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Cisco, Cheers & Jeers

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By ricksdoomsayer
February 22, 2001

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I am not a speculator, just a researcher, so I will give you the most update information that I can on Cisco as well as the other networking stocks.

In the latest edition of Barron's they have a report on Nortel that covers Cisco as well. First, the bulls side. According to Barron's, the street's logic is that the worse things are now, the better they will eventually be. Charles Pradilla, the strategist at S.G. Cowen, voices the opinion of most of the street when he says, that he believes that "95% of the decline in the Nasdaq is already over," with Cisco, Intel, Microsoft, Sun Micro, and Dell all down over 50% from their 2000 peaks.

Yet Paul Sagawa, the analyst at Sanford Bernstein who cut his ratings on Cisco, Nortel (a rarity), and other networking companies in September, dropped his 2001 estimate to 59 cents. "Every time we revisit the capital spending outlook" for telecom companies, "it keeps getting worse." Sagawa says it's getting tougher for major telecom companies to spend heavily because of rising debt and deteriorating revenues and cash flow. The competitive local exchange providers (CLECs), meanwhile, simply are struggling to stay alive. The CLEC problem is important because hundreds of public and private companies may stop buying entirely, permanently eliminating a customer group for the telecom equipment makers, according to the Barron's report. Nortel and Cisco are seeing their margins squeezed because they can't cut costs quickly enough to cope with weaker-than-expected revenues. This problem will take time to correct.

In following this market by the hour each day for over two years, if there is one thing I have found it is that corporate earnings more than anything else have always rescued this market. Ever since May of last year, when some analysts reduced their expectations only to be met by fierce retaliation by the bulls, one company after another has disappointed the street with their earnings projections. In the process, as corporate profits have fallen from 40% in the third quarter last year to 2% in the fourth quarter in the tech sector, the Nasdaq has fallen with them. Earnings are projected to be as low as minus 7% in the first quarter according to Barron's a few weeks ago.

Two other reports I think you and other investors should know about instead of just listening to the bulls: In the USA Today February 19, 2001 edition they report that problems in the tech sector are running so deep, coupled with a shaky economy, experts are now refuting hopes that things will improve by the third quarter. Inventories are piling up, and companies are putting tech spending on hold so they can meet their own numbers. Technology that drove the boom is aging without anything to replace it.

The report goes on to point out that Corning, which last year according to the bulls was supposed to have no end of growth, has cut jobs and is looking for additional ways to trim costs. Dell computer has taken a rare step for a tech firm by cutting its spending on research and development in the quarter ended Feb. 2. That worries analysts because tech firms usually boost R&D spending during tough times so they'll have new products ready for a recovery. Demand for tech products is tied to the Old Economy, the report says. The manufacturing sector is slowing. Who do you think was buying all the servers, routers, enterprise solutions and computer hardware? What's more, expectations for tech company's earnings the next five years are too high, says Steven Milunovich, technology strategist with Merrill Lynch.

The last piece of information I will give you comes from this week's edition of Barron's, from the editor himself, Alan Abelson. He says it's not at all clear, for one thing, that priming the pump like mad and slashing the interest rates will quite do the trick against a downturn that's rooted in huge overcapacity brought on by a reckless capital-spending boom and a vastly over-leveraged economy. None of us has been witness to the strange and more than a little unnerving sight of the Fed pushing on a string, but stick around and keep your eyes open. He concludes by saying the simple fact that we've had a market that has battened on at least five years of unbelievable, almost unimaginable excess, means the excess is going to take more than nine months and a partial wipeout of Nasdaq to get rid of.

I will conclude this way. We have a highly speculative overvalued stock market, a slowing economy, falling consumer as well as corporate business confidence, a touchy situation in the Middle East, and Japan possibly headed for another banking crisis. Pay attention to the price of oil in the next few weeks. Oil has always been the straw that has broken the economy's' back in the past.

This is probably more information than you needed but remember this. It is not how much information that you are getting that determines how smart of an investor you are. It is where you get your information from. I sincerely hope that I have been helpful to you and other investors who may be in the same situation. By the way, I can show you factual proof that Mr. Pradilla as well as most of the bulls have been wrong for a long time.

One last tip I may add. Every time in the past that Barron's reports about a certain sector or company the pros on Wall Street react. Look for Cisco's stock to fall at least a little... maybe 1 or 2 dollars tomorrow as well as Nortel and possibly others.