Today's Market: The Rally That Wasn't

(Updated from 3:23 p.m.)

It didn't take long for today's rally to wilt in the heat.

	At the close, the Dow Jones Industrial Average had lost 152 points, or 1.4%, to 10,424.6. The Nasdaq Composite Index fell by 40.8 points, or 2%, to 1988.5. The S&P 500 lost 19.82 points, or 1.6%, to 1191.03. The 10-year benchmark Treasury note was up 5/32 to 99 6/32, yielding 5.104%.

Ahead of the bell this morning, traders around Wall Street were looking forward to spending the day basking in the cool green glow thrown out by their screens. Nikos Theodosopoulos, a closely followed analyst with UBS Warburg, had put out a glowing upgrade on Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), index futures were solidly higher and hopes that stocks would throw off their recent torpor abounded.

Thus far the day has not lived up to those early expectations -- stocks are down. And though the market does not always make sense, today's action does.

In his report, Theodosopoulos upped Cisco's rating to buy from hold, saying that channel checks indicated the big telecom-equipment maker wasn't scrambling to book orders before the current quarter closes at the end of this month. This absence of desperation suggests, wrote Theodosopoulos, that the company will meet estimates when it reports the quarter.

Now, it warms the cockles of our heart to hear that our friends in San Jose are in a State of Calm. And it warms them even further that there are still Wall Street analysts who actually spend time talking to salespeople and distributors to gauge what a company's doing, rather than just futzing with spreadsheets and booking tables at Nobu. But the idea that stocks should rally generally on Theodosopoulos' report was based on the assumption that 1) Theodosopoulos was right, and 2) that good news for Cisco would mean good news for technology in general.

Assumptions Make an Ass Out of You and Mptions

Theodosopoulos is a pretty respected guy. He ranked third in his sector in last year's Institutional Investor poll, ranked second the year before that, third the year before that. Flawed as the II poll may be (flawed as hell -- don't get us started), that says something. And it says something that he apparently talked to people who might have a clue on what's happening at Cisco rather than waiting around for the company's next pronouncement.

That said, such things do not preclude Theodosopoulos from being wrong. The last time he changed his rating on Cisco was April 24, when he took it down to a hold from a buy. Cisco actually outperformed the S&P 500 in the intervening time. That wasn't the absolute bottom on the stock, but it was close. Since then, Cisco outperformed the market, putting on a 3.9% gain against the S&P 500's 1.1% loss.

More important, Theodosopoulos pointedly said that that telecom capital expenditures remains in a woeful position -- he doesn't expect it to improve until the second half of next year, perhaps not until 2003. One of the things he likes about the company is that it's doing so much better relative to his peers.

The problems with capex in tech land were highlighted this morning in a research note from J.P. Morgan equity strategist Tom Van Leuven. Van Leuven points out that low capacity utilization rates leave U.S. companies with very little impetus to invest heavily in new technology -- why increase productivity, after all, when what you have now is already more than enough. Moreover, he notes that many companies who might want to make technology investments are not in a position to do so -- earnings are horrid (especially if you include charges), free cash flow is negative and corporate liabilities are high.

"There's a lot of temptation to buy stocks that used to trade at $70 when you can get them for $17," he said. "We don't think that's the right thing to do. Technology earnings could be disappointing for some time to come."

Entrails

Of course, it may be silly to fixate on the market's early apparent reaction to the Cisco note and then surmising that the subsequent turnaround says or means anything at all. Your more hardcore technical analysts will tell you, when they're not counting the bumps in each others' heads and looking up things in the I Ching, that news is only what investors use to justify where the market was going to go anyhow.

Today they might have a point. Absent all the Cisco chatter, the early action in the futures market felt as much like a snap-back reaction to the big declines on Friday as anything else.

"I don't really know what the overwhelming desire to own them was this morning," said W.R. Hambrecht head of institutional trading Todd Clark.

May we suggest sunspots?