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THE DAY AHEAD: Solectron does the tech recession two-step

COMMENTARY--Analysts were expecting Solectron to cut its fiscal 2001 outlook when it reported its fiscal second-quarter earnings. They weren't expecting Solectron to refrain from giving fourth quarter and fiscal 2001 projections at all.

But that's what happened.

Solectron (NYSE: SLR), a leading contract equipment manufacturer, on Monday reported second-quarter earnings in line with projections, but cut its third-quarter outlook dramatically. Wall Street was expecting earnings of 31 cents a share in the third quarter, according to First Call. Solectron said it will post earnings of 12 cents a share to 16 cents a share in the quarter.

Sales for the third quarter will be $4.1 billion to $4.5 billion, well below second-quarter sales of $5.4 billion.

As for fiscal 2001, forget the outlook--there isn't one. Ditto for Solectron's fourth quarter. "I am reinforcing what you have been hearing lately in rapid succession--that the market visibility for most of our OEM customers is poor," Koichi Nishimura, president and CEO, said during a conference call with analysts.

Solectron had been forecasting 2001 sales of $23 billion. Assuming Solectron's fourth-quarter sales will be flat with the third quarter--a possibility floated by company officials--the contract equipment manufacturer will come up about $3 billion shy of its previous targets, if it's lucky.

Analysts fell in line by lowering Solectron estimates. Prudential analyst Ellen Chae cut Solectron to a "hold" from an "accumulate." "We believe there is additional downside in the shares," she said. Chae also predicted flat earnings in fiscal 2002. Other analysts cut their estimates and maintained "buy" ratings, but noted that Solectron shares could still fall.

None of this news is surprising considering what Solectron does for a living and the problems its customers face. Solectron makes gear--PCs, telecom equipment and other gizmos--for original equipment manufacturers (OEMs) such as Cisco (Nasdaq: CSCO), Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP). These OEMs outsource manufacturing to focus on marketing.

The thinking just a quarter ago went something like this: As tech companies struggle they'll outsource even more to save money. It was a nice thought, but a bit off the mark. No company is escaping the information technology slowdown.

When do we hit bottom? When a company can provide an outlook past the current quarter. This following quote isn't going to cut it.

"Most of the OEMs are not really clear as to what they believe is the situation, and when they will see a recovery," Solectron Chief Financial Officer Susan Wang. "We have not seen this pattern before. We do not really know just what the duration of this slow period might be."

Comforting.

Kumar sees gloom and doom
Speaking of tech recessions, USB Piper Jaffray's chatty chip analyst Ashok Kumar delivered a research note of gloom and doom about Intel (Nasdaq: INTC), whose stocks stumbled on his comments.

The gist of Kumar's note was clear. He said weak IT spending has led to a global tech recession. Kumar also noted that PC demand will be a key indicator of an IT spending recovery, but that we shouldn't expect anything soon.

"We do not believe that there will be a sustainable cyclical recovery until the second half of 2002," he said. The second half of 2001 "will not be a period of economic recovery, but a full-fledged recession, which should result in negative unit growth for the PC market in 2001, a first in its history."

Kumar said Intel could fall to the mid-teens even though the stock is down more than 60 percent from its highs.

The good news? Intel will be in a good position once things rebound, according to Kumar.

Now that the good news is out of the way, back to the bad stuff. Kumar said Federal Reserve Chief Alan Greenspan goofed. He boosted interest rates before the Asian economies had a chance to heal and kept raising rates.

"Economic data has deteriorated sharply in Japan and the banking problems in China and Taiwan are worse than three years ago," Kumar said. "As the U.S. rolls into a recession, Asia and Europe are expected to follow. We do not believe that the market has discounted this, and it is quite possible that the Nasdaq could significantly undercut the next support at 1,800." Kumar's note was such a bummer that he refrained from his usual wit and one-liners.

It's ugly out there. That's why I had to take a vacation in New Orleans last week. Those folks eat, drink and are quite merry. It's amazing what can happen when you get away from the stock market and those wish-they-had-a-clue talking heads.

Greenspan conspiracy
The Greenspan conspiracy theories are branching out faster than an "X-Files" script.

The latest theory sent to me by a reader was a bit amusing. Greenspan isn't invested in the stock market and reportedly keeps all his money in Treasury bonds. By raising interest rates and ruining the stock market, he's boosting his portfolio and finally making some money after missing the dot-com boom days. When investors go sour on stocks they flock to bonds.

Exactly. I should've put that one together myself. Who knew? TDAIN


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