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MARKET > Commentary Tuesday, April 03, 2001
by: Craig Seidler
Assistant Editor

Baseball Is Back

While baseball fans started flooding ballparks around the country to watch their favorite players swing for the fences, the market was doing its best not to strike out. But strike out is exactly what the market did today. The curveball thrown by the software and networking sectors yesterday was too much for the market to handle. The scoreboard at the end of the day tells the whole story, DOW down 292.22 and NASDAQ down 109.97.

It was more earnings warnings and news of job cuts that had the market swinging at balls in the dirt today. Ariba (NASDAQ:ARBA) started the downturn with news that it would come in with fiscal second-quarter earnings that will be half of what analysts were expecting. On top of that, it is to lay off 2,100 employees or a third of its workforce. Ariba is now expected to report a loss of $51 million as opposed to expectations of positive earnings of $12.6 million. In addition, they're calling off their merger with Agile Software (NADAQ:AGIL). Not good. The stock finished down $2.06 at $4.44.

Also chiming in with bad news was communications equipment maker Redback Network (NASDAQ:RBAK). The company told investors to expect earnings in the neighborhood of a negative $0.15/share compared with previous estimates of $0.04/share. The requisite downgrades followed the announcement and served to put RBAK back at new lows. The stock finished off $1.93 to finish at $9.77.

Will we get to a point where earnings warnings no longer upset the applecart? Of course we will, but it will take more earnings visibility on the part of corporations that will enable them to honestly say that business may be improving. The six-month market discounting mechanism has been probing into the nether reaches of the fourth quarter only to come back from the future with a big fat question mark. Investors don't buy stocks on a question mark; thus, the other shoe continues to drop.

Today's Markets

As already mentioned, it was more of the same today. Buyers stepped out of the way and sellers turned up the heat as the major indices took a beating.

The NASDAQ (COMPX) fell 109.97, or 6.17% to close at 1673. Volume was heavy with 2.5 billion shares changing hands. Confirming the overall drubbing, declining issues beat out advancers 2983 to 799.

The DOW (INDU) stumbled by 292.22, or 2.99% to finish the rocky session at 9485.71. There were precious few areas to hide from today's carnage. Sellers who just wanted out at any price occupied the regular hiding areas. Tobacco, drugs and healthcare stocks all faltered.

The only ones smiling at the end of the day were those investors that stuck to bonds. The 10-year benchmark bond added 9/32 to yield 4.935% and the 30-year note put on 1/4 to yield 5.47%.

In economic news, new factory orders placed with manufacturers dropped 0.4%, which was worse than expectations of a 0.2% slowing. This data continues to highlight a manufacturing sector that is in a recession and that is having a hard time getting rid of inventory.

Stocks and Sectors on the Move

No amount of coaxing could get buyers out of their low yielding money market accounts today. Even after Salomon Smith Barney raised its equity weighting to 70% from 65% and gave the all clear to dive back into tech, investors didn't budge.

It's tough times right now. Even the early-cycle tech companies (the ones that take advantage of an upswing in consumer purchases of PC's and other high tech products) faltered today and fell back through chart support levels. Dell Computer (NASDAQ:DELL) continued its three-day slide by falling another $0.63 to $23.44 and Apple (NASDAQ:AAPL) plummeted $1.35 to $20.24.

In other early-cycle tech wrecks, Advanced Micro Devices (NYSE:AMD), which had broken out just seven trading sessions ago, fell back $1.82 to $23.68. Joining AMD were shares of fellow chipmaker Xilinx (NASDAQ:XLNX), which notched a new 52-week low at $31.44 after falling $1.69 on the day.

The biggest disaster of the day, however, had to be the internet infrastructure company Inktomi (NASDAQ:INKT). The company lost 55% of its value in hectic trade that sent the stock down $3.43 to $2.79. This was after they told investors that it would be cutting 25% of its workforce to weather an economic environment that is worse than they expected. The company also now expects a loss of $0.23-$0.25/share for its second quarter, down from analyst estimates of a loss of $0.04/share.

Other than the obvious harsh reaction to the bad news, I am amazed by the shear magnitude of how much the analysts have missed the downturns to these companies. These are widely held and widely covered companies that either didn't see the economic downturn coming, or were effected all of a sudden by the slack in demand.

These warnings beg the question, "Are these downward surprises a function of overly optimistic analysts or did this halt in corporate spending really sneak up on the pros that fast?" If the answer is the latter, I just hope that the consumer holds his own, because the carpet could be ripped out just as fast under the retail stocks that have been rising on anticipations of a turnaround at the cash registers.

Having said that, hopes in the retail sector were stoked by earnings out of Best Buy (NYSE:BBY) that beat Street expectations. BBY posted fourth quarter earnings of $0.89/share, walloping estimates of $0.82/share. Going forward the company indicated that it sees same store sales increasing moderately in the coming year, although it did note that it expects consumer sentiment to remain soft.

Looking Forward, Always Forward

On Wednesday, investors get a peek at the March NAPM non- manufacturing number and the March vehicle sales figures. Both are expected to weaken. The NAPM is expected to come in at %51.50, down from February's reading of %51.70, and vehicle sales are expected to come in at 14 million, down from the previous reading of 17.5 million. The vehicle sales number will indirectly give us a read on consumer confidence, as folks don't buy cars unless they feel at least somewhat confident in their future household earnings prospects.

Looking at how much tech shares have come down from even just last month, you have to wonder if CEOs feel that now is a good time to announce their firm's expected upcoming short falls. More warnings would almost certainly cause another slide in tech share prices, but you'd have to think that current prices have much of this expected bad news already baked into them, cushioning any further slides.

Speaking of further slides, don't look now, but we appear to be heading for lows on the NASDAQ that have not been seen since October of 1998.

Bottom line is that the market tends to move quickly to extremes before mellowing at some median range. I think we are in for more downside, but I also expect that any move back to a median range will be just as swift as the elevator ride down (sans cable) on which we have been stuck. Third floor, trashed semiconductor, software and networking stocks, everybody off!!

Keep Stops In Place and Play By Your Rules

Craig Seidler
Assistant Editor

Editors Note:

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