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Market Wrap

Carly Hugs Michael!

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	  9-04-2001          High     Low   Volume Advance/Decline
DJIA     9997.49 + 47.74 10182.38 9894.88  1.18 bln 1626/1458 
NASDAQ   1770.78 - 34.65  1836.19 1770.76  1.50 bln 1417/2225
S&P 100   577.75 +   .64   590.71  574.34    Totals 3043/3693
S&P 500  1132.94 -   .64  1155.40 1129.06
RUS 2000  466.96 -  1.60   472.81  466.91
DJ TRANS 2835.65 + 22.24  2865.83 2807.76
VIX        28.55 +   .70    29.83   26.84
VXN        57.15 +  4.29    57.15   54.96
TRIN        1.09
Put/Call Ratio 0.83

The big news of the day was of course the merger of Hewlett Packard and Compaq. The two companies agreed to merge in a $25 billion stock deal that will create an even bigger PC giant for Dell to battle. Carly Fiorina and Michael Capellas, CEO of Compaq, hugged for the cameras and beamed smiles for all their shareholders. However the actual results were much different than they wanted. HWP lost -4.21 to $19 and CPQ lost -1.27 to $11.13. Nobody seemed to like this deal, most of all the shareholders.

The HWP/CPQ deal may prove to be a bonanza for another Michael, Michael Dell. Since Compaq is still having indegestion over the Digital Equipment acquisition last year, it is entirely possible that the CPQ/HWP deal will still be undone a year from now. Getting past the regulators both here and in Europe will likely be a challenge. Dell was up almost a dollar on the news. Lexmark however lost almost $5 on the news with investors expecting Compaq to now use HWP printers instead of Lexmark printers. Does the merger of the two giants mean the price war is over? Not hardly but the bigger infrastructure of the combined companies could actually add to the costs of producing their computers and give Dell and Gateway an even bigger target to aim at. The structure of the new company has Carly as Chairman and Michael as President. The Compaq brand would eventually go away but not before giving SunMicro one more dose of hearburn. The combined companies would impact the server side area where SUNW is already struggling to squeak out a profit. The server sale cycle is more suited to the big business, multi pressure point, large company attack where Dell and Gateway are specializing on the one on one individual consumer/small business sale. Some analysts are even skeptical that the deal will even close giving it only a 50/50 chance.

The HWP/CPQ news was not a positive factor to the Dow's +225 point gain at the open. The NAPM numbers were credited with that spike. The NAPM number at 47.9 was much higher than the 43.9 that analysts expected. This was the thirteenth month of decline but a significant jump over the low 40 numbers from the last seven months. The most encouraging portion of the report was the new orders component which jumped to 53.1 from 46.3 in July. This means there may actually be a bottom forming in the manufacturing sector. The prices index fell to 33.9% in August which is the lowest since 1998. There is no fear of inflation pressure for the Fed. The market soared +225 points on the news but came to a dead stop at 10180. After failing to break that ceiling three times the bulls called an end to the rally and took their chips off the table.

The severity of the sell off from the highs of the day were credited to several things. Dan Niles of Lehman Brothers, cut estimates on Intel again in advance of their Thursday analyst update saying he felt they would guide analysts lower. One of the reasons was the news from the semiconductor assn which said sales of chips in July were down -37% and the lowest level since 1998. They showed a continued weakness in computer chips but a slight uptick in communication chips. Several analysts were now calling for the rebound to not occur before 2Q 2002.

The uptick in communication chips is not helping Ericsson which warned that the global slowdown was worse than they previously expected and would require harsher steps than they previously announced in their restructuring. They said the high speed phones had been selling slower than expected. They did say they expected U.S. sales to pick up in the last quarter. (And what crystal ball are they looking into?)

Sanmina, a contract manufacturer, said that the current quarter will fall short of previously reduced expectations. The ongoing slowdown in the capital equipment spending environment will continue to hamper our performance. The warning also hit JBL, SCI, SLR and CLS with serious drops. Ironically SCI is poised to gain more business should the HWP/CPQ merger come to pass.

Financial markets were hit again after Providian warned that it was cutting earnings estimates and long term growth rates. The stock lost -$8.70 or -22% to $30.36 and the other two major off prime card lenders fell as well. COF lost -2.85 and KRB -$2.00. These companies specialize in secured cards and high interest rate cards to customers with previous credit problems. Soaring unemployment and a weak job market could cause loan losses for these lenders.

The economic calendar is still loaded with Productivity on Wednesday and Nonfarm payrolls on Friday. Those along with the possible Intel warning on Thursday should keep a lid on the markets this week. The Ericsson and Sanmina warnings from today as well as the SIA chip sales news continued to paint the picture that things are not yet getting better and more warnings are sure to be lurking in our future.

The severity of the market drop from the days highs is a very bad omen for Wednesday. The Nasdaq closed at the exact low of the day (-35) after being up +35 in early afternoon. The Dow was even more dramatic with a 290 point range and almost a -200 point drop from the days high. The drop was so steep that the VIX spiked to near 29 at the close and the VXN hit a five week high of 57.15. Suddenly there is real fear starting to appear in the markets and we still have September and October ahead of us!

Tomorrow conventional wisdom would have us expecting a weak open. SUNW will present at a tech conference at 8:AM in the morning and will be only one of dozens to present this week and next in the flurry of tech and biotech conferences. What SUNW says, if anything, about the CPQ/HWP merger as well as any further news on their recent warning will color the Nasdaq for Wednesday. This looks like a real buying opportunity shaping up for the buy and hold stock community but it could still be several weeks before we get the bottom signal. Keep those put plays coming! The rally today gave us some excellent exit points for those counting on a post Labor Day rally and some great entry points for those playing puts. While most readers may be frustrated by the market direction there is still a lot of money to be made by trading the trend!

Definitely, enter passively, exit aggressively!

Jim Brown

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