What's it all About?

The markets had to digest a plethora of information today, from Alan Greenspan's platitudinous ramblings to Yahoo's (YHOO) quarterly earnings. However, when it was all over, indiciveness ruled. The markets finished mixed with the Dow Jones Industrial Average (INDU) closing up 80.61 points to 10,727.19 and the Nasdaq Composite Index (COMPX) sliding down 23.91 points to 3956.38.

The trading session opened higher this morning on positive comments from Federal Reserve Chairman Alan Greenspan. Greenspan, speaking at the National Governor's Association Conference, indicated that while unemployment is near an all- time low, the rapid pace of technological change is preventing workers from demanding higher wages.

However, the COMPX couldn't hold on to early gains, as the Internet and Semiconductor sectors weighed heavily on the technology issues today.

The Internet sector was driven lower on investor concerns over Yahoo's (YHOO) earnings, which were reported today after the bell. More on Yahoo's earnings later. The source of the negativity came again from Morgan Stanley Dean Witter Analyst, Mary Meeker, who surmised that Yahoo will be increasing spending to deliver new products to service the wireless sector. Such additional spending, while perhaps prudent in the long-run, will erode short-term profit margins.

Since Yahoo only turned profitable over a year ago, investors didn't exactly cheer the news. The stock traded down $4.50 to close at $105.50 on very heavy volume today. The stock is now trading at levels last seen in late November of 1999.

By the way, Yahoo ended up beating analyst estimates of $0.10 per share and reported profits of $0.12 per share on revenue that more than doubled the prior year's numbers. The company reported just over $270 million of revenue for the second quarter. In after-hours trading, the stock traded up to $114, an 8 percent bump off of today's closing price of $105.50.

Additional factors in the Nasdaq decline today were a number of profit warnings from some prominent technology companies.

Aspect Communications (ASOT) traded away more than half of its value today after the company warned analysts of an expected $.01 to $.03 second quarter earnings range compared to consensus estimates of $.08. The company figure includes $.06 one-time gain resulting from the sale of securities. Analysts generally do not incorporate non-recurring profits into their estimates, so the real gap between the Street estimates and expected actual earnings is fairly substantial. The stock traded down $23.88 to $20.

Pinnacle Systems (PCLE) also lost more than half of its value today, as the company expects earnings in the negative $.06 per share range, substantially lower than the street consensus estimate of $.16/share. Shares sunk $13.44 to close at $9.19. Pinnacle Systems is a digital video services provider. CEO Mark Sanders blames the expected revenue shortfall on a less than favorable pricing environment.

It will be interesting to see how these two trade tomorrow, assuming there will be a Nasdaq rally. Generally, the market loses interest in under-performers, especially in relation to earnings news, and these issues will continue to drift south well after a big one-day hit.

Alcoa traded up over 8% today, a full day after it gapped up at the open on stronger-than expected earnings news. Look for situations that are limited to earnings upgrades or downgrades and attempt to capitalize on either positive or negative sentiment reaction.

In other market action today, Sprint (FON) dropped further today on news of a ratings cut from CIBC World Markets. The stock lost $4.18 to close at $47.54. Profit warnings also came from Scansoft (SSFT), Service Corp Intl.(SRV), and International Speedway (ISCA).

Making news on the upside was Alteon Websystems (ATON) whose shares jumped 30% today to close at $131.12. The company reported profitability three quarters sooner than expected although the company said it didn't expect sales to increase at the same pace going forward.

Syncor International (SCOR) jumped higher today on news that the company declared a 2:1 split payable August 9th. The stock gained over 9th, moving up $7.81 to $87.25.

In other merger-related news today, VoiceStream Wireless (VSTR) rose 11% on reports that Deutsche Telecom (DT) has offered $30 billion for the company. VoiceStream shares jumped $14.12 to close at $139.06. Deutsche Telecom is actively seeking a wireless partner and is reportedly also interested in Sprint (in which it already owns 10%) or Nextel Communications. Sprint (FON) fell on the news as its shares have been propped up recently on bids from suitors such as MCIWorldcom (WCOM). Deutsche Telecom had already expressed interest in Qwest (Q) before the USWest (USW) merger. However if this pans out, there will undoubtedly be a good level of antitrust scrutiny, not to mention any other legal snafus relating to a foreign company entering the US telecom market.

Other industries that were moving today were the Semiconductor Index (SOX) and the Oil Service Index (OSX). Lam Research Chief Executive Jim Bagley issued negative statements regarding the semiconductor industry's ability to maintain sales targets in light of possible component shortages.

The OSX closed up 9% today on news that industry titan BP Amoco is ratcheting up its capital spending projects by 15% over the next 3 years. Other major oil producers are expected to follow suit as current oil prices generate huge profits above the cost of production. All of this excess money flows through to the oil service stocks that include drillers, seismic, and other supply companies. In our July 6th newsletter, we mentioned significant upside for this industry in anticipation of increased spending levels and already tight capacity utilization in the drilling sector. Halliburton (HAL) and Transocean Sedco Forex (RIG) were big gainers today with each issue gaining about 10%.

Lots of earnings news and economic reports to look forward to this week. Big names reporting tomorrow include Abbott Labs (ABT), Time Warner (TWX), MBNA Corp (KRB), Applied Micro Circuits Corp. (AMCC) which traded down over 7% today on a possible negative earnings report tomorrow in light of Bagley's comments. They report after the close and should provide some direction for the SOX. Motorola (MOT) and Office Depot (ODP) also report tomorrow after the bell.

Chris Pikul
Asst. Editor

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