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MARKET > Commentary Tuesday, March 20, 2001
by: Craig Seidler
Assistant Editor

Vernal Equi-knocks

Today marked the vernal equinox, where day and night are equal, balanced and poised, but about to spill over towards the side of light and warmer days (for those of us in the Northern Hemisphere). Wish we could say as much for the market.

Spring is supposed to be a time of new life, hope and fertility. And though day and night are now perfectly balanced, the stock market is anything but. After the Fed cut interest rates by 50-basis points today, it seemed more like autumn on Wall Street, as screens turned red and investors turned cold on stocks.

The markets sold off (to put it mildly) after investors showed their disappointment in the lack of an aggressive 75-basis point cut. However, the silver lining to the Fed's report was that they indicated that they are fully dedicated to cutting interest rates until the economy and stock market show signs of life. Great, but investors obviously are still not able to look ahead to rosy times and are definitely still fearful of a recession.

The Fed has now cut interest rates by a full 1.5% since the first of the year. The overnight Fed funds rate now stands at 5.00%; right back to where we were in August of 1999 when the Fed started fighting what most think was "imaginary inflation" with a series of rate increased that served to pop the equity bubble.

In its statements, the Fed also indicated that it is worried that a combination of excess capacity, faltering global economies and a falling stock market will soften demand and production, delaying an economic comeback. On the other hand, the Fed sited evidence that the inventory adjustment (the shrinking of inventories) "appears to be well underway."

But the Fed's biggest carrot to the bulls was that it stated that it would monitor the economy closely. To many, this Fed- speak translated into, "the Fed is not ruling out an inter- meeting rate cut before its next May 15th FOMC meeting and will remain on guard for further weakness."

Today's Markets

Going into the 2:15 p.m. EST Fed decision, stocks were mostly higher. And at first, it didn't appear as if the Fed decision was going to have much of an effect on stocks. Then the sellers put the hammer down and the market tanked.

The NASDAQ (COMPX) fell 93.74, or 4.80%, to 1857.44. Volume came in at 2 billion shares traded and decliners whipped advancers 2258 to 1375. Both stats clearly do not point to a panic sell off, which is probably what the market needs most in order to turn this ship around.

Big cap techs generally took the brunt of the selling. Intel (NASDAQ:INTC) lost $2.44 to $24.56, Sun Microsystems (NASDAQ:SUNW) fell $1.69 to $17.38 and Cisco (NASDAQ:CSCO) dropped $1.75 to $19.06. All were losses of more than 8%.

The DOW (INDU) didn't fare much better. Money fled old- economy stocks, as investors sought to hide under the only rock that is left, that being cash. The DOW lost 238.35, or 2.39%, to 9720.76 as financials, usually the first to rally after a fed cut, dragged the average lower. Merrill Lynch (NYSE:MER) lost $2.75 to $55.75 and J.P. Morgan (NYSE:JPM) faltered by $2.56 to close at $42.59.

Treasuries finished slightly higher on the heels of the Fed's rate cut and the subsequent flight out of equities. The benchmark 10-year note closed up 13/32 to yield 4.765% and the 30-year bond finished higher by 10/32 to yield 5.27%.

Stocks and Sectors on the Move

As previously mentioned, the Fed put a bit of a hitch in just about every sector's gitty-up. The most troubling to investors, however, has to be the financials, which usually leads the market higher after a series of rate cuts. But, on the other hand, there is absolutely nothing usual about the current state of the market. The old market truisms like don't fight the Fed have failed miserably, leaving even the pros to ponder what might work next.

Getting back to the financials, Goldman Sach's (NYSE:GS) got the day off to a fair start for financial stocks by beating earnings estimates of $1.29 by a wide margin, coming in with earnings of $1.40/share. However, the news out of Goldman was mixed in that it also reported that net income fell because of loss in investment banking fees and its reported $1.40/share was a decline over the same quarter's earnings a year ago. GS slipped by $3.88 to $87.06 on the day with most of that loss coming after the Fed report.

Other notables in the banking and brokerage sectors were Wells Fargo (NYSE:WFC) down $1.18 to $46.85, Citigroup (NYSE:C) off $2.00 to $44.30, Bank of America (NYSE:BAC) down $1.68 to $51.29, Lehman Brothers (NYSE:LEH) off $3.38 to $65.90 and Bear Sterns (NYSE:BSC) down $2.00 to $46.75.

The semiconductor sector, as measured by the PHLX Semiconductor Index (SOX.X) was subjected to bad news out of KLA-Tencor (NASDAQ:KLAC) in addition to selling off after the Fed rate cut announcement. The SOX.X fell 35.71 to 542.05 which is a general area of support for the semis.

KLAC slid on warnings that came out after the close on Monday, in which the company indicated that it would fall 8-10% below its current sales estimates and would also fall short of its third-quarter EPS estimates. No surprise that the economic downturn was to blame, but what was very disheartening was that KLAC was, up until today, the clear relative strength leader of the whole semiconductor sector. With KLAC falling $3.38, or 8.08%, to $38.38, the semis may have some more patches to fill on the road to recovery (as if it wasn't already strewn with potholes the side of a VW bug).

In what may be another corporate raspberry directed at the Fed, upwards of ten companies warned after the bell this evening. Were these firms holding onto last hopes, just waiting to see if we got a 75-basis point cut before they warned? Maybe, but bottom line is how many more warnings do investors have to suffer through before we see real improvement in business operations? By the way, I'm not going go into details on the warnings because most of the companies are smaller and not widely held. Besides, I think I'm becoming more bullish, so these warnings just rain on my improving mood.

Looking Forward, Always Forward

After today's Fed cut tomorrow's Consumer Price Index release is going to seem tame. Still, its not chopped liver. The Fed said it is going to be watching closely, and the CPI certainly enters their equation when considering further cuts. The CPI is widely expected to come in at 0.1%; excluding food and energy it is expected to be 0.2%.

Investors will continue to scrutinize the financials on Wednesday, as Lehman Brothers (NYSE:LEH), Morgan Stanley Dean Witter (NYSE:MWD) and Bear Sterns (NYSE:BSC) are all on deck to report earnings. Given the current environment, nobody is expecting anything more than an infield single out of any of the above players.

Near term, many investors are wondering why they should stick out their necks and buy stocks, only to have earnings warnings wish that they were wearing steel turtlenecks.

The bulls basically have three arguments in their basket of optimism (that's it). One, stocks should go higher because the Fed is cutting rates and stimulating the economy (don't fight the Fed). Although this one hasn't worked since January when the Fed started cutting! Two, stocks should go up because tax season is almost over and investors will soon stop selling stocks to pay their hefty tax bills. Finally, stocks should go higher because there is an abundant amount of short sellers out there that will have to cover their positions should stocks start to tick higher.

None of these "arguments" make me feel good in the long run except for maybe the Fed cutting rates, and that's only if they are not too late to turn us around. Bottom line is that until the Fed cuts rates enough so that analysts, and more importantly investors, can look into the future (next year) with a glimmer of hope in their eyes, sellers will have the upper hand and stocks shall go lower.

So until fundamentals turn around, Fed cuts may not help. The investor is dialed into earnings and will not be placated until a turnaround at the corporate bottom line is seen.

However, the wildcard according to the Fed still remains in the hands of the consumer. As long as the consumer continues to spend, inventories will be whittled away and companies can start feeling good about spending money on capital improvements (CAPX). CAPX, which is in essence the jumper cables for the economy, is what drives growth and therefore stock prices.

Stick to Your Trading Rules in These Tough Times

Craig Seidler
Assistant Editor


Copyright 2001

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