IBM Leads A High-Tech Stock Market Downturn

Today, April 8, IBM indicated to financial analysts that its 1^st Quarter results (due to be announced on April 17^th) were likely to be lower than anticipated, more likely in the range of 66 to 70 cents than the expected 85 to 90 cents.  This means IBM is likely to show first quarter revenues of about $18.5 Billion, about $1 Billion below expected projections.

Not surprisingly, the high tech sector responded strongly and negatively to the IBM bad news.  IBM itself dropped its stock price initially by about $11 (a decrease of >11%), but within hours started to edge back up.  All of the indexes dropped and other high tech stocks, including EMC and Microsoft followed IBM (although much less drastically).

In its warning comments, IBM pointed to slowness in its OEM business as well as the slowness of customers returning to their normal levels of IT capital spending plans as they waited to see the economy signal a stronger exit from the recession.  Traditionally, the first quarter is a slow one for IBM, in any case.

It’s hard to separate these direct causes from a host of less direct but substantial issues that have made investors nervous:

	Concerns about the Middle East, particularly the breakdown of any semblance of peace talks between Israel and the Palestinians and the increasingly hostile attitude of Arab states toward the Israeli military actions.
	Ongoing concerns about the effects of 9/11, the global war on terrorism, and its costs, both financial and otherwise.
	The disruptions caused to the credibility of stock markets and stock values by the Enron/Arthur Andersen debacle and the ensuing rush to confess legal but non-repeating ways of enhancing revenue and profitability by internal transfers which most large firms, including IBM, have made some use of.  Investors are concerned that such events foreshadow future difficulties in generating revenue growth.

IBM managed to come through the recession unscathed, while others (such as Sun and Cisco) were wounded by their aggressive pursuit of dot.com business that melted.  But no company can escape the economy in which it does business and the fact that its customers are still nervously reading the economic forecasts, hoping for a sunny spring and summer, while toting their umbrellas and keeping their mittens at hand for just a little longer, cannot help but affect its short-term prospects.

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