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To: H James Morris who wrote (53241)	6/27/2002 1:29:34 PM
From: stockman_scott	Respond to of 65232

The Latest Washington Post Editorial... ____________________________________ Another One Falls Washington Post Editorial Thursday, June 27, 2002 IT'S ALMOST too poignant that, on the day that President Bush headed off to the G-8 summit of world leaders in Canada, WorldCom announced the biggest financial restatement in corporate history. Past G-8 summits have been occasions for American triumphalism, but this one takes place against a background of a falling dollar, a dramatic shift from budget surpluses to deficits and a string of corporate scandals that have shaken market confidence. On Tuesday Paul Volcker, the former chairman of the Fed, questioned the mantra that U.S. accounting standards are the best in the world. And that was before WorldCom's extraordinary announcement. WorldCom is the nation's second-biggest long-distance phone company; it employs 80,000 people and serves 20 million customers; it is the sort of institution of which someone might have said, "What's good for WorldCom is good for America." But now its survival is in doubt. Its share price has collapsed from a peak of more than $60 to somewhere below $1, representing a loss of wealth of more than $100 billion. It's as though an entire year's worth of output in Portugal or Israel were to vanish from the planet. The accounting tricks that triggered the latest stage of WorldCom's collapse in some ways recall Enron. Like Enron, WorldCom was a 1990s stock market darling that apparently resorted to cheating rather than disappointing investors' utterly unrealistic expections. Like Enron, WorldCom employed Arthur Andersen to audit its accounts, a duty that Andersen failed to take seriously. Andersen happily signed off on WorldCom's 2001 books, which announced an illusory profit of $1.4 billion. Later, when the illusion had been exposed, Andersen helpfully informed WorldCom that its audit reports "could not be relied upon." Yet in other ways WorldCom is worse than Enron. The extent of its deceit -- profits were overstated by $3.8 billion -- appears to be greater, and the manner of the deceit is more troubling. Enron resorted to complex off-balance-sheet partnerships and other devices, encouraging the idea that the impenetrable sophistication of modern corporate finance was a big reason for its implosion. Don't blame the auditors and board members and Wall Street analysts, the argument went; nobody could understand Enron's byzantine structure. But WorldCom makes that sort of excuse impossible. It cheated investors with the crudest of all scams, taking current expenses and counting them as capital costs that could be spread over an extended period. This violates Accounting 101. The fact that WorldCom executives dared to pull this trick shows how confident they were in their auditors' compliant attitude. The good news is that, in the Senate at least, support seems to be growing for the Sarbanes bill, which is the best bet for restoring faith in audits. Sen. Tom Daschle, the majority leader, yesterday promised to bring the bill to the floor right after the July 4 recess. But the House Republicans have passed a weak bill; the Bush administration is timid on reform; and Treasury Secretary Paul O'Neill recently complained of "an unbelievable movement . . . in the market without what I believe to be substantive information." Mr. O'Neill and others need to accept that it is precisely the lack of substantive information in corporate accounts that explains the market's jitters. © 2002 The Washington Post Company

To: H James Morris who wrote (53241)	6/27/2002 1:59:38 PM
From: stockman_scott	Respond to of 65232

SL: Semiconductors & Computer Hardware: Upgrading Semiconductor Group 07:05am EDT 27-Jun-02 Lehman Brothers (Niles, Daniel) INVESTMENT CONCLUSION : * After starting to become negative on Semiconductors & Computer Hardware names in Q3:2000, we believe investors now realize that end-demand is not improving much till 2003 at the earliest and more importantly are starting to give valuations to a few names that are appropriate for this low growth scenario by being near historic lows. SUMMARY : * As a result, we are moving from an underweight position to a market weight/slight overweight position in semiconductors. Though semiconductor revenues bottomed y/y and started improving last August, valuations have not started to reach a compelling level until now, in our minds. We are upgrading Micron and ICST to Strong Buy from Buy (the only Strong Buys we have) in the computer hardware/related semiconductor sector. We are also upgrading Fairchild and Conexant to Buy from Market Perform. * We place the downside on the SOX at 350 or about 15% above the peak seen in 1995 or about 10% lower than current levels of about 383 but upside to about 450 or roughly up 20% by year-end. * We anticipate adding more names to this list as the summer unfolds and estimates come down further along with stock prices. We fundamentally believe that the global macroeconomic picture is improving and that IT spending will follow suit but only as we get into next year. On that vein, we are also cutting our estimates for HPQ and Intel today based on a the still difficult IT demand environment and deterioration in consumer PC demand leading to high PC channel inventory. We are upgrading our semiconductor weighting from underweight to market weight/slight overweight. We are upgrading selected names in our universe that we believe have both reasonable earning expectations for the near and longer term as well as compelling valuations. These names are Conexant Systems and Fairchild Semiconductor from Market Perform to Buy and Integrated Circuit Systems and Micron Technology from Buy to Strong Buy. There are four main reasons that we have upgraded our sector weighting. First, semiconductor revenues, units and ASPs started to bottom on a year-over-year basis starting in August but investors are now finally starting to adjust to growth being slower than expected in 2002 with the best example being Intel`s pre-announcement for Q2. Second, we are forecasting growth in 2H:02 and for the full year 2003 for three key end-markets (PCs, wireless and enterprise networking). Third, end-market inventory levels are reasonable though we would say not low given the inventory builds seen in 1H:02. Finally, we believe investors are finally giving valuations that are consistent with the slower growth that we expect over the next several years for many of these names. After being negative starting in Q3:2000 and remaining negative, we believe now is the time to become more constructive on semiconductors. Rather than try and upgrade the group early with the assumption that `the worst was behind us` and `a strong upcycle will solve all valuation problems`, we chose to wait until we believed fundamentals and estimates stopped deteriorating AND valuations were at reasonable levels to discount the risk. Though timing wise, we believe there will be more estimate cuts when IT related tech companies report results during the summer including Intel, Hewlett Packard and IBM, we believe some names in our universe have already contemplated those risks in their earnings projections with valuations to match. To be clear, certain sectors within semiconductors such as PLDs, comm ICs and mixed signal, we believe still have a fair amount of risk as estimates get lowered given valuations still seem to anticipate unreasonably high growth expectations. We believe investors are finally arriving at valuations that are consistent with the slower growth that we expect over the next several years for many of these names. Currently, our semiconductor sector trade at 4.5x (vs a 5-year median of 7.3x) LTM sales, 28x (vs. 46x) forward P/E and 2.8x (vs. 6.1x) book value. While stock prices in our semiconductor universe have declined significantly over the last several months, and now trade at a 25% discount to their median 5-year P/E, we note that certain neighborhoods such as Comm ICs (40x CY03), PLD/ASICs (28x CY03), and Wireless (30x CY03) remain expensive. We would therefore focus on companies with reasonable growth forecasts and reasonable valuations through year-end. Figure 1: Company Valuation Comparable Source: Baseline, FactSet, and Lehman Brothers We also believe that much like in the mid 1980s or the early 1990s when stocks collapsed after the recovery was slower than expected, we believe we have gone through that same situation this year. We have been using the charts below for more than a year as the main reason to remain negative. In 1990 and 1985 semiconductor stocks recovered at the bottom of the cycle and actually started to collapse going to lower lows during the upcycle versus the lows set during the worst part of the downcycle. As can be seen below, we have gone through the same process this year. While no one (including us) debated that business was improving, our belief was that it would not improve as much as expected much like in those two prior time periods. We believed that this would result in many of these stocks going to lower lows during the upcycle as it became clear that though improving, revenues and profits would not match expectations for the rate of improvement as in the mid 80s or early 90s. We believe the absolute bottom if it actually has not been reached already will be seen in July or August during the depths of the summer but not at much lower levels. Figure 2: Semi Stocks vs NASDAQ vs Semi Revenue Growth (Jan 85 - Dec 87) Source: SIA and Lehman Brothers. Figure 3: Semi Stocks vs NASDAQ vs Semi Revenue Growth (Jan 88 - Dec 91) Source: SIA and Lehman Brothers. Figure 4: Semi Stocks vs NASDAQ vs Semi Revenue Growth (Jan 99 - Jun 02) Source: SIA and Lehman Brothers. We place the downside on the SOX at 350 or about 15% above the peak seen in 1995 or about 10% lower than current levels of about 383 but upside to about 450 or roughly up 20% by year-end. We would caution investors that certain sectors within semiconductors such as: 1) pure-play communication IC players such as AMCC, PMCS or VTSS (see our estimate reductions in 6/17/02 First Call), 2) mixed signal players (i.e. LLTC and MXIM), and 3) PLD vendors such as Altera and Xilinx (see our estimate reductions on 6/21/02) are likely to have a tougher time seeing their stocks appreciate given tough fundamentals and higher valuations. We would therefore focus on companies with reasonable growth forecasts, interesting valuations, and solid franchises with stable balance sheets through year-end. This caused us (at least for now) to leave out companies that had compelling valuations such as AMD which is bleeding cash right now and ONNN semiconductor due to their heavy debt burden. We view the PLD (programmable logic device) vendors as somewhere in between given estimates will be lowered substantially when they give guidance but valuations are becoming more reasonable and they have solid franchises (see estimate reductions in 6/21/02 First Call). We believe that semiconductor revenues will improve from down 49% y/y in August of 2001 to flat to down 5% in 2002 and up 18-20% in 2003. We continue to believe that the August of 2001 month was the worst year-over-year comparison with a minus 49% decline in revenue. As shown below, the semiconductor business started to rapidly deteriorate in Q4:00 as inventory exploded and demand collapsed making this an easy comparison. These figures indicate that business has mathematically hit bottom in Q3 from a y/y revenue standpoint. Going forward, we believe that revenues on a year-over-year comparison will continue to improve towards positive revenue growth. Figure 5: Semiconductor Revenues Versus Units Y/Y % Growth Source: SIA and Lehman Brothers Figure 6: Y/Y Revenue Growth Comparison (August To May) Source: SIA While unit growth finally turned positive in March of 2002, we believe it is highly unlikely, if ever, over the next year that ASPs will see positive comparisons. Our view on semiconductor pricing is always that it is set by supply and demand and not by the suppliers. It is hard for us to see demand exceeding supply over the next twelve months except in selected commodity areas such as DRAMs. That combined with the cost reductions driven by the implication of Moore`s Law of twice as much silicon in eighteen months for the same price as today, we believe will put a damper on prices till late 2003 at the earliest. We also note the aggressive shrinks to 0.13u and 300mm which will result in an acceleration in silicon produced over the next twelve months. Figure 7: ASP and Unit Y/Y % Growth Comparison Source: SIA On a positive note, we have seen some encouraging signs on a q/q basis with regards to pricing however which should at least stabilize the declines. While the most recent year-over-year numbers (April) for the entire semiconductor industry do not appear to be attractive (units up 13%, and revenues down 8%), when we take a look at the pricing trend over the past twelve months, it has been bouncing along the bottom really since July. We note that while units were up 3% on a month-over-month basis in December, revenues actually increased 15% for example. Based upon SIA data, it appears as if pricing for the overall semiconductor industry bottomed in August with the average year-over-year decline of 24%. Since then the ASP decline has improved to only down 19% in October. In the 1998 cycle, pricing declines bottomed at roughly -20% on a year over year basis. Figure 8: Semiconductor ASP Y/Y % Growth Comparison Source: SIA and Lehman Brothers Estimates Figure 8: Semiconductor Revenue Y/Y % Change Source: SIA and Lehman Brothers Estimates

To: H James Morris who wrote (53241)	6/27/2002 2:15:28 PM
From: stockman_scott	Read Replies (2) \| Respond to of 65232

Is Gold Losing Its Glitter...?? thestreet.com

To: H James Morris who wrote (53241)	6/27/2002 5:09:59 PM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Chip and chip-equipment stocks rally on upgrade SAN FRANCISCO, June 27 (Reuters) - Shares of semiconductor and semiconductor-equipment companies rose on Thursday after Lehman Brothers upgraded the chip group and Bear Stearns said it believed that many chip-making equipment stocks were oversold. "After starting to become negative on semiconductors and computer hardware names in (the third quarter of 2000), we believe investors now realize that end-demand is not improving much till 2003 at the earliest and more importantly are starting to give valuations to a few names that are appropriate for this low growth scenario by being near historic lows," wrote Dan Niles of Lehman Brothers in a note to clients. As a result, Lehman moved to a "market weight/slight overweight" position from an "underweight position" in semiconductors, Niles wrote, adding that while chip revenues bottomed year over year and started improving last August, valuations haven't started to reach a compelling level until now. The benchmark Philadelphia Semiconductor Index <.SOXX> rose 11.8 percent to 394.5. Among the biggest gainers were Applied Materials Inc. <AMAT.O>, the biggest producer of chip-making equipment, which rose 97 cents, or 5.1 percent, to $19.96. Another chip-equipment maker, Lam Research Corp. <LRCX.O>, saw its stock rise 84 cents, or 4.8 percent, to $18.34. "We still think the semiconductor equipment stocks in general are oversold," Bear Stearns analyst Robert Maire wrote in a note to clients on Wednesday. Bear Stearns recommended investors aggressively buy shares of Amkor Technology Inc. <AMKR.O>, saying they were selling for just a bit more than half their year-low price following the Sept. 11 attacks on the United States. Amkor shares rose 45 cents, or 8.6 percent, to $5.66. Mattson Technology Inc. <MTSN.O>, a supplier of semiconductor processing equipment, is also quite attractive, relative to its recent peak valuation, Bear Stearns said. Its stock rose 17 cents, or 4 percent, to $4.37. Lehman's Niles upgraded Micron Technology Inc. <MU.N>, the No. 2 maker of memory chips, to "strong buy" from "buy," and Integrated Circuit Systems Inc. <ICST.O> to "strong buy" from "buy." Micron shares rose $1.50, or 7.9 percent, to $20.50. Integrated Circuit stock rose $2.24, or 12.4 percent, to $20.24. Niles cited four reasons for upgrading his firm's sector rating on the chip sector. First, chip revenues, unit shipments and average prices started to hit a bottom starting in August, and investors are now adjusting to slower-than-expected growth in 2002, with the best example being Intel Corp.'s <INTC.O> lowering of revenue guidance for the second quarter earlier this month. Second, Niles is forecasting growth in the second half of this year and during next year for personal computers, wireless and enterprise networking markets. Third, inventory levels are reasonable, though not low. Finally, Niles wrote he believed investors are giving stocks the valuations that are consistent with the slower growth expected over the next several years. Analog chipmaker Linear Technology Corp. <LLTC.O> rose, climbing $1.84, or 6.3 percent, to $31.02. Rival Maxim Integrated Products Inc. <MXIM.O> gained $1.36, or 3.7 percent, to $38.25. Diversified chipmaker National Semiconductor Corp. <NSM.N> rose $1.54, or 5.5 percent, to $29.57, while rival Texas Instruments Inc. <TXN.N> gained 44 cents, or 1.8 percent, to $24.67. Intel edged up 4 cents, to $18.65, following Niles' reduction in earnings estimates for the chipmaker for this year and 2003. Citing excess channel inventories of PCs and weak demand in the consumer and European markets, he trimmed his 2002 earnings-per-share estimates to 57 cents from 60 cents and 2003 estimates to 83 cents from 90 cents. Shares of Advanced Micro Devices Inc. <AMD.N>, Intel's chief rival in the market for microprocessors, edged up 8 cents to $9.05. ((-- Duncan Martell, San Francisco bureau, 415 677-2536, duncan.martell@reuters.com)) REUTERS * end of story *