THE WEEK AHEAD: How low will the Fed go?

3 min read

America Online and Amazon.com headline another barrage of earnings next week but Wall Street will be paying much closer attention to the Federal Reserve Board’s meeting. At this point, analysts are convinced the Fed will cut rates by at least one-quarter point.

After surprising Wall Street with a half-point cut in short-term interest rates earlier this month, Fed Chairman Alan Greenspan gave every indication the central bank will make every effort to jumpstart the weakening economy.

Conventional wisdom says the Fed will cut rates by a half point next week, knocking the fed funds overnight lending rate to 5.5 percent.

Arnold Berman, technology strategist at Wit SoundView, said investors will be getting good news regardless of how much rates are cut.

“The next big event is the Fed. The market is starting to hope for 50 basis points (rate cut). If we only get 25 it will lead to a short-term negative reaction,” he said. “But that would be short-term because it says the Fed does not think that things are that bad and it would mean we don't have to wait that long before we can look forward to the next interest rate cut.”

On Thursday, Greenspan testified before Congress that the economy has slowed dramatically, giving a signal further rate cuts are ahead.

“There's some gamesmanship going on in advance of the Fed meeting,” said Richard Cripps, chief market strategist at Legg Mason. “Some are selling now with the idea that once you have the (rate cut) announcement, you might have some pull back and that that might be a better time to be a buyer.”

Some strong earnings reports from the likes of AOL and Amazon.com could provide an additional boost to tech stocks this week.

  • America Online (NYSE: AOL) is expected to post a second-quarter profit of 15 cents a share on sales of $2.15 billion.

    Following its recently approved merger with Time Warner, the new combined company announced this week that it would cut 2,000 jobs as part of its ongoing effort to streamline operations and reduce expenses.

    Combined with previously announced plans to lay off 400 people at the CNN News Group, the total cuts amount to about 3 percent of the company's work force of 85,000.

    AOL topped analysts’ estimates in its third quarter, raking in $350 million, or 14 cents a share, on sales of $2 billion.

  • Amazon.com (Nasdaq: AMZN) continues its fight for profitability when it reports fourth-quarter results next week.

    First Call Corp. consensus expects the online retailer to lose 26 cents a share on sales of $994 million.

    Earlier this quarter, Amazon.com executives reiterated their commitment to trimming operating expenses and its net loss in fiscal 2001.

    Last quarter, Amazon.com posted a loss
    of $68 million, or 25 cents a share, on sales of $638 million.

    So far, investors haven’t been impressed.

    The stock, trading around $20 this week, fell to a low of $13.56 earlier this month.

  • RealNetworks (Nasdaq: RNWK) was in the news this week after Merrill Lynch analyst Henry Blodget downgraded the stock, suggesting that Microsoft’s Windows Media Player was cutting into its market share and that slumping advertising sales will crimp earnings.

    Analysts expect the maker of media streaming software to earn 2 cents a share on sales of $60.7 million, down from the third quarter when it earned $6.7 million, or 4 cents a share, on sales of $67.1 million.

    Trading below $10 a share, RealNetworks is rated either a “buy” or “strong buy” by 15 of the 26 analysts following it.

  • InfoSpace (Nasdaq: INSP) should provide some interesting theater next week when it reports its fourth-quarter results.

    First Call Corp. consensus pegs it for a profit of 1 cent a share on sales of $65.8 million.

    However, the stock was hammered this week after the company announced that Chairman Naveen Jain would reclaim the CEO spot and that its CFO and COO were on their way out.

    Some analysts speculated the CFO departure might be a precursor to either an earnings miss or a watered down guidance for 2001.

    Last quarter, InfoSpace earned $9.5 million, or 3 cents a share, on sales of $57.7 million.

    F-5 Networks (Nasdaq: FFIV), PeopleSoft (Nasdaq: PSFT), MP3.com (Nasdaq: MPPP) and Electronic Arts (Nasdaq: ERTS) will also report earnings next week.