Market Update for 5/12/2002

There was a surprising drop in the Producer Price Index (PPI) on Friday, but it provided no relief for the markets as investors were focused instead on news that IBM was going to layoff 8,000-9,000 more workers. All the talk that maybe a recovery was under way was suddenly called into question. If a recovery was just around the corner why would IBM be cutting its workforce so drastically? The answer is clear. The recovery is missing in action and the IBM CEO was not kidding earlier in the week when he told his employees that growth for 2002 and 2003 could be flat to less than 10%. Surprise! This caused investors to reflect on the much-hyped Cisco earnings and several tech warnings for the week. As we expected, but unfortunately for the market, Moody’s downgraded the debt rating for WorldCom (WCOM). Not that WCOM is a big stock any more at $1.59 a share, but cutting their debt to junk cast yet another pall over the entire telecom sector. Chip stocks completed a two-day slide and were instrumental in tanking the NASDAQ. Microsoft fell over -$2 to close at $50 again. Microsoft's slide was prompted by news that the EU may exact stiffer penalties than the US may get. They are still talking about an unbundled internet browser and removing Media Player from Windows. Microsoft gets 25% of its revenue from the EU countries. If I calculate a 25% drop in revenue, then their stock has a true enterprise value of $25.00 per share. Intel continued to lose ground after CEO Barrett said, contrary to wishful thinking, sales for the 2nd Quarter would be flat due to lack of demand. Qualcomm (QCOM) lost -1.54 on worries that the economic slowdown would delay acceptance of their new technology. It sounds like the NASDAQ is still bleeding from a thousand cuts, none serious this week, but each extracting a painful toll. Next week could be yet another tech wreck. IBM holds it's biannual analyst meeting and already there are rumors they will lower earnings guidance again. Their meeting is on Wednesday. On Thursday Texas Instruments (TXN) will hold its analyst meeting in order to update everyone on the state of the chip sector. Should they guide expectations to slower growth the outcome would be a disaster. The Wednesday 305 point Dow rally turned into the feared one-day wonder and a perfect example of rampant short sellers covering their positions. The slide below 10000 on the Dow is a psychological blow for retail investors and the odds are strong they will withdraw to the sidelines as May drags by. The Dow is trapped in a range between 10100 and 9800 and if I had to bet on which side broke first it would be the lower number. It has been tested four times and next week could provide the fifth. The S&P 500 hit a seven-month low on Tuesday. The NASDAQ’s Tuesday close of 1574 is only 27 points away and that was a six-month closing low. My point in this is simple. If a monster short covering rally like last Wednesday’s can't energize investors for more than 6.5 hours (the trading day) then what will stop this skid next week? Economic reports next week will provide only comic relief as analysts attempt to spin them for maximum impact. Wednesday is the Consumer Price Index (CPI) and Industrial Production. Thursday Housing starts and Friday the Consumer Sentiment again. Personally I am more concerned with IBM on Wednesday than all of the others put together. We will continue to invest in US Government backed mortgage securities. They offer a secure and regular income during these turbulent times. These include Ginnie Mae bonds, Fannie Mae bonds, Freddie Mac bonds and certain Real Estate Investment Trusts (REITS). Call me for details. Be sure to visit my new and re-designed website at www.pivan.com. Mark Pivan