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The king has fallen and all the kings horses and all the kings men could not put him back together again

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        2-16-99         High     Low     Volume   Advances Decline
DOW     9297.03 + 22.14 9387.66  9234.73  650,911k  1,525   1,533
Nasdaq  2313.87 -  8.02 2368.41  2300.52  817,404k  1,748   2,301
S&P-100  619.74 +  3.60  626.74   614.94   Totals   3,273   3,834
S&P-500 1241.87 + 11.74 1252.27  1230.13            46.0%   54.0%
$RUT     396.40 -  2.04  402.73   395.60
$TRAN   3120.76 + 23.87 3140.48  3095.33
VIX       32.42 +  1.07   33.42    30.76
Put/Call Ratio      .65

The king has fallen and all the kings horses and all the kings men could not put him back together again

Dell computer announced earnings after the close and it was not pretty. All the pundits who expected Dell to again soar to new heights, after the punishing blow they took on Friday, are suffering from shell shock tonight. The king of ever increasing sales, revenue and profits showed a crack in its armor today. Dell is not bullet proof after all. The direct sales giant posted great numbers for any other company but the expectations for Dell were higher. Higher may now be a thing of the past.

Dell announced +.31 EPS, exactly what the street expected. No whisper beating blowout. Revenues of $5.17 bln was less than expected. Some estimates were from $5.2 bln to $5.6 bln. Sales in the Americas were actually DOWN -3%. Desktops were down -1% and enterprise servers and notebooks were flat. Sales on the Internet were strong at over $1 bln in the 4th quarter. About $14 mln a day.

So what happened? Competition. With all the major PC makers gaining ground in the direct sales market the competition for Dell is heating up. Compaq, Gateway, Hewlett Packard are all ramping up their direct models. Four years ago Dell was the only major direct seller and they were killing the computer store outlets with build on demand, custom configurations. Big companies like CPQ, HWP, IBM are not going to sit still and let a rival upstart steal their business forever. Times change.

Why does this impact the entire market? In the current tech led rally the focus has always been on just a few leaders. DELL, MSFT, INTC, CSCO. The latter three held up their end with growth and profits and positive outlooks. Their high PE ratios are still safe. They are leaders in their fields. Dell was a leader. Dell had a PE last week of 100. Dell's competitors have all suffered from rational PEs while watching Dell command the big bucks. For instance the PE for IBM is 26, GTW 32, HWP 27. Now that Dell has shown some weakness in the game plan the PE field is about to be leveled. To equate PE to dollars, a Dell PE of 40 would be require a stock price of $60. A PE of 30 would need a stock price of $45. I don't think Dell will fall this far but the piper must be paid.

Even the announcement of a 2:1 split was not able to hold up Dell in after hours trading. Last I heard Dell was down as low as $75 (-13 from the close). I heard some rumors that is was down as much as -$17. The stock split ploy is obviously an attempt by Dell to soften the blow. They normally split their stock in the $110-120 range and to announce a split at $88 shows they knew in advance how bad the earnings would hammer the stock price. Splitting again now will put the current outstanding shares at 2.4 bln and make any future earnings surprises and price gains even harder.

The market opened up strong with the Dow up +113 at one point but the nagging worries that DELL, HWP and AMAT might miss numbers after the close pushed the averages back into negative territory by midday. There was a small bargain hunting rally in the late afternoon to finish positive but the storm clouds were gathering.

What does this mean for tomorrow? Down is my bet. Earnings problems by a tech leader always ripple through the entire sector. After hours INTC was down -$3, MSFT -$2 and HWP, who blew out earnings with a $.91 to $.82 estimated, was down -$3 in sympathy.

Wall Street has no mercy when leaders lag and tomorrow could be a bad day. Futures are already down -7.00 on the news.

The market has been struggling to move forward at this level due to a lack of breadth. The averages have been dragged along by only a few leaders in each sector. Since techs have been so strong for so long the apparent earnings weakness by THE leader will kill the entire sector and maybe even the broader market. The advance/decline line was negative again today with 3,834 declines to 3,273 advances. The continued deterioration of the market internals along with the Dell disappointment could be the catalyst the market needed to break through support and retest old lows. You know I have a bullish outlook towards the long term market. There is no reason for a correction other than profit taking. If you are looking for reason don’t look on Wall Street. This could be the straw that broke the camels back. I hate it when I finally turn negative. Fortunately whenever this has happened in the past the market immediately turned around and soared to new highs. It is as if I was the last remaining bull and everybody was waiting for me to turn bearish before buying. If that is what you are waiting for then get ready. I am leaning toward a near term correction and strongly advise not opening any new call positions until the market shakes off this news and establishes a new upward trend.

Time to revisit holding over earnings again... I got many emails this weekend about holding over Dell earnings. I tried to respond to all of them with cautions. Especially Dell. The standard is so high for Dell there was just too much possibility for failure. Sure, if Dell had announced $.40 and beat estimates by 25% then we would be looking for a blowout to the upside tomorrow. We constantly warn about holding over an announcement and this is a prime example of the pitfalls. Take your profit a day or two before and you will always sleep better.

Good Luck

Jim Brown

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