MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

A trio of interest rate hikes that circled the globe and a soothing Washington Post story contributed the relief component of today's rally, the birth of AmericanWarner Inc. contributed the merger mania side of the story.

The American Home Products/ Warner Lambert merger drove drug stocks higher for a second day, and a hostile $82 billion bid from Pfizer for Warner Lambert sent them higher still (note: Pfizer also directed a lawsuit Warner Lambert's way hours after bidding for it, but that had little effect on stock prices).

After its recent period devoid of leadership, the stock market now has a host of candidates vying for the leadership throne, with the drug stocks, technology, financials, brokers (online included), and the reborn Internet stocks all leading the way higher.

The Internet stocks for their part surged today, although we must admit that events surrounding the earnings release of one Internet stock had us scratching our heads, thinking that perhaps our methods of viewing the market truly are outdated, for logic has clearly taken a turn to a higher plateau and we have been left behind.

The earnings release in question is that of Bluefly.  We gave you the details of its latest earnings report shortly after it was released, and up to that point we thought we still understood the logic of the market.  Events subsequently proved us wrong.

After the report's release, Bluefly and an analyst covering the stock both stated that the analyst had previously increased his loss estimate to a loss of 74 cents a share, so rather than missing estimates by 30 cents the company had actually beaten estimates by 3 cents (note: despite the post earnings release revelation , the First Call figure remains at a loss of 41 cents) .  The stock rallied on the revelation that an analyst had decreased his expectations for the company's business, turning an early day loss into a mid-afternoon gain.

Now perhaps we're old fashioned in our thinking, but once upon a time when an analyst sharply decreased his expectations for a company it was seen as a negative for the company and its stock.  Clearly times have changed, and results have ceded the right of way to estimates as the true measure of a stock's proper valuation.

Bluefly's beating of estimates alone can not take credit for the strong day enjoyed by Internet stocks.  The true credit perhaps lies with the death of the jitters, and the new found optimism that the worst has passed, that if the Fed hikes in November it will mark the last rate increase for some time to come.

The market's new rosy outlook was given a booster shot after the European Central Bank, Bank of England, and Bank of Australia all hiked rates, fanning hopes that this bit of preemption would do the trick, and no further hikes would be needed.

Now in the case of Australia, we feel onlookers may be jumping the gun a bit in hoping that this is the end, for we expect to see at least two more hikes over the coming months.  In the case of Europe and the UK, the pressure may be taken off to hike further for a few months, but we expect the first economic report that contains a hint of the inflationary to prompt further moves.

In the case of the US, the October employment report and next week's productivity figures will likely determine the short term fate of interest rates.  For the longer term, an easing of rising wage pressures and continued signs of economic slowing will be needed before the current rate hike cycle can truly be called dead.  As we have previously stated, unless the wealth effect has met an untimely end without our knowledge,  a continuation of the current stock market rebound will likely reverse the limited economic slowing that has occurred, putting the Fed on alert once again.

 As for the October employment report, the current consensus economist estimate is calling for the worst, while market expectations are for a benign report--a set of conflicting views that sets the stage for a powerful short term market move, and for trouble.

A trio of interest rate hikes that circled the globe and a soothing Washington Post story contributed the relief component of today's rally, the birth of AmericanWarner Inc. contributed the merger mania side of the story.

The American Home Products/ Warner Lambert merger drove drug stocks higher for a second day, and a hostile $82 billion bid from Pfizer for Warner Lambert sent them higher still (note: Pfizer also directed a lawsuit Warner Lambert's way hours after bidding for it, but that had little effect on stock prices).

After its recent period devoid of leadership, the stock market now has a host of candidates vying for the leadership throne, with the drug stocks, technology, financials, brokers (online included), and the reborn Internet stocks all leading the way higher.

The Internet stocks for their part surged today, although we must admit that events surrounding the earnings release of one Internet stock had us scratching our heads, thinking that perhaps our methods of viewing the market truly are outdated, for logic has clearly taken a turn to a higher plateau and we have been left behind.

The earnings release in question is that of Bluefly.  We gave you the details of its latest earnings report shortly after it was released, and up to that point we thought we still understood the logic of the market.  Events subsequently proved us wrong.

After the report's release, Bluefly and an analyst covering the stock both stated that the analyst had previously increased his loss estimate to a loss of 74 cents a share, so rather than missing estimates by 30 cents the company had actually beaten estimates by 3 cents (note: despite the post earnings release revelation , the First Call figure remains at a loss of 41 cents) .  The stock rallied on the revelation that an analyst had decreased his expectations for the company's business, turning an early day loss into a mid-afternoon gain.

Now perhaps we're old fashioned in our thinking, but once upon a time when an analyst sharply decreased his expectations for a company it was seen as a negative for the company and its stock.  Clearly times have changed, and results have ceded the right of way to estimates as the true measure of a stock's proper valuation.

Bluefly's beating of estimates alone can not take credit for the strong day enjoyed by Internet stocks.  The true credit perhaps lies with the death of the jitters, and the new found optimism that the worst has passed, that if the Fed hikes in November it will mark the last rate increase for some time to come.

The market's new rosy outlook was given a booster shot after the European Central Bank, Bank of England, and Bank of Australia all hiked rates, fanning hopes that this bit of preemption would do the trick, and no further hikes would be needed.

Now in the case of Australia, we feel onlookers may be jumping the gun a bit in hoping that this is the end, for we expect to see at least two more hikes over the coming months.  In the case of Europe and the UK, the pressure may be taken off to hike further for a few months, but we expect the first economic report that contains a hint of the inflationary to prompt further moves.

In the case of the US, the October employment report and next week's productivity figures will likely determine the short term fate of interest rates.  For the longer term, an easing of rising wage pressures and continued signs of economic slowing will be needed before the current rate hike cycle can truly be called dead.  As we have previously stated, unless the wealth effect has met an untimely end without our knowledge,  a continuation of the current stock market rebound will likely reverse the limited economic slowing that has occurred, putting the Fed on alert once again.

 As for the October employment report, the current consensus economist estimate is calling for the worst, while market expectations are for a benign report--a set of conflicting views that sets the stage for a powerful short term market move, and for trouble.

After succumbing to late day jitters during the week's first two trading sessions, the stock market received three welcome pre-open spirit boosters in the forms of a rumored corporate marriage between American Home Products (NYSE: AHP) and Warner-Lambert (NYSE: WLA), a better than expected earnings report and 4-for-1 stock split from wireless leader Qualcomm (NASDAQ: QCOM), and a $150 price target on General Electric (NYSE: GE) courtesy of Lehman.  Add to the mix more signs of a slowing economy, and the stage was set for a rally in both the stock and bond markets.

The bond market rallied after the latest readings on the economy reinforced the recent trend that has begun to emerge of a slight slowdown in economic activity.  Factory orders in September registered their first decline in five months with a dip of 0.9%, and shipments fell for the first time since April.  Even after subtracting out the effects of Hurricane Floyd, the numbers indicate a slight deceleration in economic activity in September.  

While the numbers indicate a slowdown in September, unfilled orders increased 0.4% and the ratio of inventories-to-shipments remained at an extremely low level (1.30, up only marginally from August's 1.28), indicating that economic activity could once again pick up in coming months.

The Index of Leading Economic Indicators and the NAPM Services survey both added to the picture of a slight slowdown. While signs of a slowdown are encouraging, the key question remains: will it last.  If the unfilled orders component of today's Factory Orders data, and the latest read from the Mortgage Applications Index are any guide, the answer is: maybe, maybe not.

The Mortgage Applications Index registered its first rise in many a moon as the recent decline in interest rates (and a decline in mortgage rates below 8%) lured homebuyers.  The rise in mortgage applications as interest rates fell in late October, along with the Factory Orders report's signs of a slowdown in the more interest rate sensitive industries as interest rates rose during September, suggests that economic activity will quickly pick up once again if interest rates continue their recent decline.

All in all, today's economic data was a mixed bag, and unlikely to influence the Fed's decision at the FOMC meeting this month.

The release of the Fed's Beige Book also presented a mixed set of signals: there are signs of a slight slowdown in economic activity and pricing pressures remain minimal, but signs of wage pressures and labor shortages increased.

If the Fed were forced to make a decision based solely on the beige book, we would expect them to look at the signs of rising wages and raise rates while adopting a neutral bias as they put further moves on hold pending more data.  Since the Fed will not be forced to base their decision solely on the Beige Book, the outcome of this month's FOMC meeting will likely be decided by the upcoming releases of employment and productivity data, with PPI a non-factor in the rate decision unless it registers a far sharper gain than expected.

While today's economic reports caught our attention, they were not the real story today. As any of the vapid talking heads of the media will tell you, Wednesday's real story was NASDAQ 3000 (for a technical discussion of the NASDAQ, see today's guest market chart commentary by Mitch Harris of the Reality Check newsletter).

Of more significance to the market than NASDAQ 3000 is perhaps the fact that it was NASDAQ and not the Dow that garnered the media raves and hit new highs today.  While NASDAQ may or may not be the true indicator of the current economy, depending on your viewpoint, it has yet to surpass the Dow Industrials as the psychological leader of the market.  When local newscasters across the country tell their viewers whether the market was up or down, it is most often the Dow that they use as their gauge.

True, there are some who will not be resting over the next few days, for a celebration is planned, the bestowing of the keys to the 3000 club, the timing of which is uncertain [editors note: timing is uncertain translates as 10:46 a.m. EST Tuesday]. While we find the arrival at 3000, or any other such 1000 mark to be rather a yawn and nonevent, we understand there are those who do not, notably the media, where talk of the NASDAQ rising above the level of the Dow at some point has already been bandied about this morning.

Now to us curmudgeons, this talk of NASDAQ 15,000 Dow 14,000 in a few years seems a bit premature.  We have a sneaking suspicion that unless the ever widening distance between the annual growth rates of NASDAQ companies and their ever expanding record P/E ratios narrows, we are far more likely to revisit NASDAQ 2000 before 4000 even appears on the distant horizon.

...but enough talk of future excesses, back to the present week, or more precisely, yesterday, when the National Association of Purchasing Managers released the latest reading on the manufacturing sector.  The headline number dipped in October to 56.6 from September's 57.8, a slight slowdown, but still strong. It was the prices paid component, however, which caught our eye, just as it has in other recent months.  The prices paid component hit a four and a half year high in October, moving up to 69.4 from September's already lofty 67.6.

Some will try to place the blame on rising oil prices, but in truth, it was not just oil prices that rose during October.  Spin a bottle, and the odds are whatever commodity it points to increased in price last month.  We realize some will say, "commodities, phooey, that's yesterday, technology is where the future is".  True maybe, but the upcoming October PPI report is also the future, and we have a wee premonition that recent signs of rising prices at the producer level will translate into a strong PPI report.  With the skies filled with the complacent orbiting overhead, the news could come as a nasty shock.

Now granted, just because there's a little bit of inflationary pressure continuing to build at the producer level, that doesn't mean that those pressures will ever see the light of the CPI, its entirely possible that manufacturers will be forced to eat their increased costs.

For investors in cyclical stocks, this leaves two possible scenarios: A. producers eat their costs, profits get sliced, and cyclical stocks get hammered; or B. producers don't eat their costs, inflationary pressures work their way through the pipeline to the consumer level, the Fed is forced to act from a position behind the curve, the stock market gets hit and cyclical stocks get hammered along with the rest of the market.  Either way, not a rosy scenario for the cyclicals.

As for today's economic data, the personal income figures were largely ignored by all, including ourselves (there was nothing new in the figures), and Greenspan said nothing to excite, a fact which did excite the markets.

For the rest of this week, myopia has focused all attention on the jobs data, and complacency will likely be given a free reign on Wednesday, and Thursday, but we wouldn't ignore the expected rate hikes by the Bank of England and European Central Bank on Thursday, nor would we ignore the expected hike by the Bank of Australia--somehow, when everyone else is doing something it makes it easier for you to, especially if you're the Fed.

Finally, for those bored with the econo-mouth running, we'll turn our eyes to a press release that blew in on an errant breeze last week.  It was an  earnings report, a fact that at first escaped our notice when we glanced at the headline: Stamps.com passes 10,000 customers.  Now what caught our eye was not the earnings, because as a development stage company, Stamps.com had no revenues during the third quarter and only expenses [note: the nationwide launch of its service began in October, it will have revenues in the fourth quarter]. No, it was those 10,000 customers that caught our eye.