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MARKET > Commentary Tuesday, June 12, 2001
by: Matt Paolucci
Contributing. Editor

Stocks Rebound

We knew second quarter pre-announcements season would likely get ugly. Well, today we got an idea of just how bad things may be in tech-land, courtesy of the world's No. 1 handset maker. This morning, Finnish-based cellular phone giant NOK (-18.9%) filled up the kettle and brewed up a steaming hot cup of jack squat for Wall Street, saying, "you can forget about 35-40% annual growth rates, you can also forget about 25-35% percent growth rates, AND now you can even forget about even 20% growth. How does growth in the single-digits sound?" Judging by the way shares of NOK opened today, down $5.36 at $23.35, we don't think investors were too happy. Steaming mad might fit the bill. The company also said you can forget about 17 cents per share Wall Street is expecting. How about something in the 13-14 cent-range instead? The clincher came when the company couldn't provide guidance for future quarters until it released actual numbers in mid-July. For those of us betting on a second half 2001 rebound in technology, today's news certainly didn't give us a warm fuzzy feeling.

Fallout from the NOK warning could only be equated to the damage of a Mount Vesuvius eruption: widespread. Shares of competitors like MOT (-5.8%) and ERICY (-3.6%) pulled back. Also, companies that supply, sell, or were in any way related to NOK also dropped. RFMD (-2.3%), QCOM (-3.0%), OPWV (-10.6%), PHG (-2.2%), and VOD (-3.3%) were some of the notable losers. The CNET Telecom Index sank 5.3%, or 123 points to 2796. The news even spread to telecom and networking players like LU (-1.2%), WCOM (-2.6%), LVLT (-8.5%), T (-2.7%), and ALA (-1.9%).

Nokia, however, was not the only tech-related bearer of bad news on Tuesday. Shares of gene-tech high-flyer Affymetrix (AFFX: -14.94) plunged some 36% after saying it expected revenues for the second-quarter to be in the range of $44 million to $50 million, falling short of analysts' estimates by $4-$7 million, widening its EPS loss to between 6-12 cents per share, considerably higher than expectations of a 1-2 cent loss. AFFX said that even though it was attempting to manage expenses, it would not reduce investments in R&D or infrastructure in a manner that would be harmful to its long-term prospects, sending sort of a "stubborn" message to the Street. Perhaps we can call the 36% thrashing in AFFX shares today a "stubborn" response by investors.

Just to throw in a few more negative tidbits, just to keep with the day's negative tone, EMC (-0.5%), the leader in the multi-billion dollar storage sector, said that 2Q orders weren't tracking in as fast as expected, quickly prompting a downgrade from Morgan analyst Gillian Munson. Even though EMC has pricing power over much of its competition, she said that a 1% drop in its gross margins translates to a penny drop in EPS. That's big, considering that 18 cents is the consensus estimate for the June quarter. Munson removed a penny from her 2Q number to 17 cents and 4 cents from her 2002 numbers to 78 cents.

Other noteworthy debacles included GM's Hughes Electronics (NYSE: GMH -2.70) unit, which plunged almost 12% on Tuesday after the satellite TV company said it would add only half as many customers this quarter as it had previously expected.

The FDA's rejection of Amgen/Praecis Pharmaceuticals' prostate cancer drug left AMGN shares basically unchanged, but PRCS dropped like a rock, ending the session down 26.7% to $16.55. Gaining on the news, however, were shares of tiny Colorado-based Atrix Labs (NASDAQ:ATRX +0.31), which has a late stage prostate drug of its own called Leuprogel.

One of the stocks lucky enough to have a green arrow next to it was Dell Computer (NASDAQ:DELL +3.3%) after Morgan Stanley upped the PC maker from Neutral to Outperform. MS said the time to buy is now, as shares will likely shine once the economy starts to recover. Dell's president said that while it sees no major up-tick until the 4Q, European sales are satisfactory.

Trying to sprinkle a little bit of sunshine on Tuesday's otherwise dark session was the up-tick in U.S. chain store sales, which rose 0.3% for the week (ending June 2) after slipping 0.1 percent a week earlier. Expectations for the month are for a rise of 2%. Weak customer traffic and heavy promotional activity continue to hinder sales. The real numbers from the likes of JCP, S, TGT, KM, WMT, FD, and May will be released on Thursday.

Despite the deluge of warnings and largely pessimistic views from analysts, the blue-chip-riddled Dow actually finished higher by 26 points at 10,948 after trading below support at 10,800 intraday. Weighing heavy was the 3.9% drop in HON (NYSE:HON -1.77) shares, after troubles with the EC regarding its pending merger with fellow Dow component GE (NYSE:GE: +1.37). The EC is trying to pressure GE (+2.9%) to sell HON's aerospace assets. Potential buyers of those assets include United Tech (UTX: -0.1%), yet another Dow cohort. In other Dow news, GM's announcement of a "substantial minority stake" (huh?) in hydrogen fuel cell maker IMPCO Technologies (IMCO:+7.5%) sent shares of IMCO higher by $2.80 to $39.82. Breadth in the Dow was split 15-15. Volume on the broader NYSE was nothing exciting, coming in at 1.1 billion shares, with losers finishing neck-and-neck with gainers 16-15. NYSE new highs tripled up on new lows 120-42.

Checking out how some of the other major U.S. indices finished, the S&P 500 Index (SPX) ended up 1.49 points at 1255 after being down almost 20 points. The Russell 2000 (RUT) closed unchanged at 507, and the Wilshire Total Market Index (TMW) ended Tuesday higher by 0.1% at 11,631.

Bonds traded narrowly on Tuesday, waiting for key data on Wednesday (Retail Sales), Thursday (PPI), and Friday (CPI) to be released. Prices on the 2, 5 10, and 30-year issues closed higher on the session. The yield on the 2-yr note fell 3 basis points to 4.06%, the 5-yr dropped 4 bps to 4.80%, the 10-yr fell 3 bps to 5.25%, and the 30-year treasury ended down 3 bps at 5.65%.

NOK, though its shares are traded on the NYSE, certainly impacted the four-letter stocks over at the NASDAQ, though the late-day rally doesn't really show it. For the record, the NASDAQ, after skidding 65 points to 2105 intra-day, closed down just 0.83 at 2170. The end-of-day figures on the COMPX really aren't a true representation of what happened on Tuesday. One of the bright spots included Extreme Networks (NASDAQ:EXTR +2.33), which shot up 7.8% in sympathy with some positive comments made on sector player FDRY (+12%) at a CIBC conference. Orders for the FDRY's April/May period are apparently coming in stronger than anticipated. Other upside movers in the NASDAQ 100 included INKT (+6.6%), EXDS (+7.3%), VRSN (+7.5%) and RNWK (+4.6%). Overall, 61% of the Nasdaq's 100 largest companies finished surprisingly to the plus side, given the four-hour afternoon buying spree. Breadth for the COMPX still ended in favor of declining issues 20-17, as volume of more than 1.7 billion shares traded hands. New highs beat out new lows 4-3.

Sector winners included Gold (XAU:+2.7%), Software (GSO:+0.6%), Internet (+1.9%), and Retail (RLX:+0.8%). Areas being kicked to the curb included the recently-hot Biotech (BTK:-3.2%), Airlines (XAL:-1.8%), and Cyclicals (CYC:-0.7%).

Hungry? Well, the queen mother of food stocks makes her debut tomorrow, as Kraft Foods (KFT) comes to market offering some 280 million shares at $30-$31 per share tomorrow. The deal, which could raise anywhere from $8.4-$8.68 billion, is the second largest in U.S. history, behind the AT&T Wireless deal. The question is whether or not KFT is worth 30 times last year's net income. The industry trades at roughly 18 times net income. So, should investors dig in? We say no. With razor thin margins and an overall industry growth rate of 1%, forget about it.

Sure, the Dow came back from -134 points to eke out a 24 point gain and the NASDAQ fought off a 65 point deficit to end at break-even, but why the rally? The NOK news was BAD, BAD, and BAD. No guidance, single-digit growth, and too much supply. Then, biotech up-and comer AFFX warns and the FDA says NO to AMGN/PRCS' prostate drug. To boot, satellite services behemoth racks up half the subscribers Wall Street was expecting. Uh, BAD!

Could it be that investors are being smart, looking down the road 6-9 months, and doing some bargain hunting? You bet, and why not. Those interest rate cuts are going to kick in soon enough. Don't, however, load the boat just yet. We still have the Beige Book on Wednesday, which will hopefully show continued declines in inventories and some stabilization in energy costs. More importantly, we have PPI and CPI on Thursday and Friday, which should be in-line with Greenspan's view that inflation pressures are a non-issue. Then again, after seeing the snapback despite NOK's woes, who knows what's going to happen. Got a helmet?

Matt Paolucci
Contributing Editor


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