We Need a Leader

Last night's gracious concession by Vice President Gore finally confirmed who would be our country's next leader, but who is going to be the market's next leader? Today, as George W. Bush began his transition into the oval office, the market turned its back on the whole election story to instead focus upon more important issues. Unfortunately, the bigger story for the market has been earnings visibility and more specifically, the lack thereof.

Today was disturbing for many traders since one of the last remaining leadership sectors (the banks) was hit by the aforementioned earnings uncertainty. The CBOE Bank Index (BIX.X) took a hit on warnings out of merger partners J.P. Morgan (JPM) and Chase Manhattan (CMB). Banks were among the last safe havens, as investors made big bets on the fact that they would benefit from a low interest rate environment.

Chase and Morgan said profit would come in "substantially lower" for the fourth quarter, but did not set a specific level. They blamed higher costs and "difficult" capital markets as the sources of their woes. Chase closed down $1.63, or 3.65%, to $42.88 on the news while J.P. Morgan floundered by $6.31, or 3.84%, to finish at $157.94.

In other news, the single biggest merger in U.S. history was given regulatory approval today by the FTC. The $111 billion merger between America Online (AOL) and Time Warner (TWX) will go through as planned, barring the necessary concessions that were necessary for approval. The companies agreed to ensure that customers would have access to other broadband providers other than AOL over the company's cable system. Separately, AOL promised to change the voice that announces, "You've got mail." (Just kidding) AOL closed up $1.55, or 3.20%, to $50.00 and TWX was up $1.90, or 2.62%, to finish at $74.50.

As par for the course lately, we had a flurry of after-hours activity on news out of some big tech stocks. Numero uno was Oracle (ORCL) who beat earnings estimates for their second quarter by $0.01. Oracle reported earnings of $0.11 a share on revenues of $2.7 billion, up from $2.3 billion form the same quarter a year ago.

To put the kibosh on Oracle's good news, however, was Microsoft (MSFT), who after the close said that was going to lower its second quarter and second half of 2001 be 5% due to softness in PC sales, internet advertising and corporate IT spending. Mr. Softee can move markets by itself as it is in the DOW and the NASDAQ, so keep those seatbelts securely fastened tomorrow!

Today's Markets:

The NASDAQ (COMPX) stumbled again today, falling 94.26, or 3.34% to close at 2728.51. It's hard to believe that the COMPX had a 3,000 handle just three days ago. Volume was again moderate, with 1.7 billion shares changing hands. Decliners trounced advancers 2640 to 1216. While there was no evidence of panic selling, most stocks steadily eroded throughout the session.

The DOW (INDU) took its lumps today, mainly because of the crumbling financials. The average fell 119.45, or 1.11%, to 10674.99. Although performing well on the day, the household products, chemical and tobacco stocks couldn't overcome the downward pressure put upon the DOW by J.P. Morgan. NYSE volume came in at 1-billon shares and advancers lost out to decliners by a smaller margin of 1695 to 1183.

Treasury yields continued to fall among more proof of a slowing economy and more weakness in equities. The Producer Price Index (PPI) rose 0.1%, while the core rate was flat in November. Economists had expected a 0.2% rise overall. That's all it took for treasuries to rally. The benchmark 10- year bond finished up 11/32 to yield 5.22% and the 30-year note closed up 12/32, to yield 5.45%, its lowest point since April of 1999.

Stocks and Sectors On the Move:

The almost-but-not-quite award goes to the Philadelphia Semiconductor Index (SOX.X) today. Most semiconductor stocks bucked the downtrend until the last hour of trading before succumbing to the selling. These stocks are getting to levels where the risk/reward scenario for the shorts is getting out of line. This morning may have been short covering followed by the selling out of recent buyers who took the opportunity of the morning strength to lighten up on positions that had gotten away from them. Watch for any more breakouts to be fueled by more short covering.

Further signs of an economic downturn came from Maytag (MTG) today as the company said that its fourth quarter earnings could be down as much as 50% from last year because of overall sales weakness. Its competitor Whirlpool (WHR) beat it to the punch yesterday by announcing it would miss earnings estimates and would lay off 6,000 jobs. Both stocks have been put through the spin cycle because "big-ticket" items are the first to be shunned by consumers who have pared down spending habits.

While jittery investors pulled money out of bank stocks today, it was not entirely clear who would lead next. We will be looking towards the "other financials" like mortgage and brokers to take up some of the slack from the banks, but they have some problems of their own associated with an economic slowdown. The airlines were starting to look good, with oil prices coming down from record highs, but they have since dropped their landing gear and look ready to hit the tarmac.

While defensive stocks like the drugs and the consumer stocks still look strong, it's hard to break out the pom-poms for a rally built around the likes of Gillette (G), Campbell's Soup (CBP) and Adolph Coors (RKY), although Coors would make it more bearable.

A sector that remained strong throughout much of the recent NASDAQ downturn is the Biotech Sector (BTK.X). It is starting to claw its way back for a recent drubbing and also possesses the type of growth attributes that could lead this market higher. A rally around the biotech stocks could be something that would draw investors off the sidelines and that could eventually trickle down into the rest of the tech sector.

Looking Forward, Always Forward:

Well, its triple witching Friday tomorrow so be on the alert for funky moves in stocks and in the indices. Triple witch is the expiration of equity options, futures and index options. With many stocks in the lower end of their quarterly and yearly ranges, look for this expiration day to be potentially more volatile.

Friday also brings with it the November Consumer Price Index (CPI). Economists are expecting a 0.2% rise in the price of the basket of goods and services. A lower number out of this report would further confirm the lack of any inflationary pressures in the U.S. economy.

Turning to charts, we can see below that investors have shaken off the perception that drug stocks are overvalued. At the end of November, investors dumped high priced drug stocks for the beaten down techs. It now seems apparent that they back for another fix. The drug stocks are being treated as a safe haven from the uncertainty of the techs and now are seeing some inflows from investors that had been hiding out in the financials.

I have just a few more notes of interest for you to ponder before I leave you to your Christmas shopping and general holiday merriment. This is traditionally the time of year that small cap stocks start to rally. The treasury futures have now priced in a 50-50 chance of an interest rate cut by February. Many analysts have all but bet their homes on a shift to a neutral bias at the Fed meeting next week. Trim Tabs reported that last Tuesday saw mutual fund inflows of $10.7 billion and a $20 billion inflow between this Monday and Tuesday (a record). What does all this mean? It means the Grinch has not stolen Christmas yet.

Good Luck and Book Those Profits Early!

Craig Seidler
Assistant Editor