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The Starting Line: Analysts contort to call bottom

At least once a week a Wall Street analyst predicts the end of the economic downturn in one of the technology sectors--but it's backed up by little more than air.

Everybody wants to be a hero--especially Wall Street's tech analysts.

At least once a week this summer a Wall Street analyst has issued a report that indicates the market for some slice of the tech sector has at least stabilized. Analysts issue their research reports with headlines touting "stabilization," "bottoms," and the fact they are moving to a "positive stance." After a few paragraphs, however, you find a lot of hedging and doubletalk.

But investors want to believe. For instance, Cisco Systems last week said its business remained stable compared with the last time it issued its outlook (just a few weeks ago), and the market cheered.

So what's a tech stock watcher to make of Wall Street reports predicting a rebound for certain sectors? Not much. Wall Street analysts are under pressure to call a market bottom so they can tell investors to get into stocks early. Never mind that some analysts may be a year early--a fact a few of them concede. The key is to err on the side of being early; analysts don't want to be left behind--again.

Many analysts failed to predict when the technology stock bubble of early 2000 was going to burst, and they don't want to get stung twice. Investors, Congress, the media and even analysts' own industry groups have criticized them. Wall Street analysts would like to put a feather in their collective cap. The pressure to call the bottom is like an invisible hand; there's no boss saying "upgrade a sector now," but the pressure is there, analysts say.

"The problem is that when the market rebounds, the move up is likely to be pretty sharp," said Chuck Hill, director of research for First Call. "They are trying to balance their opinions with what's a realistic chance that stocks will move up. The pressure is more in their mind, but it's a factor."

That pressure can sometimes produce comments such as the following:

• Jim Liang, an analyst at WR Hambrecht, reiterated his brokerage's "positive stance toward the communications semiconductor sector as we have increased confidence about a communications semiconductor sector upturn starting in the December quarter and continuing into 2002." He upgraded Marvell to "strong buy" and reiterated "strong buy" ratings on Altera and Vitesse. Broadcom and Xilinx carry "buy" ratings.

Why? Liang's checks indicate that both Altera and Xilinx saw their businesses stabilize. While acknowledging that sluggishness in Europe could derail the "nascent U.S. stabilization process," Liang said he's betting the United States will lead to a rebound in the December quarter and notes Cisco is the linchpin of his thesis. Last week, Cisco reaffirmed its sales targets, which predict a flat to down 5 percent revenue for the October quarter.

• Ellen Chae, a contract equipment manufacturing analyst at Prudential Securities, said she was "encouraged by the more constructive tone" of the supply chain for the companies she covers. Chae said the companies are set to meet lowered expectations for the September quarter, and she's "optimistic about modest sequential growth by the December quarter." She likes Celestica and Flextronics of the group.

• Merrill Lynch chip analyst Joe Osha earlier this month predicted "the worst of the downturn is now behind us," but served up little anecdotal evidence to back up his claim. The gist of Osha's call was that it's better to be early than late when chip stocks rebound. Salomon Smith Barney analyst Jonathan Joseph was even earlier predicting the worst was over for chip stocks: He made the call in April.

Many of these relatively upbeat reports on tech stocks are often disputed or dismissed. Prudential talked up PeopleSoft last week and remained optimistic on the long-term future for rivals Oracle and Siebel, but no one listened and stocks barely moved. Investors are apparently immune to upbeat research reports when there's little evidence to back them up.

The biggest issue is that investors are tired of hearing about "stabilization" and want to hear something more from companies, analysts said. Nevertheless, optimistic reports will keep coming even if there's little concrete evidence of a turnaround.

Brent Bracelin, an analyst with Pacific Crest, said there's a simple reason why his peers at tripping over themselves trying to predict better times. "At the end of the day you can look like a hero if you call the bottom," he said. "There's a lot of ego in this business, and you can make a name for yourself if you're in the right place at the right time."