MARKET OBSERVATIONS

MARKET OBSERVATIONS - 1/27

Digging Deeper...We mentioned the imbalance in the Russell 2000 on Tuesday.  Don't let the following chart fool you:

A select group of stocks is moving the Russell.  Over one half of total Russell performance since the June 30 1999 "Russell reshuffling" (reset of the index) is attributable to 20 stocks.  That's right, 1% of the total index is responsible for over 50% of the action.  Here are the lucky lotto winners:

 There you have it.  53% of the Russell's total return in 20 stocks.  (Maybe this doesn't seem so bad relative to 99% of the S&P's performance coming from 30 stocks in 1999.)  Familiar names like Broadvision, Vertical Net, Affymetrix, Human Genome, Harmonic, Optical Coating Labs, Incyte, Omnipoint, etc.  1980 stocks gave it their best shot, but clearly they came nowhere near these darlings.  Still think the market is broadening out?

Dell-apidated?...Did you really expect Dell to crash for having missed earnings estimates by 30%?  As you know, the expectation was for $.21, but the folks at Dell could only muster $.15 (and that includes $.01 in now obligatory gains).  Had these results been issued by a non-big cap tech darling, severe market cap shrinkage would surely have been an issue.  Unlike the literally thousands of stocks away from the "nifty-30", the folks at Dell have a cheerleading squad just ready to jump into action at a moments notice.  As you would imagine, we actually had an analyst upgrade.  Simply par for the course in today's world where logic has been made to stand on its head in the corner.  Of course Maria explained it all away by mentioning that this miss was widely expected.  "Don't expect the price of Dell to fall".  "The market has known this for weeks and it was in the price of the stock".  If that's true, how come the battalion of professional analysts were 30% away from the number with their estimates?  They just must have been too busy depositing their bonus checks in the bank to have had time to work on "refining" their estimates for Dell.  We knew there was a good reason.

This type of action is nothing short of a validation of extreme investor complacency.  Oil more than doubling is not a problem.  Three rate increases (soon to become 5 or more) is not a concern.  A 200 P/E multiple on the NAZ doesn't raise any questions.  A significantly massive late year 1999 allocation of mutual fund contributions right into tech and Net sector funds (while selling growth, value and bond funds) right before capital gains distributions and clearly characterizing increasingly heightened speculative fever goes almost unnoticed.  You know the rest of the routine - savings rate, trade deficit, credit creation, heightened inflationary prospects, etc.  If the investment community can blow all of this off, laughing off Dell is simply a walk in the park.     

This time it's different.  At today's close, 2 to 10 year Treasury paper sported yields above the 30 year bond.  Although we have pointed out many times that bond sentiment has rarely seen these lows, we're not so sure the long bond is rallying for the right reasons.  Clearly the short to intermediate term portion of the curve is reacting to the fact that the G-team will raise rates over the next few months.  Hopefully this will act to cool the economy some, but unless stocks get seriously whacked and the negative side of the wealth effect kicks in, this is surely open to question.  Assuming that a recession is not imminent, the only explanation we can come up with is market reaction to planned Treasury refundings.  The Treasury has announced that it will begin reverse auctions in the next few months with the goal of shortening maturities.  Less supply at the long end and more at the front.  Short rates higher, long rates lower.  Additionally, are newly converted long bond bulls expecting the government to pay down Treasury debt with our so-called surplus?  (As you know, budget surplus numbers are being revised upward these days.)  Maybe this is a false dawn and maybe it is not.  We'd have a hard time believing a recession is close at hand given the Greenspan printing press predilection and a presidential election no more than a stone's throw away.  There is no way the G-team will not react to a contraction in the economy.  They've clearly overreacted for much, much less.  Is this a rally for all the wrong reasons?  Only time will tell.

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