Thanks for the many calls the past few days. I thought a few notes updating the action in the market these past wacky weeks might be helpful.

Im going to to cover 3 areas tonite (more over the next few days):
- What the overall market is doing (How we got here and why);
- What The Hell Happened Today?
- What Tomorrow May Bring.

If I miss any item, shoot me an reply and Ill try to get to it in a follow up e-mail.

A) What The Overall Market Has Been Doing (How we got here and Why)

Although 1999 saw gains in the S&P of over 20%, the real star was the NASDAQ -- up 89%. Much of that came in the last two months of the year.

The timing of those gains is very significant. The Federal Reserve, fearing a possible panic run on the banks cash supply (remember the Y2k bug?), flooded the US economy with liquidity in the 4th quarter of 1999.

Normally, the money supply grows 3% per year or so. Thats so there is enough cash and capital to pay for all the increasing amounts of goods and services consumed each year. But in 1999, the Fed essentially put a years worth of greenbacks into supply in a very short period thru the banking system.

Much of this money found its way into the market, particularly technology, telecom, and biotech, propelling Nasdaq to its record gains. In fact, so many stocks had such huge runs that many people decided NOT to sell in December, and incur huge capital gains liability, payable 4 months later (April 00).

When the world did not end on 1/1/00, many relieved investors ran out and bought what they could on the 1st trading day of the year -- a Y2k relief rally. You may have noticed a tendency of the market to careen from one extreme to another (good observation).

Remember, even thought the S&P500 was up in 1999, its a bit misleading; The S&P 500 is market cap waited so a few large cap stocks can move the S&P 500 up, while most of the stocks in the index are down. In fact, 70% of NYSE stocks are off their April 98 highs by 20% or better.

It was right about then that the 1999 profit takers started to unload their shares; these sellers wont have to pay the cap gains on these sales until 4/15/01. That wave of selling drove certain stocks -- particularly some of the techs which had run up -- to very attractive levels.

Combine that with a slew of upside earnings surprises and a few mega mergers, and you have the makings of a strong rally, which took the Nasdaq to its all time high of 5150.

Meanwhile, all that Cash the Fed flooded into the economy had to be dealt with. A series of interest rate hikes, and a decrease in the money supply took out some of the excess supply.

The impact started to be felt around the time Nasdaq hit its peak -- 2 weeks ago. That began an overdue sell off which took the Nasdaq down 12% in 10 days.

Meanwhile, the cheap Old Economy stocks got even cheaper. Eventually, they reached a point where bargain hunters swept in. As the Dow and other, older firms started to rally -- lagging the Nasdaq high by a week or so -- the Momentum players jumped in also. Hot money chasing the latest new thing.

Which brings us to
B) What The Hell Happened Today? (March 20, 2000)

3 items caused todays 180+ point sell off in the Nasdaq.

1) Microsystems (MSTR), a high flying web tech firm, announced before the market opened that the SEC is requiring them to restate earnings . . . turning last quarters 5 cent profit into a 51 cent loss. OUCH! It seems MSTR was aggresively booking 50% of the revenue of multi-year contracts upfront; This apparently is a no-no. The stock was absolutely crushed, from $239 down to $88 -- about a 57% sell-off. MSTR is 57% owned by the CEO -- and at $88, its probably a good bottom fish, but . . . well, you probably want to sleep at night . . . But a high flyer like this getting so visibly abused, on very large volume, frightened the rest of the market, especially in light of:

2) An article in Barrons this weekend listed 150 internet companies, and when they will run out of cash. However, Barrons used a very aggressive spending formula, ie, extrapolating forward based on the 4th Quarters run rate. For some firms, like Amazon, this generates a too aggressive run rate. Regardless, it scared the poop out of some people, and they threw out the baby with the bath water. Then, to make matters worse,

3) A number of talking heads and pundits suggested that maybe the Fed would raise interest rates a half a point, instead of the quarter point which is expected, and already built in to the market.

This leads us to
C) What Tomorrow May Bring:

This should be simple:

If the Fed does not raise, but makes threatening sounds, expect a huge rally: No raise would be a big surprise -- up 250 on Nasdaq, 300 on the Dow or better.

If the Fed raises a quarter point, and doesnt make threatening sounds, expect a modest relief rally. (150 Nasdaq, 200 Dow, or maybe better)

If they raise a quarter point, and MAKE threatening sounds, expect a milder rally (100 Nasdaq, 125 Dow).

If they raise a 1/2 point, it doesnt matter what they say: Its look out below time! (Incidentally, the 1/4 point raise is the most likely scenario.)

Thats all for tonite -- lets see what tomorrow brings.

If you would like a free subscription to my bi-weekly market comments, please send an email to email to [email protected], including the word "SUBSCRIBE" in the subject matter line. Previous market comments are archived here.

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