Aaron Task
SAN FRANCISCO -- So much for easing back into the action. Anyone hoping for a slow and quiet return to work after the long holiday weekend got a rude awakening Wednesday. (I know the markets were open Monday, but it was half-day and attendance was sparse.)
The Dow Jones Industrial Average shed 0.7%, the S&P 500 declined 1.6% and the Nasdaq Composite -- saddled by tumult in the chip sector and the effects (both side and direct) of profit warnings from Computer Associates (CA Quote - Cramer on CA - Stock Picks), BMC Software (BMCS Quote - Cramer on BMCS - Stock Picks) and EnTrust (ENTU Quote - Cramer on ENTU - Stock Picks) -- lost 3.2%. Crosscurrents abound on Wall Street. Oil prices falling Wednesday and the softening National Association of Purchasing Managers' survey Monday have "the-economy-is-slowing-and-the-Fed-will-remain-on-the-sidelines" crowd cheering. Yet the aforementioned profit warnings and signs of economic slowing have others concerned. "Profits will continue to expand, but at a less exuberant pace," Goldman Sachs market strategist Abby Cohen wrote in a research note. "Recent data suggest that the U.S. economy is slowing, and that the rate of growth may have peaked in several other industrial nations." Another longtime bull, Edward Kerschner, chairman of investment policy at PaineWebber, issued a similarly tepid outlook for S&P 500 earnings on July 4, predicting growth of 15% for 2000 and 8% for 2001. "Stocks are neither as compellingly cheap as they were at their 1998 lows nor as egregiously overvalued as they were back at their 1987 highs," Kerschner wrote, suggesting the bull market has matured and "normal" returns of 5% to 10% are expected going forward. Given the increasing importance of information technology, it's not outrageous (is it?) to say the semiconductor cycle mirrors the economic cycle as a whole (and vice versa). Not surprisingly then, a similar debate about a slowdown in the chip industry has evolved, and is summarily roiling markets. As reported last Thursday, a host of observers have raised both technical and fundamental concerns about the group. As an antidote, I presented the bullish views from Richard Whittington, semiconductor analyst at Banc of America Securities. The battle continued Friday when the Semiconductor Industry Association reported record industry sales of $15.8 billion in May, and predicted industry-growth rates of 31% in 2000 and 25% in 2001. Conversely, SG Cowen issued some negative comments about industry titan Intel (INTC Quote - Cramer on INTC - Stock Picks). On Wednesday, of course, the group got slammed after Salomon Smith Barney downgraded the industry to neutral from outperform, and lowered specific recommendations on Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks), Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks), National Semiconductor (NSM Quote - Cramer on NSM - Stock Picks) and Silicon Storage (SSTI Quote - Cramer on SSTI - Stock Picks). Save T-I, which fell 5.8%, the stocks each fell more than 11.5%. Meanwhile, the Philadelphia Stock Exchange Semiconductor Index shed 9.3%. While acknowledging a slowdown in the group may take six to nine months, Salomon analyst Jonathan Joseph wrote, "The sector is likely to see peak capital spending growth rates this year, which has closely correlated with cyclical shipment peaks in the past." As the rationale for his call, Joseph cited unit growth "rolling over" after its February peak, moderating spot prices for flash memory and capacitors, and rising inventories at certain chip manufacturers. Basically, he's saying the chip cycle has peaked -- meaning the stocks can't be far behind. In an email exchange, BoA's Whittington reiterated and defended his optimistic outlook. "Every cycle the semiconductor industry has undergone has been quite separate and distinct from those preceding, and there's good reason today to believe this one will be longer than any in the past," he wrote. "The last upcycle lasted nearly four years, double that of the preceding four upturns, and produced materially higher gains than virtually anyone predicted when it commenced." The analyst sees an intensifying and significant chip manufacturing capacity shortage that "cannot possibly be alleviated until some time in 2002." Therefore, he's particularly bullish on chip-equipment leader Applied Materials (AMAT Quote - Cramer on AMAT - Stock Picks), which has a "spectacular business outlook." As for the group's short-term losses, Whittington notes they are susceptible to "intracyclical volatility" and can suffer 30% to 50% declines even in the midst of a broader upturn. "Investors shouldn't sell because several large-cap leaders have yet to reignite but rather be encouraged to add to positions in front of this occurrence," he wrote. Which brings us back to the broader market. Even if you have long-term faith in the market and the economy (which I do), it's not hard to imagine more directionally challenged trading as market players continue to parse if the economy is indeed slowing, to what degree, and whether that's ultimately a "good" thing. To and fro. Back and forth. Get used to it.
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