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Intel leads Wall St. drop
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August 6, 2001: 4:26 p.m. ET
Negative outlook spills into broad market, but light volume prevails
By Staff Writer Catheirne Tymkiw
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NEW YORK (CNNfn) - U.S. stocks tumbled Monday, led by technology issues, after Lehman Brothers said Intel, the world's largest chipmaker, would slash prices by 50 percent on its high-end chips.
The dour outlook set the tone for the broader market as investors opted to sit on the sidelines until some clear signs of a turnaround emerge.
The Nasdaq composite index fell more than 1 percent while the Dow Jones industrial average suffered triple digit losses.
Still, market participants were not overly concerned with the selloff because volume was extremely tepid. It was the lightest full trading day of 2001 for the Nasdaq Stock Market.
In a note to clients, Lehman analyst Dan Niles said he expects Intel to implement its aggressive move Aug. 26 in an attempt to raise the stakes in its price war with rival Advanced Micro Devices (AMD).
In tandem with Lehman's note, U.S. Bancorp Piper Jaffray and Salomon Smith Barney cut their earnings estimates for Intel.
"(Intel) is down but not out. We have a very nervous market and it's the dog days of summer," said Al Goldman, chief market strategist at A.G. Edwards. "We are short-term overbought so we're giving some of it back with the excuse being Intel."
The Nasdaq composite index slipped 32.07 points to 2,034.26, while the Dow Jones industrial average dropped 111.47 points to 10,401.31. The Standard & Poor's 500 index shed 13.87 to 1,200.48.
"Today's losers were last week's winners," David Briggs, head of equity trading with Federated Investors, told CNNfn's The Money Gang. "Every day is getting quieter and quieter. I think we have mild rallies and mild selloffs but we can't seem to put together any meaningful trend."
The Philadelphia Stock Exchange's Semiconductor Index, or Soxx, fell 9.51 points to 631.55, further reflecting the pressure put on technology shares.
"The chips had led the market up last week and then we had some negative news so we're testing the mettle of the market," said Goldman.
Despite the sluggish move downward, analysts continue to believe that good times are coming. For a market plagued by a weak economy and poor quarterly results, investors are just trying to put the past behind them.
"For the market as a whole, we're moving into this phase of awaiting information flow so that leads to some lackluster action," said Bryan Piskorowski, market commentator with Prudential Securities. "This is a time for patience and we should take solace in the fact that things are not getting worse."
More stocks fell than rose. Nasdaq losers topped winners 2,271 to 1,388 on limp volume of 1.09 billion shares. On the New York Stock Exchange, decliners beat advancers 1,873 to 1,199 as 810 million shares changed hands.
Investors will be bracing for Cisco Systems' (CSCO: down $0.51 to $19.54, Research, Estimates) quarterly report after the closing bell on Tuesday. The maker of Internet equipment is expected to post a huge decline, but analysts expect little new news from the tech bellwether.
"Cisco's only down (modestly) today in a sloppy market and the stock acts very sold out," said Goldman. "Cisco shares haven't made a new low since early April and I would rate technically short-term trade is "neutral" so unless they say something absolutely horrible, the shares will probably do better once the earnings are out of the way."
In overseas stock markets, Europe's and Asia's finished mixed. Treasury securities edged higher. The dollar rose against the euro and the yen.
The Intel factor
Semiconductor stocks led the tech selloff Monday after analyst chatter about leading chipmaker Intel prompted a negative reaction.
"Over the past two years, AMD has increased its market share against Intel from 13 percent to 21 percent," Lehman's Niles wrote in a research note. "For those who thought the price war was aggressive, you haven't seen anything yet."
Other brokerages chimed in. Salomon Smith Barney cut its third-quarter earnings estimate to 8 cents a share from 11 cents and also cut its 2001 estimate to 47 cents from 54 cents. The brokerage firm cited expectations for a "meaningful" back-to-school selling season were rapidly losing steam.
U.S. Bancorp Piper Jaffray analyst Ashok Kumar said end demand remains weak and trimmed his third-quarter revenue estimate for Intel to $6.3 billion from $6.5 billion. At the same time, Kumar lowered earnings estimates for the third quarter to 9 cents a share from 10 cents, and for the fourth quarter to 12 cents from 14 cents.
Chip stocks are often looked upon as indicative of what direction the broader tech sector is heading, but volume still remained tepid.
"We were up 1.8 percent last week and it was driven by the 6.5 percent run in the Philly Semiconductor Index, so we've got the Nasdaq getting knocked around because of this fear of a price cutting war between Intel and AMD," Piskorowski said. "Volume is pretty anemic – it's a summer Monday."
Aside from Intel (INTC: down $1.40 to $30.28, Research, Estimates) and Advanced Micro Devices (AMD: down $1.63 to $17.62, Research, Estimates), other chip stocks that suffered included Applied Materials (AMAT: down $0.87 to $48.73, Research, Estimates), KLA Tencor (KLAC: down $0.51 to $57.95, Research, Estimates), and PMC Sierra (PMCS: down $0.12 to $36.45, Research, Estimates).
But it wasn't just chip stocks attracting analyst commentary. Goldman Sachs research analyst Deane Dray cut his 2001 estimate on technology testing equipment maker Agilent Technologies (A: down $0.48 to $30.82, Research, Estimates) to a loss of 8 cents a share from a profit of 60 cents a share, citing a deteriorating end market.
Economy still under water
With no major economic reports on Monday, investors reacted to analyst commentary. Most agree a recovery will take longer than previously expected and are lowering their estimates accordingly.
Lehman Brothers chief portfolio strategist Jeff Applegate cut his 2001 earnings outlook for companies in the S&P 500 to $50.50 a share from $52. He also lowered his 2002 earnings outlook to $61 a share from $62.
In a note to clients, Applegate cited continued economic weakness, slower sales and "profit margin pressure greater than we had previously thought."
The dim view hurt industrial and manufacturing stocks such as Dow components Caterpillar (CAT: down $1.50 to $52.95, Research, Estimates) and 3M (MMM: down $2.36 to $109.37, Research, Estimates).
"Everybody (analysts) is lowering their earnings projections and pushing forward the earnings recovery to the first quarter of next year (2002) but they (investors) don't like to be reminded," Goldman said. "And they were reminded today that earnings stink."
Other Dow components that were dragging the blue chip index lower included IBM (IBM: down $1.67 to $106.51, Research, Estimates), General Electric (GE: down $1.36 to $41.39, Research, Estimates), and Home Depot (HD: down $0.85 to $48.28, Research, Estimates).
The selling in GE was largely due to a story in Barron's over the weekend that said the power industry may be facing an oversupply situation in the not-too-distant future, and GE's power systems unit is a significant contributor to the company's balance sheet.
Adding further pressure to the broader market was a report from Challenger Gray & Christmas that said companies slashed 205,975 jobs in July, more than triple the figure a year earlier and the most in eight years of tracking such data. The July figures pushed the total job cuts up to 983,337 so far for 2001, the outplacement firm said.
Deals drive on
Mergers and acquisitions are humming along, which could be a sign of optimism on the part of corporate America.
"This is more a digestive phase," said Prudential's Piskorowski. "You have a market that's grasping and hoping to try and put a finger on the bottom."
If companies are willing to spend money on an acquisition, analysts said it could be an indication that they are banking on better economic times ahead.
Satellite television provider EchoStar Communications (DISH: down $1.65 to $28.79, Research, Estimates) said Sunday it is making a $30.4 billion stock bid for General Motors' Hughes Electronics (GMH: up $0.68 to $20.04, Research, Estimates) unit in an apparent effort to trump rival News Corp. (NWS: down $0.80 to $37.45, Research, Estimates) for Hughes' DirecTV network. The deal values Hughes' shares at $22.83 each
Aerospace manufacturer General Dynamics (GD: down $0.86 to $81.81, Research, Estimates) said it has agreed to buy communications equipment maker Motorola's (MOT: down $0.03 to $18.60, Research, Estimates) integrated information systems group for $825 million in cash and the assumption of certain debt.
In the airline industry, US Airways Group (U: up $0.87 to $17.75, Research, Estimates) has initially dismissed its new suitor. The No. 6 U.S. carrier said it can't give any credibility to a $1.8 billion cash-and-stock proposal from New York-based Global Airways, which last year failed in its effort to land Trans World Airlines. 
Click here to send mail to Staff Writer Catherine Tymkiw
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