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Market Wrap

Surprise, surprise, surprise!

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        01-16-2001        High      Low     Volume Advance/Decline
DJIA    10625.70 +127.30 10664.00 10486.60 1.20 bln   1742/1198
NASDAQ   2618.55 -  7.95  2638.22  2576.95 2.07 bln   2418/1533
S&P 100   639.05 +  5.17   693.83   684.80   totals   4160/2731
S&P 500  1326.65 +  8.10  1327.81  1313.33           60.4%/39.6%
RUS 2000  493.28 +  7.53   493.46   483.86
DJ TRANS 3064.74 + 62.76  3069.92  2988.14 
VIX        28.18 +  0.56    29.32    28.18
Put/Call Ratio      0.56

Money rotated back into defensive stocks today as tech stocks took a breather in front of a massive number of expected tech earnings. Traders took off their bullish horns and moved to the sidelines until the true earnings picture is clearer. Drugs and food stocks and insurance stocks were up on the rotation while BRCM, JNPR, JDSU and other leading techs suffered in regular trading.

Earnings, earnings, earnings. The wait is on. Announcements after the bell today were waited heavily in the semiconductor sector. AMCC posted earnings of +$.16 which beat estimates by two cents. Revenue was light with sales weaker than expected. AMCC dropped -$3 in after hours to a low of $67 right after the announcement but rallied back to gain +$3 in later trading.

The 800lb. gorilla in the semiconductor space also announced and only met estimates of $.38. Revenue was flat at $8.7 billion and margins were stable at 63%. However they warned that earnings for the next quarter would be down -15% or more with gross margins dropping to only 58%. This is an earnings drop of almost $1.3 billion in just one quarter. Investment gains are expected to also drop to only $180 million, down from over $900 million just a couple quarters ago. Intel initially traded on both sides of positive after the announcement and ended up +1.00 after the conference call. Ashok Kumar predicted INTC would dip to as low as $26 before rebounding. He said INTC would be a strong buy at that number. That may be wishful thinking on his part.

Juniper Communications also announced and beat estimates by a huge margin. Recently raised estimates of $.18 were not even close to the $.24 actual earnings. Revenue was up +47% and they more than doubled market share at the expense of CSCO. Estimates by the company for full 2001 are for sales of $1.5+ billion and more than double the current rate. JNPR gained +12 to $139 in after hours trading after a brief drop to less than $122. JNPR advised analysts to raise their estimates for next year and claimed a 12 month technology lead over its competitors. (CSCO) Ironically CSCO gained +1.50 in after hours trading as well.

RFMD announced earnings of +$.05 that were less than last year but in line at $.05 and warned that the next quarter would drop -10% from here, citing costs associated with a new facility as the reason. NVLS beat estimates by +$.06 on a +122% increase in sales. NVLS was up almost +$6 to $43 in after hours trading.

In other news GSTRF announced that it had suspended principal and interest payments on its debt in order to maintain enough cash for operations. Not a good sign for this troubled phone company. Of more concern than the stockholders of GSTRF is the debt or investment by other companies. QCOM, for instance, has over $600 million of investments in GSTRF which it will have to write off should GSTRF file bankruptcy. This is a huge chunk of change and only the tip of the iceberg.

The Dow gained +127 points on the strength a couple positive earnings reports but it was really a quiet move. Citigroup rose +1.13 after reporting a +11% rise in income for the quarter inline with analysts expectations. BAC dropped -1.31 after posting a -27% decline in earnings but rallied to close up +.75. Dow components BA, GM, IBM and JPM announce earnings on Wednesday with IBM being the biggest worry.

The Commerce Dept reported that business inventories grew +0.5% in November while sales fell for the second month in a row. The inventory data met expectations and continued to suggest weakness in the economy. This was market friendly and traders are still expecting another rate cut on Jan-31st from the Fed. The CPI report is due out on Wednesday as well as Industrial Production. OPEC is also expected to cut production by -1.5 million bbls which would put pressure on oil prices and indirectly inflation again.

The state of California was hit by a stage 3 emergency alert and just narrowly avoided rolling blackouts to take strain off the energy grid. Credit ratings were cut to less than junk status on Southern California Edison and Edison International putting them into default on various bank loans and credit lines. The move came after SoCal Edison suspended $596 million in payments to creditors in order to keep the lights on. Bankruptcy appears to be the next option. BAC and JPM are the major lenders to both of these companies. SoCal Edison said it had $1.2 billion in cash on hand but would run out as of Feb-2nd assuming it makes all payments when due.

In spite of the weak earnings by Intel and the bearish forecast, investors were relieved that the situation was not worse. The QQQ, which is a proxy for the Nasdaq rose +1.50 in after hours trading. Nasdaq futures at 6:45EST were up +65 and S&P futures were up +9.00. This is a marked difference from the day's trading on the Nasdaq. Over two billion shares traded again with no price movement. With only a 75 point trading range the Nasdaq was suffering from traders moving to the sidelines in front of the flood of tech earnings this week. With investors believing that all the bad news is already priced in, as evidenced by the Intel rally late in after hours, tomorrow may be a better day.

The Nasdaq is still hovering exactly at the top of the down trend channel which has been in place since Sept-1st. 2650, which has been a challenge recently, could be broken decisively on Wednesday if the futures hold. The positive earnings surprises from NVLS, AMCC and JNPR have energized the after hour market with JNPR up +$12 as after hours trading came to a close. We need to remember that just as easily as three positive surprises provided a market bounce, negative surprises can take it back down again. While the futures are up strongly tonight there is a lot of darkness before morning and things can change in a heartbeat. Keep those stops tight and be prepared to exit if the euphoria diminishes.

Enter passively, exit aggressively!

Jim Brown

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