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Market Wrap

Kiss those fractions goodbye!

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          WE 1-26          WE 1-19          WE 1-13           WE 1-5
DOW    10659.98 + 72.39 10587.59 + 62.21 10525.38 -136.63  -124.84
Nasdaq  2781.30 + 10.92  2770.38 +143.88  2626.50 +218.85  - 62.87
S&P-100  709.06 +  3.83   705.23 + 17.35   687.88 +  6.17  -  4.74
S&P-500 1354.95 + 12.40  1342.55 + 24.00  1318.55 + 20.20  - 21.93
W5000  12527.30 +143.40 12383.90 +202.60 12181.30 +308.80  -294.50
RUT      498.68 + 10.59   488.09 +  2.34   485.75 + 22.61  - 20.39
TRAN    2956.19 +  2.90  2953.29 - 48.69  3001.98 -112.01  +167.39
VIX       25.14 -  1.15    26.29 -  1.33    27.62 -  4.41  +  1.80
Put/Call    .59              .48              .60              .63

A new era in trading is about to begin and an old era comes to a close. After 208 years of trading in fractions, stocks will switch to decimals on Monday morning. Lets hope we can mark that day in the win column and not as a loss. After a morning opening drop of -68 points as a result of an absolutely horrible PMCS earnings announcement, the Nasdaq rebounded yet again. After the initial dip to 2686 the index bounced back over and then skidded to a stop at 2700 and then rallied to close positive. The sentiment was clear. The market shrugged off bad news and rallied higher even after a +500 point gain over the last three weeks. Bullish anyone?

Nasdaq:PMCS was the story stock of the day. After a horrible conference call, where the company said they had not received a new order in eight weeks, the stock traded as low as $62 or -$32. After the initial drop the stock rallied back to close at $73.75 regaining one third of the loss. Other companies in the sector suffered as well but NASDAQ:BRCM closed up almost +$6 even after being downgraded by Robertson Stevens. It appears investors were looking behind the news and shifting into the stocks that had good individual earnings while avoiding the weaker issues. PMCS was hit by multiple downgrades and several were serious. CSFB cut estimates from $1.70 to $.88, JPM from $1.67 to $.92 and GS from $1.66 to $1.01. Obviously room for an upside surprise now!

Nasdaq:JDSU rebounded after the initial drop after reporting earnings on Thursday that beat the street but then lowering expectations going forward. Investors decided the warning was not material and jumped on the stock as a lifeboat in a sea of more serious earnings disasters.

Nasdaq:ERICY was the ugliest story of the day after announcing that they lost over $1 billion in their cell phone business last year. They said that 2001 would be even weaker. They are making changes to reduce the losses and those changes include turning over the manufacturing of cell phones to Nasdaq:FLEX. The move will save $1.6 billion next year. ERICY lost -13% today.

Nasdaq:CSCO fell after the PMCS warning when they said sales to CSCO, their biggest customer, were slowing. Several analysts came out and cautioned about CSCO earnings which are due out on Feb-6th. They are not worried about them missing the numbers but warning about growth going forward. As the largest supplier of routing equipment CSCO is seen as a barometer of the tech sectors health. CSCO recovered about $2 of the initial drop and closed down only -.94 cents.

NYSE:DY, Dycom Industries fell Friday after the telecommunication provider said sales from major customers were slowing drastically. They said major customers were postponing or even canceling some projects. They said earnings could drop as much as -25%. The stock dropped from $31 to $20 at the open but regained some by the close.

The economy is losing the financial Superbowl. This week alone job cuts for big name companies were over 40,000 jobs. The leaders in the layoff bowl included Nasdaq:WCOM -7000, NYSE:LU -16,000, NYSE:JCP -5,000, NYSE:AOL -2,000, NYSE:SLE -7,000. If the Fed needs any more indication of weakness they only need to look here.

It is not a question of "if" the Fed will cut rates next week but by how much. Alice Rivlin said today that the Fed would go all the way and cut 50 points. That would be great if she was still a voting member but she isn't. Others say the Fed will hold to a gradualist policy and only drop 25 points. This would be the equivalent of Greenspan standing on the edge of the cliff and yelling down at the falling economy and saying "I cut rates, I cut rates!" That is nice but it would not be enough to cushion the sudden stop at the bottom.

Things are grim by Greenspan's own admission. Saying the economy is currently at zero and falling, implies that a recession is imminent. This has traders worried. With earnings dropping through the floor the Fed must take decisive action. First Call said earnings estimates for tech companies in the S&P for next quarter have fallen from +11% as of Jan-1st to only +2% today. Greenspan said he was now in favor of a tax cut but that a cut would not jump start the economy fast enough to avoid a crash landing. This has stimulated the analysts to speculate that Greenspan thinks things are bad enough to cut by a full 50 points. This and Rivlin's comments today are what pulled the techs off the bottom and revived the market. If you look at many charts and CSCO is a prime example, you will see a spike at 1:30 which is when the Rivlin statement appeared in the press. Another spike intraday was credited to Abbey Joseph Cohen who said on CNBC that the leading companies in the "data storage sector" and the "Internet infrastructure sector" were significantly undervalued. She would not identify them by name but traders read between the lines and bought CSCO, JNPR, NTAP and EMC shortly after 1:PM.

The Fed will have a strong economic calendar to deal with next week. The surprisingly strong Durable Goods Report on Friday is not likely to continue with next weeks reports. Durable Goods rose +2.2% when they were expected to fall by -2.0%. The difference was a strong jump in aircraft and electronic components. If you took out transportation orders the index would have dropped -1.4%. Next week we have Consumer Confidence on Tuesday, GDP, Chicago PMI, New Home Sales on Wednesday. Thursday has Personal Income/Spending, Construction Spending, NAPM Index and Friday the big Non-Farm Payrolls, Factory Orders and Michigan Sentiment. You can bet the Fed will have advance notice of the Payroll numbers to help them with their decision.

The top 24 bond dealers were surveyed and they were unanimous in expecting a -50 point cut. This is setting us up for a dangerous situation. If the Fed cuts by 50 points, the market has already priced it in and we could actually have a sell on the news event. Also if the Fed does cut 50 points there may be a sell off due to worry about the economy being worse off then we know. What do they know that we don't know? If the Fed only cuts 25 points there will definitely be a sell off on the fear that the economy will not recover quick enough. Initially it looks like a lose/lose situation. However, with either cut the long term market direction will be up. The markets always follow the Fed and while there may be a day or two of market instability the eventual direction should be up.

TrimTabs said $10 billion of new cash came into stock funds last week but that is only a drop compared to the $600+ billion already on the sidelines. With earnings almost over, more than half of the S&P has announced and 20 of the 30 Dow stocks, they are only waiting for the Fed before they move. The fact that the market is shrugging off bad news left and right is evidence of money coming back into the market. With no dip events in sight, other than the FOMC meeting, buying opportunities are dwindling. You have heard us say several times that some situation had brought the market to a pivotal point. Well this is the REAL PIVOT point. This is the defining moment for the market in 2001. The normal post earnings depression meets a possibly aggressive Fed. The shootout at the O.K. Corral. There are analysts screaming that the market is overbought and ready to crash back to 2200. I really hope they are wrong but we have to be ready for that possibility as well. Monday is likely to be up but after that all bets are off. The fear of the unknown could increase volatility substantially and even though everyone expects a rate cut, no one knows what to expect after that. Will traders sell into the rally or will they start throwing money at the market? Did you know that historically the day after a rate cut is normally down? Just another piece of market trivia that can cost traders money. No guarantees but plan accordingly!

The Superbowl hype is on with 120 million expected viewers. With ads running $2 million dollars the field of advertisers has narrowed considerably. Only three of the seventeen dot coms that advertised last year are returning. Etrade, Hotjobs.com and Monster.com are the only repeat Internet companies willing to cough up the money for a 30 sec advertisement. Hotjobs.com who will be advertising for their third Superbowl in a row said they spent their entire annual advertising budget on the Superbowl two years ago. This year the same ad time only amounted to 5% of their annual budget! Is Etrade so flush with cash that they can pay two guys in plaid and a chimp to do nothing for 30 seconds and laugh about it? Their total profit last quarter was $1.4 million and they are spending $2 million on a horrible ad. Go figure!

Trade smart, enter passively, exit aggressively!

Jim Brown
Editor

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