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Market Wrap

Close But No Cigar!

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        05-08-2001        High      Low     Volume Advance/Decline
DJIA    10883.50 - 51.70 10946.80 10819.80 0.99 bln   1609/1446	
NASDAQ   2198.66 + 25.09  2210.45  2165.37 1.88 bln   2142/1712
S&P 100   656.36 -  1.10   659.19   650.90   totals   3751/3158
S&P 500  1261.14 -  2.37  1267.01  1253.00           54.3%/45.7%
RUS 2000  491.77 +  2.13   492.47   488.16 
DJ TRANS 2865.54 + 14.90  2867.68  2837.50 
VIX        27.54 -  0.57    28.54    27.01
Put/Call Ratio      0.64

10995, close to 11000 but not quite! Many short sellers jumped the gun on Monday and tried to be the first on their block to short the rally over 11000. The rush to beat the crowd short circuited the Dow and it rolled over as expected but just a little early. The Nasdaq continues to bump its head on 2200 and closed just slightly under once again at 2198. The main focus for today was the CSCO earnings announced after the bell.

Hurry up and wait. That was the sentiment on the Nasdaq as everyone held their breath waiting for the CSCO earnings. On the surface they managed to beat the street with a +.03 gain compared with the two cent estimate. Last year their earnings for the same period were .13 cents. The reason they beat the street by a penny was simply a smaller write down of obsolete equipment than previously expected. CSCO CEO, John Chambers, said "We are now in a valley much deeper than any of us anticipated and we believe the basic issues are macro economic and capital spending related." The conference call was not positive and CSCO rolled over in after hours trading after closing up +1.10. AMCC which is a big supplier to CSCO rallied on the announcement but also fell back to $27.50 in after hours after cautious statements by CSCO. The Nasdaq futures spiked to the upside initially but as the call progressed they began to drop and were down over -32 an hour after the close. Near the end of the call they did say they saw a possible bottom forming over the next couple quarters. Way to hedge your bets John!

There were several earnings warnings today with National Semi being the worst. NSM announced after the bell that it will post a proforma net loss of -.04 to breakeven, with revenue of approximately $390-$400 million. They said they were cutting -1,100 jobs and expected sales to fall more than -16% sequentially. They said market conditions were continuing to affect orders and shipments. They said lower than expected orders, high inventory and changes in the cell phone market were impacting the visibility going forward. Basically it was a "things are not getting any better any time soon" warning. NSM fell -2 in after hours.

Maxim Integrated Products, Nasdaq:MXIM, also announced earnings that were in line with estimates but said bookings going forward were off drastically. Bookings for their next quarter were only $205 million, well below the $332 million for last quarter. In warning they said the steepness of the order drop off was not expected.

Economic reports today continued to suggest that things are still not recovering. The Richmond Fed Manufacturing Survey came in at -25.0 and the shipments index at the lowest reading for the eight year history of the survey. This shows that manufacturing in the Richmond region is still contracting at a significant pace. New orders and backlog order indexes were also very weak and showed that future improvements may be slow to development. Prices received for products are also falling and calling into question the profitability of companies caught in this downturn.

Productivity fell -0.1% in the first quarter and hourly wages rose +5.2%. Unit labor costs also rose +5.2% and was an increase in the previous pace. The productivity report today showed that there are inflation pressures creeping back into the economy even when new growth is stagnant. The drop in labor productivity was the first time since 1995. Labor productivity has been seen by the Fed as the key factor in keeping inflation under control. Wages can rise but as long as output is rising at a faster rate everybody is happy. Once productivity starts falling any rise in wages will impact the cost of those products causing a rise in prices. Reports remaining this week include the Import- Export Prices on Thursday and PPI and Retail Sales on Friday.

Weakness in the financial stocks were a drag on the Dow today after JP Morgan Chase was downgraded to a sell and American Express was downgraded to a neutral. Legg Mason fell -2.63 after saying quarterly profits fell -26% as falling stock markets cut into its brokerage operations.

One of the positive developments today was an announcement that Ciena won a $150 million contract from Tycom Ltd, a supplier of fiber optic cable networks. CIEN was up over +6 on the news. The contract covered the purchase of Ciena's MultiWave CoreDirector and CoreStream products which will be used in a network to connect all six inhabited continents.

Just can't get a break. That is what investors are feeling after seeing the Dow roll over only five points away from 11000 on Monday. The follow on today was even weaker with a solid top again at 10900. The CSCO earnings were widely credited with putting a halt to trading on the Dow as well as the Nasdaq. Nobody wanted to be caught holding stocks if CSCO warned of a significant further deterioration in the economy.

The Nasdaq was still treading water just under 2200 while waiting to be rescued by a positive CSCO conference call. Sorry, it did not happen. The almost two hour conference call was peppered with things like "no visibility" and "significant challenges" and it was not until the end of the call before they closed on an up note. Futures only recovered slightly and all the stocks that do business with CSCO were trending down in after hours. On CNBC three hours after the close, Chambers dodged questions but tried to be positive in spite of the third degree. His performance may have blunted the negative feelings about Cisco's outlook going forward. There were over 171 million shares trading in CSCO on Tuesday.

For Wednesday we will be held captive to investor sentiment on the CSCO announcement. The Dow is still struggling just to hold the high ground and the Nasdaq is having the same problem with 2200. As I stated on Sunday, the closer we get to the FOMC meeting next Tuesday the greater the chance of a sell off. The rate cut is already priced in and any inflation signs like we received today could slow their pace. Since we have not broken 11000 yet, each day makes it more unlikely that it will happen before the meeting. With the summer doldrums rapidly approaching investors may be saying wait instead of buy. The volume on Tuesday would confirm that with the NYSE failing to break one billion and the Nasdaq trading only 1.8 billion. Considering almost 10% of that was CSCO the real volume was VERY light. No conviction and more earnings warnings could be spelling trouble going forward. However, every day we spend at 10900 and 2200 builds support for a stronger breakout when/if it finally occurs. This is one of those "inflection points" in the market. I think we should treat it as a "reflection" point instead and review why we would want to be buyers today. There is no clear direction. There is a period of traditional weakness in front of us. The economy is showing the possibility of stagflation for at least two more quarters. The momentum from last week has disappeared. Why buy? There may not be any overriding reason to sell but is there a real reason to buy? I don't see one yet. Should the Dow close over 11000 on strong volume or the Nasdaq close over 2250 on strong volume then I would be a believer. Until then I suggest caution.

Beginning today this commentary along with the intraday updates and play updates will be available by phone at 900-378-PICK. If you are away from your computer please feel free to call our hotline to keep in touch with the market and have the information to make those crucial, time critical, investment decisions. Since 900 numbers cannot be dialed from cell phones we will have an 800 number in place next week as well.

Enter passively, exit aggressively!

Jim Brown

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