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MARKET > Commentary Sunday, March 11, 2001
by: S.P. Brown

Public Flagellation

"It's déjà vu all over again," so supposedly said the king of the malapropism Yogi Berra.

Well, I suppose it is if you are referring to the punch-drunk tech sector. Everyday it seems a high-profile Internet-dependent company staggers to the fore with thumb firmly planted in mouth and blanket securely gripped in arm to tell the world just how miserable business really is.

What's more, it seems to be the same companies. Yes, Yahoo's (Nasdaq:YHOO) mea culpa that it would miss earnings forecast was original (though long rumored), but what about Intel's (Nasdaq:INTC) latest bomb on Thursday? Is it my imagination, or does this company insist on embarrassing itself publicly at least once a month?

If you missed the news, Intel reported late Thursday that its first-quarter sales would fall as much as 25 percent from the previous quarter and that it would cut 5,000 jobs, or about 5.7 percent of its workforce, thanks to a slowdown in the PC and network server markets.

If that weren't depressing enough, the company said it expects its revenue for the first quarter to be down about 25 percent from fourth-quarter revenue of $8.7 billion, far lower than its previous estimate that first quarter revenue would be down around 15 percent.

Intel's latest confession may have been good for the soul, but it sure was rotten for the stock price. On Friday, the stock lost $3.81 a share, or 11.46 percent, to close at $29.44.

Of course, we live in a world where public self-flagellation is expected, and even lauded, so it was inevitable that another high- tech enterprise would try and out flagellate Intel on Friday, and, as we've come to learn, that company was Cisco Systems (Nasdaq:CSCO). After the market close, the Internet routing and switching king said that 2,500 to 3,000 temporary and contract workers would be deleted immediately from the payroll while 3,000 to 5,000 regular employees would be deleted through "voluntary attrition, involuntary attrition, and the consolidation of some positions."

Involuntary attrition? Sounds like a euphemism for fired that someone on Bill Clinton's legal defense team would coin.

As a result of these workforce reductions (or attritions), Cisco is anticipating a one-time charge of $300 million to $400 million by the end of the fourth quarter of fiscal 2001.

On Friday, Cisco's market cap took a one-time charge (at least for Friday anyway) of $15 billion, or $2.19 a share. Cisco closed the day at $20.63 after earlier sliding to a two-year low of $20.31, which means Cisco's stock is now trading at levels not seen since late 1998.

Needless to say, with the Triplet's finishing Friday thoroughly in the red (I suppose I should mention that Microsoft finished off $2.56 to $56.69), no one should be surprised that the Nasdaq Composite Index (COMPX) finished Friday thoroughly in the red, too. For the day, the COMPX lost 115.95 points, or 5.35 percent, to close at 2,052.78, its lowest close since December 1998. For the week, the COMPX was down 65 points, or 3.1 percent, marking its sixth straight weekly decline. For the year, the index is off 16.9 percent. And from its all-time high of 5,132, it's off 60 percent (get the picture?).

As you can readily see on the 120-minute chart, the COMPX has been making for the nether regions like a runaway roller coaster since early February. Sure, there have been a couple of one-day outliers that have broken through the downward trend, but they would promptly returned to form the following trading session.

For long-term investors in big-cap COMPX issues, though, the trend looks more promising. The index may have caught support on the long-term trend began in 1995. (Obviously, if the trend holds, it will help short-term long traders, too.)

If misery loves company, then fans of the New Economy found companionship with fans of the Old. The Dow Jones Industrial Average (INDU) tumbled 213.63 points, or 1.97 percent, to 10,644.62. Punishing the INDU (in addition to Intel and Microsoft) were International Business Machines (NYSE:IBM), Hewlett-Packard (NYSE: HWP) and General Electric (NYSE:GE).

Despite Friday's routing, the INDU still finished the week up 178 points, or 1.7 percent. Oddly enough, the INDU was lifted higher by its manufacturing components: the same manufacturing components that are supposedly experiencing a recession, at least according to the latest slate of economic data. General Motors (NYSE:GM), Caterpillar (NSYE:CAT), Boeing (NYSE:BA), Minnesota Mining & Manufacturing (NYSE:MMM) and International Paper (NYSE:IP) all finished the week with strong gains.

Looking at the bigger picture, the INDU is off a modest 1.3 for the year and is off 6.8 percent from its 52-week high of 11,425. Though not mired in a bear market like the COMPX, the INDU is mired in its 10,300 to 11,000 trading range began last October.

As for the broader market barometer, and official arbiter of bear and bull markets, the S&P 500 Index (SPX) finished Friday off 31.32 points, or 2.49 percent, to 1,233.42. The SPX is now trading at a 19 percent discount to its 52-week closing high of 1,527, which means officially the market is not in a bear market. However, looking at the chart, I think we could easily find ourselves in one before the week is through.

As stock news, traders could find a few safe havens among the minefields on Friday. Tobacco continued its yearlong rally with Philip Morris (NYSE:MO), R.J. Reynolds (NYSE:RJR) and new Splittrader Current Play list member Universal Corp. (NYSE:UVV) all making new 52-week highs.

Speaking of our Current Play list (why waste a good segue), additional safe havens could be found in Texaco (NYSE:TX), Loews Corp. (NYSE:LTR), Lockheed Martin (NYSE:LMT), Callaway Golf (NYSE:ELY) and International Game Technology (NYSE:IGT). As I stated in last week's commentary, our plays have held up well during the month-long sell-off on the COMPX and SPX.

Finally, I would be remiss if I didn't mention the Oracle of Omaha, Warren Buffet. On Friday, Buffett's investment vehicle, Berkshire Hathaway (NYSE:BRKa), reported its 2000 net income rose to $3.33 billion, or $2,185 a share, from $1.56 billion, or $1,025 a share in 1999, a gain of 113 percent. The results were helped by a 189 percent increase in realized investment gains to $3.96 billion from $1.37 billion a year ago.

In 1999, Buffett eschewed tech stocks because he said that he "didn't understand their businesses." It seams to me that Buffett understands their businesses all too well.

In economic news, inter-FOMC rate cut hopes were all but dashed with Friday's jobs report. Employment gains were stronger than expected in February with 135,000 net new jobs added. What's more, the average hourly earnings -- watched as a measure of wage inflation -- jumped 0.5 percent, above analysts' forecasts for a 0.3 percent gain, adding to concerns over wage-led inflation. Meanwhile, the jobless rate remained steady at 4.2 percent, which was the consensus estimate.

The unexpectedly bullish jobs report (for workers) has traders concerned that the Fed may cut the fed funds rate by only 25-basis points at the March 20 FOMC meeting, instead of the hoped-for 50- basis points.

Still, interest rate concerns could be assuaged with this week's schedule of economic releases. On Tuesday, we get retail sales for February, which are forecasted to have risen 0.4 percent during the month, off from a 0.7 percent increase in the previous month. Less autos, core retails sales are expected to have increased 0.2 percent in February, off sharply from a 0.8 percent gain in January.

The on Friday, we get the Producer Price Index (PPI) and core PPI (PPI sans food and energy). PPI is forecasted to have increased only 0.1 percent in February, off from a 1.1 percent gain in January, while core PPI is also expected to have risen 0.1 percent during February, off from a 0.7 percent increase in the first month of the year. Additionally, industrial production is predicted to show a decline of 0.2 percent for February, less than the prior month's decline of 0.3 percent, and capacity utilization is expected to show plant usage at 79.9 percent, off from 80.2 percent in January.

If this week's economic news doesn't get the markets moving, it's possible this week's earnings releases will. Adobe Systems (Nasdaq:ADBE), K Mart (NYSE:KM), Comverse Technology (Nasdaq:CMVT), Kroger (NYSE:KR), Albertson's (NYSE:ABS) and Heinz (NYSE:HNZ), which warned last week, are all scheduled to report.

However, the lion's share of earnings attention will be bestowed upon Oracle Corp. (Nasdaq:ORCL), which made news last week after warning the market that it would miss sales and earnings estimates for the first quarter. This news came just two weeks after Oracle executives said that the company's business remained strong. Look for Oracle to report $0.10 a share after the closing bell on Thursday.

As for trading this week, I think the overriding factor influencing market direction will be concerns over interest rate cuts. As of Friday, the futures market predicted a 4.96 percent fed funds rate in April, which implies that traders are anticipating at least a 50-basis point cut to 5.0 percent by the end of March, meaning there is high likelihood that that we will get a 50-basis point cut at the March 20 FOMC meeting.

Still, we need to proceed with caution. If it becomes obvious that 50-basis points in the bag, I think that COMPX should hold 2,000 and the INDU hold 10,300. On the other hand, should Friday's PPI report come in stronger than expected, or should another big-cap tech stock blindside the market with an earnings warning, I think all heck could break loose like it did on Friday.

Regardless of what happens, we're going to be playing it safe through next week's FOMC meeting, meaning our Current Play list will remain weighted towards low-tech NYSE issues. Traders with sensitive stomachs and nervous dispositions should probably follow suit.

S.P. Brown


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