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Morgan Stanley and Solly High on Chip & Equipment Dust

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Morgan Stanley and Solly High on Chip & Equipment Dust
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I will have what they are having - pass it over here!

Get this, straight from briefing.com this morning: Hearing from sources at Morgan Stanley that firm is upgrading large-cap semiconductor capital equipment companies; firm said to raise AMAT, KLAC, ASML, LRCX, NVLS, TER to STRONG BUY from Outperform... Firm feels that train has left the station and recent pullback creates a buying opportunity; sees upside of 40% or more over next 12-18 months.

Salomon Smith Barney says evidence of a bottom in the equipment sector and up the food chain is becoming apparent in the March-June timeframe. At the first day of the firm's Semiconductor Conference equipment companies reiterated guidance across-the-board. Thinks investors should use dips to establish positions (briefing.com).

From Lehman: Price-to-sales valuation increased to well above trough and 10-yr average levels. As measured by price to operating cash flow, valuations are only modestly higher than trough levels achieved in 1998 & 2000. Near term fundamentals continue to worsen including weak 1Q orders, a substantial level of order cancellations, lower announced capital spending by chipmakers, a lower book-to-bill, and lower foundry utilization rates. Yet they too "continue to believe semiconductor equipment stocks must be purchased early, before fundamentals improve." (briefing.com)

Why? So they have someone to sell to and collect commissions from while they unload prior to a price collapse? While I do not think it is that sinister, is this not the same mentality that said to buy CSCO at $80 because its 15-year forward P/E of 35 was a compelling value? For those wondering, the bubble is still intact and has not been popped. Morgan, Solly, and Lehman, all high on chip dust, prove it so.

Not only that, monitoring for a sneeze in a hurricane is misguided at best and the work of a charlatan at worst. Can you imagine finding that sneeze and then proclaiming the hurricane is over? Crazy!

It is not so much that analysts come up with this stuff (after all, they have a job to do - sell more stock), but that the buying public inhales lung-fulls of the aromatic fumes and soon exhibits the intoxicating effects of their second hand smoke.

Skeptical? Buzz has lost his marbles? Sure, me and CS First Boston who saw what I saw. One hour after the opening love-fest, they noted the following: CSFB does not agree with Morgan Stanley's call on semiconductor equipment stocks; does not believe that capex levels support a turn in the business, citing data from both Asia and the US. CSFB says it would be a seller of the group into strength. (briefing.com)

In Saturday Night Live fashion, where peacemaker, Chevy Chase proclaims, "New Shimmer is a dessert topping AND a floor wax" a balance between the two positions was struck when Goldman Sachs weighed in too. Again, quoting briefing.com, "There is near-term downside risk as the bar has been raised for the group with comments by LRCX and NVLS that orders would tick up sequentially this qtr; thinks it as at least 50/50 that up-tick doesn't occur and the stocks will react negatively... Sees upside over a 12-18 month period, but does not believe that the train has left the station; would not chase this move." (briefing.com)

Solution? Just say "No" to analysts. Trust your own judgment. Still in doubt? Listen to the companies themselves from later in the day at the Merrill Lynch sponsored EMS Connector/Passive Components Conference.

Here is a snippet from Solectron (SLR), the largest contract semiconductor manufacturer in the western world, who states it does not see signs of improvement in end market demand, but that PC sector has been more stable due to more experience managing inventory levels; experiencing capacity utilization of less than 50%, which is in line with expectations for MayQ, as reported by briefing.com.

More from Salomon's Semiconductor Conference - Cypress (CY) anticipates a decrease 30% in revenue sequentially to $900 mln with bookings for Q2 to be about $205 mln, resulting in a book-to-bill higher than 1.0. Yet capex for the year going from $350 mln to $135 mln. Now just how is it that they will produce the most demanded, highest margin, newest chips without greater capex? It sees computing segment recovering first with the best inventory profile overall and wireless to recover second, some time in early 2002. What I find interesting from a fundamental point is the book to bill increasing over 1.0 without capital expenditures. Again, bet on continued weakness.

OK, one more just to drive the point home. Bear Stearns reporting on the Communications IC sector today notes that weakness is weighing on AMCC and PMC-Sierra (PMCS) in particular. Channel checks by Bear reveal AMCC and PMCS have received cancellations in recent days from Juniper and Cisco among others.

Enough? Expect weakness going forward.

Sure there was other news today, more of it interesting than important. Boeing announced that Chicago would be their new corporate HQ, beating out Denver and Dallas to woo the aerospace giant. While the 70,000 or so manufacturing jobs would remain in Seattle, Chicago would land 500-700 top brass and Chicago now gets bragging rights on snaring a new Fortune 500 company.

Oh, and lest we forget. . .what could have been disaster were it to have come in big, the Initial Jobless claims of 384,000 fell 32,000 short of the 416,000 consensus estimate. Whew, good to know unemployment rate is not falling off a cliff even though the Forbes 500 companies have a current "body count" totaling over 379,000 layoffs since the first of the year.

Perhaps lending some support were positive comments coming out of Big Blue (IBM) after the bell, where Big Lou (Gerstner) hinted that earnings could be slightly better than anticipated - double digits vs. the 9.2% EPS consensus. Perhaps that will be enough to help support the tech-related markets as IBM was up fractionally after hours. In the same appearance, he also said the PC business was going to be tougher than anyone expects thanks to the growth in popularity of handheld devices and PDA's.

EMC authorized the repurchase of 50 mln shares too.

All that said, what sparked today's bullish gap open? Look no further than an ECB (European Community Bank) who reduced their own interest rates by 25 basis points overnight. The initial reaction state side was to assume that relative to their reduced rates, our now higher returns would attract capital, and that it did . . . for about an hour after the open when investors realized a reduction next week by our own Fed would erase that advantage rather quickly, and then some.

That is the news. As we will soon see in the charts, bulls are running out of positive sentiment. There is simply no reason for them to take prices higher. A rate cut, no matter how big or little is already priced in, and many have bought in anticipation. "Do not fight the Fed" has been a profitable strategy over the last three weeks prior to this week. But now the markets remain flat. Bulls cannot move it through resistance for they are tired. Bears are afraid to short right now on the possibility that bulls may find the strength to push prices through on Easy Al's "re-inflate the money supply" policies.

Clearly, this policy is inflationary and might even lead one to believe that the Fed finds a speculative bubble acceptable as long as it does not squash the greater economic engine. Do not laugh - it is probably an acceptable side effect for now to prevent the economy from spiraling into the ground. But it is still a bubble and will be dealt with sooner or later.

Today's selling action after the initial gap may have resulted from a fundamental wake-up call by Buffet types, or it may more likely be related to traders wanting to bale out before tomorrow's big economic news where there is much at stake. Numbers to be released in the morning include PPI, retail sales, and Preliminary Michigan sentiment. The latter two will be a huge measure of consumer confidence and their effect on the market might move the indices off center from the pattern they have lately followed, perhaps drastically. However, that is not as likely with the Fed ready for another "Greenspan market put" (rate cut) unless they are really out whack from expectation.

Now for those charts.

NASDAQ-100 chart (QQQ as proxy):

I see weakness on the weekly chart as the candles begin to hit resistance - four weeks at current levels and the stochastic is finally beginning to show signs of a roll. The daily has traded within a $5 trading range for the last 17 trading days and within $3.50 for the last 10 days. Hard to say if $45 will hold going into the weekend on the heels of whatever the economic reports bare. It is equally hard to say it will fail with the prospect of a rate cut next Tuesday. But clearly a mild case of weakness exists now, as $46.40 was broken. Further weakness would bring $45, then $43.43. It looks like the tail end of a put play on a daytrading basis, but weaker overall. If you are going to daytrade this (experts only), consider waiting for a recovery to roughly $46.40 then making the play on the rollover.

Dow Industrial chart (INDU):

As for the Dow, "I think I can, I think I can". Oops, just kidding. Try as it might, 11,000 is tough to crack and the oscillators are weakening. Just below today's close is the 10,900 level. That could be support OR resistance tomorrow depending on the market's mood. But notice the lower highs too and a 60-min chart whose candles cannot reach higher levels before rolling over. Bulls are very tired and giving every indication they will at least nap over the weekend, but much depends on the economic reports tomorrow. Support at 10,900, then 10,825. Resistance at, what else? 11,000.

S&P-500 chart (SPX):

SPX? Uh oh - looking pretty sick. It is the first time on a weekly chart in five weeks that we have seen a reversal pattern. That daily doji (gravestone doji) that showed up today says the gap open had no strength and was sold all the way down back to yesterday's close almost to the penny at 1255. It is nearly a sign to kiss it good-bye for now. The daily/60/30 stochastic shows that too - major weakness on the way. Unless the economic reports in the morning can hold SPX over 1250, any rollovers from 1265-1270 will likely make excellent put opportunities, just like today. A move under 1248 set up further decline to 1239, 1232, then way down at 1207.

The VIX too is starting to show some hesitation in sinking bullishly further down, though it did make a dip into the 26 area briefly today. Support is holding strong with its lower Bollinger band showing an extreme just under 26. The VIX too suggests that a reversal is not far off and the Fed or economic reports may be just the ticket.

Then again, maybe not if the COT reports tomorrow show a continued bent for commercial traders to cover their short S&P contracts. Based on the lack of activity since last week, would it not be a surprise to learn tomorrow that they increased their short positions again - a distinct possibility.

As tomorrow goes, a lot is riding on economic numbers. You can bet that Greenspan and company have already seen them and they will weigh into the Fed's decision come Tuesday. The markets will react to whatever they think that Greenspan sees in them. It could be drastic and force an early selloff - to heck with waiting; we are outa here! Or it could be nothing keeping investors rangebound until the final outcome Tuesday, which will likely spark a "sell the news" exit anyway.

Unless something miraculous happens in the next two days, bet on further stagnation of prices and ultimate decline with the best profits going to the agile daytrader who can scalp a few points on intraday moves.

Whew! So much to say, so little time. See you at the bell with the latest take on tomorrow's economic numbers.

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