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

 SEC FILINGS

Some may see the market's ability to shrug off Microsoft's anti-trust woes and yesterday's PPI report as a sign of strength, while others may view the market's recent resiliency as a sign that the current momentum driven market is teetering on the edge of a cliff, held aloft only by a giant bubble of complacency that will burst with the slightest Fed-induced pin prick.

For our part, we'll remain neutral on who is right, the thrasonical devotees of Complacency Man or the tearful Bad News Bubble Conspirators, but we will opine that an extremely overbought index where 5 stocks account for 33% of the movement is a deep correction waiting to happen, and a market with no fear is a market with its best days behind it.

While certain segments of the stock market populace have become emboldened in their speculative excess by a belief that the future will be a tale of limitless growth with  inflationary pressures tethered to a short leash, others will look at yesterday's latest readings on the economy and, rightly or wrongly, believe that the danger has not yet passed, that the venerable members of the FOMC still have a task at hand that is yet to be completed.

In order for the collective minds of the Fed to rest easy that their task is done, signs of an easing of labor market tightness, an easing of demand, and stability on the pricing front must all appear. While the market must wait for tomorrow's retail sales numbers to get the latest reading on demand, yesterday's read on the labor market and producers prices continues to indicate that further action will be needed by the Fed.

The latest initial jobless claims numbers from the Department of Labor reiterated what is largely known: labor markets continue to tighten, and with each tightening of the screw the threat of wage pressures developing becomes that much closer.  The 4-week moving averages of claims has now spent its longest stretch below 300,000 since 1973, and the seasonally adjusted insured unemployment rate remains at a record low, in more understandable terms: unemployment remains low, jobs are plentiful but increasingly workers are not, and the economy continues to add jobs.

On the price front, although the headline PPI figure declined 0.1% and crude goods fell 1.6%, the core rate increased 0.3%, and our favorite databit from the PPI, intermediate goods increased 0.3%.

While current inflation remains tame, this year's trend in intermediate goods prices is a warning bell that inflationary pressures are building just below the surface.  After declining at an annual rate of 3.3% in 1998, intermediate goods prices have increased at an annual rate of 4.0% this year.  Add to this this year's sharp 19.4% jump in the price of crude goods (after last year's global economic woes induced 16.7% plunge), and the signs of building price pressures become clearer.

Now although we're sure long time readers have our next words etched into their memory from hearing them ad nauseum around here, we'll repeat them anyways:  "...rising  intermediate goods prices are bad news for stocks down the road any way you stack it: either the price rises get passed along the chain to the consumer level, or producers eat the price rises at the expense of margins and profits, either way not a good scenario".

The key question arising from yesterday's PPI is whether the Fed will decide to take the wait and see approach in the hopes that producers decide to eat the price rises, or whether the Fed will decide to act and nip the inflationary pressures in the bud before they ever have a chance of feeding all the way through the chain to the CPI numbers.

For our part, we expect pre-emptive action to win out over the alternative of waiting  to take action from a position behind the curve.  With complacency in ascending overdrive, and inflationary pressures continuing to percolate just below the surface, a pin prick cannot be ruled out.    

Some may see the market's ability to shrug off Microsoft's anti-trust woes and yesterday's PPI report as a sign of strength, while others may view the market's recent resiliency as a sign that the current momentum driven market is teetering on the edge of a cliff, held aloft only by a giant bubble of complacency that will burst with the slightest Fed-induced pin prick.

For our part, we'll remain neutral on who is right, the thrasonical devotees of Complacency Man or the tearful Bad News Bubble Conspirators, but we will opine that an extremely overbought index where 5 stocks account for 33% of the movement is a deep correction waiting to happen, and a market with no fear is a market with its best days behind it.

While certain segments of the stock market populace have become emboldened in their speculative excess by a belief that the future will be a tale of limitless growth with  inflationary pressures tethered to a short leash, others will look at yesterday's latest readings on the economy and, rightly or wrongly, believe that the danger has not yet passed, that the venerable members of the FOMC still have a task at hand that is yet to be completed.

In order for the collective minds of the Fed to rest easy that their task is done, signs of an easing of labor market tightness, an easing of demand, and stability on the pricing front must all appear. While the market must wait for tomorrow's retail sales numbers to get the latest reading on demand, yesterday's read on the labor market and producers prices continues to indicate that further action will be needed by the Fed.

The latest initial jobless claims numbers from the Department of Labor reiterated what is largely known: labor markets continue to tighten, and with each tightening of the screw the threat of wage pressures developing becomes that much closer.  The 4-week moving averages of claims has now spent its longest stretch below 300,000 since 1973, and the seasonally adjusted insured unemployment rate remains at a record low, in more understandable terms: unemployment remains low, jobs are plentiful but increasingly workers are not, and the economy continues to add jobs.

On the price front, although the headline PPI figure declined 0.1% and crude goods fell 1.6%, the core rate increased 0.3%, and our favorite databit from the PPI, intermediate goods increased 0.3%.

While current inflation remains tame, this year's trend in intermediate goods prices is a warning bell that inflationary pressures are building just below the surface.  After declining at an annual rate of 3.3% in 1998, intermediate goods prices have increased at an annual rate of 4.0% this year.  Add to this this year's sharp 19.4% jump in the price of crude goods (after last year's global economic woes induced 16.7% plunge), and the signs of building price pressures become clearer.

Now although we're sure long time readers have our next words etched into their memory from hearing them ad nauseum around here, we'll repeat them anyways:  "...rising  intermediate goods prices are bad news for stocks down the road any way you stack it: either the price rises get passed along the chain to the consumer level, or producers eat the price rises at the expense of margins and profits, either way not a good scenario".

The key question arising from yesterday's PPI is whether the Fed will decide to take the wait and see approach in the hopes that producers decide to eat the price rises, or whether the Fed will decide to act and nip the inflationary pressures in the bud before they ever have a chance of feeding all the way through the chain to the CPI numbers.

For our part, we expect pre-emptive action to win out over the alternative of waiting  to take action from a position behind the curve.  With complacency in ascending overdrive, and inflationary pressures continuing to percolate just below the surface, a pin prick cannot be ruled out.    

Dreams of an eighth straight record close for the parabolic NASDAQ Composite died after the first 15 minutes of trading Tuesday as a combination of profit taking,  a disappointing same store sales forecast from Wal-Mart, and the less than spectacular unveiling of a widely awaited announcement from Amazon.com quickly helped reverse a positive opening.

Expectations that Amazon.com would announce a major acquisition or co-branding partnership proved to be much ado about nothing as the company instead announced a minor acquisition, the catalog business of Tool Crib of the North (but not its five retail stores), and announced its entry into four new retailing lines: software, home improvements, video games, and gift ideas.

Speculators, who had bid the company's shares up on rumors that it would buy Beyond.com and open a co-branded store with Home Depot, promptly sold the shares off, with the stock ending the day down 7.19.  Home Depot, and other home improvement retailers also fell as investors worried that they would be hurt by Amazon.com's entry into the home improvement business.

While the selloff in the home improvement retailers is likely to be quickly reversed as investors return to their senses and realize that Amazon.com poses little threat to Home Depot, we're not so sure that Amazon.com will quickly recover from today's drubbing.

Conspicuously missing from today's press release was any mention of the expected effect on earnings of the new ventures.  Looking at today's new ventures we are left saying, "why?".

 We find it highly unlikely that contractors will be forsaking Home Depot's bricks and mortar environment and beating a path to the Internet.  We also question the wisdom of Amazon's blanket $4.95 shipping fee for home improvement purchases.  While consumers will benefit from being able to pay only $4.95 to have a "500-pound table saw" delivered, we question whether profit margins will benefit.

The move into packaged software retailing, on a day Microsoft announced the availability of its Office 2000 for users over the web, also leaves a little to be desired.  We expect packaged software to go the way of the Edsel as software becomes available to users over the Internet on a pay-as -you go, or rental basis.  Microsoft, Oracle, and Sun have all announced plans to offer key applications over the Internet, and we expect the trend to continue.

For Amazon.com the effects of today's decline may linger, but for the NASDAQ today's temporary retrenching is likely to be quickly forgotten.  Forgotten, in fact, as quickly as tomorrow, as investors reboard the train of irrational euphoria in the wake of Cisco's better than expected after the bell earnings (Cisco Systems jumped 3 1/4 on Island in after hours trading on the news, and the NASDAQ 100 December futures contract is up 23.15 on Globex ).

While NASDAQ's recovery from today's minor bout of profit taking may be a speedy one, we're not so sure that the three averages which begin with the word "Dow" will enjoy the same return to health.  The Dow Utilities ended the day near key support at 299-300, and will require a minor miracle to avoid retesting support at 292.

For the Dow Transports, the index's inability on two tries to move above resistance at 3100 sounded the death bell for the index, and there will be no miracle cure if the average

As for the Dow Industrials, there is good news and bad news.  The good news is the index kept its head above support at 10560-10600 during Tuesday's decline. The bad news is there's an iron fist of resistance at 10760-10850 waiting to strike a blow on each approach. For the Dow Industrials, momentum is dead, and the average is running in place, stuck in a rut, mired in a trading range, a place that no one likes to call home.

Like the Industrials, the bond market has also hit a temporary blip in the road, with yields bouncing back up to 6.07% after a momentary meeting with the 6.00% level.  With a slew of economic data on the way, and the FOMC meeting next week, judgment day for the long-bond is fast approaching.

That day may come tomorrow with the release of the latest PPI data, or it may have to wait for next week, but it is approaching, and when it is over, we expect yields to move marginally higher.

The October PPI numbers are likely to be a welcome relief from September's tobacco and auto fueled surprise, but with consensus estimates calling for rises of just 0.1% in both the headline and core numbers, the potential for surprise is there.  We would keep an eye on the numbers for intermediate goods in Wednesday's report. A higher than expected rise in intermediate goods prices would be bad news for stocks down the road any way you stack it: either the price rises get passed along the chain, or producers eat them at the expense of margins, either way not a good scenario.

After the PPI, the bond market will also have retail sales and productivity numbers to digest, with the FOMC looming.

An unfavorable antitrust ruling against Microsoft (NASDAQ: MSFT) late Friday sent the stock, and S&P 500 futures tumbling in after hours trading, with MSFT falling as much as 10% and the S&P futures dipping 22 points at their low point as European trading began on Monday.

For Microsoft, this first step in what promises to be a drawn out affair puts a cloud over the stock's intermediate-term future, a cloud that promises to put a lid on the stock until the final ruling early next year. Friday's ruling is unlikely to send Microsoft stock into a Philip Morris (NYSE: MO) like tailspin, but it will turn the stock from a market outperformer into a mere mortal, a market performer until a final ruling is given.

Friday's ruling has also produced two notable winners: Sun Microsystems (NASDAQ: SUNW) and Red Hat Inc (NASDAQ: RHAT), with Sun jumping 7 1/2 in the early going to a new all-time high and Red Hat soaring by as much as 23 at one point.

While Sun's Java and Red Hat's implementation of Linux both stand to benefit from any adverse rulings that may befall Microsoft's Windows operating system, the current valuations of both stocks more than discount the best case scenario.  Sun, having tripled from its 52-week low, is now trading at a  forward P/E ratio on the north side of 56, a level that far outstrips its expected annual growth rate of 19.6%.

As for Red Hat, the promise is great, but the valuations ($7 billion after today's surge) far outstrip the promise.  While we find the promise of Linux to be great, and around here we far prefer it to Microsoft's Windows NT (our Red Hat Linux powered tulipsandbears.com server never skips a beat, while our NT powered mail.tulipsandbears.com server crashes at least once a week), the market has lost sight of the fact that Red Hat is not alone in the Linux game: it is merely a repackager, a provider of support, for a freeware operating system.

As the only publicly traded Linux pure play Red Hat's stock has benefited from investors who are eager to get in on a promising technology early, but these investors have lost sight of the fact that their $103 per share is buying them a piece of the software company Red Hat, but it is not buying them a piece of the Linux operating system, which remains in the public domain, with little to stop other competitors (including Sun and Microsoft) from entering the fray with their own packaged versions of the operating system if Linux continues to gain market share. For Linux the future is great, for Red Hat the future is already more than discounted, and we expect today's anti-trust fueled share price gains to be fleeting.

For the broader market, the sentiment dampening effects of the Microsoft anti-trust ruling proved to be short-lived, with the S&P 500, NASDAQ, and CBOE Internet Index all reversing early losses within the first two hours of trading on Monday as thoughts once again turned to the future: a future where the promise was endless and (interest rate induced) fear would be a thing of the past, a future that to many became that much brighter after the release of benign October employment numbers on Friday.

There was little not to like in Friday's employment numbers: the economy showed  strong job growth with nary a hint of wage pressures, the best of all possible worlds, it would seem.  Friday's numbers were enough to tilt the consensus odds against a move by the FOMC at next week's meeting.

Although the numbers were noninflationary, we do not see them decreasing the odds of a Fed move.  While the 2-month average of non Farm Payrolls dipped significantly below trend, the accompanying drop in the unemployment rate, along with a near record percentage of the working age population that is employed, suggests that this below trend reading is due to a shortage of available workers, rather than to economic slowing.  Thus, labor market tightness continues unabated, and the question for the Fed remains how much further can labor markets tighten before the inevitable point is reached where the introduction of wage pressures into the system becomes unavoidable.

With the labor market continuing to tighten, and the pool of qualified workers continuing to contract, we do not expect the October numbers to relieve the Fed's fears that present labor market trends could be setting the stage for the introduction of wage pressures into the system at a future date (with 'future' being the key word to remember when attempting to determine the next move by a central bank that has the phrase "pre-emptive now or inflation later" tattooed on their forearms).

The outcome of next week's FOMC meeting will be close, but unless this week's PPI, Retail Sales, and Productivity numbers provide any surprises, we continue to believe the odds favor a quarter-point move by the Fed next week.  Although there have been signs of some economic slowing, there have also been signs that this slowing is only temporary and could be quickly reversed if consumer sentiment reverses its recent decline, an event that would likely occur if the Fed were to give euphoria a chance to bloom by holding rates steady.  We do not believe the Fed is prepared to give euphoria a free reign.

For the rest of this week, we expect the Microsoft ruling to become quickly forgotten, and market action is likely to be dominated by this week's barrage of economic reports, earnings reports (with Dell and Cisco at the top of the list), and new supply.

Supply will play a pivotal role this week, with  refunding taking its toll on the bond market, and the stock market will be forced to absorb a slew of big ticket IPO's, with United Parcel Service at the top of the list.  We expect the UPS IPO to put pressure on the Dow Transportation Average as money sloshes out of stocks in the average and into UPS.  

Finally, with the holiday shopping season upon us, for those of you looking for ways to get in on the e-commerce boom (and for those of you who feel pure play e-commerce stocks like eBay (NASDAQ: EBAY) and Amazon.com (NASDAQ: AMZN) are overvalued by 80%-90%) we offer you a pair of under loved Internet stocks, two stocks that promise to be among the true leaders of the e-commerce revolution: Ford Motors (NYSE: F) and General Motors (NYSE: GM).

Both Ford and General Motors have announced the creation of e-commerce Internet exchanges, AutoXchange (Ford) and GM MarketSite (GM), that will be used to handle transactions with their suppliers.  It is estimated that each of these e-commerce "sites" could be handling upwards of $200 billion a year in business within the next few years.  Of course, GM and Ford are not alone among the traditional rust belt manufacturers in their plans to use e-commerce to cut costs and better control inventory.

So as you're doing your holiday shopping for the e-commerce stars of tomorrow, it might be wise to consider that those stars are likely to be the land based commerce stars of today, with only the medium used to generate those revenues changed.

From an investing perspective, it might also be wise to consider that as traditional industries make the move to business-to-business e-commerce, it will likely be the valuations of today's pure play darlings like eBay and Amazon.com that contract as the word "e-commerce" loses its allure and becomes just another way of saying "business as usual".