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Cisco CEO Talking Again!

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        06-19-2001        High      Low     Volume Advance/Decline
DJIA    10596.67 - 48.71 10740.79 10563.66 1.17 bln   1500/1543	
NASDAQ   1992.66 +  4.03  2057.19  1978.25 1.97 bln   1589/2159
S&P 100   626.66 +  2.19   634.40   624.18   totals   3089/3702
S&P 500  1212.58 +  4.15  1226.11  1207.71             
RUS 2000  489.73 -  1.80   495.63   488.71 
DJ TRANS 2660.58 - 36.84  2703.60  2654.54 
VIX        24.92 -   .91    25.71    24.63 
Put/Call Ratio      0.73

This summer is shaping up to be anything but dull. Earnings warnings promise to be more plentiful than watermelon seeds and more dangerous than fireworks and dry grass. Cisco CEO John Chambers lit the fuse on his earnings bomb today with comments that he is still optimistic about the business but he did not want to comment on current quarter earnings. The last time he tried to talk down analysts estimates the story ended with a serious earnings warning. With TLAB warning after the bell today and JNPR and NT already on the books as early confessors, the odds are good CSCO will disappoint again.

The biggest warning today was TLAB which is now looking for a breakeven quarter compared to analyst estimates of $.29. This is a huge drop and they are citing "dramatic changes" in the telecom landscape as the cause for the current problems. They refused to comment on any future quarters due to zero visibility. This was just another in a long line of warnings in this sector which does not give investors a warm fuzzy feeling that things have bottomed. There are conflicting reports that Europe and Asia is also weakening and that has been the plug in the dike in the past.

JBL also warned today following in the footsteps of SLR on Monday. JBL said they were now expecting $.13 - $.15 instead of the nineteen cents expected by analysts. They cited no guidance past this quarter due to a continued deterioration in the macro business. The conference call was very negative and produced no hope for quick improvement.

AMR also warned today claiming that slowing business traffic and increased oil prices would impact their quarter and their year. The transportation sector as evidenced by the Dow Jones Transportation Index has fallen off a cliff. After breaking 3000 on May-22nd it has been accelerating to the downside. It closed today at 2659. After the bell UAL also warned that they expect a decline in second-quarter earnings and a double digit drop in unit revenues. They cited the worsening economic slowdown, higher labor and fuel costs.

Semiconductors are under pressure again as more and more analysts point to pricing pressure from an increasing buildup of inventory in all areas. With rumors that Intel is stuffing the channel at the expense of AMD it is expected that both will have trouble making their numbers. The expected PC rebound for the third quarter has yet to appear and retailer inventory is stacking up. The price war currently under way for components is shrinking margins and squeezing revenues. INTC at $26 is considered by some to be still overvalued based on the outlook for the next four quarters. AMD at $25 has already fallen back to April levels and the "PC bounce" gains from May have disappeared.

Teradyne, a supplier of testing equipment used in the manufacture of semiconductors, said they would post their first quarterly loss since 1991 following the sharp drop in demand by chip makers. They now expect a loss of up to ten cents per share instead of the small gain of one to two cents several analysts expected. They claim business has deteriorated in every segment of its product line. They claim that their customers are facing an unprecedented level of uncertainty in demand for all chips. Come on, now what was the real problem?

There was a bright side to the market today. It was the Oracle outlook from last night. The Ellison comment that "this quarter may have been the bottom" was good enough to bounce both the Dow and Nasdaq into positive territory at the open but as the facts appeared the sell off began again. Oracle was so desperate to make their reduced estimates that one major customer got a 90% discount and last minute discounts of -50% to -60% were common. I guess you can sell anything if you give it away and the morning software bloom wilted as the day wore on. Still it was good enough to power the Nasdaq into positive territory at the close, breaking a seven session losing streak. It was only "technically" a broken streak since the gain was only four points but we will take anything we can get.

The Dow gave up almost a 100 point gain to close down -48 as it became increasingly apparent that the GE/HON deal was dead. The Wall Street Journal is reporting after the close that the final blow from the European regulators will be dealt tomorrow. That will depress HON and unless GE can make up the slack the Dow may suffer as a result. On the plus side there is a move underway in the Bush administration to settle the tobacco suit and that could help Phillip Morris on Wednesday. MO could also help offset the drop in HON.

With the TLAB warning and the ripple down from that on Wednesday the Nasdaq may come under pressure once again. It is currently hanging on by a thread at the 2000 level and should this fail we could see another round of drops as further earnings warnings appear.

I just spoke with my staff this week about trying to find the bright side of every market day and present that in the market commentaries. You would have to look real hard to see any bright points today. A failed rally, warnings by the minute, gloom and doom everywhere. Surprise! That may be the bright side. When nobody wants stocks that is the time to buy. The VIX is neutral at 25 and the advance/decline ratios were only barely negative. There is a positive undercurrent but you must look really hard to find it. We may not be at the bottom yet but we may be close. There is support here at 2000 (which will be tested at the open tomorrow) and Dow support is less than 100 points away at 10500. We are very oversold and the Arms Index is pointing to a near term buying opportunity. Remember, the Fed meets next week and the betting crowd is calling for another -50 basis point cut. We have not seen any pre-cut rally yet and when the talking heads start using the meeting in every paragraph for filler we could see some bottoming. I am not saying jump out of the bed in the morning and go long but I would start looking really hard for some possible plays just in case somebody warns positively and sets off a Fourth of July rally.

Enter passively, exit aggressively!

Jim Brown

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