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MARKET > Commentary Thursday, June 07, 2001
by: Staff Analyst

Chips Don't Dip

Intel (NASDAQ:INTC +1.34) gave its first-ever mid-quarter update just after the bell, reaffirming second quarter guidance and suggesting stronger earnings in the second half. The company said that second quarter sales will be at the lower end of the expectations, but within expectations at least, as the world's largest semiconductor maker struggles with a slowdown in PC sales. Shares of semis were moving up in response during after-hours trading.

The company has been pummeled by weak demand for microprocessors in the current economic downturn. When it reported first-quarter earnings, however, Intel had said it saw "encouraging" signs for a stronger second half. This was despite first-quarter net income plunging 82 percent on a 16 percent decline in sales. Shares of Intel have fallen 59 percent since its record high of 74.88 in August, compared to the Nasdaq Composite index (COMPX) fall of 47 percent during that time period. Intel gained 4.49 percent to 31.16 today during regular trading.

During the day, positive expectations about the Intel report helped spark a rush to buy semiconductor shares. In addition, despite a weak earnings forecast from National Semiconductor (NYSE:NSM +3.10) for the next quarter, the company commented in its conference call that an improvement in its turns business has been driven by cell phone companies. As a result, the rally spread to stocks such as Qualcomm (NASDAQ:QCOM +2.42), Nokia (NYSE:NOK +1.24), and Motorola (NYSE:MOT +0.74). Applied Micro (NASDAQ:AMCC1.93) led the communication IC stocks higher. C.E. Unterberg Towbin analysts left a meeting with the company with the notion that near-term order cancellations, push-outs, and de-bookings had nearly evaporated. That news also lit a fire under PMC Sierra (NASDAQ:PMCS +4.65).

Also, last night the Semiconductor Industry Association projected 20.5 percent growth in 2002, which was revised upward from 10 percent, and 25 percent for 2003. The revision may indicate that a bottom is near in the sector. Corroborating that view was Banc of America Securities, which said that "motherboard checks" (sounds like fun) at Computex in Taiwan showed positive indications for the third quarter. They also noted that conversations with four large Taiwanese manufacturers showed an increase in OEM activity. The Semiconductor Index (SOXX), has jumped 19 percent since last Wednesday's low of 578.40. It's now at 697.04 - a 7.7 percent gain today - just beyond its pivotal 200-day moving average, which last month acted as strong resistance that turned back the index nearly 20 percent. Can it move through it this time?

All of the action today was on moderate volume, which showed some caution ahead of the Intel comments. But when the dust settled, the tech-bound Nasdaq Composite index (COMPX) picked up 46.27 points, or 2.09 percent, to reach 2,264. The S&P 500 (SPX) bigcaps were up 6.93, or 0.55 percent, to 1,276.96. And the Dow Jones Industrials (DJI), after being underwater this morning, closed up 20.50 points, or 0.19 percent, to 11,090.74.

In other tech news, chipmaker Broadcom (NASDAQ:BRCM +4.67) warned of a steeper-than-expected sales decrease in its second quarter and announced cost cutting plans. The company slashed second-quarter revenue expectations late yesterday, citing continued weakness in the technology sector. Nonetheless, Broadcom said in its conference call that it saw signs of increasing new orders that may well lead to renewed growth by year's end.

Discouraging news from the retail sector came in today. Unseasonable weather in the Midwest and Northeast lowered clothing purchases in May, and high fuel prices and consumer concerns about the economy reduced mall traffic, resulting in slow monthly retail sales. Large retailers including Gap (NYSE:GPS +0.61) and Federated Department Stores (NYSE:FD -1.90) warned of additional weakness in sales and/or earnings. Also, Pacific Sunwear (NASDAQ:PSUN -0.78) was downgraded. All in all, it seems the overall same-store retail sales pickup in April may not have been the precursor to recovery that was thought. Nonetheless, electronic retailers were up today, partially due to good news out of Best Buy (NYSE:BBY +2.38), which posted a 25 percent increase in Q1 sales and said that quarterly earnings would be in line with estimates. This news also sparked Circuit City (NYSE:CC +0.44), up 2.81 percent, and Radio Shack (NYSE:RSH +0.81), up 2.89 percent.

Shares of Philip Morris (NYSE:MO -1.48) and other tobacco stocks started to plunge in after hours trading yesterday after an L.A. jury ordered a record $3 billion payout to a smoker with incurable lung and brain cancer. Nonetheless, analysts -- and even antismoking activists -- said the verdict likely would be reduced by the judge or overturned on appeal. Philip Morris closed off its lows for the day to lose 2.96 percent at 48.52. R.J. Reynolds (NYSE:RJR -3.19) was down further, though, at 5.42 percent, to 55.69.

In other news, banking regulators said U.S. commercial banks earned a record $19.9 billion during the first quarter. This number was "padded" by $1.2 billion worth of securities sales however, which masked more fundamental concerns about the sector. The Federal Deposit Insurance Corp. added that troubled commercial and industrial loans continued to increase, especially at larger banks, and interest rate margins continued to decline. Banks charged off $7 billion in bad loans in the first quarter, a 38 percent rise from the same period last year.

New state jobless claims rose to the highest level since November 1992, last week, revealing a still weakening job market, which may not have bottomed yet. New claims soared above the key 400,000 level for the third straight week - the longest string since September, 1992. Economists had expected a modest drop in claims from the prior week. Here comes the Fed?

Treasury prices gained early as a result of the aforementioned jobless claims report that raised expectations of further interest rate cuts by the Federal Reserve. Then they weakened, as the 30-year 'long bond' - the most vulnerable to a potential inflation-igniting recovery - shed 31/32 at 95 5/32, with a yield of 5.72 percent, for a gain of 7 basis points. The 10-year Treasury lost 11/32 at 97 24/32, to yield 5.30 percent, a pickup of 5 basis points. The 5-year note dropped 4/32 at 99 1/32 to yield 4.85 percent for a gain of 3 basis points. And the Fed-sensitive 2-year note was flat at 100 9/32, for a yield of 4.10 percent.

For Tomorrow:

There is a gap between what Intel is saying about the future and what its box-maker customers are saying. Who's right? We'll be watching to see how this plays out tomorrow. See Intel run. See market react.

Staff Analyst


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