NEWS ANALYSIS -- Investors were forced to ask themselves whether the worst is yet to come as they as they continued their relentless dumping of technology stocks Monday afternoon, dragging the Nasdaq composite below the 2,000-point threshold for the first time since December 1998.
It didn't help that Cisco Systems, long considered the crown jewel of the technology sector, announced Friday it would layoff up to 8,000 employees and predicted the economic slowdown will haunt sales and earnings into 2002.
Before Cisco, it was Oracle. And before it Oracle it was Intel, which came after the entire PC sector warned of pathetic sales and earnings growth in 2001.
The magnitude of this Nasdaq collapse is a staggering considering the index ploughed through the 5,000-point landmark this time last year.
Those were the days of multibillion-dollar mergers and dozens of daily initial public offerings not only from shaky dot-com operations but also from upstart networking and software companies, which, if you believed the investment firms taking them public, had limitless potential.
All the paper wealth accumulated in the Nasdaq between December 1998 and this week -- roughly $3.6tn (about £2.3tn) in real money according to analysts -- has evaporated in a scant 12 months.
"A year ago all the mistakes that were made by analysts and investors were on the positive side," said Tad LaFountain, an analyst at Needham & Co. "Now the mistakes being made are on the negative side. What's interesting is if you look at the revenue and sales estimates for these tech stocks, it looks like people confused 2000 with 2001."
Throughout fiscal 2000, technology firms of all stripes and colours were posting staggering sales and earnings growth from what was already an incredibly high level established in 1999. Orders for the latest flash memory chips, network-equipment and wireless telecommunications gizmos far outstripped demand.
With technology stocks already trading at sky-high valuations and technology products saturating the market, analysts had little choice but to continue to raise estimates and maintain positive outlooks on these stocks. "You also had an entire population of mutual-fund managers driven to improve their performance without the hindrance of experiencing a downturn," LaFountain said.
Clearly investors and the companies they invested in didn't know how good they had it back in that wildly optimistic period when the Internet was coming of age and venture capitalists were compelled to back anything that might have even the slightest chance of becoming the next Yahoo! or Amazon.com.
What a difference a year makes Back in March 2000 when the Nasdaq first eclipsed the 5,000 mark, Yahoo shares were trading $183.25 fresh off a 2-for-1 stock split. CMGI, which built its name mostly on the backs of money-losing dot-coms, was perched at $144.63. Those stocks now trade at $17.25 and $3.25 a share, respectively.
But this capitulation isn't confined to the dot-com universe.
Cisco shares, which traded at $139.63, are now going for $19 a share. Intel, now at $28.25, had moved up to $118.38, and Microsoft, currently going for $52.94, was considered "cheap" at $100 a share. Lucent Technologies, now hovering around $12 a share, was trading at $68.88.
Inflation remained in check while productivity skyrocketed as all this new technology found its way into offices and factories around the world.
With amateur investors opening up online brokerage accounts in record numbers and 401(k) contributions at a fevered pitch, Federal Reserve Board Chairman Alan Greenspan did his best to curb this "irrational exuberance" by steadily increasing short-term interest rates six times in an 18-month period.
The market shrugged off these increases, making it impossible for the Fed or individual investors to accurately gauge the impact of such a severe shift in the nation's monetary policy.
Once the predictable inventory glut hit the technology sector, these rate hikes began to impact the economy at a time that it could least afford it.
Greenspan & Co. did their best to rectify the situation in the first five weeks of the year by cutting rates by a full point. Most analysts are convinced that at least another quarter-point reduction looms for later this month.
Meanwhile consumer confidence began to crumble as many of the companies that were placing orders in 1999 and 2000 either went bankrupt or cancelled orders altogether.
Nasdaq declines fan out Now that the Nasdaq has lost more than 60 percent of its value in the past year, its woes are starting to spread to more conservative investments.
"Some say we've finally hit a bottom, but I'm not in that camp," said Joseph Barthel, chief investment strategist at Fahnestock & Co. "In fact, we're starting to see this weakness spill over into the S&P 500. That really opens up the possibility for a greater decline ahead."
The S&P 500 fell below 1,200 points Monday, down 23 percent from its peak of 1,553 set last March.
Barthel said that while the monetary policy has improved and stocks have been terribly oversold in recent months, the market still lacks an improved investor sentiment that is necessary before any significant recovery can begin.
Analysts universally agree it's all but impossible to call the absolute bottom during a correction of this magnitude.
But when investors do regain confidence in the economy and these technology companies, the game begins anew.
"When this temporary mismatch between demand and supply growth is corrected, the recovery will be instantaneous and ferocious," LaFountain said. "There will be no lag from companies waiting to lay new fibre or build new manufacturing plants. Everything will be in place for a major rally."
Until then, investors will have plenty of time to get used to this new economy that happens to look a lot like the one they saw in late 1998.
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Stocks may be down, but don't count them out just yet. Steven Vaughan-Nichols reckons that if the idiots insisting on treating all technology stocks like they have foot-and-mouth disease got over it -- the rest of the economy could start to recover. Go to AnchorDesk UK for the news comment.
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