Split Decision

That's what we got on Friday, with the New Economy Nasdaq Composite Index (COMPX) heading north and the Old Economy Dow Jones Industrial Average (INDU) heading south into the weekend.

The COMPX's move up was prompted by strong gains in last year's must have stock, Qualcomm (QCOM). The wireless communications chip and software company's stock soared $7.69 to $70.50 after reporting earnings of $0.25 a share, which beat the First Call estimate for $0.24 by a penny. More important than the actual earnings announcement, though, was the company's guidance for the future. Qualcomm's CEO Irwin Jacobs said the company was comfortable with Wall Street estimates for the 2001 first quarter and full fiscal year and that there was a "reasonable probability" that the company's CDMA technology would be operating in China by the third quarter of 2001.

Qualcomm's good fortune helped lift the COMPX 22.56 points, or 0.66 percent, to 3,451.58 on Friday. However, trading was flat for most of the day and volume was modest with 1.8 billion shares being exchanged, a 20 percent discount to what was traded on Thursday. For the week, the COMPX gained 160 points, or 5.3 percent, which wasn't enough to make up for the previous week's losses. Still, the gain managed to put the tech-laden index back on its 20-month moving average, which is a significant trendline for many long-term investors.

The ying to the COMPX's yang was the INDU. The blue-chip average just couldn't get into gear on Friday, finishing down 62.56 points, or 0.57 percent, to 10,817.95 thanks to a government report showing that wages rose more then expected in October, making it less likely the Federal Reserve will lower interest rates in the first quarter of 2001. J.P. Morgan (JPM) and General Motors (GM) took the report particularly hard, falling $3.44 and $2.50, respectively.

Also pressuring the INDU on Friday were three of its more demagogued components, Merck (MCK), Philip Morris (MO) and ExxonMobil (XOM). All three fell on Thursday's revelation that George W. Bush pleaded guilty to driving drunk a quarter- century ago, which made the business-friendly candidate less of a sure-thing for the nation's top job.

Despite Friday's mild sell-off, the INDU managed to post a strong week, gaining 227 points, or 2.1 percent, putting the average above its 50- and 100-day moving averages for the first time since September 8.

As for the broader market, the S&P 500 Index (SPX) finished Friday down 1.63 points, or 0.11 percent, to 1,426.69. For the week, though, the SPX added 47 points, or 4.59 percent, putting the index within 10-points of its 50-dma, the closest its been since mid-September.

In sector news, semiconductor stocks took a hit after chip- equipment maker Kulicke & Soffa (KLIC) said it expects fiscal first-quarter revenue to disappoint investors. Other chip- equipment makers falling on the news included Applied Materials (AMAT), the biggest maker of chip equipment, which lost $2.56 to $49.44; Novellus Systems (NVLS), which fell $2.69 to $37.75; and KLA-Tencor (KLAC), which sank $1.31 to $32.19. Chip-equipment making stocks haven't been the place to be in 2000. Novellus and Applied Materials are both trading at a 50 percent discount to their 52-week highs, while KLA-Tencor and Kulicke & Soffa are trading at a third of their 52-week highs.

Despite the problems in the chip-equipment makers, the PHLX Semiconductor Index (SOX) managed to post a gain on Friday, closing up 7.89 points to 740.61 thanks to renewed investor enthusiasm for former day trading favorite Rambus (RMBS). The chip designer soared $14.31 to $64.94 after Morgan Stanley Dean Witter analyst Mark Edelstone repeated his "strong buy" recommendation on the stock.

In stock news, front-end Internet companies continue to make headlines for all the wrong reasons. Priceline.com (PCLN) tanked $2.13 to $4.72, after the online discounter reported a third-quarter net loss of $2 million, or $0.01 per share, compared with a net loss of $12 million, or $0.08 per share in the third quarter 1999. Despite the improvement, Goldman Sachs still downgraded the stock to "market perform" (read sell) from "market outperform." Hard to believe this thing was changing hands at $104 and change as recently as April.

Timeout for a lesson, folks. Priceline.com is the perfect example of why you need to think for yourself before investing or trading. Get a load of these recommendations and price targets on Priceline.com from the following Wall Street "geniuses." On March 8, USB Piper Jaffray reiterated a "strong buy" on the company with a price target of $150. On April 7, Salomon Smith Barney imitated coverage with a "buy" and a price target of $130. Then on April 7, Goldman Sachs reiterated that Priceline was on its "recommended list" and set a price target of $150.

Oy Vay! And you wonder why I keep preaching on the dangers of investing in high-flying high-tech companies. If anyone can give me the name of one front-end Internet company changing hands at a higher price than it was this past spring, I'd appreciate it because I honestly can't think of one.

In economic news on Friday, the economy created 137,000 jobs in October, falling short of the consensus estimate for 200,000 net additions. Furthermore, September's job gains were revised down from 252,000 to 195,000. Slowing job growth should help to counter the negative impact of wage inflation. The same report showed that hourly wage increases rose to an annualized rate of 6.4 percent, the highest rate since the first quarter of 1992.

Looking ahead, the coming week's economic data is again light fare. On Tuesday, we get consumer credit. The consensus is for consumer credit to have fallen $10.5 billion for September, off from $13.4 billion in August, which I guess means less of us are buying on credit. I don't see this news roiling the markets in the least.

The week's most significant economic data set is slated for release on Thursday, with the Producer Price Index (PPI). The PPI is forecasted to have fallen to 0.2 percent for October, off from 0.9 percent September, while the core PPI (PPI sans the food and energy sectors) is expected to have fallen to 0.1 percent.

As for earnings news this week, the torrent of third-quarter earnings reports has finally been reduced to a trickle. Still, not all the heavy-hitters have reported. On Monday, look for Cisco Systems (CSCO) to report earnings of $0.17 a share after the close. Then on Thursday, look for Dell Computer (DELL) to report earnings of $0.25 a share.

If you're looking to trade the market this week, you're obviously aware of the two major variables that will sway trader sentiment - Cisco's earning on Monday and the Presidential election on Tuesday.

I have little doubt that Cisco will meet analysts' estimates for $0.17 a share. But the earnings number isn't what most traders will be focused on; they'll be focused on Cisco's revenue growth. In the last quarter, Cisco grew revenues at a 61 percent annual rate, which is awe-inspiring for a company with $20 billion in annual revenues. However, many analysts are trimming their projections for Cisco's long-term revenue growth rate, with projections ranging from 20 to 50 percent.

I'll state flat out that 50 percent is unrealistic for a $20 billion company. On Friday, the Wall Street Journal did an admirable job of putting 50 percent annual growth in perspective. According to the Journal, to grow 50 percent in the fiscal year ending next July, Cisco will need to add roughly $9.5 billion in new revenue, equal to the annual sales of Nike. Then for the following year, Cisco will need to find an additional $14 billion in new revenue, equal to the annual revenue of Eastman Kodak. If you're doing the math, this means Cisco will go from being a $20 billion company at the end of 2000 to being a $43.5 billion company by the end of 2002. That isn't going to happen.

Unfortunately, this unrealistic revenue growth rate is probably priced in Cisco's stock. In fact, Cisco ran up over $6.00 a share last week to close at $56.75 on Friday in anticipation of its earnings announcement. I see traders selling the stock on Monday (buy the rumor, sell the news) even if the company does again wow Wall Street with 60 percent annualized revenue growth.

My gut feeling is that annual revenue growth will taper to 40 percent for 2001 and 25 to 30 percent for 2002. After all, Intel (INTC) is already operating from a $30 billion base and its annual sales growth has slowed to roughly 20 percent.

The other major variable, the election, will likely keep trading action to a crawl on Tuesday. After Tuesday, though, I don't see the election having much influence on trading, unless we get a worst-case scenario (Democrats get both Houses and the Presidency). I doubt that will happen. As long as we are guaranteed some gridlock after Tuesday, meaning neither party can impose its will, the markets will treat the election as a non-event. My hunch is that the American people will vote for gridlock.

So, if Cisco's earning and future guidance and the election fall the way I see them falling, I think we could be looking at a market rally. Granted, the COMPX has been choppy over the past two week, but it's been moving higher on a nice upward-sloping trendline started the last week of October. If the COMPX can hold 3,400 through the middle of the week, I see it challenging 3,500 by the Thursday or Friday. Since 3,500 has been both an important top and bottom area for the COMPX, a clean break may not be easy to achieve. On the other hand, if Cisco's guidance and the election results are better than expected, I'm not so sure that 4,000 by the end of the week is entirely unreasonable.

As for the Old Economy, I think it may be more sensitive to the election than the New Economy. If Al Gore gets the Presidency, I think the INDU will be pressured, at least until the initial shock wears off and traders realize that all that "Big Oil, Big Drugs" nonsense was just bait for the small-minded vote. Technically, traders will be eyeing the 10,800 level for support, as well as the 200-dma of 10,697. Of course, resistance remains at 11,000.

Keep in mind that most of what I've said is predicated on Cisco and the voters meeting market expectations. If Cisco or the election ends up going to extremes, Lord only knows what the market will do this week.

S.P. Brown
Editor

Editor's Note

A few of you have expressed concern that Splittrader.com has gotten away from its split trading roots. We must confess that we have, but only because of market conditions over the past two months. Split trading in a volatile, trendless market can be extremely difficult, which is why we have focused more on short plays and momentum plays that are coming off a bottom than pure split plays. We thought that a temporary change in strategy would help you in your trading.

Unfortunately, this isn't the strategy that many of you want. For that reason, we are returning to our split trading roots. In the future, we will once again focus primarily on split candidate and split run places, with less emphasis on momentum plays. In fact, we will no longer feature any short plays at all.

Additionally, we are diligently working to update and improve the site by adding new features and easier navigational tools so Splittrader.com remains the best split trading site on the Internet.

Best Regards,

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