Commentary: New March, new market

5 min read

COMMENTARY--A new March dawns on Wall Street and this year's version looks nothing like the animal we were awestruck by just 12 months ago. This one doesn’t even look like a particularly healthy lamb.

This time last year the Nasdaq composite was roaring to an all-time high, interest rates were on the rise and corporate profits—particularly from tech companies—were setting records.

Fresh off February's 22 percent bloodbath--the third-largest, single-month decline in Nasdaq's 30-year history--investors wake up in March 2001 to a completely different economic universe.

It's a frightening new land where massive layoffs, decimated stock prices and profit warnings are so common they barely register in our collective conscience. Another 5,000 or 6,000 employees axed at WorldCom. HP cuts loose 1,700 employees. Gateway warns. Lam Research warns. And so on.

Just another day at the office.

And here sits the Nasdaq composite at 2,151 points—off almost 3,000 points from its peak of 5,132 last March—limping in like a three-legged lamb desperately hobbling away from a pack of mint-jelly toting bears. The Nasdaq is at its lowest levels since the end of 1998.

Greed has given way to panic which, in turn, has given way to disbelief.

That investors continue to sell stocks in part because the Federal Reserve Board won't cut interest rates ahead of the committee's scheduled March 20 meeting, tells you all you need to know about investor psychology these days.

Keep in mind, the Fed cut short-term rates by a full point in the first five weeks of this year but we've learned that it was far too little, far too late.

This time last year, the Fed was contemplating another rate hike after raising rates on four separate occasions beginning in the summer of 1999. The market seemed oblivious to the hikes as one initial public offering after another popped 200 percent or more at birth.

"I think the past interest rate increases are going to be digested before (Fed Chairman) Alan Greenspan makes any moves,'' said Arnie Owen, managing director of capital markets at Roth Capital Partners, back in March 2000. "I think we are going to see follow-through in the rally. I think the confidence level of the investment community is building."

Wrong and wrong.

Greenspan made some moves all right, but in the other direction, and the investment community has lost all confidence.

It's so bad that analysts are now doing what was once unthinkable, breaking the bad news to investors long before the companies come clean with their profit warnings and dismal outlooks.

Of course, this only happens after all these stocks have tanked.

Goldman Sachs actually held a conference call this week to explain why it was downgrading a bevy of software companies and predicting a string of profit warnings ahead of the first-quarter numbers.

Perhaps the greatest lesson learned from the once-in-a-lifetime bull market that tech investors enjoyed over past 10 years--and this subsequent collapse--is how intertwined all these supposedly disparate segments really are.

When the economy is booming and new technology is en vogue, the momentum not only lifts the whales like Intel (Nasdaq: INTC), Sun Microsystems (Nasdaq: SUNW) and Cisco Systems (Nasdaq: CSCO), but also the bottom-feeders that were buying their chips, servers and routers during the rally.

On Wednesday, Lam Research (Nasdaq: LRCX), a middle-tier chip-equipment maker, warned that it will miss sales and earnings targets in its current quarter, mainly because its customers are cutting back on new equipment orders and canceling some of the orders they'd placed just a few months ago.

It was only five weeks ago that Lam topped analysts' estimates in its fourth quarter when it reported record sales and orders.

Folks, that's not a tap on the brakes. That's an air bag-popping dive on the pedal.

Novellus Systems (Nasdaq: NVLS), another chip-equipment maker, got touched up in Wednesday trading after a Prudential Securities analysts suggested that its orders might not be up to par this quarter.

Applied Materials (Nasdaq: AMAT), the world's largest chip-equipment vendor, already posted disappointing earnings in its latest quarter and lowered estimates for the next couple quarters.

Customers are essentially exposing their suppliers, doing everything but faxing off the press releases themselves.

It's not too much of a stretch to assume leading chipmakers such as Intel and Advanced Micro Devices (NYSE: AMD) will soon be warning of even lower sales and earnings after their latest disappointing results.

Major telecom carriers such as AT&T (NYSE: T) and Qwest Communications International (NYSE: Q) aren't ordering as much equipment from Cisco, Lucent Technologies (NYSE: LU) and Nortel Networks (NYSE: NT) which, in turn, aren't buying as many communications chips and components from Applied Micro Circuits (Nasdaq: AMCC) and Broadcom (Nasdaq: BRCM).

Pick any downtrodden technology stock you want and look at the health not only of its customers but its suppliers.

At some point investors have to face the reality that the market and economy aren't going to improve significantly for quite some time. In fact, things will probably get worse before they get better.

The Nasdaq might be trading at levels not seen since December 1998, but at least investors can take some solace in the fact that they survived the wildest roller-coaster ride in the history of the world's economy.

What a story we all have to tell.

The dot-com shakeout is almost complete. Interest rates are lower and likely will be sliced again in a few weeks. Early indications point to a decent upswing in technology sales in the latter part of this year and into 2002.

Cisco and Intel, for all their problems, earned a combined $16 billion on sales of $52.6 billion in fiscal 2000.

Sooner or later another killer application or must-have gizmo will break through and reinvigorate the tech sector. Customers will resume placing large orders and the race will begin anew.

In the interim, investors will develop a greater appreciation for those measly 10 percent and 15 percent returns they yawned at in years past—something that can only be good for the economy in the long run.