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Market Wrap

Where Is That Summer Love?

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        06-12-2001        High      Low     Volume Advance/Decline
DJIA    10948.38 + 26.29 10982.14 10788.58 1.13 bln   1572/1519	
NASDAQ   2169.95 -   .83  2184.20  2105.26 1.69 bln   1727/2032
S&P 100   647.69 +   .96   650.58   635.87   totals   3299/3551
S&P 500  1255.94 +  1.46  1261.00  1235.75             
RUS 2000  506.90 +   .00   507.53   500.37 
DJ TRANS 2794.04 - 35.83  2830.06  2778.95 
VIX        22.98 +   .24    24.65    22.77
Put/Call Ratio      0.87

The doldrums of summer, weighted down by several major earnings warnings, erased any vestiges of summer love by buyers at the market open on Tuesday. However, bulls are quick to forgive and forget and they promptly bought the dip and the Dow staged a miraculous recovery. The Nasdaq recovery was not as dramatic as the Dow's but a close +64 points off the lows was encouraging.

The biggest cloud over the markets on Tuesday was the big Nokia profit warning. Nokia said they were revising their 2Q estimates down to $.12-$.14 cents. Analysts estimates were in the $.18 cent range. Nokia receives 75% of its revenues from cell phone sales and they see that business falling to only a +10% growth rate going forward. Analysts who reviewed the warning said it is likely to get worse still before it gets better. There is no improvement seen in the near term. The bottom line is Nokia is not selling as many cell phones as it is making and the free phone giveaway by every agent is not finding many takers. The slowing cell phone revolution is putting pressure on more than just manufacturers. This is showing up in resellers, providers, switches, routers, etc. All the components of the networks worldwide are slowing as well. The market realizes this and that is why the warning hit us so hard.

Biotechs also took a huge hit with the Affymetrix warning. The stock lost almost -30% after saying that it had seen a large drop in sales of its chips used in the drug discovery process. It seems large drug companies are delaying orders. Not just PC companies are seeing corporate spending being curtailed due to the economic weakness. AFFX is not the first company to see a pullback in biotech chips. ABI and MDCC also warned recently that demand was slowing. Many analysts see investments in these companies as a waste of time and money over the next several quarters until the sector shows new life.

Dell Computer actually gained ground after saying at a tech conference that they did not see any recovery until the fourth quarter or later. The reason for the gain was an upgrade from Morgan Stanley. The COO of Dell, Kevin Rollins, said they had giving the street a down-tick in estimates of -3% to -5% and they were still confident in that guidance. He said Dell was leading the current price war and stood to gain market share from the experience. They are hanging their hat on a replacement cycle for the Y2K computers that were purchased in 1999. They are expecting them to be coming to the end of their performance cycle and customers are going to be looking at 1000 MHZ models this Christmas. Sounds like wishful thinking to me but it worked for them today. The MS upgrade was from neutral to outperform and resulted in an $.84 gain in the stock. When was the last time an "outperform" was worth anything in share price? MS thinks that Dell will break into the networking equipment business and ink some reseller agreements with some leading players.

Avaya warned of continued weakness and announced layoffs of 3000 jobs. The recent Lucent spin-off is following in daddy's footsteps. S&P said they did not see a return in profitability for Lucent until possibly late 2002 and cut their bonds to junk status. Analysts now fear they will not be able to get more than $4 billion for their fiber business and some estimates had been as high as $7 billion. Welcome to the summer of 2001!

CMGI also reported that it lost almost $1 billion in the last quarter. Ouch! Estimates had been for a loss of -$2.14 and the actual number came in at -$2.80. They said they expected revenue to continue to decline and be only $290 million. They said they were slashing costs to preserve cash. They estimate that they have 12 quarters of cash left which is an improvement over the previously reported 9 quarters. They are shutting down AdForce to save money and said Internet advertising could continue to suffer for 2-3 years. Their only highlight is UBID.com which saw a +16% increase in visitors.

The Dow screeched to a halt exactly on 10800 which has been support since early May. Had we broken that level there would have been serious consequences. The Nasdaq low of 2105 was encouraging and the third in a sequence of higher lows from mid-May. I think the rebound today was bullish but before we start yelling "summer rally" we should also remember that we have been selling off for several days and it is natural that we should bounce off support with an oversold rally. The true test will be to see if we can maintain this rally through the end of the week.

For a rally that managed to bounce the Dow +159 points off its low the volume was wimpy at only 1.1 billion shares. The Nasdaq managed only 1.7 billion or only about 70% of what you would expect for a dip buying recovery. This means that there is no conviction by buyers and with earnings warning season in full bloom, as evidenced by Nokia and AFFX today, investors are waiting on the sidelines for the next shoe to fall. Some are waiting for the whole closet to collapse before taking any new positions. The Dow came to rest just under recent resistance at 10977 and could struggle going forward. The Nasdaq is in the middle of its recent range and could easily move 70 points in either direction without any major effort. Moving farther than that in either direction would take a major sentiment change. Buyers are simply waiting between 2000-2100 and sellers are waiting at 2250 leaving no exciting possibilities for traders.

While I am positive about the bounce I am negative about the lack of conviction. We have nothing to power a rally and many chances for more warnings. Aggressive buyers could buy any dip back to 2100 and conservative buyers should wait for a breakout over 2250. Waiting is about as much fun as watching grass grow but buying just before a dip ranks right up there with a root canal.

Enter passively, exit aggressively!

Jim Brown

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