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SAN FRANCISCO -- It was a week for testing fundamental beliefs (hopes?) such as: that the


rally since Jan. 2 was for real; that the

Federal Reserve's

100 basis points of easing so far in 2001 would be like a whalebone girdle, supporting equity prices; that

Cisco Systems


wouldn't, couldn't disappoint -- no matter what CEO John Chambers said previously.

Many on Wall Street had come to feel those truths were self-evident. But the pillars of the optimists' faith were shaken this week, as the

Dow Jones Industrial Average

fell 0.8%, the

S&P 500

declined 2.6% and the

Nasdaq Composite

lost 7.1%.

"Apparently, the Street has thrown in the towel, because there seems to be no area where investors can wait out the current malaise without significant exposure to danger," Charles Payne, chief strategist at

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, commented Friday afternoon. He noted



, a large player in the normally sleepy health insurance industry, fell 10.1% Friday after warning about its 2001 earnings.

Cigna had plenty of company in Friday's retreat. Most notably,



fell 13.1% after

Morgan Stanley Dean Witter

issued some

cautious comments regarding the firm's database revenue. Stocks tumbled overall Friday, sending the Dow down 0.9%, the S&P 500 lower by 1.3% and the Comp by 3.6%. Declining stocks bested advancers 16 to 13 in


trading Friday and by 23 to 13 in Nasdaq activity. Energy, utility and select financial and drug stocks were among the exceptions.

"It is the same story all around, as all facets of corporate America face the challenge of a slowing economy," Payne wrote.

"Patience is a lot more than a virtue; it could be a lifesaver in this market."

The seriousness of the economic slowdown was starkly evident Tuesday, when Cisco reported fiscal second-quarter earnings and revenue shy of expectations. That was the first time Cisco hadn't bested consensus estimates in almost seven years. More damaging was the networking giant and tech bellwether's

slashing of revenue estimates for the second half of its fiscal year.

Cisco fell 20.6% for the week and Friday's drop left it below $30, a level considered key technical support. A number of Cisco's suppliers, customers and competitors were dragged down in sympathy, including

PMC Sierra









Juniper Networks



Cisco's woes provided the most dramatic evidence yet of corporate America's lack of

earnings visibility, particularly for high-tech companies. Fears that the lack of visibility may trump -- or negate -- the salutary effect of Fed easing on equities, at least for the short term, came to the fore this week.

Notably, major averages each ended the week below closing levels hit Jan. 3, the day of the Fed's 50 basis-point, intermeeting rate cut.

"We definitely think there's a lot more easing to come

but still have a cautious stance on U.S. equities," Doug Cliggott, market strategist at

J.P. Morgan

, commented Wednesday. "The V-shaped earnings recovery embedded in the consensus forecast" is overly optimistic.

The consensus expectation is for S&P 500 earnings to rise 7% in the third quarter and 17% in the fourth quarter vs. respective year-earlier levels. Such expectations contributed to the recent increase in investors' optimism reflected in this week's

American Association of Individual Investors'

survey, where bullishness rose to 56% vs. 50% last week and bearishness fell to 14% from 19.2%.

But Cliggott predicts S&P 500 earnings will be 15%


year-earlier results in the second half of 2001 and won't turn positive until the first half of 2002, at the earliest.

Regarding the key issue of spending on information technology, the strategist believes it is destined to fall because growth in IT spending has outpaced corporate profits. Cliggott reported tech spending rose by 37% in the past three years, while S&P 500 operating earnings rose 26.7%, according to

First Call/Thomson Financial


"Accelerating capital spending growth is usually associated with periods of accelerating earnings and decelerating capital spending fits well with periods of decelerating earnings," he wrote. "Capex budgets are now under intense scrutiny, and we can't imagine that the outcome of this review won't be some reduction from the extraordinary level of spending achieved last year."

Concerns such a scenario will come to fruition were evident this week, particularly Friday.

The Bright Side

Of course, not everyone was crying over the milk spilled this week. Some traders view tech bellwethers such as Oracle, Cisco,




Dell Computer



Sun Microsystems


as being compelling "bargains."

Each is now at or just above respective 52-week lows, and at levels many investors previously thought they'd never see again. Others take heart knowing major averages remain well above the intraday lows hit early this year, although year to date the Dow is now down 0.1%, the S&P off 0.4% and the Comp up just 0.5%.

Some put their faith in tax-cut proposals submitted this week by the

Bush administration

. Others looked ahead to

Alan Greenspan's


Humphrey Hawkins

testimony next Tuesday, hoping comments from the chairman will reinvigorate sentiment. The fact that short-dated Treasury securities continue to sport higher yields than long-dated issues -- a trend exacerbated this week -- is additional proof more Fed rate cuts are necessary and forthcoming, they say. (An inverted yield curve has historically presaged recession.)

Scott Bleier, chief strategist at

Prime Charter

, believes the return of the yield curve to its "normal" slope will be the first leading indicator of improvements in the economy and, thus, corporate earnings. (For more from Bleier, see

Thursday night's column.)

Finally, Edward Kerschner, chief global strategist at

UBS Warburg

, released a report late Thursday in which he lowered his 2001 S&P 500 earning estimates to $56.50 from $57. The strategist said the consensus views of "top-down" strategists at $59.21 and "bottoms-up" analysts at $58.67 are both too high.

Despite the cuts, optimism was the overriding theme of Kerschner's piece: "Weak Earnings But a Strong Market."

"There is good reason to believe that, although near-term momentum is poor, earnings growth should revive by the end of the year," he wrote, forecasting earnings growth of 15% in the second half of 2001. (


Bill Meehan

ruefully, but correctly, notes the recent

inconsistencies of bullish strategists regarding the effect of earnings on equities.)

Kerschner's report was the latest in a series of bullish yarns and his

second in a week in which the faith and confidence of most other bulls was sharply challenged.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.