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Summary:

Stock markets around the world are tumbling, with the Dow staying firmly in negative territory even in the face of an emergency interest-rate cut. And ready or not, the parade of technology earnings is on its way as well. A handful of tech bellwethers have already […]

Stock markets around the world are tumbling, with the Dow staying firmly in negative territory even in the face of an emergency interest-rate cut. And ready or not, the parade of technology earnings is on its way as well.

A handful of tech bellwethers have already delivered their results for the latest quarter, and if last week was any indication of what’s to come, trading in tech stocks will be volatile. IBM kicked off the season on a happy note; its shares posted their biggest one-day gain in five years after Big Blue pre-announced surprisingly strong numbers. Intel, in contrast, failed to meet already diminished expectations, and saw its stock sink 17 percent last week alone. Intel has lost more than $50 billion in market value in six weeks, or nearly a third of its market cap.

Next up: Apple and Texas Instruments on Tuesday; eBay, Motorola and Netflix on Wednesday; and AT&T, Microsoft and Nokia on Thursday. The questions now is will they produce more IBM-like heroes or Intel-like goats?

I fear it’s the season of the goat. Here are four reasons why:

1. Stocks are still overrated. Sure, valuations are down — Apple is trading at a mere 25 times its forward earnings; it was above 30 for most of 2007 — but analysts have almost surely overestimated future earnings. On the whole, downgrades have been directed at the last quarter of 2007, not 2008. Most analysts are waiting for new guidance before adjusting their 2008 estimates. And their old estimates were made before the consensus view shifted abruptly toward a looming recession. Besides, the market’s mood has been so dark that any big downgrade triggers a selloff, and companies don’t like it when their banks trigger selloffs.

2. Earnings for the fourth quarter of 2007 are likely to be worse than those recently lowered expectations. Companies have two big incentives for shifting as many losses as they can to the most recent quarter: First, they can blame the weak economy, the mortgage mess, the credit crunch and the fools who started it all. Second, a bad fourth quarter of 2007 will make year-over-year comparisons in 2008 look that much better. And investors will be focusing on 2008.

3. Uncertainty, that stock market mood-killer, still rules. Yes, contrarians are starting to look for oversold stocks, and rightly so. But it’s still too early to know if the market at large will recover in the spring, or this summer, or…even later.

4. IBM shares did rally last week, but IBM has historically been an exception, performing reasonably well when the tech sector tanked. During the swoon in autumn of 1998, when the Nasdaq dropped by 32 percent, IBM stock gained 6 percent. In fact, it was credited with helping to start the recovery in tech stocks. And between March 2000 and December 2001, shares of IBM rose 20 percent while the Nasdaq sank by 60 percent.

So things are looking rocky for the next couple of weeks, but here’s one reason to think that the worst will be over soon: As I write this, dozens of news stories are already terming this a “stock market crash.”

We’re nowhere near crash territory. And the Fed has cut rates by three-quarters of a point, which should give short-term relief at the very least. But the panic in the press is often a signal that the frenzied selling is starting to reach its peak.

  1. It’s tempting to think or hope that because there has been “frenzied selling” that somehow the volatility is over. There was such selling months ago, and again months before that. Just because the markets bounced back from those bouts of selling doesn’t mean they will do so now. “Past performance is not a measure of future possibilities.”

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