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Market Wrap

Traders vote for a new earnings recount!

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        12-12-2000        High      Low     Volume Advance/Decline
DJIA    10768.30 + 42.50 10856.30 10703.80 1.08 bln   1272/1593
NASDAQ   2931.77 - 83.33  3002.53  2930.99 1.92 bln   1559/2424
S&P 100   728.91 - 14.84   733.41   727.52   totals   2831/4017
S&P 500  1371.18 -  9.02  1380.27  1370.27           41.3%/58.7%
RUS 2000  477.76 -  9.47   487.23   477.73
DJ TRANS 2905.27 - 33.10  2944.72  2904.12 
VIX        28.28 +  1.77    28.40    26.36
Put/Call Ratio      0.71

The Nasdaq struggled valiantly to hold 3000 but the flood of earnings warnings on top of two days of strong gains and the election nightmare was too much to bear. The Dow soared +126 points to 10856 on the strength of Proctor & Gamble and Colgate before falling prey to warnings and the election. The longer the wait for the Supreme Court answer, the more investors worried that there would be a messy ruling that would force a complete recount in Florida and delay the eventual result for up to several more weeks. The Alfred Hitchcock like twists and turns and the daily cliff hanger rulings continue to take all the wind out of any positive market momentum. With no positive sentiment every negative event becomes larger than life and the result is renewed selling.

Earnings warning season is alive and well and in full swing. The flood of warnings today came from almost every sector. From giant corporations like GM to the smallest like RAZF. It appears the only ones immune today were PG and CL. Both affirmed their growth targets and said good things about their business. Still +7% growth will not get a tech investor excited but value investors did manage to add +2.88 to PG and +2.43 to Colgate. That was the end of the good news.

Beginning with GM which warned as expected the day just got worse as time passed. GM announced plans to close, restrict, reduce and restructure plants world wide but the biggest news was the death of the Oldsmobile product line. Olds was the oldest U.S. manufacturer at 103 and second oldest to Mercedes world wide. The most popular car in the 1970's, the Cutlass, will now go the way of the Delorean and the Edsel. Analysts actually liked the move as one less competitor in the crowded space. Even though produced by the same parent, GM, the brand competed with Buick, Chevy and Cadillac brands and dealers found themselves fighting for market share within the GM space as well as against the other major brands like Ford and Honda. By reducing product models internally the company expected to increase prices and reduce costs.

The biggest company, GE, affirmed estimates going forward but did speculate that we would see a possible mild recession. Their latest acquisition, Honeywell, however warned that earnings would disappoint and GE dropped -2.50 on the news and HON dropped -3.19. The warning as discussed by analysts was actually do to a scrubbing of the financials by GE prior to the merger. GE is very conservative with their accounting and the changes were made to bring the struggling Honeywell into line with GE accounting procedures. Still both stocks finished the day down on the news.

Another Dow component, EK, warned that sales were slowing and profits would be down. Eastman Kodak has not been in the forefront of the earnings parade for some time and had been expected to warn again. This was their second warning this quarter. The actual news and explanations produced a relief bounce of +1.50 in EK. Go figure!

IBM was down on the day slightly at -1.50 after saying confusing things about product mix going forward. The CEO said infrastructure will be critical and they would outsource more in the future. The CEO declined to comment on earnings and only focused on the challenges he saw going forward. He felt IBM was well positioned to do well but the market place was changing. Analysts are expecting another processor announcement soon if IBM is going to pull out of the earnings worries now hitting other companies. Saying the challenge to connect the 700 million PCs and about a trillion Internet devices would occupy IBM for some time.

There was so much negative news today I could not begin to cover it but I will try and hit some of the high spots. ARBA was downgraded, dropping -$10 and taking ITWO with it for -$6. TQNT was downgraded by CSFB and it lost -$12 taking the semiconductor sector down again. AMD warned last night but everybody expected that after Intel. Compaq warned after the close today but again, everybody knew it was coming. CPQ only lost -.88 in after hours. DCLK warned, RAZF warned, RSYS warned, NAVI warned, ONNN warned, COVD warned, DPH warned, getting the picture? ENGA posted a bigger than expected loss. Something about the Internet advertising revenue model?

SUNW went public with a disclaimer that they had no accounting problems. Period. SUNW stock down to $33 from $48 just last week had been hit by short seller rumors of all kinds and from all sides. Unfortunately, when they said no accounting problems they did not say no earnings problems. Would have been a perfect opportunity but they didn't. You guessed it, if you can't deny then there must be a warning coming. SUNW tested $32.25 again for the second day. Personally I think this is a screaming buy but not until everyone else thinks so too. While I am tempted to try and imagine a bottom today and justify buying some I am also constrained by the same question about the lack of earnings affirmation. While I would like to think that SUNW is a heavyweight in the PC sector and not subject to the soft retail PC demand, I will wait until a new trend develops indicating that there are more buyers than sellers, or a positive earnings statement from SUNW. Aggressive buyers could beat us to the punch here but with the flood of earnings all negative there could be a surprise in their future.

I think I can, I think I can. Rumors today speculated on NOK making an offer for Lucent. Lucent market cap is $65 billion even at its severely depressed stock price. Lucent rallied +$2 on the news to $18.75 but analysts said it was not likely to be true. NOK does not normally go for the super big targets but picks off the smaller niche players on its way to world telecommunications dominance. Lucent and Nokia would fit well together but the deal would have too many roadblocks and the scale could cause NOK problems in digestion. Still it was nice to see a +12% bounce in LU stock!

Even though the volume was low today with only 1.9 billion on the Nasdaq and 1.1 billion on the NYSE it was not a bad day. Decliners beat advancers on both exchanges but price drops were not bad. Considering the Nasdaq had gained +500 points in the last eight days in the face of negative earnings and negative election news I am not surprised we struggled at 3000. Had the election news been completed with a final ruling from the Supreme Court I think the outcome would have been very different. Remember CPQ did not drop in after hours trading after its warning. GM went up after warning. Big gainers over the last week in numbers approaching +$50 like JNPR, BRCM, BRCD only dropped back -$2 to -$3 on profit taking. While looking at possible plays with the editors for tonight's newsletter there were very few real pullbacks. Most just settled as traders took profits and waited on the court. It was almost impossible to find puts. You would think that the flood of earnings warnings and the negative market would have given us dozens to chose from. They did not exist. There were pullbacks but not drastically or with no major change of trend.

Although I am disappointed the Nasdaq kept its string intact of not being able to put three positive days back to back since Labor day, I am still positive that there is an explosion ready to happen. The only thing in our way I feel is the court decision. If the court makes a ruling out of left field that extends the pain and confusion for several more days or even weeks then the market will react negatively. The market is ready for a winner regardless of who it is.

On Wednesday we start loading up on economic reports and a series of market friendly numbers will set the stage for the Fed rate meeting next Tuesday. Tomorrow we get Import/Export prices and Retail Sales. Thursday PPI, Friday CPI, Capacity Utilization and Industrial Production. Without a favorable court decision that stops the process in favor of somebody, traders are likely to wait on the sidelines for the economic reports to pass as well. With an election stopping decision traders are likely to buy the economic reports hoping for a positive announcement at the Fed meeting.

The bottom line, no decision, traders will wait. A knockout punch by the court and traders are likely to buy. Technically we are at a make or break point on the Nasdaq chart. The recent rally brought us right up to the descending down trend line for the last three months at 3000. We must break this down trend line this week or be doomed to retest at least the 2700 lows again. The fuse is lit and the court can fan the flames or douse the fire. What you do with this analysis is of course up to you but I would buy any dip unless the court hits us with another delay of game penalty.

Good luck and don't buy too soon.

Jim Brown

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