InvestmentHouse Newsletter 01.11.00

[reg]

[Brigitte]

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11/1/00 Investment House Daily
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Investment House Daily Subscribers:
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TONIGHT:
- Dow takes a needed low-volume rest, and the other two major averages
join in.
- More bad news on tech stocks hurts, but does not sink the Nasdaq.
- Economic outlook continues to weaken, but Fed still dwelling on wage
inflation.
- Team Trades
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After a furious rally, the Dow took a breather. Volume was lower, down
volume barely led up volume, and the A/D line held up well. It is pausing
just below resistance at the 11,000-11,100 level, a natural place to take
a rest after a thousand point run the past two weeks. The S&P 500 and
Nasdaq, a day after confirming last Thursday's rally, also took breathers
on lower volume, but they both suffered from negative news from a few of
their members.
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WCOM warned of a profit shortfall for the fourth quarter. And for the
first, second, third, and fourth quarters of 2001; pretty much the
foreseeable future. WCOM's chart has told the story, falling from over
$50 at the first of the year. Today it sold down 20% on 195 million
shares (10% of Nasdaq volume). As one of the largest cap stocks out
there, WCOM was sitting on the Nasdaq and S&P 500 all day long. On top of
that, Altera (ALTR) announced lower than expected earnings, prompting
several downgrades of that stock as well as the chip equipment makers as
well. The whole sector, including chip stocks in general, took a beating.
XLNX, the real leader in the chip equipment sector, obviously frustrated
by the unwarranted downgrade of its stock three weeks ago because of a
perceived 'disconnect' by Dan Niles and the hits the stock has taken
because of the problems of others in its sector who are just not executing
well, pre-announced that its was going to once again blow out earnings
this quarter. On the news, XLNX recovered $3 after hours. The negative
news, however, kept pressure on the tech stocks all day long.
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Even with the bad news, however, the Nasdaq did not give up as it has in
the past. It was down over 80 points on its low (3289.46), but rallied
positive. Continued downgrades of chips throughout the day (AMAT cut by
one broker from a $60 target to $30), however, turned it back down. It
still was able to bounce in the last hour to close down just 36 points.
Not a pretty picture, but the selling was on lighter volume as it should
be, and it bounced from the lows. This kind of news most probably would
have torpedoed the index as little as a week ago. We still have to be
careful as the Nasdaq has started selling binges on lower volume, but
today's price/volume action coupled with Tuesday's confirmation day gives
us some comfort. We will continue to pick and choose plays, picking up
positions in our plays that hit our buy points. Long term we have
concerns given the economy that is slowing more than the popular media
acknowledges, but for now we have to trust what the market is telling us.
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THE ECONOMY
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NAPM tanks.
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The National Association of Production Managers reported a reading of 48.3
for October. That follows a 49.9 reading in September, and was well below
the 49.5 consensus expectations. A reading under 50 shows a contraction
in production. This is the third decline in a row, showing that the
production aspect of our economy is no longer expanding. Indeed, the NAPM
committee chairman stated that production activity is expected to slow
even more in the coming months. This is important as not many people are
seeing the picture; they see the lower number and are relieved because
they feel that means the Fed won't raise rates. With the prices paid
component falling to 56.5 from last month's 58 reading, that is true. It
is a small silver lining, however, as the Fed was shooting for slower
growth in the economy, not a contraction. Ideally, you would want to see
the NAPM hold right at 50; that would show the economy was just barely
expanding as other elements continued to cool off. Instead we have a key
component of the economy not just slowing down faster than expected, but
contracting faster than expected just as the GDP is contracting faster
than expected. With consumer confidence apparently cresting after a
year-plus increase, the snowball effect we described in previous reports
grows.
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To put these readings into perspective, the last time the economy showed
this much contraction was from June 1998 to January 1999 as a result of
the Asian crisis. U.S. manufacturers were facing a recession at that
point, and remember, that is when the Fed had to step in and cut interest
rates to stave off that result. Times have changed since then you say?
Well, again, consider the two huge insurance failures in Japan last month
and the anemic GDP growth in the third quarter across the globe; as in the
U.S., it was much less than expected. With the inventory-to-sales ratio
rising to its highest level in 11 months, it is clear that goods are not
moving fast, and manufacturers have had to cut back on production.
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But construction spending hits a record.
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At the other end of the scale, construction spending jumped 2.4%, blowing
away the 0.5% increase anticipated. That is the largest gain since
November 1999. While that may buoy some spirits, you have to think about
the timeframe for major construction projects. It is not a one-month
process to plan a new building or plant, approve the idea, draw up the
plans, break ground, and then start construction. These are long-term
plans that don't change from month to month; these plans were in the works
months ago if not longer. They were already well into the pipeline, i.e.,
actual construction underway to be logged this month. From our research
across the land, plans that have not reached that stage are being scrapped
right now because of uncertainty regarding the economic future and what
the national election will do to the economy.
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As a result, we just cannot buy into the 'soft landing' theory at this
point. We really hope that the economy can pull up before it is too late.
The one thing we do know is that when the Fed hikes rates six times, the
economy has always gone into hibernation and needed to be coaxed back out
with rate cuts and, at times, tax cuts. With the rapid drops we are
seeing in GDP, manufacturing, and consumer confidence, remedial action
needs to be taken. In two weeks the Fed meets again, and we fully expect
to see a change in bias and more talk of a rate cut. If things continue
on this pace, we still expect to see a rate cut before the end of the
year. We may miss on that one, but the economy needs it. This assumption
of a rock-solid economy in the national election is frightening as it
shows a lack of understanding of what is actually occurring in the
country.
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THE MARKETS
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A day of rest on lighter volume. With the Dow and to a certain extent
with the S&P 500, that is just fine. The Nasdaq continues to give us
pause every time it follows a good session with selling, but given the
confirmation and the low-volume selling today, we have to rely on what the
market is showing us now, not what our emotions are saying.
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Overall market stats:
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VIX: 26.56; +0.57. Slightly higher on the selling, but the mild rise
indicates this was just profit taking after a strong run in the Dow and
S&P 500.
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Put/Call ratio: 0.50; -0.14. Even with the selling today, the ratio fell,
just the opposite of Tuesday. Seems today the options buyers changed
their mind and viewed this selling as mere profit taking today.
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Remember: these are secondary indicators that we use to confirm moves.
They are not leading indicators. They can be wrong as sentiment is an
ethereal concept.
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NASDAQ: The techs were going to be under pres