From TheStreet.com: Will Microsoft's Malaise Sicken the Nasdaq Again? ...What is clear is that when traders return on Monday, the psychology for tech stocks will likely be in the dumps. As James Cramer wrote here Thursday, the tone of the Microsoft conference call couldn't have been worse. Microsoft has often used the quarterly calls to tamp down overheated analyst expectations, encouraging analysts not to raise their estimates for future periods just because the company had beaten their previous expectations.

Last week, Microsoft Chief Financial Officer John Connors went beyond suggesting that rosier outlooks would be a mistake. He instructed Wall Street to scale back existing earnings-per-share estimates for the year ending June 30, 2001, indicating they were too high by 5 cents. That's a precedent that could rattle a market accustomed to seeing Microsoft shrug off just about any setback and go on to set new highs.

Conner placed the blame on disappointing demand for corporate PCs and pointed out once again that a company as large as Microsoft -- it's fiscal year revenues are expected to approach $23 billion this June -- will find it increasingly difficult to rack up 20%-plus annual growth. Prodded by analysts Sherlund and others, Connors couldn't even speak optimistically about the current April, even though the month is nearly two-thirds gone by now. The implication: The world's most important tech company is off to a lousy start in its fourth fiscal quarter.

Or, could it be that Microsoft is suffering from unique problems that other tech companies may not feel? Intel told analysts last week that it remains upbeat about PC demand. Cisco (CSCO:Nasdaq - news - boards) and other suppliers say they still see strong demand, too.

Even if Microsoft is suffering from unique problems, it could still drag down all tech shares simply because it's so huge. CFO Connors made that point during the conference call when he bragged that Microsoft's revenue increase in the quarter alone accounted for four and a half Yahoo!s (YHOO:Nasdaq - news - boards), 20 RealNetworks (RNWK:Nasdaq - news - boards) and 75% of Oracle's (ORCL:Nasdaq - news - boards) entire software sales (not including its consulting revenues).

Then again, Morgan Stanley's Phillips says the tech markets may not be so dependent on the mood swings of the software giant. He acknowledges that the Microsoft news could make the coming week in tech stocks another turbulent one. "But I don't think it's as cataclysmic as it would have been a year ago," he adds.

There's another aspect of the Microsoft earnings announcement that bodes ill for the software giant and other tech companies that have been generating great numbers, in part, through gains on investments. Connors said Microsoft locked in enough gains in early April to ensure that its stock-sale gains in its fiscal fourth quarter equal the $442 million that it amassed in the third. This isn't great news for the rest of the stock market because it means that Microsoft has already begun bailing out. It also suggests that investors will begin scrutinizing every other company that has relied on portfolio windfalls, a strategy tech companies have adopted only recently as a way to manage earnings.

Microsoft's fall from glory also should give pause to the entire high-multiple crowd. Even taking into account Microsoft's revised earnings outlook for fiscal 2001, it still trades for about 42 times 2001 earnings. But the company expects earnings growth only in the midteens. Nonleaders with growth rates in the midteens get multiples in the midteens. But Microsoft remains very much a leader. What's the proper multiple for other leaders in this climate? That's to be determined this week.

How the market reacts to Mr. Softee's news will have huge repercussions. A hit to the already-dented stock could take down both the Dow and the Nasdaq.

Influential analysts such as Thomas Weisel's Readerman will play a role. On Friday, I asked him if he's thinking of changing his current buy recommendation, his firm's second-highest. "I've got 48 hours or so to make up my mind on that," was all he would say.

Come Monday morning, tech investors will quickly learn if this is a Microsoft-only event or if the contagion will spread.

-- DeeEmBee (macbeth1@pacbell.net), April 24, 2000

Answers

Should be another interesting week on Wall Street. "Interesting" in the Chinese sense: "May you live in interesting times."

-- DeeEmBee (macbeth1@pacbell.net), April 24, 2000.

Dee:

You're confused. This is now the "All Elian, All The Time" forum. We have no time for unimportant things like the stock market :^)

I never make predictions but I'll try one this time. I think that MSFT has already been written down to some degree in most broker's minds due to the DOJ tiff. I don't think this is going to have a big effect on the NAS. I'll say NAS down 50, Dow up 50. We'll see tomorrow if I'm still as lousy at predictions as usual.

-- Jim Cooke (JJCooke@yahoo.com), April 24, 2000.

My first prediction since before the rollover:

I predict that the Naz tomorrow will end up somewhere close to 3,693 (A PLUS from Friday, in case some of you haven't been following.)

~*~

-- (LadyLogic@...), April 24, 2000.

LL,

At 10:30 AM you are way off. Ouch.

Jim,

Elian is big in the market. He cashed in his Mattel stock 2 weeks ago.

-- Lars (lars@indy.net), April 24, 2000.

Hmmm. NASDAQ down 240. Looks like you're a little off Jim & lady.

-- Goldfinger (@ .), April 24, 2000.

Watch out! If Elian is forced to sell off his gold holdings, necklaces, medals, et al, gold will drop like a rock.

Also, watch for a fall in designer clothing. There'll be a sharp dive in sales now that the kid is no longer running around Gucci's buying one of each.

Also, I hear that Toys-R-Us is considering a chapter 11, with a marked drop in sales.

All of this can have a decided effect on our Stock Market.

-- Richard (Astral-Acres@webtv.net), April 24, 2000.

OK people

This is where the rubber meets the pavement. It's all over. Whats that smell..........hmm think I smell paper burning all week.

GOT GOLD up .70 not much but it ain't going down

Be back in a couple days to see the carnage and droopy faces around here.

-- GOLD LOSER (gl@the.club), April 24, 2000.

Let's all be sure to vote for 4 or 8 more years of this crap in November--Vote AlBore (NOT!).

-- Defeat (AlGore-In@November.com), April 24, 2000.

Ahhh well, fortunately the universe is fair. Some people have good sense...others have good looks ;o)

~*~

-- (LadyLogic@...), April 24, 2000.

Dee:

Well, shucks. I got the Dow about right but I was tad bit off on the NAZ. I think I should be given a pass this time though since I didn't know about the two stories in the papers about the possibility of MSFT being split up. I would have shaded the NAZ prediction more if I had known about that.

Or, you can say that I was at least half right, which is better than my usual track record about market predictions :^)

-- Jim Cooke (JJCooke@yahoo.com), April 25, 2000.

Jim -

The current market is so furshlugginer volatile that it's a wonder that anyone gets within a full percentage point of their "call" for a given day. The MSFT selloff on Monday seemed like a given and it had a smallish pull on the Dow while being much, much heavier gravity for the Nazz.

That said, that was just Monday. Today we're seeing an "oversold bounce", buoyed by more good earnings reports elsewhere. It is to laugh: people respond positively to earnings reports, but they buy stock whose P/Es are so high, you need an oxygen mask to own 'em! "Earnings" are treated as some sort of generic "good news" item to justify buying. LOL!

What's very interesting to me is some recent comments on sites about "battle fatigue" and waning capital. No one (and I mean NO ONE) has been able to consistently play this market correctly since the start of the year, and this applies to both bulls and bears. This is a very dangerous phenomenon, as the attrition caused by all these swings reduces liquidity, and illiquid markets become even more volatile and unstable. I've had people say that these huge swings are great, 'cause you can make big money. They obviously have never tried for any length of time; massive market volatility is not good for anyone, whether they be a seasoned professional, full-time personal investor, or just an owner of a 401(K) who's hoping for a decent retirement.

Here's hoping for the Fed's much-ballyhooed "soft landing". I say "hoping", because that's all it is.

-- DeeEmBee (macbeth1@pacbell.net), April 25, 2000.