Russia was rumored to be going nuclear but Compaq actually did it!
The bomb dropped Friday after the close and the collateral damage may be extensive. Compaq had been rumored to be in trouble for some time but the warning period had safely passed, or so analysts thought.
After the bell on Friday Compaq warned that earnings would not just miss the $.31 that analysts were expecting but would miss it by a wide margin. According to Compaq they will only post earnings in the $.15 range, less than half of the previously reduced estimates. This is a major blow. The reasons given were lower demand, aggressive pricing by the competition, bad product mix and a slow down of Y2K related sales. In actuality, everything that could go wrong, did! This could be the death knell for the booming tech sector. In after hours trading on Friday CPQ was down -$4.00 but the real damage was in the other tech leaders. Intel -4.50, MSFT -2.50, DELL -3.25, GTW -2.00. The reasoning was that weak sales for the giant meant weak sales for the supporting cast.
Another nail in the tech coffin was a report in IBD today that MSFT European president, Michael Lacombe, was quoted in Reuters as that sales of personal computers could grind to a halt in the coming months. Microsoft said large corporations are winding down purchases of PC's and software to replace old ones with the Y2K bug. He did not expect small to midsize companies to pick up the slack until their computers failed with Y2K. Michael was only talking about the European community but you can bet the comments will be taken to heart here as well.
This one, two punch could cause real havoc on Monday as tech investors rush to take sizeable profits from the last several weeks. This would be a real shame after the Russell-2000 jumped so strongly above 400 on Friday. The small cap confirmation of the big cap move was just catching fire. In a complete turnabout the RUT was up almost +6 points on Friday when the Dow was negative. The advance/decline line was also strongly positive. The transports were also up, even in the face of a surge in oil prices again. All the factors were lining up in our favor and gaining speed. It is entirely possible the wild bull express could be derailed by something NATO bombs could not deter, a tech warning.
I wrote about this possibility several times recently. The positive surprises had given investors hope that the rally was for real and the only thing that could take the bloom off the rose was a tech warning by a big name. Intel had been a worry but their time passed without so much as a whimper. Dell held an analyst conference last week and said 35-40% growth, no problem. So far so good. The only two left were CPQ whose time had also passed and HWP who never made estimates anyway. Now we are faced with the age old problem of roaches. If you see one you can bet there are more just out of sight. Once the warnings start and the lead company takes it on the chin, the others try to jump in quick in hopes to avoid being singled out for punishment later.
The only hope I see is that investors see this for what it is, a warning from a company that has found it impossible to compete in the modern Internet world. A company that is too slow to innovate, produce and change with the times. Dell is the shining example of the new paradigm. They continue to innovate, slim down, pare prices, make deals to keep themselves in the race. Compaq has tried for some time now to copy the Dell model but has not been able to execute quickly or correctly. Why has Compaq's stock price been mired in the mid $30 range for what seems like forever and Dell's stock doubles every year? It is execution, pure and simple. Compaq has failed over and over to use it's larger capabilities to better it's business model and in the meantime the smaller, faster Dell has now overtaken the giant and will soon pass it. Hopefully investors will quickly see through the smoke and continue to invest in tech stocks that win and not punish the winners for the losers faults.
Better news on Friday was the Producer Price Index numbers that came in at only +0.2%. The majority of the increase was energy related and showed again that there is no inflation on the horizon. The Nasdaq and the S&P-500 set records again with the Nasdaq adding almost +100 for the week.
The coming week is littered with a minefield of economic reports. Almost every day is a potentially deadly event. However there is no reason to expect the reports to be worse than the recent string of positive results. The economy is doing great and the world economy is recovering. Unless we get some blockbuster news that is totally unexpected then the reports should continue to shore up the existing rally. Positive reports could bring investor focus back from Compaq to the overall market.
Monday will be the key. If the broader market turns over because of tech earnings fears brought on by Compaq then we could see a possibly significant downside. Some analysts are talking about 9,000 again ! I would rather look for the bright side. I would hope that Compaq would be the only stock punished and then quickly fade out of sight. Any dip we get on Monday morning could be a buying opportunity. The key will be picking the bottom of the dip based on the severity of the sell off. I urge you to not be eager to jump in at the first sign of a bottom unless you can be just as quick in jumping out if the "bottom" was simply a brief rest on the way down. The market has had a great run the last week or so and is due to sell off on simple profit taking anyway. Lets hope the added spark of the CPQ warning just makes it sharper and brief. I hate it when it just drags down -30 to -40 points for days before finally turning up again. I will take a quick drop and rapid rebound any time. A word of warning, many stocks have added +$10, $20, $30 in the last two weeks. They can give it back faster than they added it in a selling panic. Protect yourself. Tighten your stops. Get out with a profit. Don't be in a hurry to get back in....