NASDAQ at 1800 may encounter 'Selling' resistance on any intra-week rallies (page 1 of 3)

US Stocks

When the US Treasury stopped selling the 30-yr bonds last Tuesday, at one stoke, it has done more to bring down the long term yields than the Federal Reserve Bank has in the last nine Fed Fund rate cuts. It may relieve the pain, but it will not cure it. How long will the US remain in fiscal surplus is an interesting question given last week's confirmation that the economy contracted in the 3Q, and seems to be spiraling further downwards in the October - December period. In any case, long term investors are being asked to boost the economy by accepting lower yields regardless of the risks they bear.

Whether we will have another 50 basis points cut today from the FOMC meeting has become a non-event. After all, there is a diminishing marginal utility, the additional benefits of lower cost of funds will be reduced as the interest rates decline further.

This will benefit Countrywide Credit Industries Inc (CCR $42.60), as the nation's leading service provider of mortgage refinancing. Refinancing will not necessarily put additional cash into the households; it can also reduce the term of the mortgage. Nonetheless, according to the Mortgage Bankers Association, people will take out approximately $50 billion this year, if half of the money were being spent, it will add about a quarter of a percentage point to the economic growth. But initial mortgage transaction costs will probably delay any big-ticket item purchases.

The unemployment figures last week confirm that the sales for this Christmas season would fall somewhere between bad and terrible.

It took 30 years for the total capital spending in the US to quadruple in size from 1960 to1990. In the '90s, the amount doubled within a decade and from a higher base. This feat is quite impressive, especially considering a mature economy like the US. Since hitting the peak in the 3Q of 2000, the total capital spending had declined by 8.30% y-o-y. At the same time, spending by US telecom carriers dropped by 32%.

With the large carriers like AT&T, WorldCom reeling from over expansion, the "Baby Bells" - Qwest, Verizon, SBC, & Bellsouth were thought be the last bastion of enterprise spending. But in the latest quarterly results, cracks are beginning to show; lower earnings due to the slower economy have caught up with them.

Therefore, we remain cautious on the market; earnings and economic data would get worst before they get better. We recommend selective buying on individual counters:

• Amgen Inc. (AMGN $57.64)
• RJ Reynolds (RJR $58.19) for its net yield of 4.2%
• Countrywide Credit (CCR $42.60)
• Schlumberger (SLB $47.50)
• Southwest Airlines (LUV $16.31)
• Merrill Lynch (MER $46.80)
• United Technologies (UTX $54.28)
• Applied Biosystems (ABI $30.35)
• Waste Management (WMI $24.80)

Microsoft Corp (MSFT $61.40) will learn by today how many states would want to pursue the antitrust case. Reiterate to sell into this development as MSFT has appreciated 20% from its September 11 low. The states of California and New York have already expressed that they will not join the accord. They wanted changes made to specific points, and are expected to raise their objections to the US District Judge. In doing so, it will throw the case into a legal limbo. The settlement requires Microsoft to host three independent experts who will monitor whether MSFT conforms to the terms of the agreement.