Stay out of tech issues, allow falling prices to stabilise and consolidate first (page 1 of 3)

US Stocks

Key components of the NAPM (manufacturing) rose above the 50% threshold, namely-

-production
-new orders
-exports

This has helped the NAPM to register a better than expected 47.9% reading. Nonetheless, price paid was down on its 7th consecutive month. So, production is showing signs of recovery, but the lack of pricing power would not improve profitability.

The index for non-manufacturing business activity fell by 5.5% to a record low. This means that the service sector -which is the bulk of the US economy- has begun to weaken while the manufacturing sector may be poised for a recovery after a year long slide. The labor department reports point to a leveling of job cuts, but weakness in hiring still persists.

The service sector employs about 85% of Americans and accounts for something like 60% of GDP. Consumer spending has been keeping the economy afloat through a sharp decline in manufacturing activity.
If the sector is expected to or becomes unhinged, consumers might, either out of fear or necessity reduce spending. The industries reported decline in business activities last month were:

-communication
-real estate
-wholesale trade
-agriculture
-construction

Only insurance, entertainment, and public administration registered growth.

The retail sales figures coming out this Friday (September-14-01) should give us a better picture.

As for the earnings outlook, where we have visibility, we see weakness. And where we do not have visibility, we anticipate weakness. But at the very least, earnings should start to look better on a y-o-y basis in the 1Q of 2002, since many sectors faced sharp earnings deterioration a year earlier. New accounting rules that no longer require companies to write off, or amortize goodwill and certain other intangible assets would also help profits next year.

US Technology

Cautious on technology stocks. On a week-on-week (WoW) basis, the NASDAQ Composite Index fell a further 6.5% to close the week at 1687.

If we assume the current technology BEAR was born on the weekly close of 7-Apr-00, then the matured BULL has fought with the infant BEAR for a total of 21 weeks (1-Sep-00), with the BEAR emerging as the stronger winner. Since then (8-Sep-00), the BEAR has ruled technology issues with a hungry vengeance, capitalising on the post Y2K spending bust and the subsequent lock-down in technology spendings, to devour technology equity investment portfolios and leaving a red performance trail that is almost 16 months long!

Looking back, and assuming the birth of the technology BULL was on the close of 16-Oct-98 (1620), then the NASDAQ BULL ran for 77 weeks up until 31-Mar-00. However, while the prevailing technology BEAR has also been hunting for 75 weeks already, there are no encouraging fundamental signs to indicate that the mayhem will stop for technology equity-long only investors for the short-term. While no one knows with certainty if the BEAR will finally exhaust from its hunting expedition, we look forward to 1620 as a potentially firm support level to help repel further BEAR sentiment attacks (potential consolidation zone between 1620 and 1480). As such, we again advise investors to stay out of technology issues for the week ahead so as to allow falling prices to stabilise and consolidate.

Neutral to Hewlett Packard (HWP US $18.08 CSFB rating: HOLD) and Compaq (CPQ US $10.59 CSFB rating: HOLD).