Tech Spending

Oh boy. It looks like I’ve got some explaining to do. Yesterday, I erroneously reported that the FOMC interest rate cut was 50 bps. It wasn’t. I said the move wasn’t a surprise. It was. 

The cut was 75 bps. And it absolutely took investors by surprise. And as you can imagine, not many were as surprised as me. My apologies for the error. 

*****Up 359 on Tuesday, down 99 on Wednesday. I can live with that. But I still have to wonder how long the relative optimism for stocks will last. General Electric (NYSE:GE) was downgraded and received a rare "sell" rating by Sterne Agee & Leach, and, as we saw with Honda yesterday, companies are starting lower 4th quarter earnings estimates. 

We’ve been expecting earnings estimates to come down for some time. But it remains to be seen how much is already priced in. For the financials, it could be argued that the worst is priced. 

Consider Morgan Stanley (NYSE:MS). That company posted a $2.37 billion dollar loss during its 4th quarter, which ended November 30. That worked out to a loss of $2.34 a share. A poll from Reuters showed analysts were expecting a loss of just $0.34 a share. A month ago, analysts were expecting a $0.30 profit. 

The analysts missed by a mile. They were totally unprepared for such a weak quarter from Morgan Stanley. Sounds like a recipe for disaster, right? Well, after a somewhat rough start to the day, Morgan Stanley shares finished with a 2% gain. 

The same thing happened over at Goldman Sachs (NYSE:GS). Goldman lost $2.1 billion, which was roughly in inline with expectations even though there were some wacky calls for losses as high as $6 a share. The stock jumped 14% Tuesday and added another 3.6% yesterday. 

*****The Fed’s rate cut helped Goldman and Morgan Stanley out, for sure. But there’s also the mark to market accounting that each company has to use. That means the companies must price all assets every quarter. In the case of mortgage related assets, where the prices are effectively nil, they are forced to take steep write-downs. 

Morgan Stanley took around $2.2 billion in write-downs as it re-priced damaged assets. At present, these are paper losses. But it goes to demonstrate the difficulty of earnings estimates. So what looks like a staggering surprise loss may not be quite as bad as it first appears. 

Of course, there’s also the flipside, which would be that the assets could be subject to more write-downs in the future. But for now, the companies are getting the benefit of the doubt. 

*****We’ve seen the bottom fall out of homes sales, commodity prices, retail sales and lending. Technology spending has remained fairly strong. You may recall I discussed IBM (NYSE:IBM)’s 3Q earnings in Daily Profit as a strong point of the earnings season when it reaffirmed its 2008 full year earnings back in October.   

That was then. Now analysts are expecting tech spending to be the next domino to fall. A Citigroup analyst says the first quarter could be the worst ever for software companies. A Gartner analyst is saying "There’s going to be a period of reckoning that’s not going to be pretty…" 

IBM and Sun Microsystems (Nasdaq:JAVA) are two companies that could suffer. 

IBM sold off sharply in the Fall, dropping from 52-week highs around $130 to as low as $70 a share. A casual look at one- or two-year chart might make it look as though a downturn is priced in. But a look at a longer term chart gives a different perspective. 

In late 1999, at the height of the technology bubble, IBM traded as high as $140 a share. Between 2003 and 2007, IBM was range-bound between $75 and $100. In 2007, the stock took off again and rallied to the $130 area in spring and summer of 2008. 

Now, IBM is back in that $75-$100 zone. For us to start talking about IBM hitting 10-year lows, like we have with so many other stocks, we’d have to see prices drop to the $50-$60 range.  

Sun Microsystems looks even more vulnerable than IBM. Sun was already in a downtrend when IBM was hitting highs in mid-2008. The stock currently trades just above $4 a share. 

*****One stock that may be an attractive alternative to the high-end server and software companies like IBM and Sun is VMware (NYSE:VMW). VMware makes "virtualization" software that allows companies to get more bang for their buck from their networks. 

The stock has been whacked pretty good this year (what hasn’t?) but may actually benefit from cuts in corporate IT budgets. 

*****Finally, I want to address some of the stocks we’ve talked about here in Daily Profit. We’ve managed to get in some positions that are doing well. Both Graham Corp (NYSE:GHM) and Emergent Biosciences (NYSE:EBS) are up nicely since they were first discussed here. It’s time to protect those gains. 

Shortly after I recommended a stop-loss on Questcor Pharmaceuticals (Nasdaq:QCOR), the stock started selling off. That stop loss should have taken you out of the position at $8.80, preserving your gains and keeping from suffering as the stock continued to fall. 

Now is the time to put in stops on Emergent and Graham. Graham’s got support at $10, so a stop at $9.75 should keep you in on a routine sell-off but take you out if the stock is going to head back to its lows. 

A stop-loss at $22 will do the same for Emergent. 

Chesapeake Energy (NYSE:CHK) is far more volatile and I also consider it more of a long-term holding. For that reason, I’m content to let it go, for now. 

*****Tomorrow, I’m finally going to get to your emails. As always, I read them all, and I’ll get as many in as possible. Thank you again for your support.