Continue to remain cautious on technology issues (page 1 of 3)

US Stocks

The 5-yr average for the retail and food services sales ex. autos & parts is 0.46%. Standard and Poor's credit rating service has downgraded its S&P retail group due to a bleak outlook for credit quality. S&P does not expect this activity to abate in the 2H based on negative outlooks for 35% of rated retail companies.

For the first time in its 20-yr history, the 401(k) retirement savings plan lost money last year, even adjusted for new contributions. The average account lost over 10%. Moreover, declining stock price has also hurt employee's stock options. On top of a higher unemployment, big ticket items like auto sales and housing showed no signs of slowing, 1-yr adjustable mortgage rate hit a low last Monday at 5.71%.

According to a study by Challenger, Gray & Christmas, an outplacement firm revealed that US companies announced 124,852 planned job cuts in June. This is a hefty 56% increase relative to May's number of 80,140. The cuts in the industrial sector were led by -

Telecom -27,446
Industrial goods - 22,698
Industrial services - 11,463

Corporate America is focusing on cost cutting to prop up earnings; initially it was capital expenditure, now we are seeing it in labor, and soon performance bonuses. If the credit numbers stopped growing from June to July, then we will know the consumer has stopped buying.

First Call reports that of the 1,000 companies that have given indicators of what their Q2 will be, 68% say they will miss their earnings estimates.

The "tech" earnings recession has become a more broad-based earnings slowdown. In times when capital gains are harder to come by, investments should be focusing on:

A) companies with diversified businesses like General Electric Co. (GE $56) and Loews Corp. (LTR $58)

B) companies that have already announced substantial charges like Corning Inc. (GLW $14.60) and JP Morgan (JPM $42.60)

C) companies with more reliable earnings stream like Pfizer Inc. (PFE $38.50) and RJ Reynolds (RJR $50.30)

D) Natural resources company like Burlington Resources Inc. (BR $39) and E) Amgen (AMGN $55.70) which looks very attractive at current levels despite FDA's delay in approving its update version of its best-selling drug, Epogen.



US Technology

On a week-on-week basis, the NASDAQ Composite Index rose 3.9% (closed at 2084) to rebound from the previous week's bearish decline.

Remain cautious on technology stocks. While the Bear continues to rule investment sentiment towards technology issues, US equity traders have started to take bets in the opposite direction (short-term contra trend trading) so as to capitalise on unanticipated good news from companies pre-announcing better than expected results. With visibility on end-demand still clouded and the potential recovery to future earnings growth remaining uncertain, our cautious stance on technology investments is unchanged. We recommend investors to continue taking a conservative approach to investing in technology issues in the near-term and remain patient during the reporting season to allow volatile prices (and sentiment) to settle before accumulating for long-term (1 to 3 years) performances. Looking ahead into the week, we believe the NASDAQ Composite Index has the potential to weaken back towards 1970. The market remains undecided as to when technology companies will post improved earnings growth (from 2H01, to 1H02, to 2H02) and as such, investment confidence in US technology stocks remain fragile and highly selective.