The End of Purgatory

Say good-bye, Al, because it's all over. After a month of mind-numbing legal wrangling and endless cable-television banter about butterfly ballots, chads and voter intention, George W. Bush will become the 43rd President of the United States, meaning nothing has changed from November 7.

The end for Gore & Co. came late Tuesday after a majority of the U.S. Supreme Court ruled for the second time this election that the manual recounts the Democrats sought in Florida lacked sufficient standards to protect voters' rights.

Expect the Veep to officially throw in the towel later tonight.

Initial market reaction to the prospect of someone actually residing in the White House next year was bullish, both the Nasdaq Composite Index (COMPX) and the Dow Jones Industrial Average (INDU) gapped significantly higher at the open. But as trading continued, both market barometers drifted lower, with the COMPX eventually drifting into negative territory.

After opening at 2,996.57, a 65-point premium to Tuesday's close of 2,931.77, the tech-heavy COMPX spiked to its intra- day high of 3,001.72 minutes later. From there, it was all down hill, as traders began to sell the news of the presidential election and ponder the future of the index's computer-related issues after NYSE-based Compaq Computer (CPQ) became the latest PC maker to forewarn of a business slowdown.

After the close on Tuesday, Compaq reported that it expects fourth-quarter earnings of $0.28 to $0.30 per share versus the First Call consensus estimate for $0.36 per share. Additionally, the company cut its revenue estimates to $11.2 billion, 10 percent below expectations. Though the earnings earning wasn't unexpected, it still lopped 12 percent off Compaq's market value. For the day, the world's largest PC maker lost $2.67 to $18.10.

Also falling on the day were those companies that supply the PC sector with its heart and soul, namely the software and chip makers. Microsoft (MSFT) dropped $1.13 to $57.25 while Intel (INTC) lost $1.00 to $35.50.

Also trading lower were those companies that get Internet content to the PC. Sun Microsystems (SUNW) dropped another $2.13 to close at $31.75, continuing a slide that has seen the networking computing company drop $15 in five days. Sun is now trading at October 1999 levels. Meanwhile, Internet data switcher Cisco Systems (CSCO) tanked $3.25 to $51.13.

All in all, big-cap selling pressure on the COMPX forced the index down 109.00 points, or 3.72 percent, to 2,822.77 on volume of 2.0 billion shares, which was in line with the average trading volume this month.

Over in the Old Economy, the mood was more upbeat. The Dow Jones Industrial Average (INDU) opened up five points higher at the open and then spiked up another 140 points within the first 10 minutes of trading to its intra-day high of 10,915.40. From there, though, the INDU meandered lower most of the day, trading between 10,800 and 10,850, before selling off in the final 30 minutes of trading to close at 10,794.44, up 26.17 points, or 0.24 percent for the day.

Lifting the INDU higher were three components most likely to benefit from George W's victory. Tobacco purveyor (and current Splittrader momentum play) Philip Morris (MO) added $1.94 to close at $40.81, a level not seen since May 1999. If big MO can move higher to break resistance at $43, it could be in for a big move to the next resistance level at $55.

Also helping the cause were pharmaceutical giants Merck & Co. (MRK) and Johnson & Johnson (JNJ). Merck, which is a Splittrader split candidate play, moved higher $0.63 to $92.00. Merck appears to be consolidating at $92, which could position the stock for a break to higher levels. As for Johnson & Johnson, it moved up $1.69 to $98.69. JNJ could be another split candidate worth watching if it can break through immediate resistance at $100 and then move on to challenge the November 1999 highs of $105.

Limiting today's gains on the INDU were IBM (IBM) and Hewlett- Packard (HWP). IBM lost $2.63 to close at $91.25, while Hewlett-Packard dumped $2.06 to close at $33.19.

Even though I said the tobacco sector could be a big winner with Bush's victory, the fact is, it's already been a big winner. Since April, tobacco stocks have been smoking (pun intended). Over the past eight months, Philip Morris has moved from $19 to over $40, R.J. Reynolds (RJR) has advanced $15 to $45, Loews (LTR) has gone from $40 to $94, Universal Corp (UVV) has shot from $15 to $32, and US Tobacco has gone from $15 to $25. With such a strong advance, it's difficult to say how much upside is left in these issues.

Another recent winner has been Lucent Technologies (LU). The beleaguered telecom equipment provider has seen its shares tumble from $83.75 in December 1999 to $14.31 last week. However, this week the stock has gained nearly $5.00 to close Wednesday at $19.94. Few stocks portray the potential pitfalls of value investing as clearly as Lucent. At $40 a share, the company's stock appeared to be a legitimate value play. However, little did most analysts know that the stock would lose an additional 63 percent. The moral of the Lucent saga is, if you want to be a value investor, you'd better be darn sure you are getting in close to the absolute bottom.

In after-hours news, Sanmina Corp. (SANM) declared a two-for- one stock split. The electronic contracting manufacturer closed at $73.77, down $11.31, but traded at $75.38 in after- hours trading. Business software supplier Verity, Inc. (VRTY) also made noise this evening by reporting earnings of $0.23 per share compared to the $0.20 expected by First Call. Verity closed regular trading down $0.56 to $18.56, but traded at $20.50 after in after hours.

On the economic front, today's data lent additional credence to the belief that the Federal Reserve's next action could be to lower interest rates. The U.S. Commerce Department reported before the opening bell that retail sales tumbled 0.4 percent in November, significantly lower than economists' forecast for a 0.2 percent rise. Overall, consumer demand continues to wane, with personal spending at its weakest point in 18 months in the fourth quarter.

The markets will now look to Thursday's report on the Producer Price Index (PPI) and Friday Consumer Price Index (CPI) for direction. The consensus is for both to have risen 0.2 percent for November.

If both the PPI and CPI only come close to what's expected, I'm not sure if that will be enough to move the markets. What's more, I'm not sure if the official pronouncement of George W. Bush as President will move the markets, as much of this event is already priced into stocks. The fact is, the COMPX has run into stubborn resistance at 3,000, and I think it might take more than a declaration of the obvious to move through that level. However, if the COMPX can bust through 3,000 and hold the gain, a move to 3,200 is entirely plausible.

As for the INDU, it's been trading in an ever-constricting range this week. The average has not been able to clear 10,850. On the other side, though, it appears to have immediate support at 10,750. For the INDU to break free, it still needs to advance on interest rate and presidential news. I'm not sure if that news hasn't already been fully priced into the INDU issues.

On a more positive note, I do think most of the lousy earnings warnings have been priced into the market. As it now stands, the fourth-quarter earnings growth estimates for companies in the S&P 500 have dropped to 8.4 percent from a peak of 23.6 percent in the first quarter, according to First Call. As recently as October 1, analysts were forecasting fourth- quarter earnings growth of 15.6 percent. So, there's not much of an earnings hurdle for companies to climb anymore.

S.P. Brown
Editor