Monday's Market: Dow Gains 200 Points Ahead of Tomorrow's Fed Meeting - TheStreet

The

Dow Jones Industrial Average tore off into outerspace today and didn't look back.

By the market close, the blue-chip index had recovered most of its 240-point Friday loss, gaining 210.46 points to 10,645.42 amid optimism about a possible interest rate cut tomorrow. The

Nasdaq Composite Index, however, ducked 28.7 points lower to 2624.5, perilously near its closing low for the year of 2597.9, on weakness in Internet and PC-making stocks.

It's funny. All that interest rate optimism that fueled the Dow came from one little article in the

Wall Street Journal

today. The article said the

Fed, which holds its last

Federal Open Market Committee meeting of the year tomorrow, is considering taking a more aggressive stance on the economy and might even cut interest rates at tomorrow's meeting. More importantly, it appeared the information might have been leaked by someone in the Federal Reserve.

The problem is, economists aren't too convinced. Of 26 primary dealers, 23 still expect the Fed will move its "bias" to neutral from the current tightening bias and three think the Fed will move to an easing bias. A tightening bias holds that the risks to the economy are weighted more towards inflation than towards recession while an easing bias holds that the risks are more weighted towards recession.

Tomorrow will tell what the Fed really does plan to do. The problem is, after today's whopping Dow rally, expectations of an interest rate cut may already have been priced into blue-chip stocks. And if investors are disappointed, watch out.

The interest-rate-sensitive financial stocks were some of the day's biggest winners.

J.P. Morgan

(JPM) - Get Report

gave a lot of muscle to the Dow's rally. The financial heavy hitter jumped 4.1%, adding 40.19 points of upside to the index into the close. Citigroup was also helping, up 2.7% and adding 8 points to the index.

The

Philadelphia Stock Exchange/KBW Bank Index

was up 4.1%, the

S&P Insurance Index

was rising 2.7% and the

American Stock Exchange Broker/Dealer Index

was 1.7% higher.

Internet stocks were the day's big losers after several analysts said bad things about e-commerce companies. Several analysts downgraded

eToys

(ETYS)

, including

Goldman Sachs

,

Robertson Stephens

and

ABN Amro

. Goldman also said negative things about

Barnesandnoble.com

(BNBN)

and luxury e-tailer

Ashford.com

(ASFD)

. eToys, which warned on Friday it would miss earnings targets by a mile, lost 72% to 28 cents, Barnesandnoble.com dropped 26.7% to $1.50 and Ashford.com dropped 51.5% to 50 cents. Amazon.com, meanwhile, was off 10.7% to $19.88.

Merrill Lynch's

influential analyst Henry Blodget, meanwhile, said the online toy business and all the other e-commerce categories might never carve out the

10% to 15% of the retail market that he and others had expected. If they do, he said, it will be too far into the 21st century to matter to investors in 2000.

Just last Friday,

eToys

(ETYS)

warned that third-quarter financial results would fall short of its previous expectations, citing a harsh retail climate. In addition, the firm announced that it had hired Goldman Sachs to explore alternatives including a merger, asset sale, or other restructuring.

Elsewhere in the technology sector,

Sun Microsystems

(SUNW) - Get Report

continued to hit new 52-week lows. The company was downgraded today by Prudential, which cited slowing demand for the company's business computers. At last glance, Sun Microsystems had sunk 6.8% to $28.56. Rumors have been circulating in the past week that the company may announce it expects to miss its earnings targets, though the company denied any such thing on Friday.

Investors were picking over some beaten-down tech stocks, like

Qualcomm

(QCOM) - Get Report

, semiconductor leader

Intel

(INTC) - Get Report

and PC-maker

IBM

(IBM) - Get Report

.

The bad news wasn't reserved to tech stocks, however. Earlier today, media giant

Time Warner

(TWX)

announced that it was lowering its earnings growth estimates for 2000 due to reduced cable network advertising revenue, weaker music sales and disappointing box office sales.

Time Warner added that its merger partner,

America Online

(AOL)

, would meet Wall Street's forecasts for advertising and commerce revenue. The companies received

Federal Trade Commission

approval for their deal last Thursday.

Time Warner closed down 13% to $63.78, while America Online fell 13.7% to $42.75.

Unfortunately, AOL was not the only Internet stock to take it on the chin today. On the heels of a

Goldman Sachs

downgrade on e-commerce companies,

TheStreet.com Internet Sector

decreased 4.8%.

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Market Internals

Breadth was mixed on heavy volume.

New York Stock Exchange: 1882 advancers, 1083 decliners, 1.2 billion shares. 207 new 52-week highs, 92 new lows.

Nasdaq Stock Market: 1604 advancers, 2438 decliners, 2 billion shares. 63 new highs, 377 new lows.

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Most Active Stocks

NYSE Most Actives

  • America Online: 21.9 million shares.
  • Compaq (CPQ) : 19.2 million shares.
  • Lucent (LU) : 19.1 million shares.

Nasdaq Most Actives

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A boost in gas and oil prices fueled energy sector stocks today. The

American Stock Exchange Natural Gas Index

closed up 3.4% and the

American Stock Exchange Oil & Gas Index

rose 3.3%.

Wireless stocks took a beating today after the top bidders in the 9th round of the U.S. wireless auction were announced.

EMC

(EMC)

was down 3.4%,

Ericsson

(ERICY)

was 3.1% lower and

Voicestream

(VSTR)

was face flat on the floor, down 3.8%. EMC just announced a search software storage pact deal with Internet incubator

CMGI

(CMGI)

. Some investors are concerned that

Defensive stocks like paper, drugs, tobacco and utilities creeped up today. But it wasn't a classic case of rotation out of tech, as many tech sectors were also higher, including biotechnology and semiconductors. The

Nasdaq Biotechnology Index

jumped 3.2% and the

Philadelphia Stock Exchange Semiconductor Index

climbed 0.6%.

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Bonds/Economy

Treasury prices are modestly higher based on optimism that the

Fed will lower interest rates, if not at its meeting tomorrow, then soon afterward. The rally is dropping yields to new lows for the year.

The benchmark 10-year

Treasury note rose 1/32 at 104 10/32, lowering its yield to 5.174%.

The odds rose that the Fed will lower interest rates either tomorrow or at its subsequent meeting in January following a report in today's

Wall Street Journal

. The paper reported that the

Federal Open Market Committee, the Fed's monetary policy arm, may skip a step in the process that could eventually lead it to lower rates. The FOMC, which has been expected to issue a statement declaring the risks to the economy balanced between rising inflation and too-slow growth, is considering declaring too-slow growth the paramount risk, the paper reported. The committee might even lower the fed funds rate tomorrow, the

Journal

said.

Traders of

fed funds futures are discounting 46% odds that the rate will fall to 6.25% tomorrow from 6.5% currently. On Friday fed funds futures were discounting 41% odds.

There is no economic news today.

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International

Computer-related companies lifted major European indices today. London's

FTSE

closed up 70.7 to 6246.5. Across the channel, Paris'

CAC-40

finished ahead 48 to 5887.5, while Germany's

Xetra Dax

ended 58.95 points higher to 6390.25.

Glaxo Wellcome

(GLX)

and

SmithKline Beecham

(SBH) - Get Report

, which will be formally merged into GlaxoSmithKline next week, got socked with a downgrade by

Deutsche Bank

. The firm said it knocked down its rating after the U.S. Food and Drug Administration rejected marketing approval for one of SmithKline's antibiotic treatments.

The euro finished at $0.8957. It has been gaining in the past few weeks as the U.S. dollar weakens in the face of a slowing domestic economy.

Asian markets were mixed Monday. In Japan, the

Nikkei 225

fell 69 to 14484. Hong Kong's

Hang Seng

closed up 49 to 15025.

While the greenback was lately lower against the yen to 112.16 yen, the yen is continuing its downward fall in value as it was edging new 16-month lows versus the dollar.

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