Fed Raises Rates, Markets Unsettled

For all the hype, the Fed announcement was almost a non-event. As expected, the FOMC raised both the Fed Funds and the Discount Rate a quarter of one percent. Equity markets reacted in a mostly confused manner. After the announcement, the markets attempted a rally but slid lower in late day trading. Banking issues dragged the DOW to a negative close. Technology issues stayed relatively strong, keeping the Nasdaq positive.

Today's muted reaction to the interest rate hike was a reflection of current investor sentiment. Many are asking; what happens now? Market direction this year has been blurry at best. As the saying goes, "as January goes, so goes the year". If that holds true in the year 2000, we are in for continued volatility. Most companies have already reported earnings for this quarter. Historically, February has been a month of consolidation. With another rate hike in store from the Fed, interest rate worries will remain the focus of the markets at least until the next FOMC meeting March 21st. Bottom line: the markets are likely to be led by economic reports during the next two months. If a sideways market develops, trading will be directed by technical chart patterns.

Early trading Wednesday hinted at an attempt to rally. After the FOMC announcement, the DOW saw the kind of whipsaw action usually found over in the Nasdaq market. The industrials crossed from positive to negative a total of eight times Wednesday. The industrials settled near the low of the day, down 38 points to close at 11,003. Volume on the big board was moderately heavy at 1.0 billion shares traded. Market internals were deceptively positive at 17 advancing issues to 13 decliners.

The Nasdaq composite managed to stay in positive territory throughout the day. Despite a higher close, afternoon trading was weak as the composite slipped from the intra-day high of 4126. The index gained 22 points on the day to close at 4074. Volume was moderate at 1.5 billion shares traded. Gaining issues led declining stocks 23 to 17.

On the broader market, shares traded mostly higher. The Russell 2000 gained 1.2%, while the S&P 500 finished flat, down a mere 0.01%.

Industries trading higher Wednesday included transports, telecoms, semiconductors, networking, software and the Internets. Weak sectors included utilities, banking and cyclical stocks.

The yield on the 30-year bond continues to drop, now at 6.28%. Bond prices are rallying on Wednesday's news that the treasury department would begin buying back longer-term securities. Also announced was a plan to issue fewer notes and bonds, reducing the 30yr bond auctions to once per year. Because of recent treasury actions, a disconnect has occurred in the relationship of equities to the bond market.

Company News:

General Motors Corp. (GM) announced that Richard Wagoner, 46, will become the Company's new CEO effective June 1. Current CEO Jack Smith will remain the Company's chairman. Smith is well known for pulling the Company from near bankruptcy in the early 90s. Shares of GM lost -3.88 points to close at $81.38.

After the close of trading, Amazon.com reported numbers for the 4th quarter 1999. Losses were greater than expected, coming in at -$0.55 per share vs. estimates of -$0.48 per share. Highlighted in the report were forward-looking statements that AMZN expected to be profitable in the year 2000. The e-tailer also noted that its book sales unit is now operating in the black. After hours trading had AMZN trading up +7 points at $76 per share.

Globespan (GSPN) managed to shake the earnings blues after announcing Tuesday evening. Great numbers were bolstered by a 3:1 split announcement. GSPN traded +45.75 points higher to close at $168.12.

Traders felt slighted after Idec Pharmaceuticals (IDPH) reported earnings in line with estimates, unaccompanied by a split announcement. The stock was sold in heavy volume, losing -26.94 points to close at $106.00.

Shares of Time Warner (TWX) surged after the Company reported 4th quarter earnings of $0.20 per share, beating estimates by $0.04. TWX gained +7.56 points to close at $85.50.

After hours, Pfizer (PFE) and Warner-Lambert (WLA) announced that the two companies are nearing a final deal on a merger of the two companies. Pfizer's hostile bid to merge with WLA began in early November 1999. For now at least, Pfizer seems to be winning the war to merge with WLA, having beaten out Proctor and Gamble (PG) and American Home Products (AHP). PG and AHP, by the way, have recently been in merger talks.

Discount Broker Charles Schwab (SCH) announced the acquisition of CyberCorp, an online trading service. Although Schwab already offers an online service, CyberCorp offers direct-access trading, most often used by active daytraders. SCH also announced a reduction in trades on its existing site, to $14.95 per trade. Stock of SCH closed at $35.56 off -0.06.

Thursday's Market:

Notable companies reporting earnings Thursday include LVLT, reporting before the market. During the market, BUD will report. After the close, earnings are due from AFFX and MCOM. Of these, LVLT and AFFX are likely to announce a split.

Thursday will be a test of resolve to push technology issues higher. Carry over buying may follow Wednesday's higher close on the Nasdaq, but will it last? The DOW closed just above support and the Nasdaq slid during the last hour of trading. Investors remain convinced that their money should be put to work in the tech issues, so buying on the dips is likely to continue. The market can be expected to become increasingly reactive to economic reports. Economic news to be released Thursday includes the weekly initial jobless claims, followed by the unemployment and hourly wage reports Friday. One thing to keep in mind regarding Thursday will be the release of the minutes from the FOMC meeting. In the past, the markets have been known to react to the positive or negative tone of the discussions and arguments put forth by the various Fed Governors. Investors may have been expecting a rate hike, indeed even welcomed it, but they might be a little less receptive to the likely negative tone that pervaded this particular FOMC meeting. There is a possibility that the release of the minutes may have more of the market dampening affect the Fed was looking for than the actual rate hike announcement itself.

If the markets rally in early morning trading, be cautious about jumping in early. Traders and analysts alike remain very unsure about the direction of this market. An initial rally is likely to be retested; offering opportunities to confirm market direction before initiating new positions.

Steve Pekarek
-Assistant Editor