Networkers Catch Rate-Cut Fire, but Some See Momentum Flickering Already

Networking stocks rallied on a stiff dose of Fed medicine Wednesday, but the painkiller merely confirms the diagnosis: The economy is ailing.

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And while Wall Street loves a fat rate cut, lowered interest rates don't quite alleviate the fundamental challenges communications equipment makers face as their heavily indebted, revenue-challenged customers are forced to cut back on spending.

"I don't think this does anything in the next three months that would cause AT&T (T Quote) or SBC (SBC Quote) to decide it will double its capital spending," says Bill Trent, an analyst with New Jersey's state employee retirement fund.

Yet you wouldn't know that by looking at the stock performance of Internet gear makers Cisco (CSCO Quote) and Extreme Networks (EXTR Quote) Wednesday afternoon. Cisco shot up $8, or 22%, to $41.31 and Extreme lived up to its name, jumping $12.94, or 47%, to $40.56.

These 24 hours have marked an extraordinary turnaround for these stocks, which were down 13% and 29%, respectively, Tuesday as the reality of a cash crunch among equipment buyers continued to weigh down future sales growth prospects.

The 20% Rule Networkers get revved up
Stock	Percent change	Trailing P/E ratio
Ciena (CIEN:Nasdaq)	+29%	244
JDS Uniphase (JDSU:Nasdaq)	+36.6%	NA
Juniper (JNPR:Nasdaq)	+28.7%	354
Nortel (NT:NYSE)	+15.5%	NA
Redback (RBAK:Nasdaq)	+31.2%	NA
Sycamore (SCMR:Nasdaq)	+27.2%	NA
Source: ILX

Why the radical change?

"The market is supposed to have the right price for stocks every second, but it usually overreacts on both the positive and negative sides," says Trent. The whipsaw action is most pronounced among risky high-growth stocks. "This sector tends to be more volatile, so when the good news comes in these stocks have a better reaction than the overall market."

And to be sure, the easing of interest rates may be of some assistance to the enormous roster of telecommunications companies sitting on big debts, but for many it's far too late.

Reducing interest rates is "roughly analogous to decreasing the borrowing rate for someone whose credit card is already maxed out," wrote Lehman Brothers debt analyst Ravi Suria in a recent report on the telecom junk bond market.

So unfortunately, at this moment, there's no telling how Wall Street will feel when the drug wears off.