Tech Stocks Struggle to Recover from Severe Two-Week Sell-Off
ANNOUNCER: From the world headquarters of CNNfn, the Financial News network of CNN, this is MONEYWEEK with Terry Keenan.</s>TERRY KEENAN, HOST: Welcome to MONEYWEEK, where aim to keep you ahead of curve for the week ahead on Wall Street. We have a top-notch team of Wall Street experts on board with their predictions for the this volatile market. But first, the tech stocks struggled to rebound after some severe losses. We will have an outlook for the sector and for the rest of the market. And the election and stocks. Find out which candidate might be better for your portfolio. And one well- known Wall Streeter will soon be behind bars. Jim McDermott sentenced for the passing stock tips to a porn star. And always, we have stock picks -- legal ones -- for the coming days and ones ahead on Wall Street. And we begin on Wall Street, where tech stocks struggle to recover from a severe two-week sell-off. The Nasdaq gained more than 100 points on Thursday, managing to finish the week higher. The coming week will be one to watch. Two of biggest names in tech come out with their quarterly results. On Tuesday, we get the numbers from Cisco Systems. They report after the bell. Come Thursday, Dell Computer will report its numbers. On Wednesday, look for earnings from Dow component Wal-Mart. Among the stocks making moves this past week, Cisco did gain ahead of its earnings numbers, and Dell moved lower following some bearish comments from Bancorp U.S. Piper Jaffray. And many of the chip stocks sold off again, including Novellus. But Disney, a Dow component, rallied on better-than-expected profit. Time now to bring in our team of experts, joining us this week David Alger of Fred Alger Management. John Manley, the strategist with Citibank Salomon Smith Barney, and Gregg Hymowitz, money manager at Entrust Capital. And, gentlemen, welcome. David, let me start with you, because we had a terrible week last week for the Nasdaq, I think the third worst ever. Were you convinced by the rebound this week?</s>DAVID ALGER, FRED ALGER MGMT.: Yes, I think rebound was pretty convincing. I mean, last week was just obviously a, you know, a confluence of a number of factors. You know, first of all, we had some, you know, poor earnings. Secondly, we had this sort of this, you know, semiconductor malaise that has been going around. And I think those things really impacted at the same time. I think what's happened this week, of course, is that, you know, people realize that things are greatly overdone, there are a lot of good earnings coming out, and more good earnings than bad earnings in the tech sector, and I think that fear of the Fed, this week anyway, has dissipated somewhat as well.</s>KEENAN: Yes, the employment numbers seemed to cheer everybody on Friday.</s>ALGER: And retail sales as well, I think.</s>KEENAN: John, you know, still, though, we've been really stuck in a trading pattern. I hate to use that term, but the trading range is really what we've been stuck in for the last three or four months, and the Nasdaq in particular can't seem to get past that 4,100 level. What's it going to take to move us past that?</s>JOHN MANLEY, SALOMON SMITH BARNEY: I think it's a race. I mean, I think the economy is decelerating. It's question of when it gets to technology, because the slower economy should favor growth stocks. And I think tech stocks are growth stocks most of the time. There's a cyclical component to them, but they're growth stocks. I think some sign if the Fed is through or just about through along some signs that tech earnings are going to be OK, at least through the third quarter or fourth quarter, is going to be something that's going to get us going.</s>KEENAN: Gregg?</s>GREGG HYMOWITZ, ENTRUST CAPITAL: I agree. Look, if you look at where the strength in the economy is. You know, second quarter, the real strength in earnings per share from companies were mainly from technology and energy. If you sort of look at the other parts of what really make the up the S&P;, really growth was fairly anemic. So I agree with both John and David, you have to stick with technology, because that's really where the strength in the economy is. And the only risk -- and David and I have talked about this before -- is valuation. Some of these stocks, particularly some of the Internet stocks, are extremely overvalued. And then it becomes a battle between fundamental -- strong fundamentals on one side, and potentially excessive valuations on the other, and that's why I think we've been stuck in this relatively tight range for a while.</s>KEENAN: And you know, David, there's some more controversy this week in the chip sector, but particularly when it came to Motorola. What was that all about? And is their clearly slowing demand?</s>ALGER: Well, what it was about was that most Motorola had a meeting several days ago, and they announced that they were pulling back their unit shipments from 100 million this year to 80 million. Well, I think they did something like 33 million in the first half. So, in fact, 80 million is really a good number. And everybody wants Motorola to be more profitable, not make more handsets, but be more profitable. So this is not new news; this is old news. And the fact that they've informed their suppliers, since several suppliers have come out and said it, is we knew this. This is -- you know, but somehow, some Wall Street analyst got a how hold of it and brooded it around, and everybody misinterpreted it. I think this is actually good news for Motorola. I think Motorola goes up on this, not down. And you know, after all, this has been a very fast-growing sector and continues to be.</s>HYMOWITZ: Isn't there a risk, though, David, that at least we're looking at Nokia, we're looking at Motorola, but you always hear the risk that it's becoming a commodity. I mean, cell phones, as they continue to increase their penetration, at some point becomes a commodity and prices go down, and now I think one of things that overhang Motorola and Nokia, you saw it in both stocks.</s>MANLEY: But there is a next generation.</s>HYMOWITZ: There is always a next generation.</s>MANLEY: That's the point the technology. That's why it's different from energy, there is a next generation, like they have cell phones -- or they will have cell phones that do more things for you, because it does tend to become a commodity. That's how they make their money. They go down the learning curve. They learn the business from TI. It seems to me, though, unless it's anything more than a product cycle, I think Wednesday taught us -- Thursday I think it was, taught us that's it's real tough, because can you miss the bus. It does tends it pull out very quickly.</s>HYMOWITZ: All right, that's the bullish argument.</s>KEENAN: And, John, I think you're probably most caution on the tech sector here. How would you play if?</s>MANLEY: Actually, I overweight. I think tech sector is a pretty good place to be. We do have to worry about the semiconductor side. Our analyst was one who probably started this whole anything off, John Joseph, and I thought a very well-reasoned logical call about the problems that could hit his group next year. I still think Intel doesn't really hit that. Part of that is a function with telecommunications. I think the PC sector should be getting a little bit better. I think you can play it there. I think Hewlett is still a very cheap company. I think IBM, if you want to buy cheap company, there is some question about deceleration there, but again, you're not paying much more than a market multiple. I don't think those are bad ways to play it. You can still play it and be very conservative.</s>KEENAN: Couple of your favorites.</s>ALGER: You know, I don't know that's necessarily true. I mean, obviously, all semiconductor stocks have a cycle, and we all know that they end sometime. And so it's obviously logical that, you know, you want to jump off at some point after it's been good, because eventually it's going to get bad. But I don't think we're anywhere near the ends of cycle. And in fact, I think the semiconductor equipment problems that have been brooded around this week have been greatly misinterpreted. That has to do with the fact that there are shortages of some components, which are kind of backing up the whole cycle. It is not lack of demand; it's lack of components. And that stuff just being pushed out, and I think we'll continue for many years to go.</s>KEENAN: OK, we're going take a quick break. But when we return, a record number of Americans now own stocks. We'll take a look at which candidate could better for your investment portfolio. And a bit later, top banker Jim McDermott is sentenced for passing stock tips on to a porn star.</s>KEENAN: Texas Gov. George W. Bush getting a nice boost in the polls following the Republican National Convention, but unlike eight years ago, the main focus was not on the economy, but rather on moral values and integrity. So who would be more market-friendly? And will plans overhaul Social Security be good for stocks? And, Gregg, we had the first round in this. We get the Democratic convention in two weeks. Does it make a difference for investors who is in White House this time around?</s>HYMOWITZ: Well, I think it's a little different now. I think it makes a difference who controls the entire government, and I think the best thing for this market would be a continued split in the government. Therefore, you keep the Democrats on check and they don't spent surplus; on the same hand, you get the Republicans on check that they don't, effectively, give out tax break to everybody, which potentially will cause more spending, potentially lead to inflation. So I think the Wall Street would really like to see a continued stifling of government, continued no action, and that, ultimately, will be best for the market. That's a federal role we've had for last eight years, and can you leave credence to the thought that that is what has been one beneficiary of the bull market.</s>KEENAN: David.</s>ALGER: No, I kinds of disagree with that. My theory is that the economy is decelerating. By the time, George is inaugurated, which I'm hoping will happen, I think what you're going to have is a much slower growing economy, and one that in fact may be in jeopardy of going into recession or at least a very, very slow growing period. And I think at that point, relaxation of this very tight, you know, fiscal policy which we have had in the Democratic administration, bizarrely, would be a very good thing. I think tax cuts, especially capital gains tax cuts, would be tremendous boost for the market.</s>KEENAN: John, I know David already has the shuttle tickets. But I want to ask you, how do you run against the longest peacetime expansion in history?</s>MANLEY: Well, which one is running against it, because Mr. Gore distanced himself from Mr. Clinton on certain issues not really related to politics. I think it does matter a bit more than usual this time, because number one, you have a fairly aggressive Justice Department going after Microsoft. I think that has some morays there. The drugs side, they're certainly worried. They really do care who wins this time. I think it means a bit more than usual. I think there's a slight different philosophy in government, so I think without -- I'm not going to give away who I am going to vote, but I would tend to think that a lot of sectors would prefer to have a Republican in the White House come next year.</s>KEENAN: OK, well so far, the polls look like that's what we're going to get.</s>ALGER: Well, that may be true. I am actually very interested in this, because it seems to me that if you look at it, Bill Clinton started his administration very, very much as a liberal. And by the time he was -- by two years, he was really a moderate, and I think the economy prospered as a result. I think, interestingly, Gore is way to the left of Clinton, and I think that he will end up being quite scary to business, if indeed he's elected.</s>KEENAN: Clinton, of course, discovered the bond market early in his administration. And along with Bob Ruben, really crafted a different economic policy going forward. What about the Social Security plan?</s>HYMOWITZ: Well I mean, think that, you know, what they laid out, what the Republicans laid out, is interesting. Obviously, the equity markets will take that favorably. Then all of a sudden, 5 percent of everyone's Social Security may go into the equity markets. I don't necessarily know what's the wisest thing, quite frankly, because we know if that 5 percent gets lost, you know they're going to be going come back to government for it. I think the fact is, you asked this John this question, how do you run against this expansion? How do you run against this economic boomtime? And obviously, the answer is, you don't run against it. You run against it on other issues -- values, integrity, but I still believe that the best thing is a limited government. But the way you get limited government here is by allowing the checks and balances of the two parties to work against each other.</s>KEENAN: All right. Just ahead, the financials rallied late in the week, but will the gains continue? Our next quest says yes. Get his picks when MONEYWEEK returns.</s>KEENAN: Many financial stocks rallied this past week, some consumer finance and insurance issues hitting new 52-week highs, including Providian and Chubb. Brokerage and big banks also getting a nice lift and our solidly higher on the year. Merrill Lynch up more than 50 percent year to date, hitting a new all-time high on Friday. Citigroup also beating the overall market. But regionals, such as National City, KeyCorp and U.S. Bancorp all lower -- sharply lower -- on the year. Joining us now with the outlook for this sector is Fred Price. He is the co-head of research at Sandler O'Neill, a company that specializes in the financial sector. And, Fred, welcome. Good to have you with us.</s>FRED PRICE, SANDLER O'NEILL: Thank you. Thank you.</s>KEENAN: Financial stocks had a nice performance at the end of the week. Is it a reflection of the thinking the Fed is finally done raising rates?</s>PRICE: I don't think it's a reflection that the Fed's done, but I think the reflection of is there's less to go up than there is go down from this point forward at some point, not saying that rates are going to go down immediately. Certainly the next dramatic move is probably lower rather than higher.</s>HYMOWITZ: Do you think we're going to see an uptick in consolidation now? We saw the pace has slowed somewhat. Do you think you're going to see an uptick once again?</s>PRICE: I think there are some companies out there that would like to see that. If some of these currencies can get a little bit better -- there actually has been a lot consolidation going on at a much lower level. The Wells Fargo has made a lot of acquisitions of very small banks, very quiet ones, and a lot of different markets. So there has been a lot of small acquisition. BBT, a regional in the Carolinas made a lot acquisition. Still during all of this, you haven't seen the big mega national news kind of deal, and I think that's out there to do, if a couple of these currencies get a little stronger.</s>ALGER: It seems to me that the consolidation that has occurred among big institutions has worked very favorably. I mean, you know, Chase Chemical seems to be working. You know Citigroup seems to be working very effectively. It's our second largest holding actually. You would some expect technology and dot.coms, but in fact Citigroup is our second-largest holding. And you know, there is a tremendous amount of synergy that could be achieved by rolling together these banks, so I'm surprised that, you know --</s>PRICE: No, I don't think -- that issue is not missed, and those that have consolidated and done it well, have done very well out of it. The market hasn't necessarily rewarded it at the middle to lower levels yet. Certainly we rewarded it at the higher level. I think financial stocks are very attractive.</s>MANLEY: I've got do ask, I mean, would anyone recreate the regional bank system that most -- exists now, if they were to do it all over starting now, given the Internet, given the worldwide reach, given the need for size and technology, do regional banks really have a future?</s>PRICE: I think they have future. There is going to fewer of them, and I think that's your point, is you're going to have this consolidation, you're going to have fewer providers of deeper and deeper services, and so you won't have this large mass of regional services.</s>HYMOWITZ: Which side do you play, the acquirers or the acquirerees?</s>PRICE: Well, the market right now punishes the acquirers percent and rewards the acquirerees, but at some point, I think the acquirers are going to produce on what they said they're going to produce, and the earnings enhancements are going to be significant.</s>KEENAN: Greg, do you have a question?</s>HYMOWITZ: I was just going to say credit quality. That's obviously been another concern people have. What are you seeing out there. I think it's really overblown. There are some small credit issues that are developing, no question about that, but I always find it a little bit interesting that the overall market is generally talked about fairly in good sense, that we have a good future out there, and even if the economy slows, everything is going to be OK. and yet we keep saying, well, banks are going to have big credit problems. Well, from where? If that's really going on, then where are banks going to have big credit problems from? So I think it's quite overblown, this credit issue. Banks did -- I think they are properly being recognized. For several years after the '90s when banks boosted reserves quite a bit, they backed off of that, because credit quality good so good that they made very few provisions, and so a lot of bank earnings growth were fueled by lower credit cost, and that's catching up now, and credit costs are now coming back to kind of normalized levels, and people are just getting used to seeing credit costs built into earnings statements.</s>KEENAN: And, Fred, just quickly, before we go break, what's your favorite baking stock right now?</s>PRICE: Can I give you three? Mellon, BB&T; and National City are three companies we like a lot.</s>KEENAN: Sorry, Gregg.</s>HYMOWITZ: Well, Citigroup is my second largest holding, too. I just wanted John to know that.</s>PRICE: We know. You've been a bull on that as well. OK, coming up next, we will be back with predictions. So don't go away.</s>KEENAN: OK, time now for predictions. And John Manley, let me start with you.</s>MANLEY: I think the financial stocks do pretty well through the rest of the year. I think we've probably seen the worst we're going see from the Fed. It's a very, very cheap sector. I like things like Chase. I think some of the insurance stocks like Chubb, on a cyclical basis, or Lincoln National on a longer term basis, very attractive.</s>KEENAN: David.</s>ALGER: I think that by the end of the year, you're going to see the bond market rallying 50 basis points. In the long end, the economy is really going to slow. There is going to be much less inflation. And the stock market is really going to take off.</s>KEENAN: Already been a good year for the bonds.</s>ALGER: Yes, it's going to be better.</s>KEENAN: OK.</s>HYMOWITZ: I'm going to give a slight permutation on David's. It's very interesting that the three of us all agree that the economy is decelerating, which is very different than most of us would have thought a few months ago, and therefore, I think no Fed rate increases throughout the balance of the year. Maybe next -- earlier year, you see the stock coming down again, but I think people are surprised that the equity markets don't rally as much, because the fear of slowing growth is going to start seeping into those equity markets.</s>KEENAN: Fred, you have the last word.</s>PRICE: I agree with the financials. I think now is the time to really to begin to look down not to those that have done great, but to those who have been held back a little bit, where the multiples are seven and eight, and the returns are really strong. Those are the next ones that are going to move.</s>KEENAN: And you like the insurers as well.</s>PRICE: I like the insurers as well. The whole group, the brokers group has done phenomenally. If rates come, the life group is going to do great. I think that sector is going to be one we'll talk about again in a few months.</s>KEENAN: OK, we'll have to leave it there. Thanks, gentlemen. And coming up next, we'll have a complete look at what you need to know for the coming days and weeks ahead on Wall Street.</s>KEENAN: Former Wall Street power broker Jim McDermott, the former chairman of Keith, Bruyette & Woods, was sentenced to eight months in prison on Thursday. He was also fined $25,000 and community service. The crime: passing on tips about bank mergers to his girlfriend, adult film star Katherine Gannon. Gannon is currently fighting extradition from Canada. Time now to take one last look at what is in store for next week on Wall Street. And for that, we are joined by CNNfn's Allan Chernoff -- Allan.</s>ALLAN CHERNOFF, CNN CORRESPONDENT: Thank you, Terry. Well, as you mentioned, two of the biggest names in technology are due to report their earnings next week. Cisco expected report on Tuesday. That stock has been trading in the 60s for the past two months, a tight range for Cisco. On Thursday, we'll hear from Dell Computer. And as for the economy, productivity numbers due on Tuesday and the Producer Price Index on Friday for a look at the wholesale price trends. And one IPO worth watching, Internet service provider Equinix. It's an offering from Goldman Sachs and Salomon Smith Barney. Cisco and Microsoft both have stakes in the company -- Terry.</s>KEENAN: Interesting. Thanks, Allan . Allan Chernoff. And that's going to do it for this week. Have a great weekend.