The NASDAQ began its trading week after a long Memorial Day weekend with a sell-off as Goldman Sachs' analyst, Ms. Laura Conigliaro, cut her 2001 and 2002 earnings estimates on networking equipment maker, Sun Microsystems [NASDAQ:SUNW] and on the No.1 data storage equipment maker, EMC Corp. [NYSE:EMC]. She wrote in her research note that there are no notable improvements in the demand for networking and data storage equipment in the U.S. The demand in Europe, and possibly Asia/Pacific is slowing, added Ms. Conigliaro. She expects revenue growth for EMC to be 14 percent in fiscal 2001 and 12.8 percent for Sun Microsystems in 2002.

Ms. Conigliaro's report note to Goldman Sachs' clients became public several hours before Sun Microsystems warned that for the fourth quarter ending June 2001, the company is expecting to earn between 2 cents and 4 cents per share on sales between $3.8 billion and $4 billion. The expected earnings are well below the most recent First Call consensus estimate of analysts at 6 cents per share. EMC responded to Goldman Sachs' research note by releasing an open communication statement saying that the company is taking several steps to expand its technology and market share lead in information storage, and lower operating expenses to better reflect the company's previously discussed 2001 revenue growth target of 20% or greater.

Later in the week, the NASDAQ market sentiment showed some improvement, particularly in the chip sector, as chip equipment maker, Novellus [NASDAQ:NVLS] announced that the company will maintain its financial targets for the second quarter. Investors were also encouraged by the news that the U.S. unemployment rate for April declined 0.1 percent to 4.4 percent. This number beat analysts' forecasts at CNBC/Dow Jones, who predicted that the unemployment rate would rise to 4.6 percent, instead of a 0.1 percent decline. Some experts strongly argued that the observed decline in the unemployment rate may be due to the fact that unemployed workers were discouraged and stopped looking for jobs. There is however, no evidence to support such a hypothesis.

For the week ending June 1, the NASDAQ closed at 2149.44, down 101.59 points or 4.51 percent from the previous week's closing of 2251.03. From our market sentiment index, we conclude that the NASDAQ market will continue its up-trend as investors expect that the corporate earnings outlook will not get worse.

Although the investor sentiment for Sun Microsystems appears to be lagging behind that for the NASDAQ, we believe that the sentiment for Sun Microsystems could bottom out near-term and catch-up with the NASDAQ market sentiment later this year. This optimism is based upon the comment by Sun's executives this week that the slowdown in the demand for Sun's products in the U.S. appear to have stabilized. We believe that an aggressive rate cut by the Federal Reserve will slowly stimulate growth in the U.S. economy and capital spending in the second half this year. We expect the demand for networking and data storage equipment in the U.S. to pick up first, later this year, followed by Europe/Asia early next year.

Although the book-to-bill ratio for semiconductor equipment has plunged to a ten-year low last month, we believe that a downside potential for the book-to-bill ratio may still exist. Based upon five-year historical data, the down-trend cycle for semiconductor equipment could be complete in the latter part of the third quarter as 300-mm chip equipment orders begin to pick up. 

We expect that the push-back in 300-mm tool orders, as announced this week by Novellus's executives, could have a downward impact on the price of 300-mm silicon substrate wafers. Similar to the 200-mm silicon substrate wafer, we expect that the price war for 300-mm silicon substrate wafers could intensify next year as the silicon businesses, Sumitomo Metal Industries Ltd. and Mitsubishi Materials Corp, complete their merger and the newly merged company, Sumco, is ready to take the No.1 position in the silicon substrate wafer market. If such a price war breaks out, we believe that chip companies including Intel [NASDAQ:INTC], Infineon Technologies [NYSE:IFX] and Xilinx [NASDAQ:XLNX] will benefit. According to Xilinx, the company projects that in the next 12 months, up to one-third of their product revenues could come from 300-mm wafers.