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Comstock Partners, Inc.


Sparked by the surprise ECB interest rate cut, the decline in weekly unemployment claims and some strength in chain store sales, the market rose early in the day, and then faded as the current rally, based largely on faith, ran into overhead resistance. The ECB rate cut was undoubtedly in response to the bleak economic nes coming out of Germany, whioch was alarming enough to overcome the ECB's morbid fear of inflation. Rather than being good news, the rate move is just another indicator that economic malaise is a world-wide phenomenon affecting the U.S., Europe, Asia and Latin America. The strength in retail sales, while more than expected, contrasts sharply with most other major economic data such as eroding confidence, job layoff announcements, rising gasoline prices and the prospects of continuing brownouts in California, which accounts for 8% of the nation's GDP. The drop in umployment claims may be a one-week aberration in a notriously volatile sereies. It is noteworthy that continuing claims actually reached its highest level in seven years. In addition, Fedex announced a nine percent decline in April shipments, and said the trend is continuing in May. At ther same time First Call statede that technology earnings were down 42% in the first quarter and that consensus estimates are down 51% for the second quarter, 38% for the third and 13% for the fourth. What is worse, these estimates are continuing to decline noticeably every week. With the S&P 500 at 27 times 2001 earnings estimates and the top 25 profitable Nasdaq stocks at an average of 50 times, we find it exceedingly difficult to believe that the market has discounted the bleak outlook. Technically, the market appears to be running into overhead resistance, while next week's almost certain interest rate cut by the Fed is already priced in. Even a June cut is at least partially discounted, and by that time we could see another round of negative corporate earnings and revenue guidance, reduced estimates, more layoffs and the potential of a financial crisis at any one of a number of global weak spots. What we are going through is the unwinding of a major economic and financial bubble, and it is unlikely to end in a benign manner.


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