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Market Wrap

Intel Drops A Bunker Buster

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       1-15-2002           High     Low     Volume Advance/Decline
DJIA     9924.15 + 32.73  9986.21  9865.61  1.3 bln   1871/1280
NASDAQ   2000.91 + 10.17  2011.25  1977.28  1.6 bln   1853/1772
S&P 100   584.85 +  3.99   586.10   579.62   Totals   3724/3052
S&P 500  1146.19 +  7.78  1148.81  1136.88
RUS 2000  485.00 +  1.99   485.21   480.53
DJ TRANS 2686.08 + 23.65  2705.11  2655.37
VIX        24.42 -  0.64    25.47    24.17
VXN        48.02 -  1.49    49.59    47.94
TRIN        1.28
Put/Call Ratio       .77

Intel nuked the chip sector after the close with better than expected earnings but less than expected spending. Leading a busy announcement schedule after the close INTC stole the limelight from EBAY and JNPR with a market numbing announcement that they were cutting capital spending for 2002 to $5.5 billion from $7.3 billion. The 25% cut means significant problems for companies that make the equipment Intel uses to produce its chips. The $64 question on analyst's minds became, "if Intel is cutting this much then what about the other chip companies?" Investors were not waiting around after the close to find out and were dumping chip equipment stocks from their portfolios.

The chip giant posted stellar earnings and beat the previously lowered estimates of eleven cents with actual earnings of $.15. They beat the revenue numbers at $6.98 billion, gross margins and earnings per share. They claimed a bounce in PC sales in the fourth quarter helped them produce these numbers. This good news was all blown away by the flood of bad news. They do not see ANY signs of a recovery, sales for the first quarter are expected to be flat to down, and they are cutting their spending for new equipment by -25%. In an interview with Andy Bryant, the Intel CFO, he was asked if this was really a warning on guidance going forward. He said, "no, not really, we are pretty much going to be inline with our estimates." The keyword here is "our" estimates. Those estimates were for flat and possibly down for the first quarter with "no recovery in sight." This does not sound promising on the surface. Even though P4 processors were in tight supply they were unable to mount any price gains and average selling prices were flat to down. Dan Niles said last week to sell Intel into earnings because it was fully valued for this years projections. He confirmed this outlook after the conference call today.

The bunker buster bombshell that rocked the sector was the cut in capital expenditures for new chip equipment. Intel is the largest buyer of chip equipment and a 25% drop in their spending means serious drops in revenue for all the equipment makers. Andy Grove tried to spin the announcement saying that new technology and price cuts in equipment were going to enable Intel to get the same amount of equipment for the cheap price. Whether this was spin or truth evaded investors who were busy trying to execute orders to dump chip stocks in after hours. INTC lost -$1.00, KLAC -3.60, NVLS -2.45, AMAT -3.00. Contract manufacturers like TER, box makers including DELL, CPQ, HWP and SUNW, chip companies MU, RMBS, AMCC and PMCS all lost ground in after hours. Even software companies MSFT, PSFT, VRTS, SEBL and ORCL lost ground on the negative outlook.

The ripple effect from the Intel nuke managed to immpact almost every PC related stock except Juniper. JNPR announced earnings inline with estimates at a nickel but raised guidance slightly for the first half. The basically flat guidance was better than analysts had expected for the networker which had slashed its outlook for the fourth quarter due to falling telecom sales. JNPR stock rose in after hours trading as the only bright spot on the tech horizon. This enthusiasm may be short lived if other techs follow the Intel lead and guide flat to down.

Even EBAY, which reported record 4Q earnings from strong holiday sales, got killed in after hours trading after failing to raise guidance far enough for eager investors. Revenue was up +64% over the 4Q-2000 but even that was not enough. We have seen this over and over. When Dell was increasing earnings 50% every quarter the stock was soaring but everyone knew there would come a point when that type of exponential growth would quit. Otherwise everyone on the planet would have three PCs each by 2010. You can't grow 50% forever. EBAY has 48 million registered users meaning 1 out of 3 adults in America has an account on the auction site. Factoring out the over 65 crowd, which are not a strong auction segment, and the non-PC crowd of 40 million or so leaves very little room for growth in the U.S. EBAY dropped nearly $4 in after hours trading even though they raised guidance for the next quarter. A prime example of buy the rumor, sell the news, since all the news was better than analysts had expected just not better than investors expected.

Handspring also announced earnings and even though sales were strong in the 4Q their losses widened. They expected things to look up in the future once their new "Treo" product hits full capacity but the company declined to give any guidance going forward. HAND fell in after hours to $6.95.

Doubleclick surprised analysts with a small profit when they were expecting a loss and proclaimed the bottom in the online advertising market. Finally somebody proclaimed a bottom in something!! DCLK rose in after hours and the report may be forecasting good things about the coming YHOO earnings tomorrow.

All this flat guidance in the tech sector may be a problem for the markets going forward. I have been warning that it would take a lot more than "wishful thinking" to continue the rally from the first week of January once earnings began to flow. Without any positive guidance from the larger players investors are faced with a problem. The terms like "no recovery in sight" from Intel today and the bearish comments from Cisco last week will call into question any recovery before the 4Q of 2002. Where investors typically buy recessions at the bottom expecting a recovery six months later, the comments by Greenspan and company recently may indicate the bottom may last a lot longer than previously expected. If the expected "V" bottom turns into a long and protracted "U" bottom then investors may avoid stocks completely until the 4Q of 2002 or signs of a real recovery, whichever comes first.

According to TrimTabs.com cash is still flowing out of equity funds. They estimate that $5 billion has left in the last ten trading days and it is the first time since they began keeping records that flows were negative the first ten days of January.

Now that I have painted the negative picture there are some possible surprises. Intel did say their new products were coming online quickly along with new and better technology which would enable them to earn in excess of $1 billion this year even if there was no recovery. That is not all bad. There is also a new replacement wave expected to start in 2002 of all those pre-Y2K computers that were purchased in 1998/1999. The speed and memory improvements have pushed those millions of computers almost back into the stone age when you consider that 2 Gigahertz processors are the new fad and memory is selling for $39 for 512MB. Those 233/333 Pentium 2 computers are destined for the bone pile soon. Some analysts expect that this wave will start at the end of the first quarter. (Sure!)

While this is all guesswork by analysts there is a good possibility that investors will buy any dip caused by the Intel bomb. Stranger things have happened in the past. Just when you thought the markets were doomed the lights got brightest. Investor sentiment is strange in that regard. If you have been following my exit points you should be flat or short today after the Dow fell below my bullish triggers last week and failed to bounce at the bearish triggers on Friday. (10000, 2020) The S&P did manage a bounce on Tuesday off my 1140 support level. We are likely to get a knee jerk reaction dip at the open on Wednesday but considering the Dow has been down six of the last seven days, how much farther will it go? I would be cautious about buying any dips here until we see what new earnings surprises are ahead. We have plenty of time to wait and waiting does not cost any money. My worst-case support level on the Dow is now 9725 and 1950 on the Nasdaq. If you have to buy any dip those would be my choices. Should bullish sentiment appear miraculously on Wednesday I would be very cautious about joining the party.

Enter very passively, exit aggressively!

Jim Brown
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