Fed cuts rates by half point, takes sting from warnings

ITworld.com |  Government

Two weeks ago when Dell Computer Corp. reaffirmed its lower earnings estimates for its first quarter, the financial markets cheered the news. The 146.20 point gain for the Nasdaq Composite Index was its third largest percentage gain ever, while the 402.63 point gain for the Dow Jones Industrial Average was its second-largest ever.

An earnings warning and layoff announcement from computer maker Hewlett-Packard Co. (HP) Wednesday morning threatened to reverse gains, but a surprise half-percent interest rate cut by the U.S. Federal Reserve, commonly called the Fed, announced a few hours later may have been a fortuitous coincidence for the company and for investors.

In the buying frenzy after the Fed announcement, the 10 most active companies trading on the Nasdaq exchange were technology stocks. Eight of the 10 were computer hardware or infrastructure companies like Intel Corp., which was up 19 percent , Cisco Systems Inc., up 12 percent, and Sun Microsystems Inc., up 16 percent.

Shortly before the Fed announcement and the opening bell on Wall Street, HP warned investors that it expects to report a revenue decline of 2 percent to 4 percent and earnings between US$0.13 and $0.17 cents per share for its second fiscal quarter ending this month. The company will eliminate up to 3,000 management positions and force employees to take days off.

HP's revised earnings estimate includes a one-time, $150 million charge for writing down the value of unsold consumer computer equipment. The financial shortfall was attributed by HP to the sharp global decline in consumer IT spending.

Despite the warning, at midday, HP stock (HWP) was trading up about 9 percent, to $32.02 on the New York Stock Exchange.

HP's warning was the latest in a series from major consumer computer manufacturers.Dell missed its already-lowered fourth quarter earnings estimates in February, laying off 1,700 workers. Gateway Inc. issued a warning in February as well, and has closed some of its Gateway Country stores to cut costs. Apple Computer Inc. missed forecasts in January, losing more money than expected. Compaq Computer Corp.'s warning in February indicated no growth for the quarter and reduced revenue, along with a 5,000 employee job cut.

Only IBM Corp. has had healthy profits lately, but it has steadily reduced its exposure to the consumer market. HP on the other hand has aggressively pursued consumers with low prices for PCs.

"In order to gain share, they basically dropped their drawers," said Roger Kay, research director for the International Data Corp. (IDC) market researcher. "They gained share against everyone in the fourth quarter."

By exposing itself to the consumer market, HP got caught with excess inventory after consumers stopped Christmas shopping, he said.

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