*AV* - Not that this makes amends for anything but we are presenting today's opening commentary for the thread without going into any stock specifics.
AV
Volume 3 Issue 248 December 15, 1999
DJIA - 11,160.17 Nasdaq - 3571.66
radarview.com
"Technology has dramatically outperformed the rest of the market this year, leaving some analysts concerned that the sector's strength is masking weakness in the broad market."
"The Philadelphia Semiconductor Index closed down almost seven percent, off 43.05 to 587.99 as every issue in the 16-component index turned negative, led by the steep drops in Texas Instruments Inc. and Xilinx. We are now in our 5th or 6th day of negative performance according to our indicators, and as a result, the prior LLT exits were well timed and the impending exits look to be coming at the appropriate time. Thankfully we have not seen a rush to the door all at once and most of the profits have been protected or they have held their own."
From Monday's issue: (CBS.MW) - "Beaten down hardware stocks just couldn't be comforted Friday after struggling for most of the week. IBM, National Semiconductor and programmable logic device makers contributed to the downward slide along. The weakness in the semiconductor sector appeared to stem from concerns over potential inventory buildup due to a spending slowdown in the PC market triggered by Y2K worries. As soon as some of the big chip vendors start reporting quarters, they'll probably also give a look at what inventory looks like, and then people are going to start feeling a little bit better, and then you'll get the rebound."
OPENING COMMENTARY DECEMBER 15, 1999
All last week we had the following statement printed under the Tier Tables, "Even though we have been in this positive cycle for the past few days, we have already racked up significant gains in most of the stocks. We may be seeing some profit taking, the relief rally we mentioned a few days ago, or this could be the blowout top prior to a small correction. Whatever the case may be, we must begin to protect some of our recent profits."
When we take a closer look at the Tier Tables, and all of the indicators we track, it is quite apparent we had a blowout top prior to this correction. When we look at the new SOXX table we included today, you will see the extent to which these stocks have reversed, just in one day. While profits have eroded somewhat, we can honestly say that we are in profit protection mode and have had the appropriate exit strategies in place for more than a week.
The question we must ask ourselves is what is really behind the massive reversal with a good portion of the stocks we follow in the semiconductor sector. The easiest and most plausible explanation is a set up for the January Effect by taking these stocks down during this Options Expiry week. We may seem like a broken record by crying manipulation once again, but doesn't it seem strange that a good deal of the unexplainable market shifts come in an Options Expiry week? We seem to go to the extremes during this timeframe and at month end.
If we were to take a dim view of this type of manipulation, we could make a case for the November expiry cycle being the set up for making money on the CALLs, setting up the PUTs for December, and using the CALLs in November to acquire shares. Now that the stocks had run up, it was time to shake out the stocks from the weaker hands. PUTs become more valuable and as we drive down stocks they have in their portfolios. Once we eviscerate the stocks for the sake of the Options Expiry (and of course this is a Triple Witching Expiry Friday coming up), we can now buy some cheap CALLs and more shares, and then head into a nice positive January Effect. As ludicrous as it might seem, it is the best explanation and justification for what has transpired.
Now if we back off this conspiracy theory for a moment, even though it has partially guided us through some of these nice profit cycles, we find that there is possibly another explanation. The trouble with the scenario we are about to present, is that it is ludicrous and makes the manipulation
Scenario that more believable. The following story seems to be the "official" rational reason for the pullbacks on Tuesday. Once you read this summary and some of the comments, we hope that you agree with us that this is nothing more than a ridiculous smokescreen. But if, indeed, this is the real cause of the pullbacks and correction, we have finally put the final nail in the Herd Mentality and Mob Mentality coffin and have proved beyond all reasonable doubt that fundamentals mean nothing and psychology is what drives these markets.
Like the lemmings that are led over the cliff, the media and the institutional analysts "create" the momentum and sucker in groups of individual investors, small funds, and na‹ve fund and money managers. Nothing has fundamentally changed in many of the companies we follow but we have seen some nice wide volatility swings in prices. We are not complaining since this is one of the reasons we have been successful all year long. We are not timing the market but timing a majority of the stocks we follow. We are feasting on the center crŠme filling of the Oreo cookie and it looks as if we are getting ready for some "blue light special" bargain hunting once again. You will also see we took some very small initial positions in some of the "brand recognition" stocks. We must also be very aware that we are about to trigger a huge number of LLTs real soon and that we will make appropriate exits to protect profits.
Anyway, it is time to give the alternative explanation of why the markets were in retreat on Tuesday. Keep in mind that the breadth of this market has been negative much longer than the rationale provided below. We must also realize that the overall markets are in retreat and that the problems in technology do not necessarily drive the other broader market segments.
December 14, 6:35 PM ET - Chip Makers, Contract Firms Tumble On Solectron Results
(Reuters) - Shares of semiconductor firms and contract computer makers declined in dramatic fashion after Solectron Corp.'s (SLR) first quarter results sparked investor concerns about a possible computer-industry inventory buildup. Solectron, a contract computer maker, reported first quarter earnings of 36 cents a share, which were in line with Wall Street's expectations, but its revenues of $2.5 billion were shy of some analysts' estimates of $2.7 billion. Solectron hit most profit targets on record sales volume. Analysts said a shortage of key components hurt Solectron and was part of a broader problem for printed circuit board makers. They also cited concerns over a build-up in Solectron's inventory to buffer the company during the Y2K transition. Solectron had a $400 million increase in inventory in the first quarter built up as a Y2K buffer. Based on this, analysts like Hans Mosesmann, a Prudential Securities chip analyst, believe there is some general inventory accumulation going on and they are now seeing the first evidence of inventory accumulation with Solectron. As shares of Solectron tumbled, it started a free-fall sell-off among both computer contract manufacturers and semiconductor companies. As a result of this, analysts downgraded several of Solectron's rivals, and fears of a possible inventory build-up spilled over into the semiconductor stocks, dragging them down.
CLS -$9.56 $81.00
JBL -$9.31 $66.44
SCI -$4.13 $81.38
FLEX -$7.38 $85.00
TXN -$9.38 $96.56
NSM -$5.69 $41.25
LSI -$4.56 $55.81
MU -$2.19 $62.44
XLNX -$8.06 $78.94
ALTR -$4.25 $45.44
SANM -$12.13 $95.94
ADI -$4.19 $67.50
LLTC -$4.94 $65.44
MCHP -$7.31 $62.00
MXIM -$6.69 $79.75
Mosesmann said that some computer makers and contract manufacturers had already doubled ordered to get some extra inventory for potential Y2K problems and after the earthquake in Taiwan in September some companies began triple ordering. [NOTE: It seems as if we are trying to throw gasoline on a fire here]. "So it turns out that the Taiwanese turned this around much quicker than anyone would have imagined,' he said. "People who double and triple ordered are getting product faster than they wanted it and they can't push it back to the fabs like TSMC, otherwise they will go back down to the bottom of the list.'
Wall Street analysts said a shortage of key components had hurt Solectron and was part of a broader problem for printed circuit board makers. Analysts downgraded several Solectron rivals, and a stock sell-off occurred. Fear spread up the industry supply chain, dragging down shares of leading semiconductor component suppliers, amid fears of a possible inventory parts build-up. Morgan Stanley cut investment rating on two contract manufacturers: Flextronics was cut to "outperform' from "strong buy,' and SCI Systems was reduced to "neutral' from "outperform.' Thomas Weisel Partners downgraded its rating on Solectron stock to a "buy" from a "strong buy" rating. Traders said semiconductor stocks sold off on fears of an emerging Y2K-related inventory build-up of electronic components, evidenced in a $400 million quarterly increase in inventory that Solectron had created as a Y2K buffer. Such build-ups can lead to inventory gluts and price wars.
"Solectron built some inventory in semiconductor integrated circuits, which Altera and Xilinx both make, in anticipation of Y2K," according to Sudeep Balain, a semiconductor analyst at SoundView Technology Group. He believes order patterns have slowed down a bit because obviously if the end guy, like Solectron, has inventory they are not going to place enough orders on both Xilinx and Altera. The demand is going to come back in the first quarter. Investors will have another glimpse into the health of the sector on Thursday, when Jabil reports its fiscal first quarter. Analysts expect Jabil to show earnings of 33 cents per share.
An analyst we have more respect for, Jack Geraghty, an analyst at Gerard Klauer Mattison & Co., said that he does not believe there is widespread hoarding of inventories based on discussions with a few companies. Their lead times haven't changed, according to Geraghty, who also pointed out that the semiconductor group as a whole, along with chip equipment stocks, has done very well in the past couple of months. He believes the sector is so fragile that the slightest wiggle makes people want to take profits. We heartily agree with his observation.
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