The surprise with Gateway (GTW:NYSE - news - boards) is that everybody was so surprised and that it, along with bad news out of Altera (ALTR:Nasdaq - news - boards), spooked the futures market so badly. Yet, in each case, warnings were there for all to see.

Let's start with Gateway: There were the simple warnings, as I've written on RealMoney.com's Columnist Conversation, such as the company's apparent ability to show strong growth while every other PC maker was hitting the skids. (And what where they doing opening Gateway Country stores so close to one another?)

There were the slightly more complex warnings, such as the one I noted two quarters ago, when Gateway's operating income was up 37% on only 12% growth in sales. How could that be? Gateway relied heavily on non-PC-related sales from high-margin, noncore sources such as Internet access, financing and warranties. The trouble with so much in the way of sales from noncore sources like that is that they camouflage what's really going on with the company's main business.

Then there were the more complex warnings. Nobody nailed those better than money manager Bill Fleckenstein of Fleckenstein Capital in Seattle. I don't make a habit of steering you to other sites, but I would be negligent if I didn't point you to the column he wrote on Silicon Investor on Oct. 23. It was there that the longtime Gateway bear wrote, in detail, why the quality of Gateway's earnings was rapidly deteriorating.

As for Altera, it's just more of the same: It's the channel, stupid. The supply channel has been stuffed. As I noted on the CC, the Boston brokerage firm of Fechtor Detwiler issued this yesterday: "The story we are hearing out of [distributors] Arrow (ARW:NYSE - news - boards) and Avnet (AVT:NYSE - news - boards) is to expect a flat Q1 and Q2 and 'it's going to be a couple of tough quarters with flat business at best.' "

The cause of the problem is excess inventory at OEMs across the board. It's interesting that the two companies everyone is pointing fingers at are Cisco Systems (CSCO:Nasdaq - news - boards) and Nortel (NT:NYSE - news - boards). We are told other sinners include ADC (ADCT:Nasdaq - news - boards) and Fujitsu, both of which have canceled programs;

Astral Point and Sycamore (SCMR:Nasdaq - news - boards), who have had substantial "push-outs." We are hearing that there have been meaningful cancellations and/or rescheduled orders at Actel (ACTL:Nasdaq - news - boards), Dallas Semi (DS:NYSE - news - boards), Atmel (ATML:Nasdaq - news - boards), Altera (ALTR:Nasdaq - news - boards), Conexant (CNXT:Nasdaq - news - boards) and National (NSM:NYSE - news - boards).

We have also heard that while application-specific suppliers such as PMC-Sierra (PMCS:Nasdaq - news - boards) and AMCC (AMCC:Nasdaq - news - boards) have not seen huge cancellations, CEM's {contract manufacturers} are supposedly "sitting on a 'mountain of inventory' which is causing some concern about Q1 order rates."

Which leads to the obvious: If the PC makers are hurting and component makers up and down the line are hurting, what about Intel (INTC:Nasdaq - news - boards)? Fleck's bet is that it, too, must be experiencing order cancellations, in which case he can't see how it, too, doesn't at some point by year-end preannounce. (Which, of course, would not be good for the market, unless it would be the final blow. Maybe I should dredge up my open letter to IBM's (IBM:NYSE - news - boards) Lou Gerstner -- the one that urged IBM to preannounce -- and redirect it to Intel's Craig Barrett. After all, Craig, it's the thing to do. Everybody is doing it! (Better to do it while you blend in rather than when you don't!)

Cree correction: Nobody alerted me to this; I alerted myself to it and it's a stupid mistake (though it doesn't change anything about what I wrote). I wrote that Eric Hunter, the brother of Cree (CREE:Nasdaq - news - boards) CEO Neal Hunter, is the former CEO of C3, which is now Charles & Colvard (CTHR:Nasdaq - news - boards). Sorry 'bout that, the former CEO of C3 is Jeff Hunter (the brother of Neal and Eric). Eric was merely a founder of C3, and, until this year, its largest investor as well.

And speaking of Cree: I've been advised that I'm getting skewered on the message boards for last summer having given myself failing marks on Cree in my semi-annual report card. Like I had any choice?! -- the stock was $30 when I wrote about it; it went to $202 and stayed high for an extended period of time. What's more, the extent of the related-party transactions, with investment in World Theater, was not known at that time.

---

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to Herb Greenberg. Greenberg also writes a monthly column for Fortune.

Brian Harris assisted with the reporting of this column.

---

Send letters to the editor to letters@realmoney.com.
Read our conflicts and disclosure policy.
Order reprints of RealMoney.com articles.	Top
Research Now on DLJdirect ALTR CREE GTW Visit the DLJdirect Research Center

RELATED STORIES
	Herb on TheStreet Does One Hand Wash the Other With Cree and Friends?11/29/00 6:31 AM ET Related party transactions continue to raise questions. Herb on TheStreet The 'Risk' JNI Investors Hadn't Counted On11/28/00 6:43 AM ET Also, more peppering of Salton, and more tales from the front. Herb on TheStreet Post-Turkey Indigestion: Getting Hurt by This Market11/24/00 6:46 AM ET Tales from the front tell how the swoon in stocks is spilling over to the housing market.