The Ayes of Tech's Investors Are Upon Nasdaq

Bad news continues to be discounted, but one analyst quips 'the market and Wall Street are on laughing gas. Bubble-mania is back...'
By Robert Mann ,

SAN FRANCISCO -- If investors were really worried about

Intel's

(INTC) - Get Report

midquarter conference call or

Broadcom's

(BRCM)

warning, they had a funny way of showing it today.

Overcoming seemingly whatever bad news came their way, tech stocks set the pace again today, with the

Nasdaq Composite

rising 2.1% while the

Dow Jones Industrial Average

climbed 0.2% and the

S&P 500

rose 0.6%.

Consistent with the seemingly illogical nature of the day, chip stocks were leaders within tech; the

Philadelphia Stock Exchange Semiconductor Index

rose 7.7%.

But the "what's good is bad and what's bad is good" essence of the session wasn't specific to tech stocks. The

Amex Retailing Index

rose 1.2% after a slew of firms reported weak same-store sales for May. Most notably,

Circuit City

(CC) - Get Report

rose 2.8% despite reporting a 25% decline in same-store sales last month that will cause it to post a fiscal first-quarter loss of 5 cents a share.

It was one of those sessions that can drive those who view Wall Street from a purely rational vantage point a little nutty.

"The reaction of Wall Street is hype the headline and ignore the fundamentals," said John H. Mesrobian of

Constantinople Advisors

, which advises institutions, corporations and private investors on currencies, commodities and bonds. "The market and Wall Street are on laughing gas. Bubble-mania is back. Dismiss the fundamentals and buy on good or bad news."

"Wall Street will most likely dismiss it

Intel's announcement or turn it into a good news item, said Mesrobian, a self-described bear. "We are seeing the market in a topping stage, but we are headed for the lows."

Shortly after the closing bell, Intel reiterated prior guidance, issuing a

statement in which it said its second-quarter revenues will be "slightly below the midpoint" of the previously established range of $6.2 billion to $6.8 billion. Intel's shares were sharply higher in after-hours trading. (Unfortunately, a longstanding commitment prevents me from reporting on Intel's call tonight, but there will be plenty of analysis elsewhere on the site.)

Meanwhile, optimists noted there was some actual "good" news mixed into the bad today. While Broadcom warned, the communications chipmaker indicated it is seeing a potential upturn in orders for the second half of 2001. Similarly,

National Semiconductor

(NSM)

posted a big year-over-year drop in earnings but indicated its customers have "burned off" inventory. Broadcom rose 14% today, while National Semi gained 11%.

Finally, the

Securities Industry Association

predicted the industry will rebound in the second half of the year and grow 20% next year and 25% in 2003.

Ned Riley, chief investment strategist at

State Street Global Advisors

in Boston, found it a bit curious that SIA could make such predictions when semiconductor companies continue to profess a lack of visibility. Still, Riley was far from appalled at today's action.

"The tech area clearly has gone through its Armageddon where it was discounting everything but the kitchen sink," he said. "Now, the market is prepared to accept any negative news as possibly the last that's going to hit these stocks."

A Low Hurdle to Cross

Riley remains optimistic about tech, a view he adopted in

early April at what proved to be the Comp's bottom.

"It could be a bear trap and maybe people are buying on faith," he conceded. "But you usually end up making the most money when you buy when the news is most negative and profits are so depressed you're at the maximum

low point in the fundamental backdrop. The market is reinforcing that at the moment."

Riley declined to discuss specific stocks but expressed faith in tech's leadership because "they have the cash hordes to get through an even more protracted period" of weakness. Conversely, erstwhile competitors "don't have that luxury" and the "marginal producers will get knocked out," which in the long term leaves the leaders in even better standing.

State Street's top 50 holdings include Intel,

IBM

(IBM) - Get Report

,

Microsoft

(MSFT) - Get Report

,

AOL Time Warner

(AOL)

,

Cisco

(CSCO) - Get Report

,

EMC

(EMC)

and

Oracle

(ORCL) - Get Report

, according to

Bigdough.com

.

Investors are correct to anticipate the tactics of restructuring -- layoffs and depletion of inventory -- set the stage for a boost in earnings when the cycle turns, Riley added. "Not a recurrence of the 1999 boom, but modest top-level growth. Investors are looking at that potential down the road vs. the valley we're in now."

That said, the strategist then offered an opinion that hasn't been heard in these here parts for a long, long time: That because of all the focus on tech earnings, investors have overlooked the earnings vulnerability of so-called Old Economy companies, whose shares are thus more vulnerable.

With the recent warnings from companies such as

Wells Fargo

(WFC) - Get Report

and

J.P. Morgan Chase

(JPM) - Get Report

, there's "an acknowledgement the cyclicality is real and will manifest itself in slower earnings and it isn't just in one sector," he said. The

Philadelphia Stock Exchange/KBW Bank Index

fell 0.8% today.

"Tech has discounted its problems, but the S&P and Dow probably have some bumps because these Old Economy groups weren't focused much from an earnings-vulnerability perspective," Riley concluded.

Recent market activity suggests he's right, even if the cynics' frustrations are understandable.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.

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