10,000 and 2,000 Redux
Dow component Merck lowered guidance, closing down 6 yesterday, and helping the Dow reverse the Fed led rally. Several analysts have commented that many major Pharmas have a slew of patent expirations coming (Notable exception: Pfizer NYSE: PFE). The Dow is now well over 100 points away from the 10,000 point mark. The Nasdaq continues to look stronger than the NYSE, managing to stay above 2000 on much better internals.

Closing Summary

Index	Last	Change	% Change
Dow Jones Industrial Avg.	9888.51	-32.94	-0.34%
S&P 500	1136.71	-3.22	-0.28%
Nasdaq Comp	2001.9	+9.8	+.49%
Russell 2000 Index	474.75	+0.58	+0.12%

Too late: The horse has left the barn
SEC's Pitt to Seek Self-Policing Group to Discipline Auditors

SEC Chairman Harvey Pitt said he will push for a new self-policing group in the accounting industry to discipline auditors. Addressing public concern over Enron Corp.'s collapse, he noted "I think the profession's already embraced it,'' said Pitt. ``So we're going to work with them to do it.''

Pitt's endorsement of a new self-policing group comes amid questions about the adequacy of accounting safeguards to protect investors. Pitt's chief accountant, Robert Herdman, is due to appear tomorrow before Congress to address questions about the SEC's probe of accounting irregularities at Enron, once the largest energy trader.

Merrill's Technology Fund Manager Meeks Leaves Firm
Merrill Lynch & Co.'s Paul Meeks, who ran the firm's Internet Strategies Fund until it was closed earlier this year, has left the biggest securities firm. Meeks' departure from the money management unit follows those of technology fund manager James McCall and Internet analyst Henry Blodget, who like Meeks were hired in the late 1990s to help Merrill profit from the surge in technology stocks.

“Merrill Lynch's forays into tech have been a complete disaster,'' said Russel Kinnel, director of fund analysis at Morningstar Inc., a Chicago-based mutual fund research firm.
(Source: Bloomberg)

Games-Sales Boost Is Likely Fleeting
Front page article in the WSJ Heard on the Street column: Heady video-game sales likely won't be enough to keep the shares of software companies on the high-score board.

- MRK Merck Warns About 2002 Results, saying it expects no growth in its earnings next year, sending its shares down 9.4%. Analysts had been anticipating an increase of 8%.

- PG on the other hand, raised guidance for 2002.

- AOL Releases MusicNet 1.0
AOL released a test version of its digital-music subscription service. MusicNet will be available to customers in January for $9.95 a month.

- EMC fell 4% yesterday, when it was revealed that EMC Executive Chairman Michael C. Ruettgers sold 224,000 shares of the company's common stock on Nov. 16. for $15.95 apiece. Ruettgers still holds more than 3 million shares after the sales.

- VIA, GE Viacom Inc.'s CBS was the most-watched U.S. television network among viewers aged 18 to 49 for the first time this TV season, loosening rival NBC's grip on the top spot. CBS also ranked first among U.S. households for the week ended Sunday. The win pushed CBS past General Electric Co.'s NBC to become the top-rated broadcaster among households for the TV season that started Sept. 24.

- JPM, ENE J.P. Morgan Chase filed a petition seeking to force Enron to turn over more than $2.1 billion in cash and other assets. Morgan is one of Enron's main lenders.

- ARBA Ariba was added yesterday intraday as a technical pick.

Market Stats

Market	NYSE	Nasdaq
Total Volume	1357.37m	1944.7m
Up Volume	566.84m	1,357.43m
Down Volume	742.61m	566.26m
Advancers	1557	1948
Decliners	1564	1703
New Highs	50	88
New Lows	47	35

- ADLAC follow up:
Insider Buys 1,000 of ADELPHIA COMMUNICATIONS
Director DENNIS COYLE
TRANSACTION: Purchase 1,000 11/20/01 $22.71
Insider data provided by: Washington Service (info@washserv.com)

Will the SPX (the weakest of our indices) pull the COMP down? Or will the COMP pull the broad market up?

It's difficult to tell which way the next big move will be because the action of the last four days has essentially been "inside" the action of last Wednesday. At some point we expect the gap between 1963-1980 to be filled. But so far the COMP is reluctant to comply with our expectations.

Will Liquidity or Valuation win the argument? With the Fed, the Treasury, the Legislature, and all on the side of Liquidity (not to mention nitwit Fund Managers), in the short-term, odds favor continuation to the upside. We remain cautious, however, that at some point (and it's always just before we expect it) Mr. Market will wake up, smell the coffee (valuation) and fall down hard on his head.

The SPX looks the worst among the averages. It has almost given up all of the gains of last week's Tuesday/Wednesday rally, and the CVM is not positively divergent. The support in the 1125-1130 area (the late November, early December lows) will be threatened, and may well break. The 20-dma and 10-dma have already been killed.

Tech is holding this market up. Tuesday's negative announcements by Kroger (KRO) and Merck underscore the fragility of the broad economy. Food and Drug stocks were supporting the market in its darkest hours, and now are caving.

At present the rush to be in Tech for the economic recovery has pushed tech stocks into Bubble Valuations. We'll continue to try to take what the market gives us as traders. But we will remain extremely wary of this current disconnect between economic (and valuation) fundamentals and stock prices.

The recent rally in semi-equipment stocks (which mirrors the rally in the COMP) leads Goldman Sachs to write in their Semi-Equipment Weekly publication: "(The rally) leads us to one of two conclusions: 1) the market has gotten so advanced that we are prescient enough to fully price in an upturn before we see the first sign of a fundamental recovery at the semi equipment companies, or 2) the market hasn't learned very much despite the historic sell-off.While.newsflow from upstream in the chain has no doubt been better than we expected, we are sincerely troubled by the mantra being espoused by investors recently that they see no problem fully pricing in an upturn before it even starts. What are we to do then when the fundamental upturn actually starts, fully price in a downturn?

There are too many variables to analyze when predicting a semi equipment recovery to be this aggressive pricing in upturns." We believe that what applies to semi-equipment stocks in this case also applies to the broad universe of Tech Stocks.

And what really worries us, is what Goldman didn't ask: What if the fundamental upturn is delayed?

"No one achieves a house by blueprints alone, no matter how accurate or detailed. A time comes when one must take up hammer and nails. In building a house, the making of blueprints may be delegated to an architect, the construction to a carpenter. In building the house of one's life or in its remodelling, one may delegate nothing."

- Allen Wheelis, in How People Change (1973)

Strategic Swaps Can Ease Tax Pain
By Karen Talley

NEW YORK (Dow Jones)--A technical take, if you will, on how to successfully save on taxes this year.

There are no sacred cows in the charts prepared by Arnold Kaufman, editor of Standard & Poor's Outlook, who looked for tax-mitigating opportunities among some of the biggest names in the market.

He suggests that investors sell Yahoo (YHOO), Applied Micro Circuits (AMCC), Kimberly-Clark (KMB) and Tootsie Roll Industries (TR), which have had rollicking stock moves from 2000 to 2001. Then, buy other - potentially better positioned - stocks in the same sectors, Kaufman said.

That's the way of easing the pain. Using support and resistance levels, or ultimate highs and lows, sentiment and momentum indicators, along with fundamental considerations Kaufman offers up a highly rated alternative to laggards.

The move is meant as a minor counterpoint "to the miserable market conditions of the past couple of years," Kaufman said.

His choices for sale are stocks carrying low rankings by S&P - mostly sells and avoids. From this group he culled stocks that were down at least 40% from their 2000-2001 highs, or up at least 20% from their 2000-2001 lows.

These stocks can be used to establish tax losses or gains - depending where you bought them. In scanning Kaufman's charts, the likelihood is that many of these stocks are positioned for tax-loss, not -gain, selling.

But by "swapping," or selling a stock in one sector while buying a stock in that same sector, you don't have to worry about the "wash-sale rule" where you can't claim a loss on a stock you sold and then bought back within 30 days, said Robert Stovall, senior market analyst at Prudential Financial.

Stovall highly recommends Kaufman's approach, calling it "a way for investors to save on taxes while enhancing their portfolios" by purchasing potentially better quality stocks.

For instance, in the biotechnology group, consider selling Incyte Genomics (INCY), trading around $19 (its historic high is $144.53; its low is $10.40). The stock could be sold and replaced with biotech Genzyme (GENZ), which rates five out of five stars as a well-positioned performer for next year.

In the airfreight group, you could sell Airborne (ABF) which, at $13, is midway between its high of $26.87 and its low of $7. Airborne could be swapped with FedEx (FDX), which has a four out of five star ranking from Standard & Poor's, also suggesting the company believes it will to well in 2002.

In the Internet group, Yahoo could be sold and replaced with AOL Time Warner (AOL) rated four stars. Indeed, Yahoo has been all over the map and presents a good selling opportunity, Kaufman said. The stock, at $19, is far below its $250.06 high; the low is $8.02, reached Sept. 27.

The sales could offer a fresher start to 2002, but all tax implications should be checked before making any moves, Kaufman said.

Still, "Don't let tax considerations determine what's in your portfolio," he said. "It is worth taking the time to consider how you might revamp your portfolio to ease your tax load."
(Source: DJ Newswires)

Federal Reserve Comments:

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 25 basis points to 1 3/4 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 1 1/4 percent.

Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels. To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative. The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.

Don't Kid Yourself! Valuations Still Matter By Robert Marcin
URL: http://www.thestreet.com/comment/robertmarcin/10005158.html

EXCERPT: "Valuations don't matter!" proclaim the same fools (motley and otherwise) who gave us the New Era, the Internet stock bubble, 100 P/E ratios and daytraders. The sorriest part of their proclamations is that they still have an audience to fleece with such irresponsible nonsense. Look at what happened the last time they said valuations didn't matter!

Valuations matter all right. Maybe not in the very short run. But in the long run, valuations matter. They always revert to some rational level. Always have and always will.

I begin with this little tirade because the chorus of those dismissing the importance of valuations has reached deafening proportions lately. I will not name names. If you follow the financial press, you know who they are.

I am not suggesting that the current rally will crumble into a bear market tomorrow. Over the short term (say, any six-month period), stock movements can be very unpredictable, a volatile mixture of emotion, momentum, seasonality and fundamentals. The right combination of liquidity and psychology often triggers movements of stock prices well above rational valuation levels.

--Barry Ritholtz
December 12, 2001

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