Hyper-volatile market conditions continue. So far this week, the NASDAQ100 has traded with intra-day swings of 4% on Monday, 6% yesterday, and 5% today. For the week, the Dow and S&P500 have added 3%. Economically sensitive issues have outperformed, with the Morgan Stanley Cyclical index jumping 7% and the Transports surging 9%. The Utilities have added 5% and the Morgan Stanley Consumer index 3%. Both the small cap Russell 2000 and the S&P400 Mid-cap indices have increased 3%. Tech stocks have rallied as well, with the NASDAQ100 gaining 2% and the Morgan Stanley High Tech index adding 3%. The Morgan Stanley High Tech index is unchanged year-to-date, and has a 52-week gain of 39%. The Internet stocks have rallied sharply, with The Street.com Internet index surging 10%. The NASDAQ Telecommunications index has added 1%. The Biotechs continue to outperform, adding 5% this week to increase year 2000 gains to 91% and 52-week gains to a stunning 195%. Financial stocks have been very strong, with the S&P Bank index jumping 6% and the Bloomberg Wall Street index gaining 4%. Year-to-date, the New York Stock Exchange Financial index has gained 20%, while the AMEX Securities Broker/Dealer index has surged 39%.

So far this week, we note that the Treasury yield curve is "normalizing," with 2-year yields dropping 5 basis points and 10-year yields increasing 3 basis points. Long-bond yields have added 4 basis points. Benchmark Fannie Mae Mortgage-back yields have declined 4 basis points to 7.47%. Agency yields have generally declined 3 basis points. The 10-year dollar swap spread has narrowed 3 basis points to 111. It appears that junk bond spreads have narrowed somewhat after the past month's dramatic widening, while quality corporate spreads are relatively unchanged. The dollar dislocation/"meltup" appears to have broken. The euro has now posted gains in five consecutive sessions, the first such performance in more than a year. Today was actually the 8th largest gain for the euro versus the dollar. Both the euro and the Swiss franc have gained more than 2% this week. The Canadian dollar, however, continues to struggle as it trades at a 22-month low. Yesterday's inventory data from The American Petroleum Institute showed an unexpected decline in crude and gasoline supplies. Crude inventories are now at 24-year lows. So far this week, crude has gained about 50 cents. Gold prices are relatively unchanged.

Emerging debt markets, after somewhat of a rally over the past few sessions, appear again vulnerable. Today, spreads on Argentine debt widened another 24 basis points today to 840. Standard & Poor's announced that they are reviewing Argentina's debt ratings for possible downgrade, this after recently reaffirming ratings. S&P also cut its debt rating on Peru. Emerging currencies were also under pressure today.

Yesterday was the 10th largest gain (percentage and points) in the 29-year history of the NASDAQ Composite. Three of the ten largest NASDAQ percentage gains occurred in October, and eight of the ten have occurred in 2000. Four of the ten sessions of greatest trading volume on the New York Stock Exchange occurred in October. The ten sessions with the most volume have all occurred in the past 11 months.

On the back of disappointing news, today shares of WorldCom traded 195 million shares in the third-busiest session for an individual stock in history (behind Intel on September 22nd, and JDS Uniphase on July 26th). In another example of unfolding industry turbulence, Wall Street analysts are being forced to sharply reduce revenue and earnings forecasts for the country's second-largest long distance provider. In fact, estimates for 2001 earnings were cut to as low as just over $1. The 2001 mean estimate had been as high as $2.50 just three months ago. The company cited higher costs and sinking pricing, particularly in long distance. Estimates of revenue growth were cut to the 7% to 9% range, dramatically below historical performance. WorldCom has total liabilities of over $40 billion, with shareholder's equity of $59 billion. While the stock was hammered, WorldCom debt was volatile as well. Wall Street, obviously, was not enamored with the company's restructuring plan. Similar to AT&T, it plans to create publicly traded tracking stocks for individual business units. Bloomberg quoted a Street analyst, "I expected the financial outlook to come down, but not this much."

Today, the National Association of Purchasing Managers reported a weaker than expected reading for October. The index of new orders has now declined for eight straight months, and the production index dropped almost 4 points to below 50. Even the index of export orders dropped below 50 for the first time in 20 months. While there are signs of some slowing in the manufacturing sector, we do not yet see evidence of a significant general economic slowdown. Monday, the Commerce Department reported much stronger than expected consumer income and spending. Versus estimates of 0.6%, personal spending was reported up 0.8%, the strongest increase since February. Spending gains were led by the autos and other durable goods category, where spending increased 1.5%, the most rapid pace since February. Estimates also had personal income increasing at 0.6, although the actual report came in up 1.1%, the strongest increase since last October. With spending continuing to outpace income growth, the savings rate remains negative. Bloomberg quoted a Wall Street economist: "As you get closer to the holiday season, the consumer doesn't show any signs of slowing whatsoever." Another economist stated, "overall economic growth may have slowed during the third quarter, but when it comes to consumption, the easing was minimal. And there is little reason to believe a further deceleration is in the offing." Few have focused on the fact that consumption increased strongly during the third-quarter compared to the second.

Certainly, the construction sector continues to boom. With estimates of a 0.5% increase, it was reported today that September construction outlays jumped 2.4% from August. Year on year, total construction spending increased almost 8%. Private construction expenditures increased 7.5%, led by a 19% increase in non-residential outlays. Here, industrial spending increased 37%, office buildings almost 17%, "hotel, motels" 17%, and hospitals also almost 17%. Strong private construction, however, is surpassed by the public sector. Led by a 21% year-over-year increase in education construction spending and 50% for the military, total private sector spending increased 9.1%.

With mortgage rates dropping to the lowest level in almost 1-year, not surprisingly, the housing market has again picked up stream. With estimates of annualized new home sales of 900,000 units for September, the actual number came in 5% higher at 946,000 units (9.2% increase from August). This was one of the strongest months of new homes sales on record, an eye-opening 12% above last September. Sales surged 17% in the Midwest, 9% in the West, and almost 9% in the South. Sales declined almost 5% in the Northeast. Homebuilders are having a difficult time keeping up, as inventory dropped to 3.9 months, from August's 4.3 months. This is the lowest inventory level since December 1998. Little mystery why Homebuilders have been the second strongest of 87 industry groups within the S&P500 over the past three months, gaining 50%. The Homebuilder group has gained 8% so far this week, and now trades at its highest level since February 1999. The average price of a new home sold during September increased to $202,000, while the median was $165,200. The National Association of Homebuilders housing index increased 2 points to 63, the highest reading since February. New home sales remain on track to end the year near 900,000 units, only slightly below last year's record of 907,000. This morning, the Mortgage Bankers Association reported that its weekly application index jumped 4% from the previous week to the highest level in July of 1999. While much of this is explained by a surge in refinancings, the index of purchase applications is running 10% above year ago levels.

It appears that October's tumultuous stock market did throw some cold water on what has been a red-hot automobile market. On the back of very aggressive promotions, General Motors saw vehicle sales jump almost 7%. GM car sales increased 11%. GM was quoted as saying, "although there are some signs of moderation in the industry our sales are still running at a very healthy pace." GM also stated that they expect a record year of industry sales, "slightly above 18 million." GM's discounting appeared to come at the expense of the Japanese brands that reported tempered sales, although from exceptionally high levels. Interestingly, however, the market for luxury autos appears to be holding up very well. It was the best October on record for Lexus, with sales 10% above last year. BMW reported a 31% increase over October 1999. Saab announced their best October since 1987, 40% above a year ago. Mercedes-Benz had its best October in the U.S. ever, up 4% from last year. Acura saw sales 20% above last October.

It continues to be an extraordinary environment with considerable crosscurrents in the markets as well as the economy. We expect markets to remain exceptionally unstable.