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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (57145)	7/25/2000 11:28:44 AM
From: Saulamanca	Respond to of 99985

Fiber optic values based on visions, not financials By Eric Auchard NEW YORK, July 24 (Reuters) - Put a price on all the tea in China, or the fabled gold of El Dorado, and you'll not be far off the valuation measures investors are giving to fiber optics equipment, the object of the latest stock market buying binge. In the latest sign of frenzy in fiber optics markets, Canadian communications equipment maker Nortel Networks Corp. (NYSE:NT)(TSE:NT) on Monday was reported to be in talks to sell its fiber optic parts unit to Corning Inc. (NYSE:GLW), a maker of fiber cables and components, in a deal valued at $100 billion. The price tag Corning would pay for Nortel's fiber optics business is 100 times greater than the unit's $1 billion in annual revenues. It follows a similarly pricey deal two weeks ago in which JDS Uniphase Inc. (NASDAQ:JDSU), another fiber parts maker, agreed to a deal to buy SDL Inc. (NASDAQ:SDLI) for $41 billion, or 90 times SDL's projected revenues for this year. Move over consumer Internet stocks: Fiber optics now command the tech sector's loftiest valuations, displacing once sky-high stocks like Yahoo Inc., whose shares trade at a mere 66 times expected 2000 revenue, and eBay, at 38 times revenue. "All these stories sell during the concept phase and some end up making it, but a lot don't," Chuck Hill, director research at First Call/Thomson Financial, a veteran tracker of Wall Street investment trends. Fiber optics networks deliver communications at the speed of light. They are widely seen as the best hope for meeting exploding unmet demand for raw communications capacity and to unclog the major traffic jams now occurring on the Internet. Optics have rapidly taken their place among the fabled investment stories of prior decades -- radio in the 1920s, computers in the 1960s, computer peripherals in the 1970s, biotechnology in the 1980s and the Internet in recent years. "Story stocks get way away from traditional valuation measures," Pip Coburn, technology strategist at UBS Warburg, speaking of the speculative underpinnings as opposed to cold financial calculations that propel emerging tech stock themes. "Then you wake up one day and the story is in question -- B2C and B2B are the latest to fall from fashion -- and the stocks collapse," Coburn noted, referring to the terms used to describe business-to-consumer and business-to-business Internet companies. "When valuation starts to creep into the discussion, these stocks start to go down quickly." Fiber optics use fine glass instead of wires to transmit huge volumes of information rapidly via light beams. They refer to the lasers, mirrors and multi-colored strands of glass cable now hungrily being gobbled up by Internet service providers to delivers communications at the speed of light. Fiber optics are nothing new. They've existed for decades, with analysts dating the modern fiber-optic era to Corning's development of silica-based glass fibers in the early 1970s and advances in lasers during the 1960s. Optical networks have been around in theory since at least the 1920s. Telephone and cable TV companies are now plowing billions of dollars of investment into fiber networks that connect long- distance customers, city regions and even congested office networks, where demand for e-mail storage is exploding. Nonetheless, the cost of extending fiber optics into residential communication networks capable of reaching millions of homes remains out of reach, despite the tumbling price of optics. Hill, who worked as a securities analyst following the computer industry until the late 1970s, compared the renewed fascination with fiber optics equipment to stock market bubbles of prior decades. "In the 1960s, there were Snow White and the Seven Dwarfs -- IBM and the seven mainframe computer makers. IBM is one of the only companies still left from those days," Hill said. Most of the remaining seven have disappeared or changed businesses. Computer time-sharing was all the rage in the early 1970s -- companies with faded names such as Control Data, University Computing and Tymeshare, and which rented out space on mainframe computers to other businesses. Also bid up then were the computer peripheral makers, many of them now vanished or absorbed into other companies. Many of these traded at more than 100 times annual earnings, Hill recalled. But even as he warns against such speculative binges, Hill admits to the difficulty of picking the eventual long-term winners and losers among technology stocks -- the Microsofts and Intels and Ciscos of tomorrow. "We thought that the fiber itself was going to become a commodity years ago, but it's not turned out that way," Hill said of the current skyrocketing demand for such products. Coburn agreed. "Investors always overestimate what's going to happen in the next one- to two-years and underestimate what's going to happen in the next decade," he said, speaking of a five- to ten-year time horizon. Copyright 2000, Reuters News Service Companies or Securities discussed in this article: Symbol Name NYSE:NT Nortel Networks Corp. NYSE:GLW Corning Inc NASDAQ:JDSU JDS Uniphase Corporation NASDAQ:SDLI SDL, Inc. TSE:NT Nortel Networks Corporation quote.com

To: Les H who wrote (57145)	7/25/2000 7:53:52 PM
From: Les H	Read Replies (1) \| Respond to of 99985

Global Strategy: Global Equities and Fed Peaks — Past and Present Robert J. Pelosky, Jr. History offers a new perspective on the "Same Old" IT trade. Historically, the best-performing U.S. sectors over the three months prior to a Fed peak and in the three- and six-month post-peak periods are food & beverages, financials and telecoms (last three cycles). Historical analysis expanded to encompass global markets. Global sector investment opportunities for Fed-tightening-cycle peaks are similar to those in the U.S.: telecoms, consumer staples and financials, especially insurance. IT and financials may hold key to outperformance in 2H00. Both are exposed to the trade-off between decelerating U.S. (and global) growth, with positive implications for interest rates, and the potential negative impact of slower EPS growth and deterioration in loan portfolios. Fed tightening may now be close to peak. Our economics team believes that further Fed tightening lies ahead, but they are no longer convinced that it will happen in August. We provide a sliding calendar scale of possible peaks. It usually doesn't pay to be too negative around Fed peaks. Based on the last three Fed cycles, U.S. stocks gain 8% in the final three months preceding the last Fed tightening in the cycle (global stocks gain 3%). Accordingly, a month ago we reduced cash and the degree of our underweighting in the U.S. (i.e., increased our position) in our MacroScope model portfolios. (The full report can be accessed through Client Link at msdw.com). U.S. Technical Strategy: Limited Demand, Heavy Supply Phil Roth Markets were consolidating from early June to early July but popped last week, achieving something of a breakout. However, very few stocks accounted for the upside, so this is more of a rotation than a rise in broad net demand. Supply/demand has changed dramatically. Last month was a record June for new equity issuance at $20 billion, despite being usually a slow month. The Fed reported that the supply of stock expanded in 1Q for the first time in three years. And net weekly equity mutual fund buying has been only an estimated $1.5 billion over the past four weeks. So although investors are willing to believe that the Goldilocks economy has been resurrected, the low cash and heavy supply suggests that we should expect only a rotational rally. And that's what we have seen. Investors sold healthcare in quantity, there was barely any movement in consumer staples and telecom, and tech stocks did very well. So the aggressive money is going back to the hot stocks. While the impact should be limited, it is probably something investors can exploit. The best-positioned tech stocks appear to be computer services, semiconductor and semiconductor equipment, and instrumentation. The best-positioned cyclical stocks are consumer cyclicals like media, and selected transportation like airfreight. Very few deep cyclicals look attractive. I believe we are facing an interim rally and that stock selection is key. U.S. Quantitative Strategy: What's in the Markets Joseph Mezrich There are two stories being told by the markets, one regarding technology, the other cyclicals. Cyclical stocks have been doing well lately, as the stock market is pricing in a rebound in economic growth to 4.5% at year-end, above the 4% level that Dick Berner is forecasting. For cyclical stocks this represents a shift in investors' focus from current growth to future growth. Meanwhile, markets are pricing in essentially no inflation or rate risk, so a Fed rate hike would be a surprise. The rally in the market thus reflects expectations of strong growth with no interest rate worries. As for technology, what has been powering Nasdaq has been the reduction in the risk premium. Nasdaq volatility had exploded earlier in the year, and we had expected the index to do well as its volatility declined. We think volatility has further to decline, perhaps for another month or so or maybe until Labor Day. We think the cyclical story will likely be more persistent. U.S. Economics: Secular versus Cyclical Inflation Factors Richard Berner Inflation has both cyclical and secular elements. In my view, the strong secular productivity growth of the past several years has been instrumental in restraining cyclical inflation pressures — so far. Furthermore, I do not expect the trend in productivity growth to abate any time soon. However, financial markets have fully embraced the soft landing scenario, generally focusing on the strong secular productivity growth and ignoring what I see as mounting cyclical inflation risks. Those who have acknowledged the cyclical risks have argued either that the productivity trend is strong enough to mute them or that the Fed has done enough to rebalance supply with demand. In contrast, I expect moderate cyclical inflation risk to gradually overtake the impact of productivity growth, with core inflation increasing to 3% from 2.5% currently, despite the expected slowing of the economy. At his semiannual Congressional testimony on monetary policy this week, Fed Chairman Greenspan will probably echo those competing themes, noting that the Fed must remain vigilant but giving no sense that action is imminent. Whereas markets have embraced and Fed officials hope for the soft landing scenario, I am looking for more of a "soft takeoff," following the 2Q slowing in growth. Recent retail sales data suggest that the second quarter was not as soft as it seemed and that there is still some vitality in consumer spending. I think GDP will come in somewhat below 4% for the 2Q and then pick up to around 4% in the second half, aided by a boom in exports in response to the vigorous global economy. I also expect a modest pickup in inflation pressure, with actionable consequences for the Fed. The timing of the next Fed move is uncertain, but the outcome is not, in my view. Fed action will be highly dependent on the data flow. While the chances of a rate hike in August have declined somewhat over the past few weeks, they are still higher than what is priced into markets. msdw.com