Where Do We Go From Here?
By Chris Lau

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Despite the nice rally in January, 2001 looks to be a challenging year for both the economy and the stock market. In a nutshell, gains in technology stocks were limited to the large caps, as earnings proved to be better than most people expected. Some of the technology companies reporting good earnings include Microsoft, Veritas Software, EMC, Siebel, and Nortel Networks. For the most recent quarter, however, earnings in the coming quarters will prove challenging. Companies are warning that the quarters ahead will be "soft" (to say the least). In my opinion, the "recovery" or "soft landing that everyone is talking about will be DIFFICULT to achieve.


The Bermuda Triangle is the Culprit for a Bad Market

The economic situation we currently face is most unusual (and unique). Prices are starting to creep up (it's called inflation -see your gas and heating bills), yet the economy is actually slowing. How can this be? An unusual mix of factors are coming into play, all of which make it very unlikely for profits to re-accelerate in the second quarter of 2001 (a claim made by both companies and economists). For the economy to re-accelerate, we need to ask ourselves what was driving the economy. The answer: consumer spending. Next question. Why aren't consumers spending as much? Here's the list:
1) Thanks to OPEC, energy prices remain high, and are stable enough that they are not likely to fall considerably in 2001
2) The dotcom collapse (annihilation) is no longer a threat to traditional companies. Ergo, companies don't need to spend as much on Information Technology (IT), and IT workers may not get the big bucks they were able to demand when such jobs were in hot demand
3) Interest rates were too high. Even though the Fed lowered interest rates by ½ percent twice, the effects (if any) won't be realized in the economy for at least 6 to 9 months

As the three seemingly disparate factors came together, they worked together to crush the wind out of consumer confidence and therefore consumer spending.

In a sense, the monetary policy aimed at re-stimulating a jilted economy may be all in vain. At least for 2001. We must remember there will nearly always be some sort of lag-time before the economy can pick up again.

What is The "Plan," Man?

Keep your cool. Look beyond today's stock price movement, volatility, and valuation and plan for the possible rebound scenarios. Let us look at semi-conductor stocks as an example. Xilinx and Texas Instruments (TI) are trading at expensive levels based on this year's expected earnings. Analysts expect the company to earn US$1.52 in 2002, so the forward P/E (price/earnings) is around 26. The "cheap" price is based, of course, on a recovery of wireless devices, since TI provides chips for wireless phones.

Monthly Stock Picks

Expect EMC to retest recent lows in the $55 to $60 range, since the stock broke its support level in the low 70's:

 

Art Technology Group - I upgraded Peoplesoft a year ago or so as it entered the so-called "CRM" market - well before anyone even followed CRM stocks. I now upgraded ARTG on the basis that ARTG is at the cornerstone of where CRM is headed. Earnings (most recent) confirm my enthusiasm for the stock. It reported profits of 7.2M ($0.10 EPS) vs 9.5M (-0.15). Revenue was up significantly, suggesting the company continues to grab market share from competitors (including BVSN).

Look for a retest at $30. Should the stock REBOUND from $30, investors should enter a small amount into the stock. If it falls below $30, it may re-test lows. Wait for the stock to find a range in the 20-30 range if that is the case. My target is $70 based on valuation and technical indicators, should the stock bounce from a $30 "test" price:

c) 2000 Market Analysis Canada
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