Blame it on Y2K Dawn Patrol December 06, 2000 03:55 PM PT by Thomas Coyle NEW YORK -- On Wednesday, the technology-rich Nasdaq pulled back from Tuesday's record-setting run-up, dimming, if not extinguishing, hopes for a sustained recovery this week.

The Nasdaq Composite Index lost 3 percent Wednesday to settle at 2,797. Year to date, the Nasdaq is down 31 percent. The elite Nasdaq 100 fell back by nearly 4 percent to 2,744. For the calendar year, the Nasdaq 100 is down 25 percent.

Apple falls

Part of the reason for the Nasdaq's drop was a spot of bad news from Apple Computer (AAPL). In its second warning in three months, the maker of the colorful iMac PC said its revenue would decline by between $225 million and $250 million in its first quarter of fiscal 2001, which ends this month. That translates into a Q1 loss of about 65 cents a share. Analysts had been expecting a gain of 3 cents a share in the quarter, according to a survey conducted by First Call/Thomson Financial. In the year-ago period, Apple reported earnings of 50 cents a share.

Apple attributed the projected shortfall to a slowing economy, slacker computer sales, costly promotions and the effects of price-cutting. Steve Jobs, Apple's chief executive, added that Apple suffers from a megahertz gap with its rivals and slipping educational sales.

Year to date, Apple's share price is down 31 percent on a split-adjusted basis.

All tech suffers

Apple wasn't the only boxmaker to suffer Wednesday. Dell (DELL), Compaq (CPQ) and yes, Gateway (GTW), which dropped like a rock last week on its own profit warning, fell sharply. Hewlett-Packard (HWP) took a hit as well, despite having reaffirmed its previous guidance for revenue growth of between 15 percent and 17 percent in 2001.

Intel got in on the act, too, prompted by a research note from Salomon Smith Barney, which characterized the chipmaker's fourth quarter as -- potentially at least -- its "worst in over a decade." The broader silicon group suffered as a result.

Spending spree

For Arnold Berman, technology stock strategist at Wit SoundView, the trouble with Apple, Intel and other techs this year is mainly a hangover from the Y2K spending binge.

"In 1995, [America Online] (AOL) altered expectations about returns, but technology spending patterns remained largely normal through 1996," Berman said. "But then we started to read in the back of airline magazines about Y2K."

Although the millennium glitch has become a bit of a joke, it was a serious matter to corporations by the late '90s.

"During this period, Y2K compliance was not just the world's largest technology spending priority; it was the world's largest corporate spending priority," Berman said.

In that atmosphere, "CEOs often gave their IT personnel carte blanche to do whatever it takes to achieve Y2K compliance," he added. "Many nice-to-have corporate technology goods were purchased with 'must have' arguments."

Please be normal

Y2K, in Berman's view, "created positive distortions in '97, '98 and '99, and the hangover from that created negative distortions this year."

But that distortion may be coming to an end. "Spending prospects, in the aggregate, look good in 2001 -- something people don't expect," Berman said.

"I think 2001 is going to be a normal year," he added. "It's back to a stock picker's game."

http://www.upside.com/Dawn_Patrol/3a2ed1dc1.html

-- Martin Thompson (mthom1927@aol.com), December 06, 2000