Techs Ride On Thin Hopes

With the recent news that IBM (NYSE: IBM) the technology bellwether, increased its earnings projections for the coming year by a nickel, from $8.20 per share to $8.25, along with the announcement that it had authorized $15 billion for share buybacks, the stock and the markets responded positively. Despite no other good news, this was enough to bring the Dow up 114 points on Tuesday, while the S&P rose 9.49 in accord with the Dow. The tech-heavy Nasdaq was also up 17.51.

This all happened despite a jump in the producer price index of 1%, led by energy and prescription price increases, along with a dip in consumer confidence. Also, the black cloud of the housing industry continues to loom over the whole economy and the markets. So why was the market’s take on the news so positive, and was this reaction justified?

Along with the homebuilders, the financials and the retailers, tech stocks have been bumping along either in the low or middle portion of their trading range the last several months. A recent good earnings report by Hewlett-Packard (NYSE: HPQ) for its first quarter of $0.86 per share, when $0.81 was expected, was momentarily embraced by the Wall Street then forgotten.

When Cisco Systems (NASDAQ: CSCO), on the other hand, merely met its earning target of $0.38 per share, the street reacted negatively. Cisco shares saw some selling. The stock has languished near its year low of 21.77 and recently traded at 23.92. The news inside that report carried the story of lightened bookings for the near term, perhaps a couple of quarters. This was seen as presaging a tech trend, the downturn in the technology business spending cycle for the foreseeable future. Add to that the factor that the technology cycle often shows early year drop-offs in bookings for capital expenditures for new technology by many companies, regardless of the state of the economy, and you have at the very least a double whammy.

So when the IBM news came out on Tuesday, this was taken by some investors as a sign of better things to come in the overall tech sector, with Big Blue leading the way. The confidence shown by IBM management to authorize the additional stock buyback merely underscored this.

But there are signs the market optimism may be premature if not unjustified. The earnings up tick IBM projects may be too slight to carry through to other big tech stocks, and there remains the more hidden factor that smaller tech companies, those that exist and do business underneath the level populated by tech royalty such as IBM, Cisco, Hewlett-Packard, Microsoft, Intel and so on, may have their bookings for new orders sliced or canceled at an even greater rate than the big names. Business remains difficult.

The tech downturn and the economy’s general sluggishness—recession or not—affect the small names first and worse than the big companies, particularly in the ultra-competitive technology sector. Some small tech firms which have been feeling the pressure of struggling to keep their earnings up the last few months may continue to be under pressure. So even if the tech rebound is coming, say, in the second half or end of 2008, it may not be wide or deep enough to touch all the tech companies.

About QualityStocks

QualityStocks.net, based in Scottsdale, Arizona is a free service that collects data from hundreds Small-Cap and Micro-Cap online Investment Newsletters into one Free Daily Newsletter Report. QualityStocks.net is dedicated to assisting emerging public companies with their advertising efforts and now has over 500,000+ subscribers that receive The Daily Stock Newsletters.

To sign up for “The QualityStocks Daily Newsletter” please visit www.QualityStocks.net

Please see disclaimer on QualityStocks.net website: http://Disclaimer.QualityStocks.net