High-Tech Train Wreck

Luddites rejoice. Your finger waving and relentless (if not annoying) proselytizing has finally been rewarded. The wheels finally came off a "must-have" technology stock. And in this case, it was the "must-have" technology stock of every portfolio manager from Denver to Timbuktu.

Intel (INTC), the world's largest computer chipmaker and the Nasdaq's largest component, reported Thursday evening that third-quarter revenue will fall short of analysts' estimates because of weaker demand in Europe. Specifically, the company said its revenue will only be 3 to 5 percent higher than the second quarter's $8.3 billion, instead of the $9.4 billion expected. And in case any one was still undecided about selling their Intel shares after that stunning announcement, the company added that gross margins will likely shrink to 62 percent, compared to the expected 63 to 64 percent.

Quicker than you can say "Intel Inside," investors took to dumping their Intel shares. In after-hours trading, the company lost nearly 22 percent of its value on an unheard of 12 million shares.

Unfortunately, investors who remained long in Intel through Thursday didn't see an improvement on Friday. The company's shares remained down through Friday's session to close at $47.94, meaning $91 billion of value had vanished in less than 24 hours. Moreover, Intel had the busiest day ever for a U.S. stock, trading more than 307 million shares, accounting for 15 percent of the Nasdaq's volume.

Of course, investors, being an extrapolative bunch, naturally took Intel's woes to mean desktop makers, software makers and network equipment makers will soon be peddling fewer of their wares. Dell (DELL), the biggest personal-computer maker, slid $2.00 to 35.94; Microsoft (MSFT), the largest software maker, fell $0.94 to $63.25; and Cisco Systems (CSCO), the biggest networking equipment maker, slid $0.81 to $60.31.

Needless to say, as these Nasdaq-heavyweights go, so goes the Nasdaq Composite Index (COMPX), which was the case on Friday. However, the carnage wasn't as ugly as the Intel debacle would suggest. After gapping down 212.7 points, or over 5.5 percent, at the open, the COMPX immediately began clawing its way back toward breakeven thanks to a robust outing by many of its B2B issues. PurchasePro (PPRO) soared $13.25 to $88.25, Ariba (ARBA) rocketed $16.44 to $168.75, Commerce One (CMRC) surged $7.31 to $76.31 and Broadcom (BRCM) added $9.25 to $248.75.

Amazingly, when Friday was over, the COMPX was off only 25.1 points, or 0.33 percent, to close at 3,803.11.

The other major market barometer was able to shrug of the Intel drag even better than the COMPX was. The Dow Jones Industrial Average (INDU) closed Friday's session up 81.82, or 0.76 percent, to 10.847.85 despite gapping down over 87 points at the open and sliding an additional 44 points in the first five minutes of trading. But soon the worse was over and the INDU spent the rest of the session steadily working its way to higher ground.

Helping to overcome the Intel handicap were some of the INDU's more ancient components. Coca-Cola (KO) gained $3.19 to $52.75, Procter & Gamble (PG) rose $1.13 to $64, Johnson & Johnson (JNJ) added $1.63 to $95.88, J.P. Morgan (JPM) gained $5.94 to $166.44 and Hewlett-Packard soared $8.94 to $103.94 after the computer maker said its confident it will meet its 15 percent revenue growth forecast.

The Intel hangover was felt in the broader and smaller markets, too. The S&P 500 Index (SPX) plunged almost 30 points in the first 10 minutes of trading before doing the slow crawl back to daylight. When it was over, the SPX managed to close down only 0.33 points, or 0.02 percent, to 1,448.72.

Meanwhile, the Russell 2000 Index (RUT) also fought its way back after an initial sell-off, eventually adding 4.47 points, or 0.87 percent, to close at 518.82.

As for market internals on Friday, volume was heavy at 1.16 billion shares on the NYSE and at 2.12 billion on the Nasdaq, the exchanges heaviest trading day since April 17. However, market breadth was again negative, with losers beating winners by a 15 to 14 margin on the NYSE and by a 22 to 18 margin on the Nasdaq.

If your keeping score for the week, the INDU fell 79 points, the COMPX dropped 31 points, the SPX declined 17 points and the RUT stepped back by 12.06 points. The third consecutive losing week for all four major indices.

In sector news on Friday, the closely-watched Philadelphia Semiconductor Index (SOX) was a disaster, tumbling 6.2 percent. Other chipmakers suffering heavy losses included Intel competitor Advanced Micro Devices (AMD), which fell $2.93 to $24.63; Micron Technology (MU), which tanked $10.50 to $52; and Motorola (MOT), which loss $1.50 to $31.50.

The biotechs were another story, though, as the AMEX Biotech Index (BTK) surged 4.7 percent, as investors re-deployed cash taken out of techs and put it to work in this market. Within the biotech group, genomics-related stocks were all the rage, with Celera Genomics (CRA) up $14.81 to $98.75, Millennium Pharmaceutical (MLNM) up $17.50 to $148.00 and Human Genome Sciences (HGSI) up $20.00 to $174.19.

In economic news on Friday, government intervention was the central theme. The long-suffering euro climbed 2.1 percent against the dollar 0.8784 after reaching an intraday peak of 0.9006 thanks to efforts by the European Central Bank, the U.S. Federal Reserve, the Bank of England, and the Bank of Japan to support the new-fangled currency.

Don't look for a trend to develop, though. Long-term prospects for the euro still hinge on whether the European Union can become as hospitable to portfolio investment as the United States. I don't see that happening anytime soon. Europe is just too heavily regulated and taxed to make be an investor friendly haven. So, expect those dollars that Europeans are receiving for selling us their goods and services to stay in the United States. Europeans just don't have a good economic reason to convert their dollars to Euros and repatriate them back to the continent, which is bad news for the Euro.

In other government interventionist news, President Clinton directed the release of 30 million barrels of oil from the government's emergency reserve in an attempt to drive down oil prices, which it did by shaving $1.32 off the November futures contract. Still, look for oil prices to drift up again if OPEC doesn't seriously turn up the spigots. The U.S. uses 18 million barrels of oil a day, so the President's addition of 30 million barrels to the market doesn't even to a two-day supply. What's more, the nation's oil refineries are already operating at 97 percent capacity, so it's going to be awhile before the crude hits the market, anyway.

Looking ahead, this week's major economic data releases starts with Monday's release of existing home sales for the month of August. The market consensus is calling for housing starts to have risen to 4.9 billion in August, up from 4.79 million in July. Then on Tuesday, consumer confidence index for the month of September is slated for release. The index is expected to be little changed at 141.3 for the month, up slightly from 141.1 the prior month.

The week's most significant data set will be released on Thursday with the Gross Domestic Product (GDP) numbers. GDP is forecasted to remain unchanged at 5.3 percent in its final revision of the second quarter.

As for earnings this week, there is nothing of much significance here. Monday gives us Cabletron (CS), which is expected to post a loss of $.01 a share compared to a gain of $0.07 in the year-ago period. Tuesday gives us 3Com (COMS), which is expected to post a loss of $0.23 compared to a gain of $0.33 last year. Wednesday we get Corel Corp, which is expected to post a loss of $0.36 compared to a gain of $0.17 last year (I see a trend here). Then, on Thursday, we get Safeway, which is expected to post earnings of $0.52 a share versus $0.44 in the year-ago period.

Earnings announcements should start to pick up heading into October, as we begin the fourth quarter and companies start announcing and pre-announcing third-quarter results.

Friday's trading session was interesting for a number of reasons, not the least being the Intel sell-off. Investors were clearly siphoning money out of the big silicon tech issues and putting the money everywhere these guys weren't, which really isn't a new phenomenon. Investors have been pulling money out the likes of Microsoft, Dell, Cisco and Intel through most of the summer, and I can't blame them. These stocks still trade at vertigo-inducing levels that makes them vulnerable to the slightest degradation of their market or operations, which Intel proved on Friday.

As I stated in last Sunday's commentary, I still think that Cisco is particularly vulnerable. The company trades at 170 times trailing twelve months earnings, which is 110 points higher than Intel's P/E ratio. What's more, Cisco now boasts annual revenues of $19 billion, which means the company is reaching a base that's making it extremely difficult to grow at its historical 50 percent annual rate. This fact is Cisco will inevitably disappoint one of these quarters (I don't know if its going to be sooner rather than later, but it will happen), and when it does, it's probably go to fall as hard, if not harder, than Intel.

And as for Intel, I expect there will likely be a rebound this week because some value investors will enter the market thinking are getting a volume. However, once this demand is exhausted, I think the stock will likely drift lower. Lucent (LU) and Proctor & Gamble (PG) had similar blowouts earlier this year, and that's exactly what happened to them. After the initial drop, a few tyro value players bid their stocks up a few points. But soon after, they slowly drifted down to post new 52-week lows almost daily. Keep this in if you thinking Intel might be a bargain at $48.

As for trading this week, I expect more of what we got last week - volatility. Without a clear sense of direction, traders will continue to trade primarily on specific news item, which has the unpleasant effect of producing volatile, range-bound markets.

Some traders, though, were impressed that the COMPX was able to make a technical bounce off of 3,600 on Friday to close just above its 260-dma of 3,796. I won't be impressed unless we get some follow through this week. If we don't, I see no reason why the COMPX can't fall back to 3,600 and possibly to 3,520, which was its most recent low set back in August.

I'm a little more bullish on the INDU, but not much. Friday's 80-point gain moved the average back above its 200-day moving average, which is a positive. Now, if the INDU can just push through 10,900, it might have room to run, particularly in light of the recent upturn in it On-Balance Volume (OBV). However, my enthusiasm is tempered somewhat by the fact the MACD is still negative.

In a nutshell, expect more volatility and more range-bound trading this week. I just don't see any immediate catalyst that can pull this market out of its doldrums.

S.P. Brown
Editor