Final leg of a correction has historically been very volatile (page 1 of 3)

US Stocks

It was not an enjoyable downward roller coaster ride last week. The major stock indices lost over 7%. The 'non-tech' blue chips felt the weight of the declining NASDAQ and finally buckled. For the week IBM lost over 9%, Boeing - 18%, Eastman Kodak -6%, 3M -9% and GE -7% to name a few. Not even the low beta stocks like Coke and RJR were spared loosing 5% and 8% respectively.

Is this the final blow-off? The volume certainly does not suggest so and neither do we see a capitulation because volatility remains high.

A 50b.p cut is already in the cards on today's FOMC meeting and the surprise will be how much more? On one hand, a raft of data shows nervous consumers a drastically slowing economy and a deeply depressed manufacturing sector coupled with a badly savaged stock markets. On the other, consumers are still spending, the unemployment rate is at 4.2% (just above a 30yr low) especially coming out from the state of California despite a statewide energy crunch and the national downturn in technology spending. Furthermore, the housing market remained firm.

The earnings result season is upon us again, this week Morgan Stanley, Goldman Sachs, Lehman Brothers and Bear Stearns are scheduled to release their 1Q earnings report and others will follow. So, fasten your seat belt.

US Technology Stocks

Last Friday's close on the NASDAQ Composite index at 1890 (down 7.8% week-on-week) effectively erased all performance gains since the beginning of 1999!

Looking ahead, we believe weak earnings results (for the March quarter) and poor forward looking statements from technology companies will continue to fuel sentiment towards short selling activities. As we enter into the quarterly earnings reporting season in April, we believe volatility will be high from company profit warnings and short-covering activities. Investment sentiment in the near-term will be strongly influenced by short-term interest rate policies and expectations for the year.

On company specifics, Oracle Corp's (ORCL US, $14.0625, CSFB rating: Downgrade to Buy) stock price fell 14% last week as investors remained negative on the company's near term prospects. Last week, ORCL released 3Q01 results, which met revised estimates, and further warned of sustained weakness in demand ahead as business sentiment remained poor due to the uncertain US economic outlook. ORCL posted 3Q01 revenues that grew 0.6% sequentially and 9.2% year-on-year. Earnings per share of $0.10 was in-line with revised estimates, while its cash (and equivalents) position continued to improve, advancing 14% sequentially, to $5.0 billion. Meanwhile, Deferred Revenue and Day Sales Outstanding were unchanged at $1.0 billion and 66 days. With near-term demand visibility being poor and an IT spending "lock-down" in place, we expect ORCL to be well challenged to restructure its business strategy to overcome the deceleration in earnings momentum and revenue growth. Currently, ORCL is proactively changing its marketing efforts to emphasize rapid implementations (CRM implemented in 90 days and Internet Procurement in 30 days) and speedy return on investments. We continue to like ORCL in the long-term but remain cautious in the short-term. Looking ahead into the week, we believe ORCL's stock price has the potential to fall further, and as such, we do not recommend buying the stock yet. Instead, we suggest allowing price to stabilise first before adopting an accumulation strategy for the stock.