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SIVY ON STOCKS from money.com
November 13, 2000

The tech wreck continues

Election chaos and lousy earnings news from companies
such as Hewlett-Packard are driving down tech stocks.
But don't rush to buy yet.

By Michael Sivy

There is no constitutional crisis. The presidential
election results will probably be sorted out within a
week, and certainly long before the electors cast
their votes on Dec. 18. Though the outcome of the
bitter fight in Florida is anybody's guess -- it
largely depends on technical legal issues -- the
lawyers I know think the chances of Al Gore getting
the count he wants are better than 50 - 50.

The electoral chaos is contributing to a decline in
the Dow and an even sharper selloff in the Nasdaq,
which was down to less than 2,900 at one point on
Monday - more than 40 percent off the March high.
Also a large factor in the selloff was Hewlett
Packard's third-quarter bomb. Although sales were up
almost 17 percent from year-earlier levels, earnings
came in 20 percent, or 10 cents a share, below analysts'
expectations. They attribute the profit shortfall
partly to the effects of the weak euro, but mostly to
expenses that were much higher than H-P expected. It
appears that to reach its ambitious sales goals, the
company let costs get out of hand.

 From a long-term perspective, there doesn't seem to
be anything seriously wrong with Hewlett-Packard's
business. With more attention to cost control, H-P's
sales might grow a little bit slower -- 15 percent
annually, say -- but profits would increase just as
fast. Trading at $34 a share, less than 17 times
earnings for the coming year, a sustainable 15
percent earnings growth rate makes H-P look extremely
cheap, and some analysts rate it a value buy. More
skeptical analysts, however, think that H-P's decline
could continue for a while. And that's my bet as
well.

The problem is that the tech group as a whole is in a
powerful downtrend. In fact, the biggest and
best-known tech stocks could be the hardest hit
between now and year end. Usually, money managers and
mutual fund executives try to finish their tax
selling by the end of October. But given the recent
uncertainty, portfolio managers may continue to cut
back on their big tech positions, hurting even such
tech blue-chips as Cisco and Oracle.

Tech stocks aren't the only ones with targets painted
on them. If Gore does gain the presidency, big drug
stocks could react quite negatively. Even though it
will be hard for Gore to do much to hurt the
industry, given the hostile and divided Congress he
would face, the drug stocks have been building in a
big Bush-victory premium over the past few
weeks -- and the group would therefore be susceptible
to a psychologically based selloff.

The investment that would likely profit most from a
Gore victory is fixed-income. He would face a
Republican Congress at least through 2002, and over
the next two years the surplus could total more than
$500 billion. With a sharply divided government, the
vast bulk of this money would go to paying down the
national debt, which could be reduced by 10 percent
to 15 percent over the two-year period. And even if
George W. Bush somehow manages to hang on, the
numbers would be similar.

Paying down the national debt is wildly bullish for
long-term Treasury bonds, and would also help the
bonds of government agencies -- like Ginnie
Mae -- and blue-chip corporations. A shrinking
national debt would likely slow the economy even
more -- it's the opposite of deficit spending after
all. That could contribute to a negative climate for
growth stocks and encourage the Fed to start lowering
interest rates at the first opportunity -- probably
early next year. The case for conservatism and
diversification has never been greater.



###

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