From Briefing.com: It was an O-for kind of week as the Nasdaq was 0-for-5 in terms of the win column. The tech sector's weakness was the primary reason for the losing streak that now stands at six in terms of consecutive losing sessions.
On Friday, the influential semiconductor sector struggled throughout the day. The disappointing earnings report, and outlook, from NVIDIA (NVDA 15.50 -3.80) was partly to blame, but so, too, was the deteriorating technical condition of the SOX Index. Like the Nasdaq, the SOX also slipped below its 50-day simple moving average in the just-completed week.
Anyone surprised by the tech sector's weakness shouldn't be as it was, arguably, overdue for a more pronounced corrective period. As disconcerting as the recent trading action might be, though, one should keep in mind that the Nasdaq has pulled back 7.4% from its recent high of 1776.10 and that a correction is generally defined as a pullback of 10.0%.
Briefing.com has pointed out before that a 10.0% pullback would place the Nasdaq at the bottom end of its June trading range (i.e. 1597-1600). Strictly speaking, a pullback to 1576 would still be considered within the realm of normal corrective activity as that would mark a typical retracement of 38% of the rally from the March lows.
In sum, it is still too early to declare the sky is falling in the tech sector. With that in mind, it would come as little surprise to see a bounce on Monday given the recent string of losses. Nevertheless, given the sector's recent inability to sustain an advance and the lack of leadership, it is clear that the cloud ceiling is lower than it was before, and hence, we continue to urge participants with a near-term mindset to take a defensive-minded approach to tech stocks.-- Patrick J. O'Hare, Briefing.com
4:54PM Weekly Wrap :
Relative strength was a relevant phrase this week as it was clear that some areas of the market did better than others. Specifically, on a relative basis, the blue chip shares outperformed the technology issues. Their outperformance, though, meant simply that they held up better overall than the technology stocks, not that they were remarkably strong. That point shines through in the fact that the Dow and S&P were essentially flat for the week while the tech-heavy Nasdaq Composite was down 4.2%. Small-cap shares ran into similar difficulties as evidenced by the 3.0% decline in the Russell 2000.
There was talk of sector rotation that, frankly, carries some credibility when looking at the breakdown of the best- and worst-performing S&P industry groups this week. Winners of note included the gold, homebuilding, oil service, oil drilling, retail, airline, and financial groups. The losers list, meanwhile, had ample representation from the technology sector with the semiconductor equipment, semiconductor, contract manufacturing, telecom equipment, wireless service, and biotech groups trading to the downside. Managed care was another notable laggard.
The tech sector, to be sure, had a tired feel to it as intra-day advances couldn't be sustained. Moreover, it was not unusual to see the sector fall prone to late-day selling interest. One of the key debilitating factors was a sense that the stocks had gotten ahead of themselves in discounting the pace of a recovery in IT spending. That sense was heightened by Cisco (CSCO) when it reported its fiscal Q4 (Jul) results after Tuesday's close and provided revenue guidance for fiscal Q1 (Oct) that implied virtually no growth on a yr/yr basis.
Cisco's report, in turn, prompted profit taking in other tech names that was predicated on valuation concerns. Rather than exiting the equity market altogether, though, it appeared as if tech investors simply rotated funds into blue chip names that have underperformed the highflying tech stocks on a relative basis year-to-date.
Another round of solid economic news, punctuated by the third straight week where initial claims were below 400K, a stronger than expected ISM Services Index, and a litany of positive same-store sales results from the retailers, encouraged the rotation within the stock market. Even so, the loss of momentum in the influential tech sector, weakening market internals, oil prices above $32/bbl, a skittish Treasury market following the quarterly refunding, and worrisome technical developments kept buying efforts in check.
With respect to the latter, the Nasdaq fell through support at the top end of the June trading range (i.e. 1686) and soon slipped below its 50-day simple moving average, joining the S&P 500 in that regard. The Dow spent some time below its 50-day simple moving average, but eventually rebounded to end the week above that key short-term level.
Regular readers will recall that Briefing.com urged a defensive-minded stance entering the week, emphasizing patience in committing new money, restraint in chasing momentum plays, and possibly taking on covered call positions. Based on what has transpired since then, we see little reason to change the recommendation. Next week, the key happenings will include the FOMC meeting, a barrage of economic data, and earnings reports from the likes of Wal-Mart (WMT), Applied Materials (AMAT) and Dell (DELL). For added perspective, be sure to read Briefing.com's Looking Ahead Story Stock.-- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 9153.97 9191.09 37.12 0.4 % 10.2 %
Nasdaq 1715.62 1644.03 -71.59 -4.2 % 23.1 %
S&P 500 980.15 977.59 -2.56 -0.3 % 11.2 %
Rsl 2000 468.08 453.94 -14.14 -3.0 % 18.5 %
12:28PM Looking Ahead : The economy is going to be front-and-center next week as there are a litany of economic reports due to be released. The real economic event of consequence, though, will be the FOMC meeting on Tuesday.
Briefing.com - and the market for that matter - isn't expecting any change in the fed funds rate, which currently stands at 1.00%. Greenspan's semi-annual Congressional testimony, recent economic news, the backup in Treasury rates, and the improved stock market are among the factors contributing to the no-change viewpoint, as each is linked to an expectation that the economy is poised to strengthen in coming quarters. Such a view would normally lead one to think that an increase in the fed funds rate is in the offing, but the on-hold stance is warranted as continued disinflation tops growth concerns.
With the accompanying policy directive, Briefing.com expects the Fed to continue to pay lip service to the continued battle against disinflation. Briefing.com's Chief Economist, Tim Rogers, opined in a Fed Brief this week that "The tone of the statement carries market implications. While improved economic data help affirm the balanced risk the Fed has carried on the growth outlook, the disinflation risk supports the extended on-hold policy outlook the Fed has made clear. The absence of comment on disinflation, or worse - a balanced risk assessment - would further fuel the bearish tone in long term interest rates and cut in to the aggressively accommodative policy the Fed has engineered."
The equity market wouldn't find an expeditious rise in long-term rates from current levels comforting, as it would precipitate a residual fear that higher rates will retard economic growth and raise the attraction level of the return on bonds versus stocks.
As for the data next week, insight on the (dis)inflation picture will be gleaned from the PPI (Thurs.) and CPI (Fri.) releases, and the report on Export and Import Prices (Wed.). In turn, the Retail Sales (Wed.), Initial Claims (Thurs.), NY Empire State Index (Fri.), Michigan Sentiment (Fri.), Industrial Production (Fri.) and Capacity Utilization (Fri.) reports will contribute to the debate on growth prospects in 2H03. Added perspective on each item can be found on Briefing.com's Economic Calendar.
The Earnings Calendar is dominated by retail companies, but their reporting should be somewhat routine since most already commented on Q2 expectations when reporting July same-store sales results this week. By and large, those reports were strong and the stocks traded higher, so a sell-on-the-news response to the actual earnings report is a distinct possibility, unless guidance for the remainder of the year is notably strong. Applied Materials (AMAT) and Dell (DELL) will hold some sway over their respective sectors, and perhaps the broader market, when they check in with their earnings results after the close of trading on Tuesday and Thursday, respectively.
The 2003 Semiconductor Conference in San Francisco and the HP World 2003 Solutions and Technology Conference in Atlanta are on the Events Calendar and could generate some headline buzz during the week.-- Patrick J. O'Hare, Briefing.com
11:23AM Nvidia (NVDA) 15.34 -3.96: Nvidia (NVDA), the maker of semiconductors focused on the graphics market, reported earnings last night after the close. While the Company did post an increase in revenue, both sequentially as well as on a year over year basis, it did fall short of original guidance. The Company did move guidance lower during the quarter, and told analysts that it expected revenues to come in between $455 mln to $460 mln; analysts ended up settling on $458 mln. Total sales of $459 mln represent an 14% increase from the year ago period and an 8% increase from the prior quarter.
Earnings per share of $0.14 were better than the Reuters Research consensus estimate of $0.11, but all isn't what it seems, as the company lowered its tax rate to 9.4%, a significant decrease that helped the company beat estimates. In the same period a year ago, NVDA had a 30% tax rate. If the tax rate were 30% in the current quarter, EPS would have been $0.11. The tax rate was reduced due to the expectation of foreign earnings as a percentage of sales.
Gross margins slipped in the quarter, down from 31.3% last quarter to 28.3% this quarter. At the same time, operating expenses increased by about 5% or $5.1 mln in dollar terms. Going forward, the company called for gross margins to be flat to down slightly in the coming quarter. Operating expenses are forecasted to increase 5% - 10%. Revenue growth of 5% - 6% is likely to be overshadowed by the decreasing margins and increasing costs.
None of these developments should come as a shock to loyal Briefing.com readers. Back on May 9, 2003, Briefing.com posted a Story Stock on NVDA on the heels of its last earnings report, and we noted that the company was expecting margins to decrease and expenses to increase. Admittedly, we somewhat missed the boat when we told investors to take a wait and see approach (the stock was at $18.98 when we posted the story and it moved above $26 per share in a month).
Our wait and see approach looks like it was the right call, though, as the stock is now lower. Briefing.com believes that stocks with decreasing gross margins, and increasing expense and top line growth estimates that are being pulled back are not particularly good buying ideas. Those factors, when combined on a technology company make it very hard to grow earnings, which in turn drive stock prices. Briefing.com expects NVDA to post a decrease in earnings, and recommends prospective investors avoid purchasing this stock and current shareholders to consider liquidating their position. --Brian Bolan, Briefing.com
9:33AM ATI Tech target raised to $14 at SoundView (ATYT) 11.41 -0.03: -- Update -- Soundview raises their target to $14 from $12, as they believe the mkt will progressively assign a multiple premium on ATYT vs NVDA over the next few qtrs given NVDA's continued cost issues and poor gross margin outlook.
9:31AM Asian PCB makers seeing sharp improvement in business -- Legg Mason : Legg Mason reports that last night it had an extensive discussion with one of the largest Asian Printed Circuit Board manufacturers, who has a solid presence in the wireless. This co is computing substantial improvement in business in just the past four weeks. Legg Mason's contact stated that demand has increased strongly across virtually all end-markets, driving the firm's utilization rate from the high-80% range, to now 100%. Strong demand has pushed lead times from two-weeks, a month ago, to now four-to-six weeks. With this strong improvement in orders, firm's contact is much more confident in an IT spending recovery as strength is also being seen in non-seasonal corporate infrastructure spending. Legg Mason recommends looking at the wireless computer spaces; firm continues to recommend ISIL (+0.4%) and RFMD (+1.3%), as well TXN (+0.2%) and SWKS (+1%).
8:15AM NVIDIA downgraded at Thomas Weisel (NVDA) 19.30: Thomas Weisel downgrades to Peer Perform from Outperform after the co cut Q3 guidance; firm cites the following factors: 1) concerns regarding growth in the co's core (non-Xbox) biz, 2) inventory growth in excess of anticipated rev growth, 3) uncertainty regarding the timing and likelihood of recapturing lost mkt share and of gross margin improvement, and 4) significantly lowered EPS ests.
8:03AM Broadcom, Intel settle litigation, enter patent cross-license (BRCM) 20.55: Under the settlement agreement, all outstanding claims and counterclaims in those actions will be dismissed with prejudice. The parties also entered into reciprocal releases covering all patent claims and certain other claims. In connection with the settlement, Broadcom will pay Intel $60 mln in cash in two equal installments in Q3 and Q4 of 2003. Additionally, Broadcom and Intel entered into a separate comprehensive cross-license agreement covering patents owned or controlled by either party or its subsidiaries.
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