Greenspan’s words bring out the bulls

Massive rally on Greenspan’s words

Nasdaq gets largest percentage gain ever

NEW YORK (CBS.MW) – Friendly comments from Federal Reserve leader Alan Greenspan produced a bull stampede on Wall Street Tuesday, igniting a formidable tech rally that handed the Nasdaq its largest percentage gain ever.

But Wednesday will test the market’s resolve following a profit warning from Apple Computer late Tuesday that sent tech stocks lower in after-hours trading. The PC maker (AAPL) lowered revenue and earnings guidance for the first quarter and full year and saw its shares fall 19 percent in Tuesday’s after-hours session after closing up 31 cents to $17. See for post-market trading activity.

Bill Schneider, head of block trading at UBS Warburg, said the reasons for Tuesday’s climb were threefold: The Florida court ruling Monday, which increased hopes that an end to the presidential impasse is near; deeply oversold conditions signaling the major averages were ripe for a rally; and Greenspan’s remarks, which fanned the flames.

Speaking before America’s Community Bankers Conference in New York, Greenspan hinted at a shift in monetary policy to a neutral stance on rates, which could pave the way for future rate cuts.

Most tech stocks were on a rampage, pushing aside earnings worries — at least for one day — even as companies like Xilinx, 3Com and LSI Logic warned of slower growth.

“We’ve broken the chain reaction to profit warnings Tuesday,” Schneider said, noting that 3Coms’s warning, for example, had no ripple effect on other networking stocks.

Computer software and Internet issues paced the tech advance Tuesday. In the broad market, biotech, financial, cyclical, transportation and drug shares surged, with bank and brokerage stocks especially receptive to Greenspan’s comments, which also produced a rally in the fixed-income market.

Few red spots flickered on quote screens: Defensive stocks – like drug, consumer, utility and gold – took a breather following their recent run-up. And oil stocks fumbled as January crude lost $1.69 to $29.53, reaching its lowest level in over three months as concerns over Iraq’s suspension of oil exports were calmed by OPEC’s assurance that it’s ready to boost output to meet any shortfall in global supplies.

The Dow Jones Industrials Average ($DJ) rallied 338.62 points, or 3.2 percent, to 10,898.72. The steepest gains were seen in shares of 3M, Intel, J.P. Morgan, Home Depot, IBM, Citigroup and Microsoft.

Minnesota Mining & Manufacturing (MMM) gained $11.63, or 11 percent, to $116.63 after naming W. James McNerney Jr. chairman and chief executive officer, effective Jan. 1, 2001, replacing L.D. DeSimone. The stock was upgraded by Goldman Sachs and Banc of America Securities.

The Nasdaq Composite ($COMPQ) closed at its highs for the session, piling on an explosive 274.05 points, or 10.5 percent, to 2,889.80 while the Nasdaq 100 Index swelled 298.47 points, or 11.7 percent, to 2,852.87.

Todd Gold, technical strategist at Gruntal & Co., said that while Tuesday’s tech action is most definitely constructive, the proof will be in the Nasdaq’s test of resistance at 3,000.

“I expect significant resistance for Nasdaq at 3,000. It will be hard to take out that level on the first try. I expect it to act as a near-term ceiling,” Gold said.

That said, two huge positives for the market Tuesday included a close above 50 for Cisco Systems and a close above 600 for the Philly Semiconductor Index, according to Gold.

All of the Nasdaq’s major tech stocks checked in with smart gains: Intel tacked on 9.3 percent; Cisco rose 13.8 percent; JDS Uniphase piled on 16.3 percent; Oracle climbed 11.8 percent; Dell Computer added 7.6 percent; Sun Micro tacked on 16.3 percent and Microsoft saw its shares swell 6.1 percent.

The Standard & Poor’s 500 Index ($SPX) climbed 3.9 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks put on 4.6 percent.

Volume was very healthy, standing at 1.39 billion on the NYSE and at 2.48 billion on the Nasdaq Stock Market. Market breadth was comfortably positive, with winners trouncing losers by 21 to 8 on the NYSE and by 28 to 12 on the Nasdaq.

The Greenspan effect

Greenspan said the abating wealth effect from the stock market is dampening demand, indicating he sees risks that current policy may be too restrictive.

Further, Greenspan said the pace of economic expansion has moderated appreciably, in part as tighter financial conditions have had some impact on interest-sensitive areas of the economy.

But the Fed chair said that while current credit conditions warrant watching, they aren’t comparable to the 1998 crunch, during which the central bank cut rates three times.

“(The speech) shows Greenspan’s clear recognition that downside risks to the U.S. economy have increased while the risks of higher inflation have decreased,” said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

“Greenspan’s speech is tantamount to an announcement that the Fed will almost certainly shift its policy directive to neutral when it meets again on Dec. 19 and that the Fed may cut rates at the Jan. 30-31 FOMC meeting.”

But one economist wasn’t quite as sanguine.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he’s a bit baffled by the strongly favorable reaction to Greenspan’ speech, in which he clearly suggested that the Fed needs to see evidence of a further slowing before easing rates.

“The Fed Chairman acknowledged an ‘appreciable’ slowdown, but, critically, he said that the tighter conditions in the credit markets are ‘no way comparable’ to 1998. The Fed’s inflation bias will go (at the FOMC meeting on) Dec 19, but rate cuts will take longer,” Shepherdson concluded.

Presidential impasse ending?

Equity markets cheered news that may signal an end is in sight for the presidential debacle.

A state judge rejected Monday Vice President Al Gore’s contest of Florida’s election results, dealing a major blow to the Democratic nominee’s presidential hopes. Gore’s last shot will come Thursday, when the Florida Supreme Court will hear his final appeal.

“We don’t think that it matters to the equity market which candidate achieves victory. Now that it believes this (presidential) uncertainty has been alleviated, the market could undergo a powerful rally,” noted William Rhodes of The William Capital Group.

But Rhodes doesn’t regard any rally from current levels as necessarily sustainable. Once an election-induced rally runs its course, investors will be confronted with the same, nagging issues, he said, including slower earnings and revenue growth as well as a narrower market.

Sector movers  

Internet stocks checked in with mammoth gains, with an especially formidable advance in shares of business-to-business stocks. Merrill Lynch’s Internet Holdrs (HHH) swelled 12.1 percent, led by Inktomi, up an amazing 57 percent to $34.44. Stalwarts Yahoo and EBay put on 15.7 percent and 22.2 percent, respectively, while Amazon saw 4.5 percent of its value lopped off. In the B2B space, Merrill’s B2B Holdrs (BHH) climbed 25.6 percent, spearheaded by Commerce One, up 29.6 percent, and Ariba, up 28.9 percent.

Among the few losers on Tuesday were shares of 3Com (COMS), which tumbled $3.34, or 30.1 percent, to $10.03. 3Com warned late Monday that it expects a second-quarter loss of 19 to 23 cents a share — vs. previous expectations for a loss between 7 and 9 cents a share — due to slower-than-expected sales to telecommunications customers. The company also painted a less-than-rosy picture for its fiscal-third quarter. The stock saw its ratings shaved by Goldman Sachs, Lehman Brothers, and Gerard, Klauer & Mattison.

Among the other networkers, Cisco Systems https://www2.marketwatch.com/news/search.asp?Query=CSCO&SearchOption=ticker swelled $6.31 to $52.13 and the Amex Networking Index ($NWX) managed a 10.3-percent advance. On Monday, Cisco’s CEO John Chambers reiterated that the networking giant’s 2001 revenue would be 50 to 60 percent higher compared to 2000 levels.

In the chip arena, LSI Logic (LSI) added $2.61, or 14.3 percent, to $20.80 even after warning investors early Tuesday that it expects lower fourth quarter earnings-per-share and revenue growth due to an inventory build-up in the supply chain. LSI now sees EPS at 34 cents a share vs. the First Call estimate of 36 cents.

And Xilinx (XLNX) climbed $1.88 to $43.56. The company lowered late Monday its sales growth forecast for the December quarter to a 5-7 percent range compared to previous expectations for a 12 percent growth rate. The Philly Semiconductor Index ($SOX) jumped 10.1 percent in its third straight day of gains.

Storage stocks rose, with EMC (EMC) gaining $10.44 to $89.94 after unveiling new hardware and software products aimed at grabbing more of the growing networked storage market. Among other stocks in the group, Network Appliance jumped $23.69, or 41 percent, to $81.56 while Storage Computer gained 15.8 percent to $9.26.

Wireless telecom stocks saw their share of gains Tuesday after Nokia (NOK) told investors that it expects revenue growth for the first half of 2001 to be in the upper end of its own 25 to 35 percent forecast. Nokia added 15.3 percent to $51.38, Ericsson climbed 10.7 percent to $13.63 and Motorola added 3.4 percent to $19.

Financial shares swelled, with the S&P Bank Index ()https://messages.marketwatch.com/mwclub/tickerLink.asp?ticker=$BIX&dist=newsm up 4.2 percent and the Amex Securities Broker/Dealer Index ($XBD) surging 9.2 percent. Greenspan’s comments sparked a rally in the bond market, which in turn supported financial shares. Further, the Fed chief positively addressed another concern of bank investors — that of credit quality. Dow-components Citigroup and J.P. Morgan climbed 6.1 percent and 9.5 percent, respectively. Among the brokers, Morgan Stanley Dean Witter flew 12.6 percent and Merrill Lynch bounced 10 percent.

Treasury action

Government prices ended with smart gains following Greenspan’s comforting words. The 10-year Treasury note was up 29/32 to yield ($TNX) 5.43 percent while the 30-year government bond rose 1 2/32 to yield ($TYX) 5.59 percent.

On the economic docket, October factory orders fell 3.3 percent vs. expectations for a 2.1 percent decrease. Excluding defense, factory orders lost 3.6 percent and they slipped 1.2 percent excluding transportation. .

Wednesday will see the revision to third-quarter productivity as well as the release of the Fed’s Beige Book report on economic conditions. View Economic Preview, economic calendar and forecasts and historical economic data.

Cornering the currency market, dollar/yen gave up 0.1 percent to 111.07 while euro/dollar shed 0.5 percent to 0.8973. On Monday, currency markets pondered news that Japan’s third-quarter gross domestic product grew by 0.2 percent, in line with market expectations.