MARKET OBSERVATIONS

MARKET OBSERVATIONS - 1/25

B2B...Not Business 2 Business.  That's old news.  Not Boom 2 Bust.  That's "tomorrow's" headline.  The new definition of B2B is becoming Bulletin Board 2 Bulletin Board.  Like any drug addict, at some point the same old stuff just isn't good enough anymore.  Something stronger or faster is needed to achieve a state of satisfaction.  Obsessive-compulsive behavior needs to achieve higher and higher levels of endorphin release.  It seems that the new game in town these days are the OTC Bulletin Board stocks.  It's simply no fun anymore trying to move a Qualcomm from $200 to $300 when you can ram a .20 cent stock to $2, or $10, or $20+.  The ethical market makers in this type of paper are surely thrilled.  This kind of action is not being widely discussed on the CNBC's of the world or in the mainstream press, but just have a two second peek at sites like RagingBull.com and you'll know what we are talking about.  Stocks with the biggest number of posts each day are penny stocks, or were penny stocks last week or the week before.  The posts on mega chat boards like RB are nothing short of classic.  "We are all going to be rich on this stock."  "XYZ bulletin board stock has modeled its business after "now famous ABC internet stock.com" - it's a sure winner.  The boards are an incredible study in group-think dynamics.  Current longs wax poetic about the future prospects of the BB stocks they own.  Potential new investors implore board posters to answer the infamous "is it too late to buy in?" question.  The power level of the greed electro-magnet has been cranked up to full.  When the bulletin board stocks have become all the rage, have we finally hit the lowest common denominator?  What other speculative class is left to exploit?  Gold?  Oh well, we guess they don't call it RagingBull.com for nothing.  (Before we receive the hate mail deluge of RB fans, there are hundreds if not thousands of sites dedicated to penny stocks.  RB does not promote anything, especially penny stocks.  The activity register on the individual boards they provide are simply a reflection of the current focus of a large number of active traders.  They are an online, real time study in group psychology.  And yes, we already know how stupid we are for watching and not participating, thank you.)

Feeling Hot, Hot, Hot...Our buddies at Ed Hyman's ISI Group publish a weekly survey resulting from their individual polling of companies in a broad number of industries.  Moving into January, things are picking up.  The economy is accelerating into the first quarter.  This should surely be the ammunition that the G-team needs to raise interest rates.  Retail sales have continued to be above plan for many retailers.  Specifically the retailers stated that they are seeing an increase in credit card balances and are concerned that consumers are re-leveraging.  'Tis the season.  Bonuses, profit sharing contributions, early tax refunds, incentive pay, and of course higher stock prices are all contributing to buoyant confidence.  If these surveys are indicative of economic numbers that will ultimately be reported in one-to-two months, will the Fed hit the interest rate blast off button twice before this quarter is out?  Given the gradualist attitude, we'd doubt it, but if Al wants to clear the decks well before the election, he has to get moving now.   Labor market tightness is another factor that has to be moving the Fed clan toward the hawkish side of the interest rate fulcrum.  Average hourly earnings are creeping higher and big layoff announcements are absent from the daily newswires.  Employee layoffs have dropped like a rock since the summer of last year.   Lastly, with the US census quickly upon us, the pressure on the per unit cost of bodies can only increase.  Oh well, who's counting anyway?

The Best Performing Index?...You may have heard that one of the best performing indices this year is the Dow Jones Utilities.  It's up over 10% YTD.  We even saw one "name brand" strategist use this statistic as a "sign" that pessimism reigns on Wall Street.  Market participants are worried and buying utilities.  Of course this perma-bull strategist was arguing that the market was bound to go higher as there was too much pessimism as reflected by the move in the utilities.  Feast your eyes:    

As always, we are simply amazed by the superficial analysis and commentary being spewed forth by highly compensated "professionals".  The recent huge pop in Dow Utility heavyweight Enron, resulting from its discussion of its very own "broadband strategy", accounts for the majority of the move in the Utility Index.  Shouldn't Wall Street equity strategists be accountable for doing at least some research?  It's like the recent cheerleaders for a market broadening as the Russell 2000 index has "come to life".  Again, the move in a select few 'Net and tech issues are carrying the day for the Russell.  The other 1950 stocks are simply asleep or continuing to hyperventilate due to lack of liquidity.  The movement in the averages and the indices probably means less for the broad market than it has in decades.  Beware the used car salesmen (and women, to be politically correct) of Wall Street.  Actually stocks aren't used, they are just "pre-owned".

All Teched Out, With Nowhere To Go...As a follow-on to our statements on the indices, we all know it's tech that is carrying the day (at least up until last Friday).  As usual, pictures put so much into perspective:

(Once again, all credit to the ISI crowd for the chart)  Without tech, the S&P was only up 4% last year.  Without tech, the NAZ and the Russell were plainly in a depression.  Is tech now so heavy that it simply breaks under it's own weight?  Can it be cured via the slow but steady Richard Simmons miracle diet, or does it have to die of a sudden death myocardial "event"?  As you can barely tell by the chart, there have been approximately three separate tech booms and two busts in the last three decades (we're waiting on the third bust and it promises to be a doozy).  Never in the last two booms was tech anywhere near a portion of the S&P that it now commands.  The S&P hasn't always been so tech-bloated as now.  Here are the numbers for you history buffs:

Onward and upward?

The Ultimate Internet Ad Rates?...You may have thought that Superbowl advertising time was expensive.  Well think again.  Have you been watching the deals Amazon is cutting these days?  Greenlight.com and Drugstore.com?  Amazon will be providing "tabs" on its site to companies like Drugstore.com for real $$$$$.  Who needs the capital markets when you have companies like Greenlight.com and Drugstore.com willing to cough up what amounts to very expensive Net advertising fees to be included in the all-hallowed Amazon site?  One analyst was quoted as saying that "Amazon could sign another 25 deals like these".  As you know, if this type of "business focus dilution" continues, at some point there simply won't be any more room on Amazon's web site for books.  Maybe that's OK as there are losing their ass*s trying to sell books.  Who says hollowing out your original core business can't be accretive?  In the New Economy, that seems to be what it's all about.  On a worst case basis, Amazon is slowly becoming the largest "links page" on the Internet (not to mention the most expensive).

Only Your Share Dresser Knows For Sure...Head and shoulders anyone?  Not that we have not been here before in the last few years, but the S&P may be putting in a (violent) right shoulder.  We'll just have to see what happens.  Thanks much to reader TH for the very fine chart work:

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