Potential for further weakness in Nasdaq (page 1 of 3)

US Stocks

There is this perception that since the semiconductor industry has never experienced a decline of this magnitude, it must be the bottom. And with cheap and easy money, semiconductor is to lead the technology recovery.

Last week Goldman Sachs boarded Merrill's semiconductor train by declaring that the fundamentals are likely to strengthen in the 4Q. A bottom may have been reached, but a meaningful recovery in the 4Q may be a bit early.

More than dozen chip plants have been closed since the beginning of the year. Any increase in demand will prompt these fabs to come back on line. Then supply will increase and push back prices.

In Asia, apart from TSMC, UMC of Taiwan, and Chartered Semiconductor of Singapore's planned capacity expansion; Dongbu Group of Korea, First Silicon (Malaysia) Sdn. and Silterra (Malaysia) Sdn. will start operation this year. The top three companies are expected to account for 84% share of the world's chip production on contract this year.

Hynix Semiconductor (formerly Hyundai Electronics Industries) has shifted to making chips for other companies, as its main memory chip business remains unprofitable.

There is more capacity to come on stream in China; two new fabs are under construction in Shanghai with another two on the drawing board. This development will certainly put pressure on profit margins.

The semiconductor market depends on the consumer electronics and capital markets for survival. Not only because it supplies the economy with the primary parts for goods, but it's capital projects are so large it is only during economic expansions that they are able to secure large amounts of financing. During the past five years American consumers have been flush with cash more than ever before. This has not only driven demand for electronic goods, but has supplied a huge amount of liquidity to the capital markets.

Whether there will be a recovery will depend on the coming Christmas season. Let us hope that the consumers can hold up until then. Meanwhile, our clients can consider accumulating the following non-semiconductor stocks at current levels for a cyclical recovery of the economy:

-General Electric Co. (GE $40.80)
-Boeing Co. (BA $54)
-Exxon Mobil Corp. (XOM $40.47)


US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index broke away from it's 17-week consolidation zone (between 2255 and 1915) and closed 4.5% lower at 1867. Looking into the week ahead, we believe the potentials exist for price to weaken further towards our previously identified risk level (CS Weekly, 23-Jul-01) at 1756.

Investors were spooked by Ciena Corp's (CIEN US, $18.78, CSFB rating: not covered) negative revenue guidance for the rest of the year and 2002. While the company announced sales and EPS figures that were generally in line with analyst expectations, CIEN sharply revised down forward looking earnings expectations due to the uncertain demand for telecommunications services which resulted in its customers delaying purchases and upgrades.

While investor psychology is still trapped in an "earnings concern" state of mind, we believe that the distressed sentiment will be short-lived (ie 3-month life span) as most of the weak prospective earnings scenario has already been expected and is reflectived in present price levels. We believe sentiment will not be attractive in the short-term (3-months) and that market conditions within the technology sector will be difficult as we enter into the following October-3Q01 reporting period.