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Market Wrap

Three Days And Counting!

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       8-7-2001          High      Low     Volume Advance/Decline
DJIA    10458.74 + 57.43 10472.72 10376.05  .97 bln   1702/1382	
NASDAQ   2027.79 -  6.47  2043.48  2013.75 1.28 bln   1741/1941
S&P 100   618.71 +  3.50   619.70   613.13   Totals   3443/3323
S&P 500  1204.40 +  3.92  1207.56  1195.64             
RUS 2000  480.33 -  0.63   481.19   477.49 
DJ TRANS 2921.46 + 13.19  2922.67  2898.05 
VIX        22.65 -  1.09    23.46    22.56 
Put/Call Ratio      0.81

The Nasdaq has posted three down days in a row on three of the lightest volume days of the year. The analyst war over the fate of semiconductors took center stage while investors waited for Cisco earnings. Microsoft called for help and Emulex can't get any. Just another trading day in August.

CS First Boston took exception with the Merrill Lynch chip upgrade last week and took revenge with a downgrade of twelve chip stocks to hold from buy. Analyst Charlie Galvin said valuations in the sector were expensive based on the recent chip rally. He felt that the current inventory glut would take all of 2002 to remedy and based on this chip stocks were 20-30% over valued. Some of the big names in his downgrade were AMAT, KLAC, NVLS, ASML, ALTR, AMCC, ATML, LSCC, MXIM. He did leave buy ratings on LRCX, BRKS, DPMI and FEIC. The downgrade put pressure on the Nasdaq as PC and storage stocks also fell on the news. Ahead of the Cisco earnings tech stocks were especially vulnerable to these negative comments. The Semiconductor Index had soared over +15% in the last two weeks and profit taking was due.

The big news that has kept a lid on the tech sector this week was of course the Cisco earnings after the close tonight. Cisco announced earnings inline with estimates of two cents and posted more than an 80% drop in earnings compared to last year. Sales in some areas are improving but others were still "challenging." After initially trading up on the announcement that inventory had dropped -$572 million, the conference call removed those gains. They said earnings would be flat to -5% down for next quarter, overseas sales could get worse before they got better and future quarterly growth could be in the low single digits. When pressed about their previous estimates of +30-50% annual growth, Chambers said it was still "possible" but that it would be a "stretch." Not what the market wanted to hear. CSCO and all the Cisco related suppliers promptly lost all the after hours gains and were heading down. One item that almost escaped notice was a cut in R&D spending of $77 million which would have brought CSCO in a penny light. Managing earnings John? In an interview he said they were "cautiously optimistic" about the future but were not ready to "call the bottom" yet. He said their enterprise business had leveled off and book to bill was greater than one. He said they gained significant market share over Lucent and Nortel and 3-5 points from Juniper. He said turns went from 3.9 to 4.6 and suppliers in their growth products could see an increase in orders soon. He emphasized that CSCO has $19 billion in cash and was in a much better position than his competitors.

Emulex announced earnings after the close and beat the street by a penny with eleven cents but warned that revenue would fall to $55 million for the next quarter compared with analyst's estimates of $62 million, and a penny light on earnings at nine cents. They warned that full year revenue would be $250 million compared to estimates of $279 million. The storage sector sold off on the news. Aspen Technology also announced earnings and then warned of a shortfall ahead. Serena Software also warned that earnings would fall.

Earnings in non-techs were not any better with a warning from Conseco that if business conditions remain on their present course they will have a $50 million short fall over the next two quarters. Zale Corp (ZLC), Carreker (CANI), Mandalay Resorts (MBG) were among others who confessed that they would miss. There were some pleasant surprises from companies that most investors have never heard of like AMRI, OPTN, RCCC, MET, HPT and ETM which announced decent earnings.

Microsoft decided to call for help to the Supreme Court. The equivalent of a "hail Mary" pass as the case was about to expire and return to the lower courts for a new penalty assessment, could put the decision on hold for another couple months. Should the Supreme Court decide to hear it then Microsoft would benefit from months or even years before the final decision. Should the court decide not to hear it then nothing changes. They seem to have nothing to lose and everything to gain. Their claim is that Judge Jackson was so biased that nothing he ruled on could be considered impartial. If MSFT is successful on getting the "illegal monopoly" label removed then the many class action suits by users could also be killed. Observers feel MSFT has little chance of getting the case heard by the Supremes but the move could allow them to release the XP version of Windows without judicial intervention.

The productivity crash predicted for Tuesday by Dresdner Bank failed to appear. Productivity gained +2.5% compared to estimates of only +1.5% and far in excess of any drop expected by Dresdner. This was definitely a positive report which means the steps manufacturers are taking to trim costs are making an impact. Increases in productivity come when more goods are produced by the same number of people or the same output is maintained by fewer workers. Layoffs historically increase productivity since the remaining workers tend to assume more duties without an increase in labor costs. This means the same goods are produced for less cost. This quarter output of goods grew slightly while hours worked fell -2.4%. This was the largest drop in hours in a quarter since the last recession in 1991. Dresdner had also forecast a revision in the first quarter estimate downward and instead it was actually revised upward to 0.1 from -1.2%. The crash prediction that muddied the markets on Friday is now history and it may be sometime before Dresdner repeats such a highly visible market call.

Wednesday is a toss up. Futures and QQQs are down slightly after the CSCO earnings and cautious guidance. The name of the game is rotation. There are no safe sectors. Every sector is taking its day in the spotlight and then getting hammered a day or two later. Biotechs, semiconductors, homebuilders, energy, networkers, drugs, basic materials, none are immune. Welcome to August trading. No clear direction and no clear winners. The prospects are more of the same. With volume at yearly lows the markets are trading in very narrow ranges. The VIX is nearing a monthly low but the put/call ratio is high at .81. Conflicting signals? Yes. The CSCO earnings doubtlessly influenced the volume of puts purchased. Even with the markets trading sideways the new highs on the Nasdaq beat new lows 98/66. The NYSE saw a much higher ratio of 140/24 and shows that investors are still nibbling at stocks even though the major averages don't show it. We are still in a basing mode and as long as 1950-2000 holds on the Nasdaq and 10400 holds on the Dow we should be okay. There is just no compelling reason to buy. Welcome to August!

Enter passively, exit aggressively!

Jim Brown

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