Strong demand at the latest BOE gold auctions (4.1 times covered) helped gold, and gold shares jump higher in today's session. However, perhaps of equal importance backing the jump in gold has been the steady decline in the U.S. dollar. The dollar index topped 121 last Thursday but has been on the decline ever since. Today, in what looks to be the fourth straight decline in a row, it cracked below 118.5. Perhaps not a big enough move to signal panic to the proponents of a 'strong dollar' but a move nevertheless.

The markets are stagnating after yesterdays volatile swing lower. That said, decliners in tech land, despite the average being flat, are nearly doubled advancing issues, and the action on the NYSE is only marginally better. Yesterday's put/call ratio was a surprising 0.94 – this is shocking because it is summer, and we are supposed to be awaiting a 'late year rally'. Typically this high a number is what you would find in Sept/Oct. That it arrived yesterday could mean nothing, but it could also mean that the markets were only able to look past horrific corporate earnings until they started to arrive (yes, I like to state the obvious after it happens).

You may remember that last year the rally showed up ahead of schedule (in August), and soon vanished in September. Although an exact replica of last year will probably not unfold there is reason to believe that second quarter earnings season will be forgotten before the dust settles. Meaning that until more hard evidence of an economic recession or rebound arrives investors may be able to stay the course and keep praying for the late 2001 recovery. It appears that until the Fed has played all of its cards, and/or previous cuts are baked in, there will always remain a glimmer of hope on the horizon.

The tech laden index broke below 2,000 yesterday for the first time since April 17. Although 2,000 is only a psychological level, the question begs to be asked: will the Nasdaq break below 1619 during the current sell-off, or will this level hold until later this year?

Yahoo For Earnings
Internet King Pin Yahoo will kick off the earnings season later today. Despite the fact that Yahoo is trading at over 100 times year 2002 EPS estimates, there is a more basic valuation rule to look at: that being don't buy companies that will likely never achieve their market cap potential: Currently Yahoo trades with a $10 billion market cap, and roughly (lets be generous) a $2 billion book value. Even if Yahoo were to report year 2002 profits double the current estimates, and maintain this fabulous achievement into infinity - it would still take the company over 47 years to achieve a parallel between its book value and its current market cap. To put this in perspective Philip Morris, from maintained earnings extrapolated from this year alone, would take only 8.8 years to place its book value in parity with its current market cap.

Even though I don't like Philip Morris at 46 bucks I could see myself waiting 8.8 years for an investment to make sense. As for Yahoo -- I am not even sure if I am going to live for another 47 years. As well, I am not sure Yahoo can earn 30 cents next year (double the consensus estimates of 15 cents). The only thing I am sure about is that Yahoo is not worth buying at $16 -- and unless you have a bottle of tequila, and are a well practiced hyptnotist you cannot convince me otherwise.

The bull won't last
If Yahoo beats estimates by a few pennies a handful of investors will think the future is so bright they have to buy. That is what this market is about – meaningless, and often times manipulated EPS releases being devoured by a sea of anxious, and greedy investors. Little does everyone know that earnings from a company like Yahoo make no sense no matter what they arrive at. Furthermore, until companies like Intel (currently 21.25 years to achieve the book/cap parallel) start looking more like the Philip Morris's this is still a high priced bull.

Even though long-term earnings expectations are slowly becoming less exceptional, stock prices are just as irrational today as they were yesterday. Many investors may continue to buy for the late year 2001 recovery, but who really wants to hold on for the rest of his or her life? The bulls are holding on...

Brady Willett
July 14, 2001