BUSINESS WEEK ONLINE
March 6, 1998
THE INTEL EFFECT: LESS THAN FEARED -- FOR NOW
Given Intel's status as a bellwether for stocks, the chip giant's bad news on Mar. 4 didn't wreak as much havoc in the markets on
Mar. 5 as many investors expected. Although Intel Corp. (INTC) suffered a punishing decline of 10 13/16 points, to close at 75 5/8
-- a 12.5% drop -- major market indexes closed down a much more modest 1% to 3%.
Much of the damage came soon after the opening bell. The Dow Jones industrial average had slid about 80 points by 10 a.m. and
closed down 94.91 points, or 1.1%. The tech-heavy NASDAQ Composite immediately lost about 50 points, but was down 47.78
points, or 2.7%, by the close of trading.
"All in all, the market could have acted much worse," says Peter Coolidge, managing director of equity trading at Brean Murray &
Co. "Intel was a shocker. There was a quick correction in values as investors who had to get out got out. Then the buyers stepped in
-- but not at any price."
"Things aren't as bad as you might think," Tim Grazioso, head of NASDAQ trading at Cantor Fitzgerald & Co., said at
mid-afternoon. "There is a fair amount of cash around. The one having a hard time is Intel."
The semiconductor giant warned after the close on Mar. 4 that first-quarter earnings would come in lower than analysts had been
projecting because of weaker demand for its products. This created fear that PC demand is slowing and anxiety that other companies'
first-quarter earnings would also be lower than expected.
"Obviously, PC stocks all got hammered pretty significantly in light of the news," says Todd Baker, who covers hardware and
peripherals for Hambrecht & Quist. Dell (DELL) fell 7 3/16 points to 130 3/4, a 5% drop; Compaq Computer (CPQ) fell 7/8 to 27
1/8, a 3.1% decline; and Gateway 2000 (GTW) declined 1 3/8 to 37 5/8, a 3.5% loss. Baker thinks demand for PCs is holding up but
that computer makers will have to contend with too much supply and aggressive pricing. "We've been pretty cautious on the whole
group," says Baker. Dell is the only one he currently recommends.
Still, some traders were surprised that the damage wasn't worse. Like computer makers, Microsoft Corp. (MSFT) didn't suffer
losses nearly as steep in percentage terms as Intel's. Shares of the software king and tech bellwether fell 2 1/4 points to 80 1/16, a
2.7% decline. "If both those companies are dominant suppliers to the PC industry and if PC sales slow down, they should each slow
down," notes Kevin Landis, co-manager of the Technology Value Fund.
Indeed, even though traders were pleased the market held up reasonably well on Mar. 5, they're cautious about the future. "It will be
interesting to look back and see whether this signaled a market top or was just another hiccup in our steady march upwards and
onwards," says Coolidge. He says it will take a couple of days for analysts to adjust to Intel's news. A monthly unemployment
number due out on Friday will also have an impact on overall market sentiment. "There is a sense the economy might be heating up,"
says Coolidge. "The unemployment numbers will be scrutinized even more closely in light of Intel."
Grazioso notes that a lot of short positions in big stocks such as Dell and Microsoft may have helped support prices. (Short-sellers
sell borrowed shares, hoping the stock price will decline, and they can pay back the loan with cheaper shares, pocketing the
difference.) Short-covering brings buyers into the market even if the overall tone on a stock is negative.
Still, this could be a time to be cautious when looking for values. Landis remains wary of technology stocks that are affiliated with
PCs. And he notes that even chipmakers that have nothing to do with the PC market also sold off on Mar. 5.
The latter could bounce back, though. "If you like chip stocks that have nothing to do with PCs, this was a terrific day to go
shopping," he says. He recommends Vitesse Semiconductor (VTSS), which makes high-speed chips used in telecommunications
products. "It doesn't go anywhere near the PC market," he says. "It has everything to do with the telecom market and mostly U.S.
telecom." It closed down 2 1/8 Thursday at 45 after trading as high as 56 last September -- before getting caught in the general tech
sell-off. The "general business outlook hasn't changed" for such companies, says Landis. He also recommends high-speed networkers
PMC-Sierra (PMCS) and Level One Communications (LEVL), which both declined two points, or about 5%, on Mar. 5. |
