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MARKET > Commentary Tuesday, June 05, 2001
by: Matt Paolucci
Contributing. Editor

Bulls Regain Upper Hand

Data suggesting that the economy was getting weaker came fast and furious this morning. It started with the one-two punch of lower productivity numbers and higher unit labor costs. From January to March, the amount of goods and services the average U.S. worker cranks out fell more than in any other quarter in eight years, dropping 1.2%, according to a revised government report. The anemic pace at which employers have laid off workers compared the viscous rate of the economic slowdown was cited as the main reason for the decline. Going hand-in-hand with the lower output numbers were increased labor costs, to the tune of a 6.3 percent annual rate, previously reported at a 5.2 percent rate. The first-quarter rate was the fastest since the fourth quarter of 1990, when it increased at a 6.8 percent pace. The decline in 1Q productivity was 0.4% lower than expected, while the jump in labor costs was 0.3% higher than Street expectations.

Sure, today's productivity news wasn't too encouraging, but if you compare the first-quarter of 2001 with the same quarter last year, productivity was ACTUALLY up 2.5 percent, a sign that at least a part of the recent gains are likely to be preserved, even with the economy ailing. Pessimists say that productivity in 2000 was driven by semiconductors, the Internet, and other innovations UNLIKELY to be duplicated. We'll see.

OPEC decided today to keep oil output unchanged, making our summer driving/vacation season a bit more expensive. Iraq's surprise call to stop exporting oil yesterday is not, however, expected to impact world oil markets. An emergency meeting will held in July to review Iraq's rogue move.

On the optimistic side, consumer confidence rose in May for the first time since October, suggesting that Americans are still spending freely, banking on the fact that the five consecutive rate cuts this year will soon find their way into the U.S. markets, pulling us out of the wreckage. Bloomberg's confidence index came in at 83.8, up slightly from the 82.4 reading in April. The index had fallen in three straight surveys from a peak of 100.39 in October. A third of the 1200+ participants in the survey said they expect the economy to improve during the next year, compared with 31 percent in April, while those expecting more pain fell to 25 percent from 27 percent a month ago.

Judging from the spending activity generated from such high consumer confidence, folks apparently have plenty of cash to throw around. Congress' tax cut plan should put even more money in consumers' pockets, adding fuel to the recovery. Checks ranging anywhere from $100 to $300, and $600 for married couples should be hitting our doorsteps sometime in October. Yahoo.

Add to that, fed funds futures predicting that there's a 100% chance that Mr. Greenspan and his buddies will cut rates at least 25 basis in late June, along with a 24% possibility that the Fed will trim for a sixth time by 50 basis points. Once again, we'll see.

Checking out the major U.S. indices, investors spurned the morning's productivity, labor, and OPEC news, instead focusing on upbeat news from a few tech leaders.

After a squelched deal with Alcatel (+3.5%), Lucent Technologies (+7.2%), the battered, fried, and fricasseed telecommunications- equipment giant, pleased investors by reaffirming its fiscal 3Q guidance at the Supercom Trade show in Atlanta, saying it saw modest sequential GROWTH above the $5.9 billion in revenue it logged in the 2Q. CEO Henry Schacht said LU also plans to step-up its cost reduction efforts. Investors cheered, sending shares 8% higher, or 67 cents, to $8.67. Don't forget, however, that LU is down to $1.4 billion in cash, with more than $2.3 in debt, most of it due by March of 2002.

Helping to drive the Dow and NASDAQ higher today was last night's news from field-programmable gate array purveyor XLNX (+9.6%) and telecom chipmaker CMVT (+15.1%). In its 3Q business update, XLNX said cancellations and delays had slowed considerably, but cautioned that it still expects to see revenues down 15-25% from fiscal 4Q levels in 2001, ending March. Investors again focused on the positive, sending XLNX up $4.02 to $45.61. Israeli call- management-system maker CMVT, which beat First Call estimates by a penny on record revenues Monday afternoon, surged on Tuesday, also benefiting from an upgrade to Buy from Salomon. The firm did wimp out, though, lowering CMVT's target to $100, citing an "unjustifiable" decline in shares in recent months..

Biotech stocks were hotter than a Ricky Martin concert at an all- girls school, courtesy of some kind words from J.P. Morgan. One of the firm's analysts noted, "The biopharmaceutical business model has proven to be an engine for growth with rapid sales uptake and high margins leading to sustainable earnings growth." Brilliant. Succinct. Could not have been said better by another garden-variety sell-side analyst anywhere (whatever). They recommended buying stocks with drugs already on the market, close to commercial launch, or in late stages of development. What's left? Talk about covering the bases? Okay, I'll stop.

JPM's bullish comments on CELG and HGSI sent the entire sector stratospheric, with the BTK adding 32 points, or 5.1%, to 674, above its February relative high of 667. Immediate resistance is now at the 708-level. Shares of Cerus Corp. (CERS:+8.6%) added $5.84 to $73.65 after saying that the nation's blood supply could be made safe from Helinx bacteria-fighting technology. IDEC Pharmaceuticals (IDEC:+8.1%) surged $5.61 to $74.57 after an upgrade from Morgan Stanley, in which it predicted a blowout 2Q fueled by strong sales of its cancer drug Retuxin. Finally, MYGN popped 9%, or $6.45, to $77 after announcing that it found the gene responsible for high cholesterol.

Checking the day's details, the Dow turned in an impressive day, putting more distance between it and the 11,000-level, closing up 114 points at 11,176. The old-school index benefited mostly from the tech and drug sector, with MSFT, INTC, HWP, SBC, MRK and JNJ all finishing with gains. Holding back the blue chips were shares of MO, DIS, and JPM. The 11,300-level is now near-term resistance. Over at the NASDAQ, the tech-laden index posted its fourth straight day of higher ground, just like the Dow, finishing up 77 points higher at 2234, pushing past the index's 10, 20 and key 100-dmas in the process. Immediate resistance now looms overhead with the May 22 intra-day high of 2326. Breadth on the NYSE concluded with advancers outpacing decliners 18-11 and by 23-14 on the NASDAQ. New highs beat new lows on the NYSE 20-11 and by 25-14 on the COMPX. Ninety-three of the NASDAQ's 100 largest companies (NDX) ended in the green. The SPX finished the day up 16 points at 1283, now within 42 points of its 200-dma and just 30 points from its relative high at 1313. The SPX is now up some 15% from its April lows.

Bonds soared on premise that the weak economic data will spur more easing by Greenspan and Co. The price of the two-year note rose 4/32 to 100-8/32, sending the yield down to 4.11%. The five- year note closed up 12/32, lowering its yield 9 basis points to 4.83%. Rounding out with the longer maturities, the 10-year closed at 97-30/32, yielding 5.27%, down 7 basis points, and old 30-year bond ended with yield of 5.66%, down 4 basis points.

Sector winners were mostly tech-related, with semiconductors leading the way (+6.7%), networking issues not far behind (+5.1%), followed by biotech (BTK:+5.1%), software (GSO:+4.6%), high-tech (TXX:+4.4) and gold, surprisingly (XAU:+1.2%). Investors exited utilities (UTY-2.0%) and transports (TRAN:- 0.1%). By the way, the SOX blasted through its 5, 10, 20, 50, and 100-dmas, ending at 652. A push through 700, just 7% higher, would be a huge positive, as the chips are one of the typical leaders out of economic downturns.

Now comes the 64,000 question: can the COMPX follow through? Can we push through 2326? The NASDAQ has not been above the 100-dma since September of last year. Can the Dow add another 150 points, possibly giving it the gas to make a run at all time highs (11,700)? Is the SPX on its way to breaching 1313, ideally 1380, to really open things up? Maybe. Volume was decent, with the NYSE clearing over 1.1 billion shares and the NASDAQ logging 1.8 billion, but the volatility readings are of great concern. The VIX (CBOE Volatility Index) is at 21, suggesting that fear has all but left the market. Keep in mind that we are still coming into earnings warnings season. Then again, based on what the Fed has already done and what it promises to do (i.e.: avoid recession by any and all reasonable means); and judging from today's consumer confidence data and the market's spurning of the higher labor cost numbers, folks are looking toward the end of the year and basing their investment decisions on that premise. Hey, things have to be getting better if AMZN still thinks it can post pro-forma profits in its fourth quarter.

Matt Paolucci
Contributing Editor


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