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Marconi Sparks Market Fizzle!

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         7-5-2001        High      Low     Volume Advance/Decline
DJIA    10478.05 - 91.25 10567.64 10461.14  .93 bln   1377/1690	
NASDAQ   2079.91 - 60.69  2130.96  2079.83 1.32 bln   1339/2320
S&P 100   628.65 -  9.99   638.55   628.51   totals   2716/4010
S&P 500  1219.32 - 15.21  1234.45  1219.15             
RUS 2000  492.34 -  4.10   496.83   492.14 
DJ TRANS 2811.68 +  3.46  2820.86  2789.71 
VIX        22.72 +  1.77    23.22    22.12 
Put/Call Ratio      0.66

Just when you thought the earnings warnings were about over another tech/networking/communications company bares all. Marconi (MONI) fell -53% after saying sales would drop by at least -15% and it would cut 4000 jobs. Profits could be down by -50% but the critical point at issue was the accelerating decline of the European business climate. U.S. companies that had been struggling to break free of our own economic problems took another hit in their stock prices.

Alacatel, Cisco, Nokia, Ciena, Juniper all headed lower after the Marconi warning. U.S. companies reap between 20-40% of their income from European/Asian sales. The Nasdaq never had a chance with the networking, communications and fiber sectors all DOA. Chips also headed lower since slow sales of those communications devices would also suggest that chips to make those devices would also be slow. There was also a report out of Lehman Brothers on Thursday saying that they expect a -30% decline in semiconductors this year after a -88% increase last year. This could be the worst year in the last 20 years for semiconductors in their opinion. ABN Amro also said they expect revenue to decline more than -25% in 2001. PMCS, BRCM, AMCC, AMAT, NVLS, KLAC and CREE were all lower.

Another foreign chip equipment maker, ASML Holdings, (ASML) warned that they would experience a sharp drop in profits due to weaker global sales. The main bullet point from ASML was a comment that a "fourth quarter economic recovery was increasingly unlikely." Just what tech stock buyers needed to hear! ASML is the worlds largest maker of scanners and steppers which map out circuitry on silicon wafers. They should know if semiconductors are still sick or getting well.

AMD (Another Microchip Disaster) warned after the close and it may be a huge problem. Analyst estimates were for 27 cents and the new guidance by AMD is in the 3-5 cent range. Ouch! They said sales for the quarter fell -17% and far more than their previous -10% warning. Demand for flash memory continues to be much weaker than expected. Price pressure in the processor market depressed average selling prices even though they achieved record unit sales of the Athlon chips. They said aggressive pricing by Intel was hurting sales and profits. No kidding! Can you spell "price war?" INTC dropped -$2 and AMD fell to $24 in after hours. Is Intel going to be next to warn or miss earnings?

EMC also warned after the close that revenue would fall about -20% to $2 billion and profits of 4-6 cents compared to 12 cents expected by analysts. They said the slowdown which began in the U.S. has now spread to virtually all international geographies which were further impacted by the strong dollar. Gross margins were expected to fall to the 40% range due to lower sales volume and pricing pressures. EMC fell to $25 in after hours after a close of near $30.

BMCS warned that earnings would drop as much as -5% from the low end of previous estimates. Customers were canceling or postponing especially large orders. PMTC warned that earnings would drop to between 2 and 4 cents and analyst estimates had been for 8 cents. PMTC lost -2.25 to $10. "While we see no indication that the current economic conditions are likely to improve in the foreseeable future, we continue to believe, based on evidence from customers and industry experts, that PMTC is well-positioned for growth when the economy recovers," said President and CEO Richard Harrison in a company statement. "No indication of improvement in foreseeable future?" Why not just say "techs are dead, bail out now?"

Sony (SNE) got hit for almost a -$4 drop to $59.40 after news that they would recall 560,000 cell phones for battery problems. AAPL continued to fall slightly after saying they were going to stop production on the new G4 cube computer which had been hyped so much recently. Apparently consumers were not so excited about a computer that looked like a box of Kleenex. Dell took another hit today after Prudential said the computer price war was getting worse and pricing pressure in notebooks and desktops was increasing. Dell does a majority of their business in these areas but also has a strong server business to help offset consumer weakness. Still Dell lost ground and closed near the low of the day.

Just so you don't think techs were the only disaster today, a retail company, Federated Dept Stores, (Nyse:FD), dropped their own bomb. They cited continued weak sales in their department store segment as the reason for the earnings drop. They are now expecting as low as 40 cents when analyst estimates were in the 65 cent range. They are expecting same store sales for the fall season to decline and said they would continue to mark down and discount existing inventory in order to start the fall in good shape. Analysts have been saying that the retail sector has been slashing prices to dump inventory and maintain volume but the deep discounting would hurt profits. The FD warning today is evidence of this. You can sell anything if you sell it cheap enough but it is hard to make a profit if you sell below cost. FD is generally accepted to be the best run retail franchise and analysts fear their problems will be magnified in the lesser quality stores.

There was some good news hidden in the flood of warnings. WCOM raised their estimates by a percent or two and said they would buy back $670 million in debt. Bear Stearns said today that AMZN may be ahead of the street estimates. They said they expect Amazon to post smaller losses and increased revenue and come in "well ahead " of street estimates. User traffic analysis apparently showed them that revenue would top $700 million or about +$25 million ahead of estimates. They raised their rating to attractive with a $30 price target.

The economic news was not exciting with jobless claims moving up +7000 to 399,000 again and stopping a three week drop. Now that the holiday is over we could expect even more claims next week. Not a sign of economic recovery. The June NAPM survey did jump slightly to 52.1 which indicates a slight recovery in non-manufacturing services. Tomorrow's nonfarm payroll report will be crucial to market direction. Should no sign of recovery be seen there is likely to be nothing to pull institutional investors off the sidelines.

Until today there was an increasing amount of sentiment that the economic news could not get any worse. It remains to be seen if the same feeling will continue after the warnings tonight. The market internals today were terrible on very low volume. The Nasdaq posted the lowest volume day of the year at 1.3 billion and decliners beat advancers almost 2:1. The Dow only managed 931 million but decliners only beat advancers by 313. I warned on Tuesday that the low volume and the lagging warnings could jerk investors around Thr/Fri and that certainly came true. Waiting until Monday as suggested is looking like a better plan as the minutes and warnings tick by. There is a growing fear that the "summer rally" writers have been predicting actually came in April and left in May and may not return. Stocks are cheap but can get cheaper and as traders we can wait patiently for that next tidbit of information that will cause the next bounce. The major indexes are nearing support at 2000 and 10400-10450 and would be ripe for an oversold bounce at those levels. Caution is the watch word because although warnings may be drawing to a close, earnings misses are sure to follow. Friday would be a great opportunity for those dip buyers to rush to the rescue thinking it can't get any worse. It has happened before as with the last CSCO warning. Either way Friday should be really exciting!

Enter passively, exit aggressively!

Jim Brown

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