Greenspan and Florida Combine to Fuel a Market Rally

Federal Reserve Chairman Alan Greenspan finally applied salve to a market stung by weeks of earnings warnings. On Tuesday, Greenspan told a group of bankers convening in New York, "In an economy that has already lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household or business spending."

Mr. G's tortured, though encouraging, words had the market thinking the Fed will soon bust a move on interest rates, meaning it will likely change its rate-raising bias to neutral, if not rat-lowering, at its next meeting on December 19.

With that prospect in mind, traders propelled the Dow Jones Industrial Average (INDU) higher by 338 points, or 3 percent, for the day and rocketed the formerly down-trodden Nasdaq Composite Index ahead 274 points, or 10.5 percent -- an all- time record on both accounts.

Following Tuesday's coup, traders decided to take Wednesday and Thursday off, allowing the market to drift lower through both sessions until being graced with more good news.

Before the opening bell on Friday, the Labor Department reported that the economy created far few jobs than many economists expected for November. According to the report, non-farm payrolls added 94,000 workers last month compared to a consensus for 140,000. Further establishing the slower pace of job growth, the number of jobs created in October was revised to 77,000 from 137,000. As a result, the 12-month average pace of job growth fell to 176,000 in November, the lowest since April 1996. All the major market indices gapped up at the open on the news.

Keeping the indices elevated, though, was word from Florida that judges Terry Lewis and Nikki Clark (that's right, Lewis and Clark) rejected cases brought by Democrats in Seminole and Martin counties that sought to disqualify 25,000 absentee ballots because of alleged election irregularities. Keeping the absentee ballots all but assures business-friendly George W. Bush will win the state, and therefore, win the presidential election (more on this later).

Friday's action was particularly robust on the COMPX, where 2.3 billion shares changed hands. More importantly, though, 1.8 billion of that volume was up -- making Friday the second highest up volume day over the past three months. At the close, the COMPX was ahead 164.77 points, or 5.99 percent, to close at 2,917.43. For the week, the tech-heavy index added 260 points, or 10.2 percent, to its value.

As for the Old Economy issues, they were nearly as vigorous as the New Economy issues. Volume on the NYSE was a stout 1.35 billion share, with up volume exceeding down volume 977 million to 341 million, which means no one should be surprised that the INDU was able to close the day firmly in the black. In fact, the blue-chip barometer, like the COMPX, wasn't upside down at any point in Friday's trading and closed the session up 95.55 points, or 0.90 percent, to 10,712.91. For the week, the INDU added 338 points, or 3.3 percent, to its value.

In the broader market, the S&P 500 Index (SPX) gained 26.34 points, or 1.90 percent, to close at 1,369.89. For the week, the SPX added 55 points, or 4 percent, to its value. On Monday, look for the SPX to more closely resemble the COMPX. The broad-based index is trashing Polaroid (PRD), Spings Industries (SMI) and Russell Corp. (RML) and replacing them with Stryker (SYK), Vitesse Semiconductor (VTSS) and Qlogic (QLGC).

If you think there might be a trading opportunity in the new additions, you might be right, but only if you're trading from the short side. A recent study by Standard & Poor's showed that new SPX names tend to gain an average of 8.5 percent in the week between their selection and actual entry to the index. However, in the week after their listing, they sell off roughly 2 percent.

To get an idea of just how influential the labor report and the Florida ruling were to trader psyche on Friday, Intel's (INTC) unpantsing Thursday night did little to temper bullish sentiment. For the uninitiated, the chipmaking giant reported that it anticipates fourth-quarter sales will be in line with the $8.7 billion earned in the third quarter, rather than rising 4 to 8 percent as many analysts had expected. What's more, First Call was expecting the company to post $0.42 a share. That estimate has since been revised to $0.36. In a nutshell, Intel will likely post its worst fourth quarter in a decade. Nevertheless, its stock finished ahead $1.69 to $34.00.

And Intel wasn't the only chipmaker moving higher on Friday. Its rival Advanced Micro Devices (AMD) rose $1.56 to $16.06, while Micron Technology (MU), the largest U.S. maker of computer-memory chips, climbed $4.06 to $34.69. The biggest chip winner, though, was Texas Instruments (TXN), which soared $6.63 to $49.50. Together, this quartet lifted the beleaguered PHLX Semiconductor Index (SOX) 12 percent for the day.

In light of this gain, I think it might be time to give the chipmakers the once-over again, particularly Intel. Sure, the company is no longer growing at break-neck speed, but there is still value there. After all, Intel has $14 billion in cash, no debt, 30 percent return on equity and a 22 price-to- earnings ratio. Plus, you can get it on sale at half-price.

Another reason I like Intel is that Wall Street is nearly unanimous in its disdain for the stock. Last week, Chase Hambrecht & Quist lowered its rating to "market perform" from "buy" and dropped its price target to $45 from $50. ABN Amro downgraded Intel to a "hold" rating from "add." And UBS Warburg dropped its price target to $40 from $52, and lowered 2000 and 2001 estimates to $1.64 and $1.54 from $1.68 and $1.67.

But in my opinion, the biggest reason Intel might be a buy is Lehman Brothers analyst Dan Niles, who is now the reigning superstar on Wall Street. Nary a day passes that Niles isn't quoted in CBSMarketwatch, CNBC or the Wall Street Journal.

Recently, Niles has become one of Intel's harshest critics, advising investors that any rally in Intel's stock should be sold. This has me believing Intel has more upside potential than downside. The fact is, superstar analysts are notorious contrarian indicators (look no further than Henry Blodget and Mary Meeker). Don't be surprised if Intel continues to rally.

Another notable noise maker last week was Sun Microsystems (SUNW). Sun split 2 for 1 on Monday, not that the split did much good for the stock. Sun lost nearly $10 this week, closing at $38.94 amid rumors that the network computer company faces accounting problems and that it might warn of weaker quarterly results.

Looking ahead to this week, the economic calendar is chocked full of data that will influence the Fed's interest rate policy. On Monday, wholesale inventories for October are forecasted to have increased by 0.5 percent for the month, up from 0.2 percent in September.

On Wednesday, we get retail sales, which are expected to have risen 0.2 percent in November, up from 0.1 percent in October.

Thursday brings the Producer Price Index (PPI) and core PPI (PPI sans food and energy). The PPI is expected to show an increase of only 0.1 percent for November, off from 0.4 percent the prior month. Less the volatile food and energy sectors - core PPI is expected to have climbed 0.1 percent in November, up from a 0.1 percent decline the previous month.

Finally, on Friday the week's most awaited economic data is due to be released with the Consumer Price Index (CPI) and core CPI (again, CPI less food and energy). The CPI is expected to have risen by 0.2 percent in November, unchanged from the prior month's posting. As for the core CPI, it's expected to have also risen by 0.2 percent for the month, which is also unchanged from October's posting.

On the earnings front, Oracle (ORCL), Red Hat (RHAT), Adobe (ADBE) and Verity (VRTY) are all set to report this week. Traders should note that all four of the companies have beaten estimates in the past, sometimes by a large margin. Out of the four companies, Oracle has the most potential to do both good and harm to the market.

As for trading this week, all I can say is hold on for a bumpy ride, particularly in light of what happened after the market closed on Friday. As you are probably aware, the presidential mess is again no closer to being mopped up than it was a month ago thanks to a 4-3 decision by the Florida Supreme Court to manually recount all undercounted votes statewide, including 9,000 ballots in Dade county. The court also ordered 383 Gore votes from Palm Beach and Miami-Dade counties to be included, cutting Dubya's lead to 154 votes.

Color me cynical, but I think the close 4-3 split was for appearances only. Given that the Florida Supreme Court is comprised of seven Democrats, I'd be willing to bet every share of Webvan I own that the decision was more like 7-0.

Either way, a fat lot of good the decision did for the market. Gore's court victory sent futures and stocks plunging in after-hours trading and raised a whole new round of appeals and questions regarding the election's outcome. Don't be surprised if the market disgorges much of Friday's gains on Monday.

On a more positive note, the growing expectations of the Fed easing interest rates are clearly seen in the federal funds futures market, where the April 2001 contracts are priced to reflect a high likelihood of the fed funds rate falling to 6.0 percent. In other words, the market is assuming that there is an almost zero chance of the Fed holding the funds rate at the current 6.5 percent target for more than another two months.

If that's the case, longer-term I think the market should continue to gain. I liked what the COMPX did last week. Then again, who didn't? The index developed a nice uptrend with support being garnered at the 50 percent retracement from the November 15 high. What's more, there appears to be additional support at the trendline at 2,800. If the COMPX can continue to rally next week, it could gain addition support at the 38 percent retracement near 2,950. If that happens, look for the index to challenge 3,000 and 3,200.

As for the INDU, I think support at 10,600 is reasonable. However, the average could run into some near-term resistance at 10,750. So on a risk/reward basis, I'm not sure the Old Economy will be the place to be until the INDU can break and hold that level.

Of course, everything I'm saying today is predicated on the market's reaction to the latest presidential legal wrangling. And according to the future markets, it's not looking good for Monday, which means we could once again find ourselves in the same market mess we were in two weeks ago.

S.P. Brown
Editor