From Briefing.com: General Commentary - At this point, it's relatively clear that the major averages are less than committed to a particular near-term direction. The reasons for the trendless price action are painfully well documented -- ongoing earnings pre-announcements, concerns about the Israeli/Palestinian situation, concerns about the U.S./Iraq situation etc. etc.
As we head into the end of September -- which also happens to mark the end of the third quarter -- it's worth keeping in mind that many traders have been waiting to initiate positions in the general area of early November. This is seasonally a standard entry point for stocks, and with the markets hovering near five-year lows, many would contend the indices have room for a sizeable move. The point being that the 'early November' entry point is only about four or five weeks off. So the intermediate-term competing interests will be: a) the current/near-term warning season and political uncertainty on the one hand versus b) the upcoming prospects for a significant seasonal run on the other.
From a technical perspective, we've been watching the 'July to present' time frame which has taken on a somewhat disturbing look from the standpoint of its chart pattern. Namely, the Nasdaq has taken on the shape of a crude head and shoulders pattern which is a decidedly bearish formation. Again, this suggests the next several weeks will be important from the standpoint of determining the intermediate to longer-term direction.
Looking towards the upcoming week, there are a few identifiable catalysts to have an eye on. While the earnings calendar is relatively lean, the more likely drivers next week are tied to the economy. Namely, look for the Chicago Purchasing Managers Index (PMI) on Monday morning, followed by the ISM Index (Institute for Supply Management) on Tuesday. Those two reports precede the headline September Employment Report which is set for release Friday. Keep in mind that the Employment Report is tied in closely to the consumer, as concerns over weakness on the consumer side has been a more recent drag on the markets.
Mike Ashbaugh
Nasdaq holds 1200 level -- Technical --Despite the horrible technical picture going into the final hour, the index has thus far managed to hold support at 1200. From current levels, look for initial resistance at 1206 followed by subsequent overhead at 1212.
Dow edges below 7700 level -- Technical --
2:40PM Dow Industrials edge in on key levels : -- Technical -- Index coming down towards support at its July 24th closing low of 7702. On a break lower, look for subsequent support at this week's new closing low of 7683. After those two levels, other support points of interest include modest congestion at 7590/7606 followed by the July 24th intraday low at 7489. To the upside, initial resistance is at 7800 followed by subsequent overhead at 7875.
12:49PM Micron upgraded by Rick Whittington this morning (MU) 13.20 +0.65: Rick Whittington was previously the semi analyst at B of A and is now with the boutique firm American Technology Research. This morning, he upgraded MU to a BUY from Hold citing these factors: 1) signs of seasonally improved PC sales, 2) channel activity for graphics memory, frequently a precursor to main system memory, 3) Taiwan inputs that leading foundries are seeing upped production plans from graphic chip set customers, 4) improved risk/reward for MU (but not the semi sector generally).
12:55PM Solectron (SLR) 2.24 +0.03: Fresh off of their 52-week-low level, shares are 1.4% up in today's session due to last night's in-line Q402 results and guidance. This morning, Thomas Weisel upgrades to ATTRACTIVE from Mkt Perform due to improved outlook for cash flow, debt, working capital and business generation; thinks shares remain speculative, but suggests investors consider potential for capital appreciation. Soundview is not as quick to forgive shares their 81% decline YTD; remains cautious on weakness in underlying business; maintains Neutral rating. Goldman Sachs is concerned with headline risk from telecom OEMs, but thinks low valuation offers protection and attractive upside potential for long-term investors; maintains Mkt Performer rating.
9:28AM Amkor finalizes agreement to sell Anam shares (AMKR) 1.52: Company finalizes agreement to sell 20 mln shares of Anam Semi to South Korea's Dongbu group for roughly $93 mln; apparently half of this amount has already been paid, with $12 mln to be paid next week and the remaining $34 mln in installments over the next two years, according to a Dow Jones report. AMKR up 15% pre-market to 1.75.
9:15AM Brocade target, estimates cut on worsening IT spending (BRCD) 8.33: Morgan Stanley says that IT spending has worsened sequentially from Aug to Sep, and Sep weakness has caused BRCD's Oct qtr to be more back-end loaded than usual; believes that if this softness persists into Oct, then co may have to reassess its FY03 rev/EPS forecast; lowers price target to $15 from $25. Separately, Goldman Sachs cut BRCD's Q4 and FY03 rev/EPS ests in the face of what appears to be an even weaker IT spending environment which in turn is leading to some pushouts in SANs.
9:02AM Taiwan Semi, United Micro cut capex - UBS : UBS Warburg says that today's Economic Daily News reported that TSM and UMC will lower their 2002 capex due to lower capacity expansion; report stated that TSM will cut capex to $1.65 bln from $2.0 bln and UMC will cut to $1.1 bln from $1.3 bln; firm says move was widely expected.
8:48AM Wachovia initiates INTC, AMD, LSI, and MU with Hold ratings :
8:45AM GlobeSpan Virata downgraded at Prudential (GSPN) 2.55: Prudential downgrades to HOLD from Buy based on decreased confidence in the near- to mid-term as visibility continues to be challenging in the face of a weak telecom mkt; cuts price target to $3 from $5.
8:29AM Solectron upgraded at Thomas Weisel (SLR) 2.21: Thomas Weisel upgrades to ATTRACTIVE from Mkt Perform following better than expected earnings; raises FY03 est to $0.06 from $0.02.
8:15AM Goldman Sachs cuts estimates for Comm IC stocks : Goldman Sachs cuts 2002-03 ests for AGR.A, AMCC, BRCM, CNXT, PMCS, TUNE, TXCC, and VTSS; says recent checks combined with further end mkt deterioration makes firm increasingly concerned about the slope of growth in Q4 and the magnitude of the recovery in 2003; maintains ests for MRVL.
7:30AM Varian Semi announces guidance, restructuring (VSEA) 15.61: Company sees revenues of $85-105 mln and breakeven EPS in Sep qtr vs Multex estimates of $101 mln and $0.04; also announces that it will reduce workforce by 15%, or 1,370, as pace of semiconductor recovery is slowing.
7:17AM ASML Holding sees slowdown in H1 2003 (ASML) 6.71: After encouraging the market the other day with its reaffirmation of a 100 system shipment target for the second half of 2002, ASML reportedly disappointed investors today, according to Bloomberg, by saying that shipments in the first half of 2003 would fall 10-15%.
7:03AM General Electric downgraded at Lehman, CSFB (GE) 26.39: Lehman downgrades to EQUAL-WEIGHT from Overweight, saying the recovery of the short cycle businesses has stalled and losses at ERC are pressuring GE Capital earnings; trims 2002-03 ests. CSFB downgrades to NEUTRAL from Outperform, as firm is concerned that GE is caught in a no-win situation for at least the next 18-months: if the economy continues to weaken the co's results will be negatively impacted, yet significant upside to the co's earnings in an economic rebound will be capped by the impending deflation of the power bubble; trims 2002-03 ests.
2:36PM Goldman Sachs on Wireline Comm Cos : Following checks and continued deterioration in end mkts, firm is increasingly concerned about growth in Q402 and magnitude of recovery in Y03; lowers ests for Recomm List-rated Broadcom (BRCM 11.28 -0.58); Mkt Outperformer rated Agere (AGR.A 1.01 -0.08), PMC-Sierra (PMCS 3.95 -0.19) and Microtune (TUNE 2.59 -0.35); and Mkt Performer rated Applied Micro Crcts (AMCC 3.04 -0.13), Conexant Sys (CNXT 1.05 -0.04), Transwitch (TXCC 0.39 -0.04), and Vitesse Semi (VTSS 0.70 -0.15); although lacking catalysts that would cause stocks to bottom or recover, firm thinks current prices discount softness; maintains ratings. Firm's only exception in slashing wireline comm cos' ests is Recomm List-rated Marvell Tech (MRVL 17.14 +0.21) due to its continued strong product cycle momentum.
1:25PM The Fed and the Market : The FOMC opened the door to a future rate cut in the event that the financial markets continue to deteriorate. Though it is not surprising that the Fed would react to market weakness, it is surprising to see such an open admission of that willingness in the FOMC minutes.
The minutes for the August 13 FOMC meeting reported this caveat after noting that policy makers favored a steady policy: "a further significant weakening in economic prospects--for example, that might be associated with additional deterioration in financial markets--might well call for a policy response".
In the past, Greenspan has argued that the Fed's job is to respond to changing economic risks, and not to changing stock market levels. But he has also been careful to point out that changing market conditions can have a significant impact on the economy. For example, lower equity prices can both reduce household wealth and thus consumer spending and increase the equity cost of capital, thus reducing business investment.
What was interesting about this mention in the FOMC minutes was that it was so explicit. Typically the Fed will talk about the economic risks, with any substantial change in stock prices having an obvious impact on those risks. The fact that policy makers explicitly stated that a deterioration in financial markets could prompt an easing suggests that they were quite concerned about the impact of this year's market declines and were contemplating an easing based solely on this factor.
Since the August 13 meeting, stocks briefly rallied and then of course fell back to their July lows. Given that those lows didn't prompt an easing back in Jul/Aug, it is probably safe to assume that we're not yet at a point where market weakness alone will prompt a rate cut, but it is also safe to assume that we're not far off. Another leg down in the market indexes during October would most likely result in Fed action at the Nov 6 meeting. - Greg Jones, Briefing.com
11:44AM NVIDIA (NVDA) 8.90 +0.03: NVDA announced yesterday that it was effectively going to give its employees a $66 mln gift by allowing them to swap underwater stock options for common stock. The fact that there was little market reaction to this plan indicates that investors still have a high degree of tolerance for abuse.
In the technology world, stock options are a common and useful tool of compensation, but the popping of the tech bubble left most of these options worthless. The result? Boards of tech companies have sometimes exchanged options with high, pre-crash strike prices for options with strike prices at current depressed levels. This policy has drawn criticism from some shareholders who believe that the whole concept of options creating an incentive to work hard is destroyed if the options are repriced when the stock price falls.
In this NVDA case, however, the gift to employees was much greater, and much less justifiable, than a simple swap of old options for new. The company is actually granting common stock to holders of underwater options, without those option holders having to pay any strike price at all! Let's say you're an NVDA employee with 10,000 options priced at $50. Under this new program, you can swap those options for shares whose value equals the initial 10,000 amount multiplied by $3.20. In this case, that would be $32,000 in stock, or roughly 3,600 shares. The employee would therefore be trading 10,000 virtually worthless options for 3,600 shares valued at $32,000 (less applicable tax withholdings).
NVDA has the nerve to claim that this swap will help "retain and motivate" its employees. NVDA is based in Santa Clara, the heart of the current tech recession. Our guess is that most employees are probably happy just to have a job right now, and to the extent they aren't, handing them this very liquid gift of shares probably makes them more rather than less likely to leave. As for motivating, how is a gift of common stock a more potent motivator than new options with lower strike prices? Half of the shares are eligible for immediate sale, offering little motivational value (25% must be held six months, and the final 25% for one year).
For shareholders, there will be roughly 3% dilution and a charge that will approach $66 mln in the current quarter. Brokerage firm analysts are largely cheering the move this morning, confirming that conflicts of interest are alive and well on Wall Street. CSFB was an outlier, gently chiding the company by noting that while retaining employees was a good thing, the "means enlisted are somewhat counter to shareholder's interests..." NVDA employees are probably nice people and we'd hate to say that they shouldn't get this gift, but if you're a shareholder, you would be justified in asking the company why it's your responsibility to foot the bill. If you don't get an acceptable answer, move on to another investment. - Greg Jones, Briefing.com
Entegris (ENTG) 7.34 +0.07: USB Piper Jaffray downgraded to OUTPERFORM from Strong Buy based on a new outlook of fundamental deterioration over the near-term followed by a more modest recovery in the 2H of FY03; cut 2003 ests.
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