Consolidation still in progress for the US technology sector (page 1 of 2)

US Stocks

In the previous weeklies, we had mentioned the following -

• Challenger report (out placement)
• Non-durable manufacturing down

According to the Challenger report, July was the largest announced layoffs in its history. A whopping 200% increase on a y-o-y basis. The non-durable manufacturing was down for the first time since 1993. These products are things like personal products, sundries, and food. Perhaps this is a harbinger of increased downside risk to employment and consumption numbers going forward. If companies stayed true to what they claimed that they are seeing the bottoming of the cycle and anticipating a turnaround in 2002, we would not be witnessing such large amount of job cuts.

The latest consumer credit for June was a decline of $1.6 billion, the first drop since November 1997. The Bloomberg survey was for a positive $7.8 billion vs. $6.9 billion for the month of May.

The annual revision of data from the Department of Commerce will perhaps explain why on one hand we have a manufacturing recession, while consumption is still holding up. Profit margins peaked in 1997, and have been dropping since. Money that once flowed into profits went to the American workers, in the form of higher wages. Corporate America has taken up the extra costs while the economy slows. Further job cuts can reduce these costs.

Let's get technical, for the S&P's Consumer Goods Composite Index, the 50-day moving average has broken through the 200-day line in late July.

Waiting for the other shoe to drop? So far, the property prices in both coasts are holding up, though transaction volume have been coming off as of late. If we see a price downturn, then consumption will be further curtailed.

The short-term uncertainty in the equity market might have edged higher, now. However, we believe that accumulation over the next few months for the long-term could turn out to be sagacious.

US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index closed 5.3% lower at 1956. Investors have been hungry for news (both company specific as well as economic data related) throughout the week and were left direction-less with scant updates to help in their investment decisions for the near-term.

We believe investors are in a dilemma at the current time. Company specific news have so far been mixed, with Oracle Corp (ORCL US, $15.16, CSFB rating: Strong Buy, CSPB MG V Buy Recommendation List) warning that its August-1Q02 sales will likely fall below pervious estimates due to continued corporate IT spending restraints. Meanwhile, if we were to take the NASDAQ Composite Index as a proxy to represent the overall technology segment, then we potentially have limited downside risk at 1756 (-10%) and 1620 (-17%). This then further implies that an "easy money" scenario for investors will be low probability outcome. Bullish technology investors will not be able to look forward to a strong rebound in stock prices because technology companies continue to experience sluggish demand (primarily from spending constraints). Bearish traders will have to be more selective in their short trades and be more diligent in protecting their downside profits as fragile sentiment could result in a nasty short squeeze if investors turn positive ahead of the Fed's meeting next week. As a result, we have a bull and bear stand-off, with neither one making any serious attempt to breakout from the near-term deadlock.