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Intel sparks a technology rally

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        7-14-99          High     Low     Volume   Advances Decline
DOW    11148.10 - 26.92 11209.21 11112.01   756,170k  1,530   1,393
Nasdaq  2817.98 + 39.90  2818.14  2771.21 1,075,198k  2,279   1,740
S&P-100  721.58 +  1.79   723.03   715.62    Totals   3,809   3,133
S&P-500 1330.41 + 29.25  1332.83  1301.16             54.9%   45.1%
$RUT     461.46 +  3.35   461.46   457.78
$TRAN   3421.51 + 15.91  3424.00  3395.09
VIX       20.38 -  0.20    21.27    20.00
Put/Call Ratio      .49

Intel sparks a technology rally

Despite missing earnings by $0.02 and falling short of forecast revenue by $150 mln., investors applauded and heaped another $2.63 of value on Intel's stage. Bravo! But what a paradox. The reasoning is logical and simple. It sounds something like this: "We promise to do better in the next half." Right. . . and the check is in the mail. With all due respect to market analysts, INTC has been telling us the same thing for the last 2 earnings releases, only to warn mid-quarter that things aren't looking as rosy after all. Intel has a habit lately of overstating or at least over-emphasizing greatness at earnings, then showing its warts when the market is focused on other issues. We're not knocking spin control, just analysts' seeming inability to see through it.

In fact, there is some basis for the optimism. First, gross profit margin rose to 60% from 59%, which stemmed from cost cutting and manufacturing efficiencies. Second, part of the revenue shortfall is seasonal. Third, sub-$1000 PC demand is robust, "forcing" Intel to focus more on shipping the lower margin Celeron chips, in other words lower average selling prices, thus revenues. But higher margin Pentium III chips will continue to ramp up sales going forward. Not only that, but INTC will release another new high margin Merced chip for sampling in Q3, and the new Coppermine chip later in the year, while more costs will be removed from the Celeron platform. It sounds like a new racehorse, doesn't it?

Not so fast, Sea Biscuit. Dan Niles, the analyst from BancBoston Robertson Stevens who called the "short-comings" of Dell at a time when Dell could do no wrong, exposed INTC's Achilles heal. The guy turned out to be correct then, and disagrees now with the rosy outlook for INTC's future. He cites (as we do) that INTC has overstated anticipated revenue the last 2 quarters, and essentially thinks they've done it again. (Leopards don't change their spots theory) He cites that BBRS cut their estimates in early July and it wasn't enough. Next, he thinks the trend toward cheaper PC's will blunt the penetration of the more expensive P-3 chip, adding further margin pressure as buyers support the less expensive Celeron platform. Last, but not least, he believes it's wrong to write off AMD. The K-6 chip prices will fall too in order to garner some cheap PC business away from Celeron. Also, they will introduce their Athlon chip, a 600 MHz competitor to the Intel's P-3, which will find willing buyers in Compaq and IBM. Frankly, these guys don't want AMD out of business. If you thought MSFT was tough to deal with, watch what happens if INTC owns the whole processor market! In short, Mr. Niles believes that INTC will fall in price. We concur.

Well, now perhaps you see the tug of war over Intel, which began long before earnings were ever released. Therein lies the psychological secret to the rise. MARKET SENTIMENT. Unlike say, Dell who had few bears biting at its heals at the time of its misfortune, Intel bears just about equal Intel bulls in number, thus keeping the unbridled enthusiasm in check. In short, half the market already thought INTC had problems and priced it in, which precluded a 100% disappointment. Heck, that's why half the market thought INTC delivered good news. It wasn't as bad as the bears would have us perceive. Even so, the jury is still out and this battle will go on through the coming weeks. Our vote: Euphoria will wane and INTC will fall. When you boil it all down, INTC failed to deliver on already downward-revised numbers. That never looks good.

Enough about Intel. Investors' enthusiastic receipt of their results nonetheless buoyed the tech market today, but couldn't bring the blue chip DOW stocks with it. In INTC's wake, other semiconductor issues like Micron and AMD, and chip equipment makers like Applied Materials, Novellus, and LAM Research all rose in sympathy. That rubbed off on PC box makers Dell, Compaq and Gateway, and even filtered into disk drives, where Quantum, Seagate, Western Digital, Komag, etc. all posted nice gains too.

Check out some of the other earnings releases today:

Ford (F)- beat estimates by $0.05, but faces some challenges in the coming quarter. Down $0.56 to $52.94.

Apple (AAPL)- announced after the close they'd beat estimates by $0.05 and announced a $500 mln. share repurchase. Up $2.25 to $55.94.

Inktomi (INKT)- $0.02 narrower loss than estimated. Bank of America rates it a buy with $175 price target. Up $3.31 to $128.88.

Earthlink (ELNK)- $0.01 narrower loss than expected. Keep your eyes on MSPG, a current play. Down $1.38 to $64.

Rambus (RMBS)- $0.02 better than estimates. Up $7.63 to $97.56.

VISX- $0.03 better than estimates. Up $2.31 to $92.

Weyerhauser (WY)- a penny better. Unchanged.

Time-Warner (TWX)- $0.06 better, and double the estimate (a.k.a. $0.12). Up $1.56 to $77.31.

Allied Signal (ALD)- in line with estimates. Up $1.25 to $66.25.

Advanced Micro Devices (AMD)- reported a loss $0.16 narrower than expected after the close. On Intel's coattails, up $0.94 to $18.

Whirlpool (WHR)- reports $0.06 better than estimates. Up $3.13 to $73.94.

Finally, Motorola (MOT)- $0.03 better than estimates, which for them is stellar. Unfortunately, Iridium, the only operational satellite-based telephone system made it known that they were not on track to pay their debt interest in August and may be faced with bankruptcy. Motorola is a backer to the tune of $1.5 bln., which in the worst of conditions will turn to smoke unless other backers up their ante too. MOT is no longer willing to fatten this hog. So we ask again, smoked Iridium porkchop, anyone? In a sidenote, Globalstar, backed by Qualcomm, Loral and 15 others, will be a clear winner with or without IRID in the picture.

See the pattern? . . .no disappointments. Earnings season is going well and we're seeing lots of plays work out well. Expect more of the same. However, where the sentiment is strongly bullish, expect a normal post earnings depression and get out before the announcement. If there is a sentimental tug-of-war, even buying puts on the expectation of a drop can be dangerous. Just look at Intel.

Not much in merger news today, unless you count Egghead.com and OnSale.com's $400 mln. stock swap agreement.

Now, on to the overall market performance. The NASDAQ was the clear leader today, propped up on rosy forward-looking statements by Intel. The market bought it, but not until after that rocky start and descent following the open to 2771. By 11:00 a.m. buyers jumped in and didn't stop until the close. In a particularly bullish display, the NASDAQ spurted 13 points in the final 10 minutes to close at a new high of 2818. In a statement of investor conviction, volume exceeded 1 bln. shares on today's gain. The A/D line was a site to behold. Though the index started with advancers losing to decliners 2:1, a steady reversal ensued wherein the finish was 31% more advancers by the end of the day. A 631 tick registered a very bullish close. This day was a big win in our book. Even the Russell 2000 got in the action as it neared a region not seen since last July at 461. (This comes after many of the large-cap Internets have been moved off the index.)

The DOW despite a valiant attempt at recovery in the middle of the day, lost about 45 points in the last hour of trading to bring the index to a close of 11,177, down 27 points from Yesterday's new all-time high. No glum looks; this wasn't so bad. Despite the loss, like the NASDAQ, an early morning A/D line had turned decidedly positive by the end of the day. Not only that 385 mln. shares of up volume bested 321 mln. shares of down volume. Total volume was about 756 mln. shares, about 9% shy of average.

So what about tomorrow? Notice that we haven't even brought up the PPI numbers released this morning? Benign. Extremely benign. . .they actually registered negative numbers. There is no inflation in sight. However, a nervous bond market won't let inflation fears die, as the bond rate remained around 5.91% today. Apparently, bond traders are awaiting confirmation with the CPI numbers tomorrow. Again, no inflation in site. The CPI figures (if not alarming) should only factor positively into tomorrow's trading. Continuing on the earnings front, Boeing, Coke, Gillette, Seagate and Tellabs all report tomorrow too.

With today's really positive performance on the NASDAQ, the strength of the DOW reversal with a strong closing tick (despite negative closing numbers), tomorrow looks like another up day. Just don't buy during the first hour of trading, or you'll over pay. Also, remember too that Murphy's law is alive and well and can sneak up on us with unforeseen negative consequences. So keep your stops set and as always, sell too soon.

Buzz Lynn
Research Analyst

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