Microsoft news hangs over
markets
BY MATT MARSHALL
Mercury News Staff Writer
When bad news hit Microsoft Corp. three weeks ago, the Nasdaq
index fell by more than a quarter of its value in 10 days.
That's because the market's conventional wisdom has, for some time
now, been: ``What is bad for Microsoft is bad for the markets.'
Could it happen again Monday?
Some analysts think so.
First, think back to when Microsoft's stock crumbled on April 3, the day Judge Thomas Penfield
Jackson issued his ruling in the federal antitrust suit against the company. The next day, the Nasdaq
roller-coastered wildly. After that, it slid lower and lower to where it stood Thursday, down 27.8
percent from its March 10 peak of 5,048.62.
Investors are still reeling, asking just where the market will go next. A slew of earnings estimates last
week were overwhelmingly positive, but then, they were expected. Signs are mixed, as are
predictions by market gurus.
But Thursday evening, after markets closed for the week for Good Friday, Microsoft announced
some more bad news: Company officials said in a conference call with investors that slowing demand
for personal computers could slow future growth.
While analysts said that Microsoft has often sought to lower expectations by similar warnings of
slowing growth, this time was different, they said. The tone was harsher, and they weren't happy.
James Cramer, a manager of a hedge fund and co-founder of the TheStreet.com, wrote in a column
Thursday that the conference call was ``a disaster, a tragedy.' Cramer declared he'd decided to dump
his Microsoft shares immediately, despite a deep loyalty to the stock from his years as a roommate of
Microsoft Chief Executive Steve Ballmer at Harvard University. In college, Cramer edited the
university's newspaper while Ballmer ran its business side.
By the time Microsoft's call was over, Cramer wrote, ``we were short 10,000 Microsoft.' Other
analysts were worried, but weren't sure how much of a leadership position Microsoft still enjoys in the
market. After all, Cisco overtook Microsoft as the market's most valuable company four weeks ago,
highlighting investors' expectations about the rising importance of the Internet compared with the
stand-alone personal computer.
However, Microsoft still has the most clout in terms of sheer bulk and profits, enough for David
Readerman, partner at Thomas Weisel Partners in San Francisco, to believe that the news will
definitely have an impact on the market Monday. ``Microsoft tends to be a bellwether, for both the
Nasdaq and the Dow indexes, ' he says.
Just how bad the damage will be, he says, depends on whether investors decide to drop Microsoft in
favor of other companies, for example Sun Microsystems Inc. or Oracle Corp., which do not depend
so much on the personal computer.
``People could decide to say, `What is bad for Microsoft is good for Sun Microsystems and Oracle,' '
Readerman said. Alternatively, investors could decide to dump technology stocks altogether, and buy
stocks of consumer or financial service companies like Proctor & Gamble and American Express.
``Massive portfolio rebalances could well begin on Monday, but it's a bit dangerous to say that the
market will definitely be down.'
Meanwhile, things weren't helped Friday by the negative performance of Japan's Nikkei index, which
closed on its worst one-week loss since September 1990. The 11 percent drop came after the index's
stock listings were reshuffled, and investors rearranged their portfolios by sellings stocks that were
delisted and buying those that were newly added. Because the newly listed companies are more
valuable than the old ones, investors were forced to sell stock in order to afford to buy the new issues.
Microsoft closed Thursday at $78.94 a share, but fell sharply to $74.75 in after-hours trading.
The company said that growth for PCs has slowed because many companies already bought new
machines to avoid the year 2000 glitch. In Europe, the changeover to a new currency, the euro,
spurred even more computer acquisitions before the end of last year. However, Microsoft is relying
heavily on sales of new computers to introduce its Windows 2000 operating system and other
software.
There were several similarities during the time of the 1987 market crash, though it's open to question
how much they apply to the current market.
Then, interest rates were up, and economic growth was expected to continue. Inflation was tame.
Just as now, investor sentiment had deteriorated after a flood of quarterly corporate earnings reports.
Investors shed shares of IBM because its 12 percent profit increase in the quarter wasn't up to
expectations. Even Apple Computer Inc.'s shares fell despite a much bigger-than-expected 54
percent gain. Abby Joseph Cohen, renowned investment strategist, cautioned that sellers were
overreacting.
On Monday, Cohen cautioned again that company earnings will remain robust, and predicted a 15
percent gain in the Standard & Poor's this year. |
