, even after being up +55 intraday, things may look pretty gloomy. That may be a good thing. Traders often make their best trades when things look worst and as long as we don't break 2850 this could be the worst. Contrary to everything I said above the Nasdaq is terribly oversold and any positive news could cause a relief rally of several hundred points. It just remains to be seem if we will get enough volume from optimistic traders on Wednesday to produce that rally.

Good luck and don't buy too soon.

Jim Brown

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