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And A Sigh Of Relief Was Heard By All!

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         06-28-2001        High      Low     Volume Advance/Decline
DJIA    10564.73 +131.37 10646.45 10438.66 1.30 bln   1882/1213	
NASDAQ   2125.32 + 50.72  2157.32  2096.88 1.93 bln   2319/1398
S&P 100   635.33 +  8.89   640.63   626.69   totals   4201/2611
S&P 500  1225.82 + 15.13  1234.44  1211.07             
RUS 2000  502.99 +  7.41   503.31   495.58 
DJ TRANS 2765.56 + 65.36  2780.21  2700.78 
VIX        22.58 -   .99    23.34    21.65 
Put/Call Ratio      0.50

In case you live in a closet the big news of the day was the unanimous Appeals Court ruling over turning the breakup order for Microsoft. They also said that Judge Jackson had acted inappropriately in the case. They said Microsoft did not use monopoly power in bundling their Explorer browser but did say that they had been a bully in the operating system arena.

The news about Microsoft was followed by extreme volume on the Nasdaq. The volume in MSFT stock was so heavy that it shut down the two main systems on the Nasdaq and MSFT stock was halted for trading for about three hours. By the time trading resumed the competing press conferences had thrown a cloud over the real impact of the verdict and trading was muted. The Microsoft team was quick to trumpet their "free to innovate" mantra and the Justice Dept was yelling "still an operating system monopoly" from every corner. There are numerous benefits and gains as well as questions on both sides of the verdict. The Appeals Court sent the case back to a lower court to decide several issues as well as come up with a new remedy in the case. Microsoft spokesman said that today's ruling drastically narrowed the case and said they will continue to work to resolve the remaining issues without the need for continued litigation. Read that as "we want to settle -PLEASE !!"

The ruling while closing another chapter in the Microsoft saga also will solve nothing for anybody. Yes, it is positive for MSFT but until they settle they still have to tread lightly. An aggressive MSFT would only aggravate competitors and the states that had sued them. Microsoft needs to be humble and contrite, beg forgiveness and settle quickly before the case gets complicated again as everyone attempts to get their pound of flesh.

Many analysts point to the Microsoft verdict almost two years ago as the downfall of the Nasdaq. They also suggest that this decision will trigger the long awaited tech rally. MSFT stock closed up only +1.57 after all the shouting was over. Surprised? Many thought MSFT would soar double digits when the case was decided. In reality MSFT has already gained almost +81% from its $40 low in Oct of last year. This represents a +$166 billion addition to their market cap and is +$35 billion more than the entire market cap of Cisco. Many point to the very narrow trading range around $70 for the last 2.5 months as evidence that the verdict was already priced into the stock. I have to admit I am surprised at the paltry gains today after the huge volume spike after the announcement. While this case is far from over the possibility of a favorable outcome is much greater. This will remove many sellers from picture and prompt many long term buyers to consider Microsoft as an investment again. As MSFT goes, so goes the Nasdaq. With possibilities of a settlement on the horizon the possibilities of a rally are strong.

Despite all the positive sentiment today surrounding the MSFT verdict, reality continued to plague us. PMCS warned that they would now post a loss of minus seven to nine cents for the quarter instead of the two cents previously expected. They also warned they would take an undisclosed charge in the 2Q for unsold inventory. This hit AMCC and BRCM which are in the same business and had already warned on their own. PMCS actually gained on the day and was trading up almost $1 in after hours. BRCM and AMCC were also posting gains. Is the chip sell off over? It would not be up to me to say that but it is clear that continued bad news is having no impact and investors are moving back into those stocks.

Liberate Technology warned that they would miss estimates slightly and AFOP said they would come in at a nickel loss. The big mover after the close was Ingersoll Rand (IR) which said they would miss by -20% to -30% and saw no U.S. rebound anytime soon and were seeing growing weakness in Europe and Latin America. IR fell from a close of $43.50 to $41 in after hours trading.

Other market moving news today was an offer by GE to sell off some of their avionics business in an effort to get the EU to approve the Honeywell merger. The markets loved it and felt the door was left open to get approval and HON gapped up over +$3 on the possibilities. Close but no cigar! After the close the EU said that they would not approve the merger and it now appears dead. The last minute proposal was struck down and there appears no other avenue in the wings. HON dropped almost -$4 in after hours and GE gained +$1 on the news.

Iraq gets another chance to be in the limelight this week as rumors abound that they will start pumping oil again. Oil has already sunk to a 14 month low on news of much stronger than expected supplies and a lower than expected demand. Oil companies sold off quickly and airlines and trucking companies gained more ground. Federal Express announced earnings that beat the street by twelve cents but warned that earnings and revenues would miss estimates going forward due to slowing corporate shipments and higher costs. However the stock soared on the news of a hiring freeze and cost cutting efforts that FedEx said would help them regain their profits. FDX gained +1.91 or +5% on the news.

Greenspan must be taking his Geritol because he is one active Fed head today. He spoke this morning at the Federal Reserve Bank of Chicago at the opening of the new visitors center. He also speaks again tonight at The Economic Club of Chicago on the Impact of Energy on the Economy. Analysts will be listening to see if his energy speech is going to dwell on the inflation impact of higher costs and if he will talk about productivity increases to offset energy costs. Of course they will also be sifting each sentence to see if there is any rate change bias as well. This is the first time he has spoken about energy since the crisis began over a year ago.

The minutes of the FOMC meeting in May were released today and they showed that the economic slowdown was lasting longer than the committee members had originally anticipated. They were mixed on whether the economy had bottomed but all still believed that a recovery would occur later this year. Wishful thinking? They were unconcerned about future inflation and the bias was still toward a monetary policy of expansion. There was a dissenting vote to cut -50 points in May but they could not muster any support for only a -25 point cut. Obviously others came to the same opinion in the last month. There was an indication that the members felt they were coming near the end of the easing process (and this was in May) which means they really think that the process is almost done with the June cut. They also felt the tax cut would stimulate the economy and prevent the need for them to continue cutting. The release of the minutes corresponded with the afternoon market decline as traders realized the Fed was probably done. The Fed funds futures still point to an 84% chance of another -25 point cut at the August 21st meeting but it is really too soon to speculate on whether that will hold.

New jobless claims fell for the third week in a row and could be showing that the worst is over. However, it could be just a seasonal blip that indicates that the newly unemployed were simply taking a summer vacation before heading back to the treadmill. Next week has several important reports including the non-farm payrolls and I will touch on that in the Sunday newsletter.

Fearless Friday forecast: Futures are up on both the S&P and the Nasdaq. The HON/GE merger news will take a toll on the Dow with HON down -3.50 in after hours but the GE gains should help. MSFT should gain as the spin doctors try and suggest that the end, although not close, may be in sight for long term investors. Semiconductors are up in after hours and the sentiment appears to be bullish. Historically the week before the 4th of July is up due to end of quarter window dressing and retirement funds coming into the market at the six month window. The Russell-2000 is poised to end the month over 500. The Russell-2000 is undergoing a huge rebalancing this week with about 150 companies leaving the index and another 150 being added. Companies being added have been rising steadily over the last couple weeks as speculators moved into position ahead of index funds which will have to rebalance their holdings on Friday as well. Once this rebalancing is over there is likely to be a bleed off as those speculators move on to other projects. I look for decent volume Friday with a bullish bias. With the Nasdaq gains from this week there could be some profit taking which hopefully will be offset by new buyers encouraged by the MSFT decision. I told you Tuesday techs were not dead and I was criticized for it. Make your own decision if you don't like mine. I suggested QLGC at $57.74, it hit $64.74 today. I will take a two day gain of +$7 every week! How about you?

Enter passively, exit aggressively!

Jim Brown
Editor

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