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Texas Instruments: Part Of The Problem

If you are looking for a reason why the market has been unable to make much headway on rallies, look no further than Texas Instruments .

A bullish call by Merrill Lynch on Texas Instruments was one of the reasons for Friday's turnaround in the market. TXN is seeing stabilization in its analog order backlog and has begun to see new order activity, which could lead to sequential growth in the analog business by the fourth quarter.

While any sign of a bottom is good news for the industry, the problem for investors is TXN's valuation. Texas Instruments trades at a lofty 173 times this year's estimates. That is roughly the same valuation that Cisco Systems had at its March 2000 peak of $82 a share.

If TXN grows earnings by 100% in 2002, it will still trade at a PE of 86 - four times its long-term projected growth rate of 22%. How much higher can investors push the stock under those circumstances?

The problem with this market may not be whether or not business has hit bottom. The problem may be that investors haven't yet priced in slower growth, which appears to be a virtual certainty at this point.

This is that bizarre week in the middle of the quarter when a bunch of big-name technology stocks report earnings, and thus could be a pretty significant week for investors.

On tap for tomorrow: Applied Materials , BEA Systems , Network Appliance , and NVIDIA . Brocade reports on Wednesday, and Ciena , Dell and Hewlett-Packard report on Thursday. Enough of a representative sample to get a good feel for the current state of technology business conditions.

Add in a few big economic reports - retail sales tomorrow, business inventories, industrial production and capacity utilization on Wednesday, housing starts and the CPI on Thursday (more signs of deflationary pressures?), and Michigan consumer sentiment on Friday - and it should be anything but a boring week.

Commercial futures traders kept their commitments relatively unchanged - and bearish - last week, still short the S&P and Nasdaq futures by a hefty margin. There was some evidence that commercial traders may have covered some of those S&P short positions on Wednesday, which would be a fairly encouraging sign, but that won't be known until this Friday, when the CFTC updates its report.

And finally, there were some calls after Friday's deflationary PPI report that the Federal Reserve should cut interest rates by 75 basis points when it meets next week.

Short-term interest rates probably should be that low, but if the Fed really wanted to start a panic, that would probably be about the best way to signal that things are bad and the Fed has little power over the situation. The common wisdom is that rate cuts take 6-9 months to begin working, and the Fed first began to cut rates 7 1/2 months ago. Better to keep bluffing than to remind investors that the most aggressive rate cuts since 1929-1930 have yet to produce a measurable bottom in the economy.