From Briefing.com: Updated: 05-Nov-02 - General Commentary - Yesterday's action was a classic example of a news-related pop, as indices exploded off the open in response to the positive ruling in the Microsoft antitrust case. However, as with most event rallies this one ran out of gas early on. Though market still closed higher, indices finished well off their respective intra-day highs. As for the tech heavy Nasdaq it peaked at 1420, or right at the lower-end of Briefing.com's target when the recovery began.
Curbing the market's early enthusiasm for all things stock was an announcement from Secretary of Defense Rumsfeld that the nation would soon begin to activate reservists in anticipation of war with Iraq. Rumsfeld's comments shocked a market which had generally come to believe that the crisis in Iraq would be resolved without military action. It did not shock us. Briefing.com has maintained all along that the US would force Hussein from power, and that such action would only occur after the midterm elections.
Well, it's election day. Once the media finishes its obsession with the election and its potential impact on the economy, look for attention to immediately turn to the prospects for war. This will be especially true if the Republican's gain control of Senate while holding on to the House. Such an outcome would be viewed by many as an endorsement of the Administration and its policies - including its hawkish policies in the Middle East. For Briefing.com's election predictions, please see Monday's (11/4) Stock Brief.
Returning to the markets, we reiterate that the internals look good, momentum is strong and the seasonals are favorable. These factors could underpin the indices for another week, maybe two. But eventually the very force which triggered the rebound - the technical picture - will be its undoing, at last short-term.
Most of the key tech indices have now run to or near their August highs. Indices are also well above their shorter-term 20-day moving averages. Throw in the highest MACD/RSI readings in nearly a year, and ongoing concerns over the weakening economy, and the risk/reward ratio at these levels is not positive.
Could we see another event-related pop if Fed decides to cut rates by 25 basis points as everybody now expects? Sure. But just as Monday's rally faded quickly, so to will any Fed induced advance. Consequently, we continue to advise reducing exposure to tech on any near-term gains.
Robert Walberg, Briefing.com
8:53AM Analog Devices estimates cut at SG Cowen (ADI) 30.71: SG Cowen cuts 2003 est to $0.80 from $0.90 (consensus is $0.88) and expects the rest of the Street to trim numbers between now and when ADI reports on Nov 19; with the stock up roughly 65% in the last month (vs the SOX up roughly 55%), firm believes there is risk to near-term stock performance as numbers are cut.
Soundview survey suggests 2003 will be inflection point in IT spending. Soundview says that their Gartner-SoundView IT spending survey showed a strong year-to-year improvement in intent-to-spend questions, suggesting pent-up demand and a high probability that 2003 will be a positive inflection point in IT spending; although top-down budget questions indicate a flat YoY growth in 2003, firm says their survey has rarely shown such a divergence between IT spending confidence and IT user wants. However, survey indicates that application software spending may lag broader infrastructure priorities, and security showed deceleration from last year. Highlighted co's include DELL, HPQ, CSCO, NTAP, and EMC.
Lehman: investors overlooking weak fundamentals in semi equipment shares. Lehman says that investors are overlooking weak fundamentals at semi equipment co's in favor of the prospect of stabilization in end mkts and the fear of missing the upturn in equipment shares; overall, shares trade well above historical trough levels, and the co's with the greatest discrepancy between price/book and tangible book include AEIS, BRKS, KLIC, MKSI, and PLAB; believes the most likely candidates for asset impairment charges are KLIC and BRKS.
8:28AM : S&P futures vs fair value: -3.5. Nasdaq futures vs fair value: -12.0. Weak tone persists in the futures trade as a number of downgrades tied to valuation concerns are keeping the buying interest in check... Stocks affected by such calls include the likes of AXP, TLAB, NXTL, SFA, SYK, AFCI, ADTN, and PMCS... Weakness in the dollar, which is attributed to growth concerns, isn't helping matters either
8:04AM : S&P futures vs fair value: -3.0. Nasdaq futures vs fair value: -14.0. Cash market is expected to start the day on a relatively weak note with valuation concerns, a Circuit City (CC) earnings warning, and Applied Materials' (AMAT) job cut announcement weighing on sentiment... Latter being interpreted as an indication of a lack of confidence in demand pick-up... Look for tech stocks to pace the early declines
3:00PM Symantec (SYMC) 42.07 +1.12: Shares of Symantec have returned just over 27% since we reviewed them favorably on September 17th. By way of comparison, the S&P 500 is roughly 5.4% higher over the same time frame, while the Nasdaq has returned about 12.5%.
As far as what the company does, the chances are relatively good that you have Symantec's antivirus software on your computer. The company's Norton AntiVirus 2001 and Norton SystemWorks 2001 have been the number two and five top-selling software products respectively (according to PC Data). The two products give Symantec a reliable base of business to support its effort to take the company in a new direction. Namely, the company intends to create the industry's first fully interoperable, centrally managed security platform. To this end, the company has acquired Axent Technologies which provides two important technologies -- enterprise-class intrusion detection and vulnerability assessment.
In terms of near-term risk, note that in mid-July Symantec acquired three privately held businesses for an aggregate purchase price of $355 million (roughly 6% of Symantec's current market value). While some may contend these present an integration risk, we believe the aggregate size of the acquisitions is not substantial enough to warrant the level of concern raised by others. In addition, management has stated that new acquisitions are unlikely until the integration of this Summer's deals is complete. Based on Symantec's second quarter results -- reported in October -- it doesn't look as if the ongoing integration is hindering the company's performance.
Symantec posted second quarter revenue of $325 million, a 34% increase compared to $242 million for the same quarter last year. At the same time, the company reported pro forma earnings per share of $0.38, compared to a pro forma number of $0.28 per share a year ago. For the quarter, Symantec's worldwide enterprise security business grew 30% year-over-year and represented 44% of total revenue. Performance in the enterprise security business was supported by 61% growth in firewall/VPN sales and 36% growth in antivirus sales compared to the same quarter last year.
Fundamentally, the shares trade at 26.4x trailing earnings and 24.2x estimates for fiscal year 2004 earnings -- i.e. projecting forward eighteen months. This compares favorably to its five-year historic price multiples which range from an average high of 54.0x to an average low multiple of 17.9x.
From a technical perspective, note that the shares edged above the upper end of their 10-day Bollinger bands earlier in today's session. This suggests two alternate dynamics looking ahead. First, it suggests that in the very near-term the shares may be somewhat extended as they have edged outside the trading range which encompasses two standard deviations of its 10-day volatility. Yet this leads us to our second, and more important, point. Namely, on an intermediate-term time frame, the underlying strength which pushed the shares through that upper band should follow through leading to additional upside.
Look for subsequent resistance at prior congestion around 42.50 followed by more significant overhead in the area of its 52-week high at 43.10. To the downside, watch for initial support just over 40.00 which matches up with an area of notable prior congestion. That level is followed by additional support at 38.50 which approximates the bottom of its most recent trading range. -- Mike Ashbaugh, Briefing.com
10:32AM Microsoft (MSFT) 57.10 (+4.10) (+7.74%) Microsoft surges on the heels of the Friday federal court ruling. The end of the four year antitrust case can only be seen as a positive. But the removal of this case does not make much of an argument for Microsoft as an investment long term. Valuation issues, declining growth rates and the creation of new businesses with much lower margin models all argue for a long term stalemate for the stock price. In today's Stock Brief we detail the reasons behind this line of thought and provide a historical perspective on valuations for the great software company.
Short term traders may find Microsoft something to play with in the coming days. One avenue to consider is that the exuberation of this court victory is a short term event, and that over the coming days and weeks the longer term perspective will again begin to prevail. That long term perspective is a downward trend. It started back in January 2000, when MSFT peaked at $120. The forces driving the stock lower for more than two years have not been removed with this court ruling. See today's Stock Brief for more. - Robert V. Green
10:28AM Technical Levels : When we reviewed the Nasdaq on October 23rd, we were looking towards the index' massive 22-month downtrend line -- at the time, that line rested in the area of 1,365. Over the past two weeks, the line has dropped so that at this point it's currently closer to 1,355. Well guess what? On Friday, the Nasdaq finished the week with a close at 1,360, and in the process, it edged out that significant 22-month downtrend.
So this begs the question of whether today's rally is driven by enthusiasm over the Microsoft (MSFT) court ruling, or whether this is more a function of the significant technical break? For the time being, we'll leave that as an open question. To the market technician, identifying the catalyst is less significant than the assessing the underlying strength of the move.
In the case of today's rally, the underlying strength is once again impressive. Total volume traded is notably heavy on the session as the Nasdaq had surpassed the 500 million share mark in the first 45 minutes of trading. Yet perhaps more importantly, market internals are generating extreme bullish reads behind the strong volume. On the Nasdaq, advancing volume outpaces declining volume by a 13 to 1 margin while the same ratio is generating an extreme reading of 6 to 1 on the NYSE.
Now in a separate review of the Nasdaq on October 21st we pointed to resistance in the area of 1,419 to 1,423. As we noted at the time, this area is notable as it coincides with three points of interest over the prior five years -- 1) the September 11th-induced reaction lows which bottomed at 1,423, 2) the reaction lows of October 1998 which bottomed at 1,419 and 3) the ordinary course of its original uptrend during the Summer of 1997. Yet also note, this area happens to mark -- almost precisely -- the top of the prior leg higher which closed on August 22nd at 1,422.95.
The chart above illustrates the Nasdaq's incredible rise and fall. This is a monthly chart -- showing the opening and closing levels for each month between October of 1995 and the present. So while October was a record month for the Nasdaq, the index is far from overextended when taking the truly longer term view. With the markets coming up on resistance at former multi-year lows, many would contend the indices continue to have room for additional upside. For the time being, keep an eye on the Nasdaq's notable overhead in the range of 1,419 to 1,423. -- Mike Ashbaugh, Briefing.com
1:01PM Cisco Systems (CSCO) 12.68 +1.07: Ahead of company's Q1 earnings report scheduled for 11/6 after close, Fulcrum is reiterating Neutral rating in morning note. Despite slowing in overall network spending during last several weeks, firm expects CSCO to match its Q1 revenue estimate of $4.8 bln and post at least $0.13 in EPS; says weakness in Q1 and lack of a year-end budget flush will make Q2 extremely challenging; seasonally higher calendar F4Q carrier spending may help offset weak enterprise spending; notes that F2Q guidance is key to share price movement over immediate future... CSCO currently trading up 9.2% today.
12:49PM Microsoft (MSFT) 56.97 +3.97: With shares having advanced 7.5%, it is evident market views Friday's court ruling regarding anti-trust issues as largely positive; Salomon Smith Barney thinks ruling was much more favorable than market was anticipating; looks for stock to trade more on fundamentals and less on regulatory risk going forward. Soundview Technology is not as quick to let MSFT off the hook; although expecting short-term strength, thinks issues of Y03 growth and legal proceedings remain. Banc of America thinks ruling paves the way for more transparently aggressive and competitive business practices; sees company succeeding and thwarting others' threats with best-in-class software and platforms.
12:26PM Thomas Weisel on Equity Growth Strategy : While signs of deflation do exist in many markets, firm thinks current pricing environment fear is highly misplaced; recommends increased weightings in tech and telecom services sectors because they are best positioned for unit growth-driven recovery; specifically, suggests AT&T Wireless (AWE 8 +0.40), Cisco (CSCO 12.57 +0.96), Dell (DELL 30.46 +1.48), Mercury Interactive (MERQ 29.40 +1.66), Nextel Comms (NXTL 13.36 +0.88), SAP AG (SAP 21.23 -0.10) and Verizon Comms (VZ 39.89 +1.30) due to their positions as 'industry franchises' with strengthened operating margins and ability to lever EPS upside with modest unit growth; also, recommends Clear Channel (CCU 39.12 +1.81) and Viacom (VIA.B 45.55 +1.20) in consumer, Forest Labs (FRX 101.65 +1.47) in healthcare, and Lockheed Martin (LMT 52.80 -3.58) in industrial growth due to franchise leadership and unique underlying price.
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