Today's Market: Cisco's Ripple Hitting Tech Stocks

<LI>The networking giant sinks on bad earnings news.</LI> <LI>Chip stocks slide.</LI> <LI>Productivity and labor costs rose more than expected in the fourth quarter.</LI>
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Updated from 9:48 a.m. EST

Networking giant

Cisco

(CSCO) - Get Report

succumbed to the earnings ills of Wall Street, announcing last night that it missed earnings targets for the first time in three years. The company also slashed revenue-growth forecasts dramatically.

This clearly was not what the market wanted to hear, and tech stocks were well into losers' territory. Some fear a Cisco-motivated selloff could erase what remains of the

Nasdaq's early January rally. Following a bit of recent selling, the Nasdaq is up 8% year-to-date.

A mixed but disappointing preliminary fourth quarter

productivity report wasn't helping matters. But it didn't do much damage either. The Nasdaq was off 62 to 2603.

But the blue-chip

Dow Jones Industrial Average was trying to stay in the green. It was lately up 3 to 10,960. The broader market, as tracked by the

S&P 500, was 9 lower to 1343.

Chip stocks were sliding, as were dot-coms.

The productivity report showed stronger-than-expected growth in productivity and unit labor costs in the fourth quarter. The high productivity number may mean that the

Fed doesn't have to be as aggressive about cutting interest rates as some hoped it would be, while the high unit labor costs could hurt already weakened corporate profits. Preliminary fourth-quarter productivity came in up 2.4%, compared with economists' consensus forecasts for a 2.0% rise. Unit labor costs grew 4.1% on the quarter compared to forecasts of 3.3%. The fourth-quarter rise in unit labor costs is its biggest gain since the second quarter of 1999 when it rose 4.3%.

Cisco CEO John Chambers last night said revenue growth would grind to a halt, with flat or negative growth for the next two quarters. Chambers also said 2001 revenue growth would be around 40% -- short of the company's 45% average during the past five years and in the middle of the executive's recently trimmed range of 30% to 50%. Chambers said tepid buying from the nation's manufacturing sector was partly responsible for the weakness.

Guess who was busy this morning? Cisco was downgraded this morning to buy from strong buy at

Lehman Brothers

and its target was cut to $36 from $45;

Salomon Smith Barney

cut its price target to $65 from $80;

Credit Suisse First Boston

cut its rating to buy from strong buy and lowered its price target to $45 from $60;

SG Cowen

cut its rating to buy from strong buy and its price target to $47 from $55;

Robertson Stephens

lowered its rating to attractive from buy and

ING Barings

cut its price target on the stock to $42 from $50. The stock was falling 11.4% to $31.63, right near its 52-week low.

For Cisco investors -- and that encompasses a broad universe of mutual fund investors and people who buy individual stocks -- there is some fear that this news means the company's long upward ride is over. But it shouldn't be

too

much of a surprise, since Chambers recently spoke words of warning about weakness in the company's business during the month of January. Plus, in early December he revised lower the company's growth forecasts for 2001.

Perhaps worst of all for the broader market of technology stocks, Cisco uttered that dreaded word --

"visibility" -- saying that "this capital spending trend could get worse before it improves" and that the company's visibility on capital spending was poor. At this murky juncture in the economy, many companies have said that visibility, or companies' ability to forecast upcoming performance, is blurred. That V-word hasn't been any good for stocks. If no one knows where earnings are headed, how can they set the price for a stock?

So, why the murky picture? With interest rates on their way back down since early last month, market-watchers and companies have been expecting that the economy and earnings will turn around in the second half of this year. But that depends, in large part, on future interest rate cuts and the economy's ability to react quickly to them. So the timing of a turnaround is still uncertain. After a year and a half of raising interest rates, the Fed cut interest rates twice last month. Those actions slashed short-term rates by a full point to 5.5%.

In the words of

Sun Microsystems

(SUNW) - Get Report

CFO Michael Lehman, "Everybody is saying they have less visibility into the current quarter than they did a couple months ago. We're not immune to that. I can't think of a company -- there may be one or two who claim they are -- that is immune to that. We don't set interest rates. We have to deal with this environment." Lehman

spoke these words yesterday afternoon at the Unix-systems company's two-day analyst meeting in San Francisco. Sun is off 4.5%.

Key to the networking and optical industries is the fact that no one knows when the spending slowdown in information technology will hit bottom and begin to turn around. Beleaguered telecom companies -- hurt by slowing business and more limited access to financing -- have for months been announcing cutbacks in spending on networks and infrastructure.

An anomaly in this environment may be telecom

Verizon

(VZ) - Get Report

, which is expected to

announce today that it plans to create a multinational network to serve large businesses, giving it more leverage against global long-distance competitors

AT&T

(T) - Get Report

and

WorldCom

(WCOM)

according to

The Wall Street Journal

. It was 2% lower.

Meanwhile, this morning's release of the preliminary fourth-quarter

productivity focuses investors on the health of the economy and, perhaps more importantly these days, expectations for the Fed's upcoming interest rates plans. Productivity rose 2.4% in the fourth quarter, preliminary results out this morning show. Economists polled by

Reuters

had forecast a drop in fourth-quarter productivity to a 2% rise in the fourth quarter from 3.3% in the third quarter.

Preliminary fourth-quarter productivity came in up 2.4%, compared with economists consensus forecasts for a 2% rise, while third quarter productivity was revised down to 3% from 3.3%.

Unit labor costs grew 4.1% on the quarter whereas economists were expecting 3.3%. Third-quarter unit labor costs were revised upwards to a 3.2% rise from a 2.9% rise. The fourth-quarter rise in unit labor costs is its biggest gain since second quarter of 1999, when it rose 4.3%.

Productivity measures changes in output per hour for all members of the nation's workforce while unit labor costs measures the labor costs per unit of output.

Most on Wall Street are expecting at least another half-point cut before the end of the Fed's next meeting on March 20, and some are hoping for more. Lower interest rates help to ignite economic growth because they make it cheaper to pay off debt and encourage consumer and corporate spending.

High productivity has often been cited as the golden apple of the unprecedented economic boom of recent years, allowing for a long period of strong growth without runaway inflation. So Fed Chairman

Alan Greenspan, who is staunchly anti-inflation, is particularly interested in keeping that productivity number high.

The big question now is whether the Fed can help stave off a deep recession in corporate earnings and throughout the economy.

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Bonds/Economy

Treasuries were rallying early this morning ahead of the productivity report. The benchmark 10-year

Treasury note was lately up 7/32 to 104 11/32, yielding 5.168%.

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International

Stocks in Europe were lower, in part on the Cisco news. Also,

France Telecom

(FTE)

said it is cutting the valuation of its

initial public offering for its mobile phone group. The

FTSE

in London was lately off 77.30, or 1.2%, to 6216.10. Over on the mainland, Paris'

CAC-40

was losing 94.36, or 1.6%, to 5757.99 and the German

Dax

was falling 85.16, or 1.3%, to 6607.87.

Asian markets, however, finished higher. The

Hang Seng

closed up 136.23, or 0.9%, to 16049.47 and the

Nikkei 225

gained 96.16, or 0.7%, to 3366.01.

The dollar was falling against the euro, lately trading at 0.9340 euro.

The yen was lurching lower against the yen following the release of a disappointing business sentiment index. The dollar was lately trading at 116.10 yen.

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