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MARKET > Commentary Wednesday, March 28, 2001
by: S.P. Brown

Everybody Down

After today's abysmal trading session, I figure I'd go with a diametrically opposed title to Splittrader's Sunday commentary title of "Everybody Up." It seems the right thing to do considering losers blistered winners by a 22-to-9 margin on the NYSE and by a 26-to-11 margin on the Nasdaq.

The catalyst for this latest round of bloodletting was two former year 2000 high-flyers (which could be nearly anyone these days). Electronic organizer king Palm (Nasdaq:PALM) got the rivulets forming when it announced after the close on Tuesday that it expects fourth-quarter earnings to fall short of estimates. According to the company, it now expects to post a fourth-quarter loss of $0.08 a share vs. the First Call estimate of a $0.03 per share profit.

Palm's confession may have been good for the soul; unfortunately, it wasn't very good for the stock price. For the day, Palm shed $7.44, or 48 percent, to close at $8.06.

Nor was Palm's confession very good for the competition. Fellow handheld contraption peddler Handspring (Nasdaq:HAND) got whacked for $5.31 to $10.88 while Research in Motion (Nasdaq:RIMM) got nicked $4.43 to $20.25.

Still, the handheld market's woes were small potatoes compared to the outright despair displayed in the networking sector. This morning Canadian telecom equipment supplier Nortel (NYSE:NT) reported that it expects a per-share loss wider than it forecast in February. The company also reported that its 2001 projections are unreliable (hey, who should know better?) and that it will dismiss 5,000 employees by mid-year. For the day, Nortel tumbled $2.76 to $14.00, which, of course, was a new 52-week low.

Nortel's mea culpa quickly reverberated throughout the entire networking sector. Cisco Systems (Nasdaq:CSCO), which was the most active stock on the Nasdaq, skidded $2.38 to $15.75. Meanwhile, Juniper Networks (Nasdaq:JNPR) crumbled $8.85 to $43.89 and Corning (NYSE:GLW) slumped $3.49 to $21.50.

Another notable telecom loser was Lucent Technologies (NYSE:LU), which had the misfortune of tapping the equities markets for its Agere Systems (NYSE:AGRa) today. Agere is a seller of microelectronics and optical components used on communications equipment and networks. Agere was priced at $6.00 a share, a considerable discount to the $15 to $20 share price Lucent had anticipated as recently as last month.

Despite the lousy climate for tech stocks in general, and optical component makers in particular, Lucent had no choice but to proceed with the offering. The company trashed its balance sheet last year, causing its debt to balloon to unhealthy levels (over $8 billion), and the spin-off will help clean up some of this mess. For the day, Lucent finished off $1.43 to $10.27 while Agere finished up $0.02 to $6.02.

In Sunday's Splittrader commentary I said that no company has stubbed its toe more times over the past year than Lucent. (With the latest stubbing, I think Lucent has worn its poor toe down to a stump of gangrenous flesh.)

The seemingly never-ending tech sell-off was fully manifest in most major market indices today, but nowhere more than the Nasdaq Composite Index (COMPX). The tech-heavy index was routed for 118.13 points, or 5.99 percent, to close at 1,854.13, putting it smack-dab on its intermediate downtrend line.

I see a possible silver lining here. While everyone is carrying on about COMPX 1,750 or COMPX 1,500, there is an ever-so-slight argument that it could hold 1,800.

Of course, for the COMPX to have any chance of standing firm, it must get some help from the Triplets, meaning Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC) and Cisco Systems (Nasdaq:MSFT). All three finished off more than $2.00 today.

Meanwhile, in the Old Economy, traders and investors were once again thinking bear market. The Dow Jones Industrial Average (INDU) lost 162.19 points, or 1.63 percent, to close at 9,785.35. Of the INDU 30 components, only three finished the session up. Johnson & Johnson (NYSE:JNJ) was the notable winner, closing up $3.03 to $86.28 thanks to an upgrade from Morgan Stanley.

As for the INDU losers, the most notable was Disney (NYSE:DIS), which lost $0.84 to $28.36. In a surprising announcement, the company said it will eliminate about 4,000 jobs, or 3 percent of its worldwide workforce, to reduce annual operating expenses by $350 million to $400 million. If anything, the notion of folks who used to earn a living masquerading as rats, dogs, birds and dwarves having to seek employment elsewhere proves beyond a doubt that no one is immune from a slowing economy.

Despite today's attrition, the INDU looks as if it will stay out of bear-market territory (officially recognized by a close below 9,377) for the remainder of the week. Technically, the INDU appears to have support 9,650, if not more immediate support near a weak uptrend line at 9,750. In all honesty, though, predicting support levels in this market has been as easy as picking Powerball numbers.

In other stock news on Wednesday, ADC Telecommunications (Nasdaq:ADCT) lost $2.25 to $8.31 after reporting that it expects a second-quarter loss. Like Disney, ADC expects to slash up to 4,000 jobs.

Yahoo! (Nasdaq:YHOO) also made news again today. The king of the Internet portals fell $0.63 to $14.94 despite being upgraded by UBS Warburg. However, the upgrade could be considered left- handed at best. Warburg upgraded Yahoo to a "hold" from a "reduce."

Not that the rest of the Internet sector fared much better than Yahoo, because it didn't. Selling was widespread in the Internet issues, as the AMEX Internet Index (IIX) tumbled 11 percent today.

Still, there is one sector of the capital markets thriving in this contracting economic environment, and that's the treasury sector. The 10-year Treasury note was up 7/32 to yield 4.98 percent while the 30-year government bond shed 11/32 to yield 5.465 percent.

As for economic news, we were once again reminded that we are in the midst of an economic downturn. The Commerce Department reported that new orders for durable goods fell 0.2 percent in February, while new orders for capital goods - which tell us how much companies are spending on new equipment and software - dropped 4 percent.

Needless to say, every time the market gets slapped with a negative economic data set, its eyes instinctively turn to the Federal Reserve for comfort, which at this point may be a waste of time and energy. At this point, I think the Fed has done just about all it can do. After all, liquidity isn't the end all to our economic downturn. Clearly, the technology sector has serious inventory overhang and pricing issues, which won't be washed away by more market liquidity.

With that said, I wouldn't be surprised if the economy turns by mid-summer, which means that the market will turn before then. The fact is, the market is a discounting mechanism and I think that most of the bad economic and earnings news is already reflected in current stock prices.

Finally, I think that market pessimism has grown to levels that probably necessities some sort of rally. According to Bloomberg and Investors Intelligence, pessimism about U.S. stocks surged to its highest level in more than 16 months last week. Keep in mind, long before the economy and investor sentiment turns positive, the market will probably be half way to reaching new highs.

S.P. Brown

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