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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