Signs of the times

Look around the market today. Read the headlines. Listen to the commentators and the talking heads. Not to sound apocalyptic, but it feels like we are entering new times. Want some proof? Look at how we shop. Look at the way we do business and how it affects existing companies. Look at the core changes in the major markets.

In terms of shopping trends changing, look at how many people out there are avoiding the malls this shopping season, or at least cutting down on the mall visits and shopping on-line instead. Someone is, because the e-tail on-line shopping sales figures are expected to double this holiday season, from $4B last year to over $8B this season. Two years ago these numbers were almost non-existent, and on-line shopping was a novelty. More and more, it is becoming a necessity. In response, retailers are establishing an e-tail presence. Home Depot is a great example. They were recently added to the Dow because of their market presence and the fact that they represent business in the U.S. Guess what, this traditional bricks and mortar (literally) is establishing an on-line presence to ward off competitors stealing market share.

What about basic business and how we conduct it? Perhaps the biggest story today concerns Xerox Corp. The Company came out on Friday after the market to warn that their numbers (EPS, sales and revenues) could be reduced by as much as 40%, with further problems expected going forward. Do you think this problem is due to bad management and limited to Xerox. Don't count on it. The reality is that existing technologies are turning over and changing at staggering rates. Office equipment is becoming more and more obsolete as paperless and virtual offices become the norm. In reality, that's nothing compared to the bigger forces at work in the workplace and in the world. The companies that are garnering the headlines are the companies responsible for building out the Internet, providing content or services to business and customers. B2B's, B2C's, ISP's, Content providers, routers, search engines......You would have to be living in a hole to have not heard these terms millions of times in the last year or two. The Internet has and is changing how business is done and how we do business. Proof of this is the recent addition of Yahoo to the S & P 500, replacing Laidlaw, the biggest manufacturer of school busses in the U.S. The same can be said for Microsoft's addition to the Dow. The markets are beginning to recognize fundamental changes taking place in business, and identifying the companies that will lead and influence those changes. For the most part, those companies are and will continue to be high tech and Internet companies.

As for the major markets, the Nasdaq was a step-child as recently as a decade, make that 5 years ago. The Dow and issues on the NYSE routinely won out when it come to deciding where to put your money, as there was a widely held belief that the Big Board was where the quality issues resided. It would have been unheard of for the Nasdaq to have traded more shares, received more attention, set more records and attracted the hearts of investors to such an extent even a short time ago. It would have been blasphemy to suggest that a Nasdaq issue could or ever would be added to the venerable Dow. WRONG! In addition, you've now got the Nasdaq - American exchange. You hear the term daytrader or momentum investor every trading day on TV, radio or in the press. After-hours trading and eventual 24 hour trading are close to becoming a reality. Lending and margin rules are changing. GLas-Stedman, one of the biggest pieces of regulatory legislation that came our of the Great Market Crash, regulating the ability of banks, brokerages and insurance companies to get into each other's business has been taken off the books. Look at today's news. The Nasdaq and Hong Kong Exchanges will co-list certain companies, with Microsoft, Intel, Dell, Cisco, Applied Materials, Amgen and Starbucks set to be listed in Hong Kong. This should increase the amount the foreign investment in the US markets, especially the Nasdaq. One other tidbit regarding the changing climate on Wall Street. GE is considered the barometer on the economy and the Dow. Why, because they are involved in everything and have for years been the most capitalized company in the world. Guess what? They were surpassed in terms of capitalization a while back by Microsoft. Things are changing!

As for the DOW and Big Board trading today. Blue chips once again were overlooked for the excitement in the Nasdaq. The Dow closed down -32.11 at 11,192.59, on heavy volume, 978M. Once again, advancers succumbed to decliners 11 to 19. Also in line with the recent trend, the new high-new low numbers continued to slide to the negative side, with 61 new highs and 256 new lows, a very negative sign. Among the leaders were retailers WMT +4.50 and HD +3.81. The high techs were lead by MSFT +2.75, IBM +1.19, INTC +1.81 (despite the Prudential downgrade from Strong Buy to Accumulate) and AOL +2.31. The other sector helping the index was the airlines, lead by UAL +0.69, LUV + 5/32 and AMR +2.06. Weighing on the Dow were issues like NFS -3.13, HWP -4.31. MRK -3.51,LU -0.69, KO -1.63 and AXP -1.56.

Any guess as to what the Nasdaq did today. If you guessed that the 52nd new record of the year was set, you win the prize. The composite (COMPX) finished up +37.95 at 3658.18. Volume was heavy at 1.57B, but breadth was lousy at 20/19. The new high / new low came in a little better, with 258 new highs and 76 new lows. As for the performers, semiconductors were weak once again, with the SOX down -1.59, lead by; AMAT -1.38, MXIM -0.06 and ALTR -0.31. Others not participating in the most recent rally included; SUNW -1.44, ORCL -4.81 (earnings due out Tuesday after the market), AMZN -4.19 and YHOO -2.44. Those leading the upside included; INTC and MSFT, as well as ; WCOM +0.63, CSCO +1.38, AMGN +1.88 and CHKP +8.97. The S & P 500 went somewhat unnoticed today, finishing down slightly -1.82 at 1415.22.

The bond traded down somewhat today in anticipation of tomorrow's release before the market of the CPI and retail sales numbers. The bond price slipped -14/32. The yield on the 30-year was slightly up at 6.20%. In terms of the expectations regarding the numbers tomorrow, the CPI and its core (excluding food and energy) are expected to increase by .2% respectively. Retail sales are expected to increase by .5%. As we stated in the Sunday market wrap, either could negatively impact on the market should they come in unexpectedly high. The retail sales could be the bigger wild card due to the fact that analyst are notorious for missing those numbers.

As we alluded to earlier, the story of the day was probably Xerox (XRX). The Company warned regarding the fourth quarter on Friday after the market. Today, investors didn't wait to show their displeasure, dropping the stock to close near its 52-week low (although it did finish in plus territory for the day) at $21.48. The stock has traded as high as $64 this year. The warning took its effect on other office equipment competitors, driving HWP down -1.29 and LXK -0.88. Shares of Xerox were downgraded at a number of firms, most notably at Prudential and JP Morgan.

The other big news of the day is the agreement between USWeb/CKS (USWB) and Whittman-Hart (WHIT) to merge. Both companies are known for helping businesses to erect websites for e-commerce. In the case of USWeb, most of their concentration has been with larger corporate clients. Most of Whittman-Hart's business has dealt with smaller to mid-sized corporations seeking full-scale advice related to launching a web presence. The deal is thought to be in the area of $8B. Investors of both Company's voiced apprehension as to the ability of the two to effectively create a balance of their existing businesses. Shares of both companies were punished, with WHIT losing -24.75 points to finish at $54.50, while USWB gave up -7.06 at $43.81.

As for companies reporting today, Copper Cos. (COO) reported before the open, missing expectations by $0.01, which sent shares down -1.75. After the market, Solectron (SLR) reported numbers in line with the street. The stock was unchanged for the day. Also reporting after the bell was Net2Phone (NTOP), who beat expectations by +0.04. The Company indicated that revenue had increased over 130%. Traders anticipated the good numbers as they traded the shares up +10.88. As for Tuesday's scheduled earnings releases, the morning will be dominated by retailers as Pier One (PIR) and Best Buy (BBY) come out with their numbers. After the market, look for Oracle (ORCL) and Verity (VRTY) to release their numbers (don't forget we are looking for a split from ORCL).

Looking forward, tomorrow will be interesting for a number of reasons. This will probably be the last time for economic numbers to impact on the market in this year, so any reaction could be exaggerated. As we stated earlier, the retail numbers could take on special significance due to the season and the fact that everybody's focused on the CPI. It's usually the unexpected numbers or events that shake the markets. A benign CPI report combined with a bad retail number could cause damage for the simple fact that no one's expecting it. Then again, if the numbers are well received by bond traders and in turn equity traders, we will probably see a disconnect between the bond and equities for not the first time since this past summer. Probably not for long though. The other thing we think will be interesting will be the markets reaction to the numbers. The release of the last two sets of numbers (employment/wage cost and last Friday's PPI) sent the markets higher immediately. What we are anxious to see is whether such an occurrence will happen again and whether it will be sustainable. A gain in both the Dow and the Nasdaq would be expected on good news, but more and more, the question of exhaustion comes to mind. A failure to maintain gains and rally going forward over the next several days may foreshadow things to come. For now, the music plays on.

Louis Horkan
- Chief Editor