Sellers Stay in Control at Midday

Investors found a fresh appetite for technology stocks today after Cisco (CSCO) CEO John Chambers said last night that business is beginning to stabilize.

Cisco was lately up 7.2%, thanks to the news, but the joy was by no means limited to one stock. Even outside of the communications-equipment sector, tech shares put on big rallies. The Philadelphia Box Maker Index was up 4.1% and the Philadelphia Semiconductor Index was up 5.3%.

Clearly, investors are hoping once again that business is improving across the board in techville. But an economic report out this morning suggests those hopes are misplaced. Durable goods orders slipped by 0.6% in July, the fourth month in a row they declined. And once again, the sorest spot was technology.

Not So Fast A five-year low for tech orders ($billions, seasonally adjusted)

Source:Census Bureau

Overall, new orders for technology declined by 4.4% in July, falling to their lowest level since December 1996. Orders for computers and related products slipped 4.1% and semiconductor orders plunged 26%. The only bright spot was communications equipment orders, which popped up 18.3% after falling sharply the preceding two months.

"The general pattern of a very sharp decline in tech orders is still very much intact," says Goldman Sachs director of U.S. economic research Bill Dudley. "It doesn't look like the bottom yet."

Meanwhile, the gap between new orders and shipments for tech goods widened to 10% from 8.8% in June. That likely means tech companies will continue to struggle with excess stock in their warehouses.

"If orders are this low and this far below shipments, inventories will become more of a problem before they become less of a problem," says Salomon Smith Barney economist Steven Wieting.

The way to clear those inventories is to cut prices. Companies are loath to do that: Once prices fall it's very hard to raise them again; as a result, margins can end up getting pressured for some time. Yet given technology's inventory and capacity problems, says Wieting, more price cuts are inevitable. He notes that that isn't without upside. The telecommunications services, financial services and healthcare industries are big buyers of technology. Where tech companies see margins fall, these industries will see them fatten.

At closing: Dow: up 194, or 1.9%, to 10,423 Nasdaq: up 74, or 4%, to 1916 S&P 500: up 23, or 2%, to 1185

But what of the pick-up in communications equipment orders? Doesn't that, along with Cisco's remarks, suggest a turnaround in the telecom equipment sector?

Not likely, according to Dudley.

"I'd be hesitant to say that's meaningful, given that the telecommunications area seems to be the one with the most excess and overhang," he says. "I don't think it means much that we had a bounce in that sector for one month."

Williams-Sonoma(WSM) earned 2 cents a share in the second quarter, beating Wall Street's estimates by 2 cents. The company earned 9 cents in the year-ago period. The company also said its same-store sales for the period rose 1%.

Mergers, Acquisitions & Joint Ventures

Tribune(TRB) and Knight Ridder(KRI) said on Friday that they will partner up to buy HeadHunter.net (HHNT), an online job hunting site and resume bank, and combine it with CareerBuilder, an online recruitment company backed by the publishers. The companies will pay about $200 million for HeadHunter.

Analysts Actions:

Lehman Bothers cut its 2001 earnings expectations for Advanced Micro Devices(AMD) to 25 cents a share from 35 cents a share. The firm also dropped its 2002 estimate by a dime. The revision is based on the expectation that Intel (INTC), AMD's chief rival, will slash prices in order to gain market share.

Prudential cut its rating on Kmart(KM) to hold from buy, saying the company may face a cash crunch. On Thursday, Kmart said it lost $22 million, or 4 cents a share, in the second quarter, excluding a charge related to BlueLight.com. The bottom line met analysts' estimates.

Lehman Brothers and ABN Amro slashed their earnings estimates for Zygo(ZIGO) following the company's earnings release on Thursday and a warning of a fiscal first-quarter loss.

After Thursday's Close:

Cisco(CSCO) said it was restructuring the company into 11 technology groups. The company also it sees signs of business stabilizing. Cisco said Kevin Kennedy, the head of the company's service provider business, will step down and pursue unspecified "external opportunities."

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