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Mid-Week Analysis

There were very few places for bulls to hide so far this week as the market continued the sell-off that started late last week. Internet stocks continue to sell-off as The Street.com index dropped 18% to levels not seen since last 1998. The Phily SOX, and Morgan Stanley High Tech each saw declines of 8%, which helped pull down the NASDAQ100 9% for the week. The AMEX Broker/Dealer index was off 10% and the S&P Bank index fell another 2% this week. The brokers have cut their year-to-date gain to 14%. Smaller issues were also down, with the small cap Russell 2000 index down 5% and the S&P400 Mid-cap index decreasing 3%. Biotech stocks were slightly up today, but are still off 7% for the week. Transportation stocks were only off 1% and the Morgan Stanley Cyclical index declined 2%. Consumer stocks managed to stay positive for the week, with the Morgan Stanley Consumer index up 1%. The consumer stocks helped dampen the broader indexes with the Dow off only 2% and the S&P 500 off 3%. So far with week the XAU is the best performing group, up 7%.

Natural gas prices rose to a 10-year high of $6.62 during the trading session before closing at $6.577, up 2.4% from Tuesday's close. The natural gas market is closed on Friday, so Monday will be the first time traders can react to the inventory data released after the market closed. The report from the American Gas Association, showed that natural gas inventories fell 3.4% last week. A Bloomberg survey of analysts suggested that inventories would drop only 2.4%.

Looks like Florida is not the only place undertaking recounts. Yesterday, Lucent said it was "recounting" fourth quarter sales due to $125 million revenue recognition issue. With the continuing deterioration of telecom companies we can't help think that the problem is related to the vendor financing issue, which became a major issue throughout the industry last month when Lucent reported fourth quarter results. Since this is coming after the fourth quarter when the auditors take a look at the books, I wonder if the auditors are in the middle of a "manual recount."

U.S. firms plan on adding to their payrolls according to the latest survey conducted by Manpower. For the first quarter of next year, 27% of firms anticipate adding workers with only 10% expecting to reduce their number of workers. Fifty-eight percent of the respondents do not foresee any change, while five percent were not sure. These results are the best indication of planed job growth since the survey started in 1976, and compares to last year's survey that indicated 24% of companies planned to add workers. The rosy projections fell upon several industries with durable-good manufactures a little higher at 29% and construction a little lower at 24%. However, only 15% of construction firms plan on reducing the number of employees. This ties a 23-year low set in 1999.

Areas of the county that are dominated by technology reported the highest percentage of companies anticipating increasing their payrolls. In Orange County a record 35% of firms plan on increasing payrolls during the January-to-March period with only 5% of firms planing on cutting back employees. Manpower spokeswoman, Sue Foilgelman commented that the economy is "still on a very hot pace, based on these numbers." Other California cities in the survey are anticipating a rosier scenario. Seventy-one percent of firms in San Diego plan to hire additional workers with only eleven percent planning reductions. In the Long Beach area, 50% anticipate adding employees with only 7% anticipating a reduction. Here in Dallas, 18% of firms expect to add workers, but only 2% plan on any reductions. Austin firms are projecting a much larger hiring binge - 57% plan to increase payrolls early next year. A Texas Workforce Commission spokesman commented that "employers are finding it increasingly difficult to find labor and are turning to nontraditional sources such as retirees, traditional homemakers, students and ex-offenders."

The current labor picture seems a little clouded. Today the government indicated that jobless claims rose 2.1% last week. However, we continually see signs that employers cannot hire enough workers. Retailing companies are doing everything they can to attract new hires. Land's End is offering full benefits for holiday workers to help fill 2,600 holiday positions. Macy's includes an advertisement for employment on customers' receipts. Part of dilemma that retailers' face is the increased number of stores, which retailers continue to open. While the economy chugs along fast enough to justify a store, retailers are not able to staff them adequately. Target has opened more then 60 stores this year for a total of 978 stores. Target typically hires between 50 and 75 people per store. That means Target will be looking for up to 73,000 workers. Several retailers are offering sign-on bonuses, immediate employee discounts, and referral bonuses.

Earlier this fall UPS sponsored a sort of "UPS Olympics" at several Chicago area universities to help recruit students to fill 95,000 positions. The USA Today ran a story about a recent job fair at a college in Santa Monica that illuminated the psyche of potential employees. One nineteen-year old indicated his flexibility, "Whatever work I find for the Christmas season is going to have to be only on the weekdays." Another nineteen-year required at least $10 per hour adding that "Anything less than that isn't worth it."

Besides a tight labor market, Americans continue to import goods at a record pace. Led by increases in oil products and semiconductors the trade deficit widened to a record $34.3 billion, over 10% higher than estimates. The year-to-date trade deficit now stands at $270 billion. With three months left in the year it has already surpassed the total deficit for 1999, $265 billion. Undoubtedly, the strong dollar has been a major factor to the record trade deficit. As the dollar continues to strengthen, foreign goods become cheaper in dollars while U.S. goods become more expensive to foreigners in their local currency. In a Bloomberg story, Chris Rupkey, economist for Bank of Tokyo Mitsubishi in New York, pointed out how the record trade deficit hurts US companies. "Much to the chagrin of U.S. business, these goods continue to stream to our shores, making it impossible for them to raise their prices in order to firm up their sagging profit margins." Remember it has been our contention that these record trade deficits are indeed an indication of inflation. In fact, we believe that trade deficits are a much more detrimental to the economy than inflation that manifests itself through increasing the price of goods.

The current steel industry provides a simple case study on how a strong dollar increases imports to the detriment of U.S. companies. I hear often hear economists stating that the low steel prices are an indication of a slowing economy. This would be true in Econ 101 where everything else is held constant. The truth of the matter is that steel consumption is likely to rise 5.5% this year according to World Steel Dynamics in a story published in the FT Monday. The story also pointed out that much of the increase in production comes from Eastern Europe and Asia where cost are much lower than in the U.S. Throw in a soaring U.S. dollar and the result is an increase of imported steel. Yesterday, the Specialty Steel Industry on North America released steel import data indicating that the industry faces "record levels of imports for all product lines, both in terms of volume and penetration," according to H.L. Kephart, Chairman of SSINA. Imported specialty steel increased 25% to 657,460 tons during the first eight months of 2000. So far this year, these problems in the steel industry have caused six firms to declare bankruptcy.

In light of the trade deficit it came as no surprise that the Port of Long Beach and the Port of LA continue to handle record volumes. October normally marks the end of the holiday shipping season, and it ended with a bang. The Port of Long Beach handled 15% more containers this year than last year. Last week the Port of LA reported it handled 26% more containers than last year.

Another interesting development in the credit markets is the announcement from British Telecommunication of a $8 billion bond issue. The issue will be dominated in U.S. dollars and targeted to U.S. investors. We are intrigued since BT is using the proceeds to refinance its short-term debt in the commercial paper market. On the heels of Xerox announcing that it was unable to access the commercial paper market, we wonder if this is another indication of the commercial paper market becoming less liquid.

The Prudent Bear Fund wishes everyone a safe and enjoyable Thanksgiving.

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