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MARKET > Commentary Tuesday, February 27, 2001
by: Craig Seidler
Assistant Editor

Takin'_Losses Says It's True

A disgruntled Cisco (NYSE:CSCO) investor, Takin'_Losses, just posted a message that we are going to get a 50-basis point intra-meeting rate cut, Cisco is going to warn and the NASDAQ will rally 30% before the end of March. Heck, this guy must be a reputable source; yeah right, he's not even using his real name.

We all know that message boards can be a dangerous, rumor filled and often-vile place to obtain information. With the market as vulnerable as it has been in years, rumors are once again being taken for absolute truth, which in itself is a dangerous turn of events.

Case in point, the market has been propped up over the past two trading days by comments out of former Fed Governor Wayne Angell who believes the Fed will cut by 50-basis points before their scheduled meeting. Way to go Wayne. As a former Fed Governor, you of all people should know that the intra-meeting cut has, and always will be, a way for the Fed to get more bang for the buck by surprising the market.

As a result of Angell's rumor follies, one of the Fed's best pieces of ammo against a tanking stock market has been taken away from it. With the market actually anticipating an intra- meeting cut, the surprise is gone and worse yet, it may become a sell-the-fact event when and if it does happen.

What does Greenspan think of all this? Of course nobody really knows, but one can only surmise that the Fed Chief is good and nervous. The market, no I take that back, the world is waiting to see if Greenspan has become a puppet to the stock market. While he needs to be attentive to a plummeting stock market, he cannot come off as being panicky or acting in response to conjecture from Wayne "I'm No" Angell.

Another rumor that was swirling around the Street today was that Cisco is due to issue a profit warning. This rumor must have hit the market around 2 p.m. EST, as this is precisely when the giant networking stock sold off. I stress again, this is only rumor, but rumors are hurting lately. With investors on edge and with most of the news having a negative bias lately it is easy to see why, rumor or not, investors are not willing to stick around to find out the truth.

Take away the rumors and you have a market that is selling on any rallies and is living from economic report to economic report.

This morning it was the Consumer Confidence numbers that got the markets off to an edgy start. The Consumer Confidence number came in at 106.8 versus last month's figure of 115.7 (the lowest reading in four years). Expectations were for a reading of 110. In addition, we received a lower than anticipated Expectations Index reading of 68.7 versus the previous reading of 79.3. While these numbers confirm that the consumer is indeed nervous and has low expectations for the future, these readings still do not coincide with consumer spending figures, which show that the consumer is still spending money.

With Greenspan publicly admitting that the biggest part of an economic recovery is in the hands of the consumer, this Consumer Confidence reading takes on additional weight in that it may have a baring on whether the Fed cuts now or later, and by how much. Speaking of reports, the market will be anxiously awaiting Thursday's release of the NAPM, a measure of economic activity at the factory level. Economists are looking for a slight recovery from 41.2% to 41.8% in February.

Today's Markets

It was another Fed member, Fed Vice Chairman Roger Ferguson, not Greenspan that stole the spotlight today. Ferguson made some comments this afternoon that hinted that although consumer confidence was low, it is not at levels that justify immediate action. This was all it took to squash the high levels of optimism injected by Angell earlier in the week.

The NASDAQ (COMPX) notched another new closing-low for the year, having lost 100.68, or 4.36% during today's session to finish at 2207.82. The NASDAQ has not closed at this level since December of 1998 and is now down 57% from its March 2000 intraday highs. Most of its large cap generals continued to snowball lower, with Cisco down $2.06 to $24.00, JDS Uniphase (NASDAQ:JDSU) down $4.81 to $27.81 and Broadcom (NASDAQ:BRCM) down $9.38 to $53.63. These prices mark new 52-week lows in each case and are indicative of the mood in high tech. The only positive to take away from today's action was that volume was light at only 1.8 billion shares traded.

Things were not much better over in the DOW (INDU). The old economy average closed down 5.65 to 10636.88 after having been in positive territory for much of the afternoon. Helping to prop up the DOW were shares of United Technologies (NYSE:UTX), which rose $1.20 to $79.65 and also shares of Phillip Morris (NYSE:MO), which rallied $1.76 to $48.26.

Over in the treasuries arena, bonds took flight and yields plummeted, as traders anticipate more rate cuts out of the Fed. The 10-year note rose 22/32 to yield 4.95% and the 30- year bond rallied 1 13/32 to yield 5.35%.

Stocks and Sectors on the Move

The few pockets of strength today were seen in tobacco, defense and to some extent the banks. The AMEX Bank Index (BIX.X) rose 5.46 on the heels of sharply lower short-term bond yields. Some winners within the sector included Wells Fargo (NYSE:WFC) up $0.49 to $50.07, Bank of America (NYSE:BAC) up $0.45 to $51.43 and Summit Bankcorp (NYSE:SUB) up $0.59 to $43.29.

It was Goldman Sach's (NYSE:GS) that helped to drag the tech sector lower by initiating sweeping downgrades across a number of sectors based upon valuations. They lowered guidance on such names as IBM, off $2.71, Hewlett-Packard (NYSE:HWP) off $1.40, EMC Corp (EMC) off $3.34, Applied Micro Circuits (NASDAQ:AMCC) off $4.75, PMC Sierra (NASDAQ:PMCS) off $6.56 and Broadcom (NASDAQ:BRCM) off $5.13 among others.

It was also a rough day for Nike (NYSE:NKE). The stock swooshed lower by $9.57, or 19.46% after it warned late Monday that it would substantially miss earnings estimates for its third-quarter due to weakness in U.S. footwear orders. Additionally, it blamed its supply chain management program produced by I2 Technologies (NASDAQ:ITWO) for its problems. Nike finished at $39.60 and ITWO finished down $7.94 to $27.56.

Another big downside mover was high-flyer Frontier Airlines (NASDAQ:FRNT). The Denver based discount carrier announced today that it would likely come in with fourth-quarter earnings of $0.38-$0.48/share, much lower than previous estimates of $0.59/share. The airline descended $11.19, or 31.51%, crash landing at $24.31. It was also downgraded from "strong buy" to "market perform" by Raymond James.

Turning to the Splittrader Current Play stocks, we have not been immune from the market downturn but since our rotation to conservative picks, the list is holding up well. Moreover, we have some standouts that are actually advancing amidst the strong selling pressure seen throughout the rest of the market. Performance Food (NASDAQ:PFGC) advanced $0.56 to $50.56 today and successfully broke out of a double bottom formation. International Game Technology (NYSE:IGT) finished down $0.10 to $54.50 but notched a new intraday high at $55.50 earlier in the day.

Looking Forward, Always Forward

All eyes and ears will be tuned towards Alan Greenspan's testimony before the House Financial Services Committee tomorrow to catch any hint of what he might be doing with rates. Although the Fed Chairman is famously tight lipped about rate moves, the market's precariously fragile state might be cause for a piece of subtle insinuation on Greenspan's part.

With optimism of a 2001 second half recovery quickly fading and with the NASDAQ continuing to make lower lows, it has all come down to more rate cuts. The only question is whether or not the market (or more specifically the institutions) believe that further cuts will help or if they are positioning themselves for an extended recession. If bond yields continue to fall and bank stocks roll over again, even after further rate cuts then hold the phone then I believe that we are not done yet.

Again, keep on your toes and remain defensive until the market's mood significantly changes. Not that we short stocks on Splittrader, but now is not the time to be considering that strategy either. With another rate cut on the way, a short squeeze could be in the works for many stocks that have exhibited strong down trends. Although, the longer the Fed waits to cut rates, the less of a chance that we will get a short squeeze pop in the market like we got with the first surprise rate cut in January.

Craig Seidler
Assistant Editor


Copyright 2001

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