SunMicro and EMC were downgraded by Goldman Sachs before the open and that was as good as it got. The trading day for tech stocks started out bad and got worse. The Dow dipped under 11000 but then recovered to gain +33 points. The Nasdaq however was not so lucky. After holding the 2200 support line all morning it finally failed at 12:15 and things started looking ugly.
The day began with Goldman Sachs downgrading estimates on SUNW and EMC earnings. That started a chain of events which included SunMicro delaying their analyst conference call until after the market had closed. This started rumors in earnest that SUNW would warn and there was serious trouble in tech land.
After the close SUNW did warn that earnings for the 4Q could be half of analysts already lowered estimates. They cited lower than expected sales and zero visibility going forward. The CFO flatly refused to speculate on future earnings and said it was "a challenging environment without a doubt." SUNW also said that while U.S. demand was less than expected they were now seeing weakness in Europe and Asia. This was the real kiss of death for the techs. Europe and Asia have been the last bastion of computer strength and if they are now following the U.S. path then the tech recovery could be substantially farther in our future. SUNW fell -1.80 in regular trading and another -1.15 in after hours.
Lucatel? Not today. The long rumored and heavily reported "take under" of Lucent was called off after the close today. The companies said intense negotiations over the long weekend failed to yield an agreement. Sources said that differences over management of the combined company and country of governance were the main causes of the divorce. Also mentioned was a fight over choosing a new name for the company. Alacatel rose sharply after the death sentence was announced but the real question is what will happen to Lucent. If Lucent was willing to do a deal for no premium or actually a negative premium then what is going on behind the doors at Lucent? The .24% of ALA per every share of LU works out to about $6.48 for every Lucent share. There were other considerations to bump the real price but any way you look at it Lucent was looking for a life raft. That life raft would still have seen 20,000 to 30,000 jobs being cut. It is also entirely possible that another bidder, upon hearing the bargain basement price, decided to give the LU CEO a call. We may not know if that is the case for several days but it is a good possibility. The real price may now get even cheaper if no white knight appears. Without the financial backing of Alacatel, Lucent may face a run on its stock as investors worry about the stink coming from the boardroom. It is going to be very difficult for Lucent to get any respect for quite a while. The good news here is the lack of a recapitalized competitor in the networking sector. Stocks which took serious hits on the news of the merger like JNPR and CIEN could rally on the news of its failure.
Consumer confidence came in this morning at 115.5 and above estimates of 111.3. Consumers were buoyed by a market rebound and the drop in interest rates. They are still spending and planning on spending as the expectations component clearly showed. The index has bounced positive two of the last three months and it is closely watched by Greenspan. A positive consumer confidence would slow the Fed's need to cut rates much further. Personal income edged up slightly by 0.3% in April and Personal Spending grew by +0.4% which was the fastest monthly growth rate so far this year.
The movement in the markets today came on very light volume. The NYSE did manage to break one billion shares only slightly but the Nasdaq only managed 1.59 billion shares. Tech investors were sitting patiently on the sidelines hoping that the SUNW rumor would simply blow over and support would hold. Neither came to pass. Declines beat advancers on the Nasdaq by almost 2:1 and the SUNW announcement after the bell could pressure trading on Wednesday as well. Just announcing an earnings warning would not have had much impact by itself. However the inclusion of the keywords "Asia" and "Europe" are sure to cause investors to rethink jumping on the tech bandwagon. I said "sure" to rethink but of course nothing is ever sure. Could investors shake off this serious warning and buy techs? Sure, they could, and it would be very bullish if it happened. We are only a week away from the official start of earnings warning season where this type of event will be a daily occurrence. Actually, SUNW, made their announcement very early in the cycle. They are a late cycle reporter and this early announcement might be a warning signal we should heed!
Support at 2250 failed, 2200 failed and should 2175 fail the next stop could be 2050. The Dow rebound back above 11000 could also be in jeopardy because of the Dow techs MSFT, INTC, IBM and HWP which could make any gains on Wednesday tough to achieve. Nasdaq traders should be flat or short until we hit 2250 on the upside again. I would not be a dip buyer at this point. Let's wait and see how investors react to the SUNW news before attempting to pick a direction.
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