Markets Surrender Gains as Apple’s Woes Demolish PC Stocks

Just as the markets found reason to begin a serious rally, Appleis inability to liquidate its backed-up inventory rehashed this seasonis motif of weak earnings in a weak economy. Apple lost 15.8% to score lows not seen since July of 1998.

Appleis warning that it will miss already lowered earnings estimate for this quarter took the whole PC sector down, Gateway and Dell made new 52-week lows, while Compaq skimmed the yearis low. PC stocks are now about as out of favor with investors as an industry can get.

Appleis stock nose dived 2 11/16 to 14 5/16 on ridiculously huge volume of 24 million shares.

Cupertino said that it will spend $135 million in sales promotions this quarter to get those 11 weeks of inventory off store shelves by December 30. Most PC vendor margins are between 5 to 10%, so there is very little room for PC prices to come down before Christmas. However, Appleis margins are the highest in the industry, giving Cupertino more pricing flexibility than a Gateway or Dell. Some analysts are predicting a PC price war going into next year.

According to Reuters, a number of analysts are skeptical that Apple can return to profitability by Q2 2001. "I am not convinced they can achieve break-even in the second quarter,ii said Merrill Lynch analyst Steven Fortuna.

Appleis latest warning won the company two downgrades. CS First Boston and JP Morgan no longer believe Appleis stock deserves a buy rating. Thanks guys, I guess theyire from the buy high, sell low school of investing. However, CS First Boston doesnit have anything against Apple, they downgraded Compaq and Gateway for good measure too.

In other Apple news, ZD Net News article says few OS X software developers, "anticipate fully OS X-native versions of their products until well after the commercial release of Mac OS X early in 2001." Most developers are pleased with Appleis efforts to help ease software engineers through the transition, but there are problems. "One issue common among developers is that Carbon has not yet been finalized by Apple," reports ZD Net News, "leaving product managers and programmers with the choice of either basing their work on a protean specification or waiting and perhaps falling behind the curve."

The Nasdaq lost 92 points (-3.21%) to close at 2796 on high volume of 2.2 billion shares.

The Dow shed 233 points (-2.14%) to close at 10663 on volume of 1.3 billion shares. Financial stocks got slammed by Bank of Americais (BAK) warning and Eastman Kodak (EK) fell over 5% late in the day on rumors theyill be next to warn about earnings.

The S&P 500 wilted 25.06 points (-1.84) to close at 1351.48.

In Apple related businesses: Akamai lost 5 1/8 to 32 3/8. Adobe dived 9 1/2 to 67 3/16 after getting slapped with a downgrade. Apple is taking the blame for IBMis softness today as Big Blueis stock gave back 6 5/8 to 96 3/4. Likewise, Motorola lost 1 3/16 to 17 13/16, a new 52-week low, pushed down by the synergy with Apple.

Salomon Smith Barney lowered earnings estimates for Intel and said in a research note that the chip makeris Q4 is "shaping up to be the worst in over a decade." Ouch. Intel dived 4 1/4 or -11 to 31 3/4, a new 52-week low. Naturally, Intelis problems are the PC vendorsi problem and PC stocks were already getting hammered today by Apple misfortune.

Dell lost 2 1/4 or -11% to 18 dollars. Gateway fell 2.02 or -10% to 16.76 and Compaq took it on the chin, down a whopping 4.40 dollars or 18% to 20 dollars a share. Microsoft lost 3 3/16 to 56 11/16.

Carly Fiorina, Hewlett Packardis CEO, said she will forgo her bonus along with other HP executives after missing earnings by $0.10 per share in fiscal Q4 2000, but she was optimistic her reorganization plans will improve earnings next year. HP fell 3 dollars to 32.

In economic news: U.S. productivity, a measure of goods and services produced per hour of work, climbed at a 3.3% annual rate in the 3rd quarter, missing estimates of 3.8%. Productivity rose 6.1% in the 2nd quarter and continues to easily outpace the average rate of the last 30 years at a very healthy 4.8% pace for the last 12 months ending September.

However, labor cost rose 2.9% in the 3rd quarter, the fastest pace in a year. A slowing trend for productivity combined with a rising trend in labor cost spells inflation to the Federal Reserve.

According to the Wall Street Journal:

"Sturdy gains in productivity, largely attributed to technological innovations, have helped boost how fast the economy can grow without triggering inflation. Through the 1990s, the economy generated efficiency gains of around 2%. For the past two years, however, productivity growth has come in around 4%. But maintaining that pace of productivity growth in an economic slowdown may prove difficult, economists say."

For full quotes on all the companies mentioned in this article, we have assembled this set of quotes at Yahoo! for your reference. For other stories regarding Appleis stock activity, visit our updated Apple Stock Watch Special Report.

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