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Market Wrap

Waiting to exhale

HAVING TROUBLE PRINTING?
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        12-07-2000        High      Low     Volume Advance/Decline
DJIA    10617.40 - 47.00 10689.00 10583.20 1.12 bln   1439/1386
NASDAQ   2752.66 - 43.84  2794.53  2707.96 1.75 bln   1551/2362
S&P 100   710.29 - 14.84   717.29   708.64   totals   2990/3748
S&P 500  1343.55 -  2.32  1353.50  1339.26           44.4%/55.6%
RUS 2000  461.10 -  2.44   463.54   459.88
DJ TRANS 2796.04 - 19.67  2815.34  2794.59 
VIX        28.98 +  1.04    29.51    28.11
Put/Call Ratio      0.78

Traders and candidates alike held their collective breath on Thursday waiting for decisions from three key court cases and the all important Jobs report on Friday. Discretion was the better part of valor for traders faced with multiple unknowns and another flurry of earnings warnings. Volume was very light with only 1.7 billion shares traded on the Nasdaq and 1.1 billion on the NYSE. It was clearly a standoff between the bulls and bears as both decided to hold all bets until the judges named the winner. With only four days left in the election conflict the possibility of a wild card victory from left field just provided more cautionary feelings than the recent sell off.

The leading warning from today was Motorola which said business was still good but profits were going to be down for a variety of reasons. After dropping -$2 at the open MOT actually closed near its high for the day with only a -.06 loss. Costs were higher than expected but sales are still strong. There was a lot of activity on Motorola as institutional traders felt that $16 was about as low as it would go. Why? At $16 it is trading below book value and the market cap is below the estimated sales for next year. At those numbers it could also be a take over target.

Other warnings included National Semi which beat the street by a nickel but warned that excess inventory at customers locations would reduce sales by -7% next quarter. NSM also closed well off its lows on positive sentiment that the current 52-week low was pretty much the bottom. Do you see a recurrent theme here?

Other not so fortunate included MSFT which had earnings cut and was downgraded today. Claiming the soft PC sales could not help but depress software sales analysts are running from MSFT. The stock dropped -3.56 to $53.12 which is only $5 from the 52-week low. The so called Bush premium has been flushed from the stock based on recent Gore wins and the weaker earnings expectations.

Yahoo also was the recipient of more bad news as more analysts climbed on the downgrade bandwagon. The Internet ad sales model has deteriorated to almost all CPC (cost per click) or CPA (cost per acquisition) pricing. With most banner ads ignored by readers the CPM (cost per thousand impressions) model is dead. It is not page views any more but qualified leads that draws advertising revenue and that narrows the YHOO advantage. YHOO dropped to a low of $31.50 intraday but rebounded by faithful buyers to close at $34.94. A significant bounce but driven by those that remember YHOO at $200 and are still in denial.

BVSN was hit by a rumor today that GE-Capital had pulled all its business from BVSN and the stock dropped -2.75. Both GE and BVSN publicly refuted the rumor but the stock did not recover. Seems that investors hoping to get back to previous levels of $35 to get out alive were not eager to buy the dip and average down again.

MANU announced that it would meet or exceed estimates going forward but the stock still got hit with a -2.75 drop on questions about an acquisition currently in progress.

BBY announced an acquisition of Musicland today and analysts dumped the stock in waves. BBY dropped -5.88 or -20% on the news.

Three Five Systems (TFS) warned that sales of components were lower than expected and earnings would suffer. The stock dropped -3.75 on the news. CDWC warned after the close that sales were slumping and earnings would drop to only +.40-42 cents compared to estimates of $.50. CDWC dropped -3.42 on the news.

Banks were still weak along the lines of the cockroach theory. Where one is having trouble others in the same business are assumed to be having the same or worse results but have not felt the need to make it public yet. JPM dropped almost -$4 again.

Mad cow again? Macdonald's has been hit by the mad cow fears again in Europe and analysts are cutting estimates. MCD has an analyst meeting scheduled but the forecast is not expected to be positive. The higher Euro has been a problem in the past and higher beef prices for certified safe beef is sure to impact costs. Just not any safe plays anymore.

Liar, liar pants on fire. After reaffirming estimates and saying they were not going to warn, INTC went back on its word after the close today with a warning that slowing sales would knock about -4% to -6% off 4Q revenue. Saying that gross margins would remain at 63% but revenue would be flat for the 4Q. Not only were chip sales weak but orders are being cancelled world wide at an alarming rate. Expenses are rising and capital equipment costs are up for next year. Also the vaunted INTC investment stock portfolio was down between -66% to -75% from prior levels. The bear market bites big investors as well as small. Interest income from investments is also going to be down to only $675 million from almost $950 million last quarter. Having trouble collecting those debts big guy?

Remember last week, I warned that there were many more big cap companies that could warn and MOT and INTC were only two. We still have exposure to the likes of IBM, MSFT, YHOO, AA, AOL, AXP, CSCO, C and dozens of others. This is not new news but each new warning ripples through each sector as investors decide if there is more downside or in the case of NSM and MOT the worst news is already factored in. When INTC opened for trading in after hours it dropped as low as $30 before bouncing on high volume from bargain hunters thinking $30 was a real steal for long term holders. If this bottom holds overnight then the impact for tomorrow will be muted. Once the market decides that all the bad news is priced in then everyone else can warn and we will see no real impact. Come on now, did anyone not expect INTC to warn after all the bad news from the last two weeks? Probably not. This is just a follow through from the sector weakness. Other box makers were flat in after hours after an initial dip so there does not appear to be a major reaction. The QQQs dropped to $65.27 on the news but rallied back to $67.50 shortly thereafter.

With the low volume on the Nasdaq today it is clearly apparent that we are being held hostage by the payroll report and the final election decisions. The employment report will be announced at 8:30 Friday morning and it is widely expected to be market friendly with only +150,000 new jobs and unemployment rising slightly to 4% from 3.9%. The component the Fed will watch is the average hourly earnings which are projected to rise by +0.3%. Any strength in the jobs or wages numbers will put the Fed back on inflation watch and endanger the hoped for neutral bias change.

As important as the employment report may be we will be more influenced by the expected decisions on the election. The Florida Supreme Court is expected to rule on the Gore appeal to reverse the Circuit Court decision from Judge Sauls. A negative verdict is expected to bring a concession speech but with the two counties still in court with election winning absentee vote cases I doubt he will concede until those cases conclude. The good news, all three cases are expected to conclude on Friday. This is the make or break day for Gore and Bush. One will win, one will lose but the market will be free to trade without the cloud of uncertainty. A favorable employment report and an early announcement on all three cases could set the stage for another rally like we saw on Tuesday. Negative results from the employment report and a decision on the election that the market does not like and we could be seeing another retest of the recent lows.

As an investor I plan on buying any Intel induced dip at the open ASSUMING the election news is also positive. Without positive news I can afford to wait until Monday. Even a +200 point Nasdaq day can be erased in a heartbeat if the election news turns horribly negative. It is just not worth the risk in this market to be long without a good reason. Is it a good reason just because many analysts are claiming 2500-2700 the bottom? No! 2500 could (and should) be the bottom but that does not mean we could not visit it again with the wrong market/election news. It is good business to wait for a trend not try and pick a bottom. We all know how hard that task has been lately. Many investors have blown up their accounts buying every dip since September. If we are really going to have a Santa Claus rally then we can afford to wait an extra day for all the news to settle. There will be more warnings and you never know who will be next. Heck, Intel said early this week they would not warn. Who are you going to believe? We feel that we are at a bottom or very close. My favorite stocks were up today and it took a lot of self control to keep from betting on an outcome I can't control. I can't control the employment report and I can't control the election outcome. I can't control earnings warnings either but those are less life threatening between now and tomorrow morning for the stocks I follow. I make it a habit that I don't bet tens of thousands of dollars on situations I cannot control like the Friday morning news. The market could go either way. One way you lose thousands, the other you make thousands. It is out of your control. You might as well lay $10,000 on your desk and flip a coin. Heads you put it in your pocket, tails you burn it. That is the same risk you take when betting on news events on which you have no control. Think about it!

As of 6:PM all of the Intel inspired after hours dips on stocks like RMBS, IBM, DELL and MU have all recovered to the same level where they closed. This bodes good for the open on Friday assuming the news is also positive. This would confirm to me that we are at a bottom when major companies can warn and have no market impact. Of course we still have a lot of dark before morning and anything can happen. After hours trading can be only a vague hint of the morning direction but it appears to be positive at this point. Intel is trading over its closing price now and that is very bullish. Keep your fingers crossed and start looking for Santa Claus.

Good luck and don't buy too soon.

Jim Brown
Editor

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