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The Market Shrugs Off Chip Warnings

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        03-05-2001        High      Low     Volume Advance/Decline
DJIA    10562.30 + 96.00 10571.60 10468.50  928 mln   1649/1406
NASDAQ   2142.92 + 25.29  2163.09  2127.96 1.50 bln   1810/1846
S&P 100   638.43 +  4.54   639.21   633.89   totals   3459/3252
S&P 500  1241.41 +  7.23  1242.55  1234.04           51.5%/48.5%
RUS 2000  475.79 -  1.09   479.78   475.65 
DJ TRANS 2939.40 + 24.21  2946.09  2908.70 
VIX        29.22 -  1.64    31.30    29.15
Put/Call Ratio      0.68

The Market Shrugs Off Chip Warnings

The major indices stayed within a somewhat tight trading range after rising in early action. Volume was unusually light at 926 million shares on the NYSE and 1.5 billion on the NASDAQ Stock Market. The threat of a 30-year snowstorm in the Northeast kept some traders off Wall Street. The worst of the storm is expected to hit tonight.

The Dow Jones Industrial Average added 96 points or 0.9% to 10,562.30. Market breadth was marginally positive on the NYSE, with advancers outpacing decliners by 17 to 14. New 52-week price highs on the Exchange totaled 128 versus 17 new lows. The NASDAQ Composite moved up 25.3 points or 1.2% to 2,142.90. Certainly, it was nice to see the NASDQ Composite refrain from diving after chip companies issued warnings and many stocks were downgraded. Winners nearly matched losers on the NASDAQ, while 102 issues hit a new low and 58 logged a new high.

Apparently, Prudential's downgrade of 15 stocks was done to highlight the stocks that still rightfully have Strong Buy ratings, including AXT Inc. (NASDAQ:AXTI +0.19), Emcore (NASDAQ:EMKR +0.44), Micron Technology (NYSE:MU +2.91), Texas Instruments (NYSE:TXN -0.36) and Xilinx (NASDAQ:XLNX +0.75). Among the stocks getting downgraded were Microchip (NASDAQ: MCHP), Atmel (NASDAQ:ATML +0.19), Pericom (NASDAQ:PSEM +0.06) and Safe (NASDAQ:SAGI +0.17). Prudential believes that semiconductor up cycles exhibit double peaks, which guides its thesis that the chip stocks should bottom some time in the next six months. The PHLX Semiconductor Index gained 5.2% to 612.3.

Chipmakers warning today included Cypress Semiconductor Corporation (NYSE:CY +0.27), LSI Logic Corporation (NYSE:LSI +0.51) and Vitesse (NASDAQ:VTSS +1.25). Cypress said it will earn 30 to 34 cents per share in 1Q, versus the expected 56 cents, blaming poor demand and changes to its business model. The company has decided to let one of its key customers order and receive chips, but not take ownership until it actually uses them. LSI Logic said that its 1Q revenue and profit will miss previous expectations, falling 30% from the prior quarter's level of $751 million. A 12% decline was originally expected. Vitesse said it now expects to earn between 21 cents and 22 cents per share in its fiscal 2Q, having previously predicted earnings of 26 cents to 27 cents. Vitesse predicted revenue will be between $150 million and $160 million, well below its previous forecast of $180 million to $190 million. These warnings came as the Semiconductor Industry Association (SIA) said that global sales of semiconductors in January fell 5.7% from December, blaming excessive inventories and poor demand for goods using the chips. George Scalise, SIA president, said "Current forecasts suggest the inventory adjustment will be completed by the end of the third quarter and end-market product demand will improve later in the year." Compared to January 2000, the Japanese market grew 23.2% in January of 2001, the Asia/Pacific market grew 2.9%, the Americas market rose 15.4%, and the European market 14.6%.

EMC Corporation (NYSE:EMC +0.20) has decided to focus on international business to help meet their 2001 revenue target of $12 billion. Speaking at a Morgan Stanley investment conference, CFO Bill Teuber said there is plenty of room for the data storage giant to expand its business in Asia and Europe. EMC's stock has been weak since late last month when the company said it might miss its revenue goal.

Prudential also made bearish comments about e-commerce software firms, saying the current economic climate is beginning to impact "even the best-positioned software companies." The firm left its ratings intact but slashed 2001 and 2002 revenue and earnings estimates on Art Technology (NASDAQ:ARTG -1.00), BroadVision (NASDAQ:BVSN -0.41), E.phiphany (NASDAQ:EPNY -0.44), eGain Communications (NASDAQ:EGAN -0.03), and Interwoven (NASDAQ:IWOV -0.62). Prudential said it believes reduced visibility for these companies presents a risk as "deferrals of application software purchases are just beginning to be felt now." Also, current international strength may not last, according to Prudential. Art Technology was hardest hit, losing 4% to $23.12.

Reports of secret talks between Wal-Mart (NYSE:WMT -0.55) and Amazon (NASDSAQ:AMZN +2.62) to form a strategic alliance appeared in the British Sunday Times. This could be a successful combination of on-line expertise with a great customer base. Wal Mart could use some help in gaining better Internet presence, and Amazon could use help in the cash department. Although these rumors have not been verified, industry watchers are questioning how the deal would affect Amazon's alliance with Toys R Us Inc. (NYSE:TOY -0.25), which currently operates a co-branded retail toy Web site, in competition with Wal-Mart, the top seller of toys in the United States.

Finally, not a warning! Verizon Communications (NYSE:VZ -1.38) said it is on track to meet its operational and financial targets for 2001. Earnings for 2001 are expected to be between $3.13 and $3.17 a share, with revenue growth in between 8 and 10%. Shares still dropped 2.5% to $48.13.

AT&T (NYSE:T +1.16) rose to $23.56 on a favorable court ruling last Friday by a U.S. appeals court that overturned federal rules limiting the number of cable customers one company can serve. Merrill Lynch analyst Jessica Reif Cohen said the court's decision "paves the way for more consolidation and is a huge win for cable companies." Other cable operators benefiting today included Comcast Corporation (NASDAQ:CMCSA +1.62) and Cablevision Systems (NYSE:CVC +1.44).

The economy in the services sector improved in February according to the National Association of Purchasing Management (NAPM). Its non-manufacturing survey rose to 51.7% in February from 50.1% in January. Readings over 50 show expansion of activity. The index "indicated more life in the economy than it did in January," said Ralph Kauffman, the head of NAPM's survey.

Although February's 101,731 layoff announcements were up 187% from last February's 34,415, total announcements are actually down 28% from January according to outplacement firm Challenger, Gray & Christmas. However, layoffs have been above 100,000 for three straight months for the first time in the survey's eight-year history. Automobile, telecom and retail sectors have been most heavily hit by announced layoffs so far.

It looks like investors finally stopped pouring money into stock mutual funds. Trim Tabs reported Friday that investors pulled about $13.4 billion out of stock funds in February, the first month of redemptions since August of 1998. While both the Dow Jones Industrial Average, S&P 500 Index and NASDAQ Composite have shown similar percentage increases since 1998, the NASDAQ has climbed and descended by far the steepest peak during that time. Technical analysts are worried about the buying, which reflects complacency during the NASDAQ's decline of the last year. According to Investor's Business Daily, the remote possibility of mass redemptions worried the Federal Reserve enough to research the topic. If fund shareholders all decide to sell at once, managers may be forced to sell massive amounts of stock to pay off investors. Given that mutual funds own about 20% off all the stock outstanding, this would likely drive stock prices lower. The Fed study, published in December, says that scenario is unlikely because managers have enough cash to meet redemptions and often have bank credit as a backup. Outflow the past 13 years has been because investors aren't buying enough to offset normal redemptions.

A quick perusal of top industry groups based on stock price action in the last six months (published by the Investor's Business Daily) reveals that many retail and medical sectors are holding their places high on the list. Those retail groups have actually improved their standings over the last three months. Regional banks also make a good showing on the list. The only tech sectors appearing in the top half include computer services, educational/enterprise computer software, and military electrical systems. As you already knew, most tech stocks have had dismal price action in the recent past, even though technology still has the greatest growth potential. The fact that those sectors have not started to recover yet tells us that other overriding economic factors are keeping investors out of technology for the time being.

After the Bell

Xilinx warned as scheduled after the close, saying that February was weaker than expected and sequential revenue will decline by as much as 15% in the March quarter. Currently, analysts expect earnings of 27 cents per share on revenue of $481 million. During the prior quarter, Xilinx had net income of 31 cents per share on revenue of $450.1 million. Based on Xilinx's new projections, revenue could be as low as $382.5 million. After rising 1.8% to $43.25 in the regular session, shares were down 31 cents in after hours trading at the time of writing.

TriQuint Semiconductor (NASDAQ:TQNT +0.25) warned that earnings per share this quarter could fall to 14 cents, and revenue to $80 million, down from $90.3 million in the previous quarter. Shares are trading up 6 cents to $19.06 in after hours trading.

Looking Ahead

Tomorrow brings us the Factory Orders Report for January. Bear, Stearns and Company analysts believe that the large drop already reported for orders of durable goods, down 6% in January, virtually guarantees a large decline in total factory orders, forecasted to drop 2.2%. This report will also provide the first look at inventory investment in the first quarter of 2001 and the first readings from 2001 on orders and inventories for various high-tech goods.

The Beige Book on Wednesday will not create much market reaction after last week's policy comments from Mr. Greenspan. The most important report this week ahead of the FOMC meeting on March 20 is the Non-farm Payrolls Report for February. Bear, Stearns and Company reports that a number of employment-related indicators have eroded since the last employment report. Also, February payrolls should fall due to January's large gain, which appeared to have been partially weather related. This is especially true in the construction sector, where payrolls surged 145,000 in January, versus an average monthly increase of 17,000 over the last 12 months. Analysts expect that payrolls posted a small gain of only 50,000 in February, with private payrolls rising only 40,000. Manufacturing payrolls are expected to fall sharply again as suggested by the fall in the NAPM employment index.

While the weather in New York may keep the trading volume down tomorrow, expect some volatility this week into the payroll report. Trade safe and use stops, or drive safe and go skiing.

PJ Mitchell
Contributing Analyst
www.OptionInvestor.com

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