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Market Wrap

Oracle Giveth, Merrill Taketh Away!

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        06-26-2001        High      Low     Volume Advance/Decline
DJIA    10473.28 - 31.74 10534.21 10394.72 1.19 bln   1780/1294	
NASDAQ   2064.43 + 13.75  2068.15  2017.34 1.65 bln   2043/1697
S&P 100   629.44 -  2.49   632.03   623.85   totals   3823/2991
S&P 500  1216.68 -  1.84  1220.70  1204.64             
RUS 2000  490.56 +  6.63   490.82   482.19 
DJ TRANS 2645.05 -  2.82  2663.74  2606.26 
VIX        23.35 +   .10    24.50    23.33 
Put/Call Ratio      0.66

Tech warnings are bleeding into other sectors as evidenced by the huge Merrill Lynch warning this morning. The tech wreck has caused a market wreck which knocked as much as -37% off Merrill's profits. Merrill said they had already cut -3300 jobs as a result of lower retail trades and losses in the stock market. We are all aware of the tech damage on Wall Street but International Paper also said they were laying off -3000 of its non-manufacturing employees to cut costs in an effort to cope with falling demand. These were just two of the market movers at the open and the Dow dropped over -100 points on the news.

It looked very ugly about noon with the Dow down over -100 points and threatening to fall below 10400. The financials were in the tank after the Merrill warning. Techs were still under pressure even though some were trying to buck the trend. The positive economic reports had Fed guessers worried that we would only see a -25 point cut and the talking heads on TV were doing everything they could to put a positive spin on the news. No, it is not October but the market has many people thinking they went to sleep and woke up several months later. The markets were looking for any excuse for an oversold bounce. From 10759 on June 21st to the 10394 low around noon, there was about -360 points of pain that investors were looking to forget.

The bounce came on several fronts at once. There was a rumor that the GE/HON deal might get new life and GE spiked to the high of the day before the rumor was killed. Microsoft gained almost +2.50 between noon and 2:PM on rumors that the appeals court was going to rule in favor of Microsoft. Oracle CEO, Larry Ellison, went public with news that some big customer orders were starting to come through and the current quarter would be much stronger than last quarter. ORCL went vertical on the news recovering all its loss for the day and closing fractionally positive. Traders were grasping at any straw that appeared to justify jumping into the market before the Fed announcement on Wednesday.

The coming Fed decision is about as hotly argued as the presidential election last November. The positive economic reports all but killed any hopes of a -50 point cut in many minds. The Durable Goods report showed that orders for Durable Goods rose +2.9% which was much greater than the 0.5% analysts expected. With the good DG news we also saw another upturn in Consumer Confidence which came in at 117.9 for June after a 116.1 in May. The Fed has said they watch that indicator closely. Also causing trouble for Fed watchers was the increase in New Home Sales of +0.8% which shows the lower interest rates are impacting consumer buying. The triple whammy of three economically positive reports has veteran Fed watchers thinking the Fed will cut but only by -25 points. According to most market watchers this will not be met with enthusiasm by investors. It would signal the end of an aggressive Fed and investors would have to depend on earnings for stock direction and we all know how the earnings are going. The decision will be Wednesday afternoon and which ever direction they go the markets are likely to be highly volatile.

The Merrill warning this morning was not the only high profile disaster. Goldman Sachs cut ratings on 39 tech stocks saying there were only weak signs of a possible recovery and when one actually appears it will only be moderate in their opinion. They said yearly estimates had to come down because of sales in the first two quarters as well as growing weakness in Asia and Europe.

Lehman Brothers chip analyst Dan Niles said he was not changing his estimates on Intel at this time "BUT IF HE WAS GOING TO" he would cut earnings estimates due to inventory oversupply, lack of pricing power, lack of demand, etc, etc, etc. So, was this a "soft" warning to keep Lehman from losing any Intel business or is he just hedging his bets?

After the barrage of chip warnings today Niles is probably wishing he had made a high profile downgrade announcement to capture headlines before the flood washed his soft comments away. XLNX, a maker of programmable logic chips, said revenue for the quarter would be -32% less than the prior quarter, a much larger decline than originally forecast. The company said "turns", where orders are booked and delivered in the same quarter, had fallen substantially. They said the drops in revenues and orders were worse than expected. Also margins were shrinking in the current environment. Photronics cut its earnings estimates stating the current environment is one of the most severe the company has experienced during its 32-year history. They now expect to earn as little as a penny a share and analysts had expected about twenty-three cents. PRI Automation warned that revenue would be -20% lower than expected. They said "the unprecedented industry slowdown is affecting all of our business segments." VTSS warned that it was cutting estimates for the quarter after seeing "no improvement in visibility at a majority of our customers" and remaining high levels of inventories. All of this came on the back of the AMCC warning from yesterday. There were probably more chip related warnings today but you get the point, I hope!

The chip sector is commonly referred to as "the" leading indicator for tech stocks and the Nasdaq in general. If this is the case then what should we expect for earnings and stock prices this quarter? Our hope is that investors are feeling that all this bad news is already priced in and now is the time to buy. The failure of the Nasdaq to break down the last three days while the Dow was tanking is evidence of this hope.

Good news after the close that could help fuel this concept was the PALM earnings. They beat lowered estimates for a loss of nineteen cents with only a sixteen cent loss and said they expect to return to profitability by 2Q 2002. That was about as optimistic as we can hope for today. 3Com, COMS, also announced a loss of -.67 with a drop in revenues of -38%. They said they saw no industry upturn anytime soon. A duel of competing announcements. Which one will investors hang their hat on tomorrow?

With the unofficial recession in full bloom it is no longer just tech companies with problems. One of the most stable companies hidden in the background is Danaher, the maker of Craftsman tools. They warned that earnings for the second half of 2001 may fall short. "The accelerated rate of decline in the U.S. coupled with added slowness in Europe and Asia, has made the revenue picture more challenging in recent weeks." The "possible" earnings shortfall was only a couple cents but the keywords in the warning were "accelerating in recent weeks" (read that "no recovery in sight") and "slowness in Europe and Asia", (read that as "recession spreading globally"). I have no axe to grind on DHR. I only mention this to make a point. Their products are one of the lowest levels of consumer spending, tools. If mechanics, handymen and home owners are not buying tools, a staple item, then what chance do computers, Digital TVs and high dollar products have in a "challenging environment?"

Why am I writing all this bearish news? Because this is why I think the Fed will cut -50 points on Wednesday. I could be wrong, it is just my opinion and I have a 50/50 chance but don't you think the Fed has a little more info from which to make their decision than we do? Don't you think the Fed is probably looking at underlying details that are painting more of a dismal picture? We, investors, tend to look at only one indicator. The markets. We tend to color our perception of reality by whether the markets are up or down. Alice Rivlin said on CNBC tonight that the Fed does not care about the markets. Bull! Why do you think the Consumer Confidence was up again? It is because the Dow was bumping 11000 until a couple weeks ago. The Nasdaq was bumping 2250 three weeks ago and the term "summer rally" was in every stock broadcast. Today's market feelings are much different. The Fed needs the consumer to feel bullish and they can't do it with daily -100 point drops.

Who knows? They may be looking at a briefcase of positive numbers and they know the recovery is already underway. Unfortunately they have not told the chip sector yet and that is the sector that builds the basic parts that all retail products are built around. No chips, no computers, cell phones, TV, toasters, hair dryers, etc. A recovery cannot be underway if chips are not selling. If we are not going to get another -50 point cut on Wednesday then we could be in deep water. The good economic numbers on Tuesday could disappear just as quickly if the Fed quit too soon. They need another big cut for insurance. They can take it back later if it was too much but it will be easier to swallow at Nasdaq 3000 than 2000. Many analysts feel that this is the last cut and only 25 points could send the wrong message to the markets just in front of the summer doldrums.

I will quit on a positive note. Although the volume was pretty light today advances beat decliners on BOTH the NYSE and Nasdaq by about 400 issues each. Considering the Dow was down over -100 at noon and -32 at days end, the broader market was not as depressed. The Russell-2000 actually gained +6.63 when the S&P-100, 500, Dow and transports were down. Could there still be a positive undercurrent here? Contrary to public opinion all tech stocks are not declining. QLGC added +2.79 and appears ready to breakout over $60. Yes, a tech stock at $60! In the Ripley's Believe It Or Not category, there is still an Internet stock at $70, EBAY, which gave risk tolerant investors an entry point today. It is all a matter of perception. If you own LU, WCOM, CMGI or EXDS you are in the worst bear market you can remember. Or you could be playing leaders like QLGC and EBAY for a profit. Tech stocks are not dead, but DO NOT TELL GREENSPAN BEFORE 2:15 ON WEDNESDAY!

Enter passively, exit aggressively!

Jim Brown

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