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To: Les H who wrote (255)	6/4/2001 9:18:42 AM
From: Les H	Read Replies (1) \| Respond to of 29602

MARKET EARNINGS There are still no definitive signs as to whether the 4Q01 earnings recovery the market appears to be expecting will in fact come about or whether the recovery gets pushed back a quarter. In this quarter and in the last two quarters, there was optimism early in the quarter that the recovery was only two quarters away. In the second half of the last two quarters that optimism gave way to a realization that the recovery was slipping by a quarter. At this point the visibility on a two quarter out earnings recovery is not coming into focus as quickly as it did in the last two quarters. As we move into the heart of the 2Q01 earnings pre-announcement season, the visibility on 4Q01 earnings may improve. If not, the outlook for 4Q01 earnings likely will come into focus in mid-July during the peak weeks for 2Q01 earnings reports. Many of those reports will be accompanied by earnings guidance for 2H01. The longer it takes for the information fog to lift, the more likely that the earnings recovery will in fact take place in 4Q01. We may be in a world of information overload, but that unfortunately is not the case for info that will provide guidance on 4Q01 earnings. However, info that might be helpful is often overlooked. Sometimes it may be in areas that get minimal analyst coverage. In the case of technology, two such areas are the makers of printed circuit boards and the distributors of electronic components. Both serve a broad spectrum of the technology sector. Every electronic product is built around one or more printed circuit boards to interconnect the semiconductor chips. In April, bookings for printed circuit boards nose-dived. It was the biggest decline since the IPC trade group began keeping track 20 years ago. A few distributor analysts have indicated in recent weeks that business in Europe was rapidly declining and that softness was emerging in Asia. Therefore, the announcements last week from Sun Microsystems and Altera, both of which cited weakness in Europe as the main problem, were not surprising. There likely will be more tech companies with business in Europe that will come out with negative pre-announcements with weakness in Europe being the main culprit. Bookings for semiconductor capital equipment also collapsed in April, and since this is a lagging industry relative to the chip industry itself, The semiconductor capital equipment companies are also candidates to warn. Outside of tech, other industries that are prime candidates to warn include airlines. Announcements this week on May passenger miles and/or appearance at a broker transportation conference could trigger negative pre-announcements from the airlines. That conference could also trigger warnings from the truckers, rails, and air freighters. Another hot spot for warnings may be hotels. The revPARS data for April showed a big drop. Same store sales reports this week for May from the retailers may trigger pre-announcements, but it is less clear whether negative ones will predominate. An additional group that would have candidates to warn would be companies that do considerable business in local currencies, particularly in Europe. The main candidates in that group would be the multinational consumer staples companies. On a broader note, the continuing acceleration in negative pre-announcements is very worrisome. The issue is not the impact on 2Q01 earnings. The market has already written off 2Q01 earnings. The issue is the implications for an earnings recovery later this year. If one is going to materialize, negative pre-announcements should soon begin decelerating rather than continuing to accelerate. Warnings for 2Q01 are running 11% ahead of the record setting pace for 1Q01 at the equivalent time in the quarter. Even worse is the greater increase in warnings from large capitalization companies. Warnings from S&P500 companies are up 24% from the record setting 1Q01 pace. The increasing use of regularly scheduled mid-quarter conference calls, most of which come early in the third month of the quarter may shift some of the warnings that previously would have come late in the third month to the early part of that month. A notable mid-quarter call on tap for this week is Intel on Thursday. The estimates for S&P500 earnings continue to come down at a faster than normal rate. There was some moderation in May relative to April, but that was nothing more than the usual seasonality. Most of the decline comes in the last month of the quarter, while the least are in the middle month. The real test will be how much estimates for 2Q01, 3Q01, and 4Q01 come down between mid-June and mid July. The big change last week in the estimates was the drop in the 2Q01 consumer cyclical sector expectations. The problem was the Ford recall. The analysts originally were excluding it from earnings from operations, but Ford convinced the majority to include. That charge alone took about 1.5 percentage point off the growth rate for the S&P500. It was by far the reason the expected 2Q01 earnings for the consumer cyclical sector dropped from a 22% decline to a 39% decline. The estimate for S&P500 earnings stand at a 13.8% decline for 2Q01, with the final results likely to be about 13%. The 3Q01 estimate is at a 3.6% decline, but the final results will likely show a decline similar to that of 2Q01. The outlook for 4Q01 is at a gain of 7.9%. If warnings and revisions were to suddenly revert to normal patterns, that would imply final results of about a 4% gain. That clearly will not happen, but even if there is a gradual reversion to normal patterns over the next several months, that would probably mean flat earnings compared to 4Q00 would be the high end of what can be expected. The big question is will the final results be that or something much lower. Stay tuned. The First Call valuation model (comparing the forward four quarter P/E ratio to the inverse of the interest rate on the 10-year Treasury) indicates the market was about fairly valued on 30 March. However, the April surge in stock prices, particularly in the technology sector, along with the continued slippage in earnings forecasts, again particularly in the tech sector, led to the market moving solidly back into overvalued territory and has remained there. The S&P500 was essentially flat in May, but earnings continued to slide while the interest rate on the 10 year note rose. The current P/E is 23.8, compared to the implied fair market P/E of 18.5. That means the market is 29% overvalued, down 3 percentage points from last week. www1.firstcall.com

To: Les H who wrote (255)	6/5/2001 9:28:37 AM
From: John Madarasz	Respond to of 29602

Stockmarket Cycles update for Monday, June 4th. Despite some potential contradictions, we believe the outlook for the stock market remains positive over the short to intermediate term. Perhaps it is a good time to review some of the nominal 20 week projections currently outstanding. Dow Jones industrials 12,477 ± 340 points New York Composite Index 726.97 ± 18 points S&P 500 cash index 1,446.15 ± 37 points Those projections were generated four-five weeks ago. Because they are nominal 20 week projections, they will be overdue quite soon, but let's not be in a rush. Until or unless we see evidence to the contrary, we will assume those projections will be met. The evidence from the Trading Index makes it easier to believe that the above projections will be reached. First of all, there was a classic reading above 1.50 in late March indicating the possibility of an important bottom being imminent. Over the past week or two, there were additional Trading Index readings suggesting the market is historically oversold. As recently as today, the Open 10 TRIN closed at 1.20. This is a rare oversold reading the likes of which have been seen over the past 19 years almost exclusively in the area of important bottoms. From August of 1982 through the remainder of the 1980s, there were only three such readings. They occurred in August 1982, November 1982, and October 16th and 19, 1987. In the 1990s, a reading higher than 1.20 on the Open 10 TRIN occurred in only six time periods. One or two of them were slightly premature, for example August 23rd, 1990, but they were all closely related to important market bottoms: January 1991, September 1991, February 23, 1993, December 1997, and late September 1998. They have become more plentiful over the past year, and we believe that is one more sign of a long term bull market rotating into a long-term bear market. Over the last year, Open 10 readings higher than the 1.20 occurred on July 6th, 2000, November 30th and December 1st, 2000, December 27th, 28, and 29, 2000, and have now occurred in 2001 in the months of January, February, March, and now June. The 10 day Trading Index closed today at 1.30, with TRIN 5 at 6.31, and the New 10 TRIN at 0.88. The McClellan oscillator moved handily into positive territory with a reading of + 23.6, giving a positive short-term signal. Rydex switchers are 100% in Rydex Nova Fund, Fidelity Select switchers are 100% in Cash. All mutual fund switchers should call the telephone update each market day after 3:20 p.m. Eastern time and call each market evening. Stock-index futures traders-through noontime Eastern time tomorrow, exit your long position in the June S&P futures only if there is an hourly or half hourly cash reading below 1254.10. After noontime Eastern time, exit your long positions only if there is an hourly or half hourly reading below 1258.30. There are no new projections for the XAU or for bonds . That's it for now. Have a great day. We'll talk to you tomorrow. stockmarketcycles.com