Today's prudentbear! -->
Market Summary July 20, 2001
Posted Daily Between 5 and 6:30 PM EST
by Lance Lewis
Bad News Matters, Eventually
Asia was mixed last night. Europe was off a percent, and the US futures were substantially lower. We gapped down at the open, had a little selloff and then started trying to rally. We basically filled the opening gap by trading back up to yesterday’s close and then rolled over again to slip back to the lows. But the bulls were able to mount another rally attempt, albeit somewhat lesser in stature, late in the afternoon. Unfortunately, it also ran out of gas, and we drifted down into the close to go out in about the midrange of the day. Volume was OK (1.2 bil on the NYSE and 1.6 bil on the NASDAQ.) Breadth was slightly positive on the NYSE and slightly negative on the NASDAQ. The big sector winner was the oil services as the OSX rose 6 percent. The big sector loser was computer hardware as the HWI fell 4 percent.
We had a slew of earnings last night. MSFT was perhaps the funniest. Recall all the hysteria that surrounded MSFT’s “positive” preannouncement last week that many claimed heralded that things were turning around and signaled the long awaited Summer rally. Well, last night MSFT reported and slipped in a bit of a warning for next quarter by guiding revenue and earnings down due to a likely continuing deterioration in PC sales going forward. MSFT was surprisingly only clipped for 5 percent off that. GTW also reported last night and blew away downside expectations by losing more money than expected and was slapped for 25 percent. Staying with the PC theme, Dataquest noted this morning that global PC sales had declined quarter over quarter for the first time since 1986. Last night in Korea, we also got some news out of Samsung, the largest manufacturer of DRAM. Samsung said that DRAM supply was likely to continue to overwhelm demand through at least Q4. So, it was basically a full sweep in the PC area as far as bad news goes. Back to more earnings news, we got some reports out of several chip companies (XLNX, VTSS, PMCS, IDTI), which all either guided lower or failed to offer guidance, but PMCS did offer a hopeful note that there were indications that customers’ inventories are coming down. Unfortunately, the fact that PMCS guided revenue down another 30 percent and said that their loss would double seemed to overwhelm that hopeful note since the question still remains as to when demand will pick up again, and the stock was spanked for 13 percent. SUNW posted its first quarterly loss since 1989 but declined to give any guidance on Q3. SUNW did have a slight uptick in US sales, but that was more than offset by deterioration in Europe. Nevertheless, that seemed to get some people excited, and they chased the stock for 4 percent. NT reported its loss last night and threw in the towel on the rest of the year by saying, “These challenging industry dynamics are expected to continue and we do not expect meaningful growth in spending to occur before the second half of 2002.” The Internet garage sale, EBAY, was one of the few bright spots as it turned in fairly impressive growth results. Unfortunately, EBAY is trading at 170x next year’s estimate and 220x trailing earnings, so a lot of that (and more) is already discounted in the stock price. Finally, ERICY also reported their loss over in Europe this morning and cut their forecast for global handset sales by another 17 percent. All of that data had technology lower, ex the Internets that is, which were all higher off EBAY despite the fact that none of them had any connection to EBAY’s business other than the fact that they have to do with the Internet. The SOX slipped 3 percent, and the optical area was a little lower off of NT’s gloomy outlook.
I wanted to touch a bit on something that I hear bulls toss around a lot. You hear a lot of bulls say you should buy XYZ stock or that the market is healthy because it’s not going collapsing on bad news. For example, I heard some guy on Heehaw (CNBC) today point to the fact that MSFT only fell 5 percent today, as well as the fact that the market didn’t collapse off all the bad news last night as being very bullish and indicating that the market has reached (you guessed it) a “bottom.” That’s not the case other than maybe for a day at times, especially in a schizophrenic market like we have currently. When that type of action matters and is meaningful in determining when to invest is when stocks are cheap and sentiment is incredibly bearish. We have neither currently. Let’s take a few examples of how this sort of logic would have come back to hurt you recently. The large European semi equipment maker ASML warned back on the 5th, and was one of the first semi equips to throw in the towel on the fabled Q3 and Q4 recovery. The stock cratered on the news but held its lows that have been support for about a year now. So, it looked like the bad news had been bought since further deterioration in the fundamentals seemed to be ignored as far as stock price went. However, as of today ASML has now taken out that low and appears to be edging through that yearlong price support as well. So, just because the stock didn’t crash on the news didn’t mean it wasn’t done going lower. Other examples can be found in AMD, which warned, fell a bit but not much in relation to the warning, bounced, and then took out that low this past week. Or take AMCC which reported an absolute disaster on Wed night, it actually tried to rally the next day, which many pronounced was the “bottom” for it too. Unfortunately, today AMCC fell back below its pre-earnings level to the low for the week.
There are many more examples. The point is that these stocks still aren’t cheap even today after they’ve fallen further. ASML is trading at 60x this year’s “expected” earnings and 23x next, so we’ve already discounted the second half recovery that isn’t going to happen plus those estimates are likely to come down even further. AMCC is trading at 142x this year’s “expected” earnings and 50x the next for goodness sake. As far as sentiment goes, two polls out this week make it pretty plain that people are way too bullish to give us any sort of bottom. Investor’s Intelligence, which measures newsletter writers, had bulls rising to 52 percent and bears at 23 ½ percent (a 6 year low.) AAII, which is the American Association of Individual Investors, showed bulls doubling over the last week to 50 percent and bears collapsing to 15 percent. These numbers are not what you see in a sold out, cheap market. But, on to the rest of the day’s action…
The financials were mostly lower again. The BKX fell a percent, and the XBD was flat. GE was also flat. A settlement was announced today between MER and a disgruntled investor over the highly publicized Internet hyping of MER analyst Henry Blodget. If you recall, the case surrounded an investor that claimed to have lost $500,000 in following Blodget’s advice to buy Internet stocks. Now, this was an arbitration case (as all cases against your broker are due to the fine print on your account agreement that you sign), which are much more difficult to win than a jury trial for a plaintiff. The fact that MER settled for just about all of his losses is going to really open the door for this type of litigation, and I suspect we’ll be hearing a lot more about this going forward. The other question that it raises is why did MER settle so quickly, knowing this would encourage others to sue and that it’s normally so hard for a plaintiff to win in an arbitration? It could be because the plaintiff was asking for over $10M, and discovery would have produced a smoking gun. Or maybe it wasn’t? We’ll never know now.
Oil rose $1.16 to just shy of 26 bucks on more talk of production cuts from OPEC. The XOI rose 2 percent, and the OSX rose 6 percent. Gold rose 50 cents. The HUI was up a percent. The US dollar index traded on both sides of unchanged but ended down a touch. The euro was up a hair. Treasuries were a little lower.
This weekend we have the G8 meeting. Recent statements out of the Bush administration suggest that any sort of currency intervention to bring down the dollar is not in the cards, and that the market should determine exchange rates. So far this week, the market has chosen to take the dollar down. With expiration now out of the way, I suspect next week will be most interesting. With sentiment as bullish as it is, the fundamentals continuing to deteriorate with no second half recovery in sight, and the dollar finally beginning to droop, it may finally be time to head down again. And the break could be big. It just depends on whether people are ready to give up on their Q4 hopes yet (I think we can safely say at this point that you have to be pretty thickheaded to still think Q3 is going to see a massive economic recovery.) If they are, we’ll see a collapse in prices. I’d buckle up if I were you. |
