Morning Report for Wednesday, May 30, 2001

http://www.internetstockreport.com/column/article/0,1785,1661_775201,00.html



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Sun Provides Reality Check

By Paul Shread (mailto:pshread@internet.com)

May 30, 2001 - Any hope that the second quarter could provide some sign
that fortunes are improving for technology companies was pretty much
dashed by Sun Microsystems last night.

Sun not only guided estimates lower, from 2-4 cents per share, down from
estimates of 6 cents a share, but the company also refused to provide any
forward guidance, meaning that there is still no sign of when the earnings
outlook might improve, or at least stabilize.

Sun blamed the shortfall not on product transition, but on "overall
slowdown in demand." There is some evidence that the U.S. is stabilizing,
Sun said, but not before the problems have begun to spread abroad:
European and Asian markets are getting weaker, Europe much more than
expected. "The surprise is Europe," was the word out of last night's
conference call. And cause for concern, too, because the European economy
had been one of the few bright spots this year.

If there was any hope that the June earnings warning season would be an
improvement over March, Sun just delivered a bold statement that it likely
will not be.

So does this mean the Nasdaq goes back and retests its April lows? Maybe
not just yet, but it's beginning to appear likely at some point in the
seasonally weak period of May-October.

For now, investors are betting that the Fed will prevail in its crusade to
keep the economy from slipping into recession. And that's not a bad bet to
make - the Fed has pulled out all the stops on this one. In addition to
the most aggressive course of rate-cutting in its 88-year history, the Fed
has removed the safeties on the other weapons in its arsenal. Just
yesterday, the Fed added about $10 billion in reserves to the banking
system, the most since it added $11 billion on May 16, the day after its
last rate cut. Think the May 16 rally was a delayed reaction to the Fed's
rate cut the day before? The word among traders is that it was the
unexpectedly large addition of reserves via repurchase agreements on May
16. The Fed was letting the market know it will pull out all the stops to
win this one.

But it's a risky bet, and time is running out. Fed rate cuts take 6-9
months to begin to hit the economy. The Fed began cutting rates on January
3; that means they could begin to hit the economy as soon as July. Which
means that companies had better have something - anything - to say about
visibility on their July conference calls, and certainly by Cisco's August
conference call. Otherwise, this market may not continue to support
valuations that are double the Nasdaq's 15-year historical average.


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