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Market Wrap

Greenspan rally hit by falling apple! Supreme Court will hear case.

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        12-06-2000        High      Low     Volume Advance/Decline
DJIA    10664.40 -234.30 10896.10 10620.90 1.37 bln   1219/1669
NASDAQ   2796.50 - 93.30  2916.20  2781.24 2.31 bln   1540/2392
S&P 100   717.25 - 14.84   731.16   714.24   totals   2759/4061
S&P 500  1351.46 - 25.08  1376.01  1346.15           40.5%/59.5%
RUS 2000  463.54 -  7.63   474.11   463.13
DJ TRANS 2815.71 - 27.96  2854.28  2810.87 
VIX        27.94 +  1.00    28.34    26.49
Put/Call Ratio      0.61

The warning by Apple Computer after the close yesterday was the primary cause of the early morning dip but that was just the beginning of the problems. The warnings list today was led by Banc America and followed with about a dozen lesser companies. The downgrades were flying and stocks were dropping. Just like last week all over again. Four of the Fed head's partners on the FOMC gave speeches today but there was not anything earth shaking like the Greenspan speech. Did you really expect the markets to tack on another couple hundred points today?

The Greenspan speech was dissected by dozens of pundits today each with a sharper microscope. What Alan said about positive things ahead was filled with enough caveats to fill a state of the union address. Seems he was preaching to the choir and they heard what they wanted to hear and ignored the things they did not like. Kind of like my children when listening to a list of chores to be completed before going to the movies. Traders heard soft landing, bias change and rate cuts and did not hear the "IF" word used repeatedly. Part of the IF came true this morning with today's economic reports. The Productivity Report showed a revised +3.3% gain in 3Q productivity, revised downward from +3.8%. This is still good news. The bad news was the Labor Costs rose +2.9% which showed that even though employment is still tight but declining the costs are climbing. The Fed has been concerned for quite a while that the climbing productivity would slow and labor costs would rise. Bingo! This report will be overshadowed by the Non- Farm payroll Report on Friday. If the unemployment rate stays in the 3.9% range and hourly wages climb along with a rise in jobs then all the IF clauses in Greenspan's speech will come back to haunt us. The other Fed gremlins have almost all gone on record recently as saying they are still more concerned with inflation and labor markets than recession. Perry is the one exception that comes to mind today. He said he personally felt the economy was dropping faster than necessary. With the Fed not meeting until Dec-19th we still have over a week of verbal warfare before the actual outcome is known.

With all the Fed dread sneaking back into the market chatter after only one day of euphoria, the earnings warnings news was even more dramatic. The Apple warnings rippled through out the entire PC sector. INTC, which had reaffirmed its estimates recently was downgraded again by Salomon Smith Barney saying they expect the fourth quarter to be the worst in a decade for Intel. Wow! INTC dropped to another 52-week low of $31.24 making our lottery put on INTC a sure winner without a miraculous recovery. Dell, CPQ, IBM and HWP all suffered similar fates with Dell hitting a new 52-week low to $17.50. Hewlett-Packard had an analyst meeting today and affirmed their estimates but still fell -3 to $32. The PC sector is turning into the Rodney Dangerfield sector and it may be a long time before they garner respect again. The PC has now invaded 60% of U.S. homes on the Internet wave last year. With a 3yr or longer replacement cycle that puts us into late 2001 and 2002 before there is any replacement wave expected to form. The Y2K business upgrades are now approaching two years old and the same replacement cycle puts them into 2002 before there is a major wave. With more and more Internet enabled devices other than the PC there is a large possibility that many of these current PC strongholds will not be replaced but retired. CSFB downgraded almost anything that touches a PC this morning and more are sure to follow. As written here before the worst sector to downgrade is the PC sector since it hits almost every other sector except maybe biotechs. Chips, Internet, Networking, Software, Retailers, etc will all suffer from the falling PC sales and ripples of downgrades. ADBE took a serious hit today since they are linked to Apple for many retail products. We don't see this as a major problem for them since they are receiving much more business from Internet commerce and we added them as a play tonight.

Juniper got hit today on not only profit taking but on news that Ericsson had sold 10.4 million shares of JNPR stock for about $1.2 billion that they said they were going to use to fund the third generation cell phone effort. JNPR traded down -$22 in pre-market trading but the key word here was "sold." Ericsson had already sold these shares and there should have been no impact other than sentiment to JNPR stock. JNPR closed down -16 which was only about 2/3 of the gains from yesterday. We view this as an entry point for JNPR ASSUMING the market recovers and moves higher.

The big noise in the market today was the BAC warning. Claiming that loan losses would be almost double the 3Q rate the stock dropped almost -$6 from yesterday's high but recovered to close down only -1.19 after the smoke cleared. The damage was to other financial stocks guilty by association.

Other high profile warnings today included FSR, another bank, and CC, CEFT, SCNT and HAS to name a few. Circuit City warned that slowing sales would almost quadruple the expected -.08 loss into a possible -.33 loss. CC dropped -25% on the news. The good news CSGS warned to the upside saying that they would probably beat estimates going forward. LSCC said they were taking the low stock price as an opportunity to buy back an additional 5 million shares of stock. Henry Blodget downgraded Yahoo again and sent it back down to $37.50 where it appears to have found support. YHOO announced today they were looking for a new sales executive and I wish them luck. Internet ad sales is very tough now and even though they have clout on their side it is a tough sell. Dow Jones also warned today due to a slowing demand in advertising after the Internet died. Tribune also warned after the close.

The election news was mixed with several cliff hangers currently in process that could turn the election 180 degrees in a heartbeat. The win by Gore in the Atlanta court today took another -$3 off the MSFT stock price. This was obviously impacted by the PC sector downgrades as well. The court cases are rapidly approaching a brick wall of noon on Dec-12th. According to the law electors have to be certified by then so there are only five days left for all the fireworks to end. That will be another benchmark for the market and with the election still teetering on the brink and no clear winner everything is still up for grabs. The market does not like this uncertainty as evidenced by the wide swings whenever there is major news of court decisions. This could help keep the lid on until the final gun sounds.

Bonds soared today with the prospect of lower interest rates next year and with money flowing out of the bipolar markets. With no follow through from Tuesday's rally the same money that was ready to jump on the next tech train was derailed into bonds. Oil rebounded off $28.20 and rose almost +1.60 from the lows. The three day drop had energized the transport sector but the bounce today brought them back to reality.

Did you pop the champagne last night or did you wait like I recommended? Do you feel as confident today as you did last night? There was a lot of rumors in the market today that the majority of the bounce yesterday was short covering by large hedge funds and almost no retail trades. As much as the talking heads tried to fuel the bounce and give it legs it just did not happen. The Nasdaq spiked up to resistance at 2900 and rolled right over to close at the low of the day at 2796. The Dow never had a chance with a strong bounce off resistance at 10900 and then the BAC warning which knocked -$12 off JPM in only about 30 min. The Dow is heavily financially weighted and with AXP, C, JPM and tech weighted now with IBM, MSFT, INTC, UTX, HWP. Either sector could have caused weakness but the combination of the two was the kiss of death. The Dow gave back -234 of the +338 points it gained on Tuesday. Now I would gladly trade those numbers on alternate days forever but I don't think that is in the cards. Even if we had not had the big high profile warnings today there would have been some weakness from simple profit taking. You don't get +250-350 point gains without pull backs.

Many analysts are now pointing to the length of time before the Fed meeting, the election uncertainty and the flood of earnings warnings as evidence of yet another retest of 2500 on the Nasdaq and 10400 on the Dow. Maybe, maybe not. The taste of positive sentiment on Tuesday was a powerful drug and as we know today's traders have a very short patience threshold. With the important Payroll Report due out before the open on Friday there is a possibility that traders will want to lighten up Thursday afternoon. Recently we have had the reverse with traders buying in anticipation of a post jobs report rally but the market is very fragile now and traders burned today may want to simply watch. Many analysts are saying that any further dip is a selective buying opportunity but they have been saying that since Nasdaq 3800 which happens to be the 200 DMA, over +1000 points above us.

I would be a selective buyer. Simply to take out the naysayers I would like to see another 2500 retest so they would have no excuse going forward. Another retest would also take a lot of the risk out of the market again and us dip buyers could party yet once again. Still I would buy NTAP, JNPR, BRCD, BRCM on any pull back and rebound. After the close today ORCL picked NTAP as their vendor of choice for network storage only one day after EMC announced their NTAP competitive product. Timing is everything! The VIX retreated to only 27.94 and the put/call ratios .61. This is not pointing to a big up trend. While I personally believe 2500 was the bottom, that belief and $3.50 will get you a cup of coffee. What I believe more strongly is that we will jump around a lot until the election is over and the Fed actually does something. There is a strong possibility that they will still do nothing. However, once the election is settled on Dec-12th the bargain hunters and bottom fishers will start loading up before the Dec-19th Fed meeting in hopes of a favorable decision. I believe we should selectively buy the dips on ONLY the strongest stocks. We should also be ready to bail on a moments notice in case our entry points were not the bottom of the dip. This is a traders market and not a market for people who want to buy and hold options until 2001. That time will come but probably not for a week or two. Be patient or be quick. That is our only opportunity at this time. There are a lot of stocks that appear to have put in bottoms but even a helium balloon goes down in a down elevator. Wait for the up elevator!

Good luck and don't buy too soon.

Jim Brown

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