Nortel Nukes the Nasdaq

There's nothing quite like an unexpected business slowdown to turn a Wall Street darling into a Main Street gargoyle. In the recent past, Intel (INTC) and Apple Computer (AAPL) have undergone this unpleasant metamorphosis just because their businesses ceased to meet expectations. Today, it was Nortel Network's (NT) turn.

Late Tuesday, the Canada-based networking giant posted third- quarter earnings of $0.18 a share, a penny ahead of the First Call estimate. No harm, no foul here. Too bad investors were focused more on the top line than they were the bottom. Nortel's revenues grew 42 percent to $7.3 billion for the quarter, which seems reasonable upon first glance. Unfortunately, that was roughly $200 million shy of what the good folks at First Call were projecting.

When the market opened this morning, there was more than one institution and individual informing his broker that it was time to take profits. Nortel gapped down at the open to $44.88, an $18.43 discount to Tuesday's close of $63.31. And it never looked up from there. Nortel closed the day down $18.31, or 29.21 percent, to $45.00 on a record (for Nortel) 123 million shares traded.

Before anyone angrily puts pen to paper, I realize that Nortel resides on the NYSE. The problem, though, is that most of the companies that cater to the huge networking entities like Nortel, Lucent (LU) and Alcatel (ALA) et al reside on the Nasdaq Composite Index (COMPX). In other words, it was the high-flying fiber optic concerns sporting four-letter ticker symbols that bore the brunt of Nortel's wrath.

And bore they did. JDS Uniphase (JDSU) dumped $24.06 to $71.00 on 130 million shares trade. But doing JDSU one better was its partner-to-be, SDL Inc. (SDLI), which jettisoned $81.78 to $234.19. Meanwhile, Ciena (CIEN) plunged $27.00 to $108.38 and Sycamore Networks (SCMR) slid $16.78 to $65.50. Not surprisingly, the AMEX Networking Index (NWX) was off a whopping 11.7 percent today.

Not wanting to free-fall alone, the fiber optic guys took a few of the chip makers down with them, particularly those chip makers that make those fancy new communications chips. Applied Micro Circuits Corp (AMCC) tanked $50.31 $148, PMC Sierra (PMCS), which gets a 20 percent of its revenues from Nortel, sank $37.75 to $161.13 and Vitesse Semiconductor (VTSS) slid $11.44 to $56.06.

The carnage in the networking sector, along with a thoroughly disappointing outing by Microsoft (MSFT), Cisco Systems (CSCO) and Intel, all but doomed the Nasdaq Composite Index (COMPX) today. The tech-laden index traded down 70 points at the open, and kept trading down for most day to eventually close off 190.22 points, or 5.56 percent, to 3,229.57, its biggest percentage and point loss since May 23 and its third loss in as many trading sessions this week.

Bucking the trend for most of the day was the fogy-laced Dow Jones Industrial Average (INDU). After making for the nether regions at the open, the blue-chip average made an about-face to trade higher in mid-morning trading. In fact, just after 11:00 EDT, the INDU was in positive ground, cresting at 10,461.97. But sellers soon entered the INDU again, and by late afternoon the average was trending lower. In the end, the INDU finished off 66.59 points, or 0.64 percent, to 10,326.48. Pressuring the blue-chips was centagenarioan telecom AT&T (T), which dropped $3.50 to $23.38 on Nortel's woes and investor skepticism about its plan to reorganize into four separately traded companies.

The broader and smaller markets also suffered on Nortel's mea culpa. The S&P 500 Index (SPX) sank 33.24 points, or 2.38 percent, to 1,364.89, while the small-fry Russell 2000 Index (RUT) gave up 12.64 points, or 2.31 percent, to 475.21.

Not surprisingly, market breadth was terrible today. Decliners routed advancers by a 19 to 10 margin on the NYSE and by a 27 to 13 margin on the Nasdaq. Volume was extremely heavy on both exchanges, with 1.30 billion shares changing hands on the NYSE, 26 percent more than the three-month daily average. Meanwhile, 2.14 billion shares were exchanged on the Nasdaq, it's ninth-busiest day ever.

In earnings news, nearly three-fourths of the S&P 500 companies have reported quarterly earnings so far, which, according to First Call, have grown an average 19 percent over the same year-ago period. When it's all said and done for this latest quarter, First Call expects S&P 500 earnings to have grown 18.1 percent from the same quarter in 1999.

Speaking of earnings (no sense in wasting a good segue), the companies that reported today had mixed results. On-line retailer Amazon.com (AMZN) gained $5.25 to $35.81 after reporting a third-quarter loss of $0.26 a share, which was $0.07 better than the First Call estimate for a loss of $0.33. It seems the freewheeling cash burner is finally focusing on operations. Amazon officials said the better- than-expected result was due to reduced shipping expenses and better terms from suppliers.

Affymetrix (AFFX) soared $16.03 to $68.36 after the maker of chips used in genetic research said it broke even in the third quarter and predicted a profit for the fourth-quarter.

Another earnings barnburner was Barra Inc. (BARZ), which soared $9.44 to $55.06. The company, which makes investment- management software, reported quarterly earnings of $0.90 per share, which easily trounced the First Call estimate for $0.72 per share.

However, getting waxed on earnings news was integrated circuit maker Maxim Integrated Products (MXIM), which tanked $20.31 to $57.13 reporting fiscal first-quarter earnings per share of $0.29, in line with Street estimates. Nevertheless, Credit Suisse First Boston downgraded the stock due to near-term booking and inventory concerns.

On the economic front, today's offering was light fare. The National Association of Realtors reported that September existing home sales fell 2.7 percent to an annual rate of 5.14 units, which was slightly stronger than the consensus for 5.10 million units. What's more, August home sales were revised to 5.28 million units from the earlier report of to 5.27 million units.

In other news, the euro fell to another all-time low against the dollar, meaning that one issue of the new-fangled currency will only buy you $0.8262. The nascent 22-month euro, which should have been still born, dropped amid waning hopes that global central banks will come to its aid.

So much for Wednesday's news, what about tomorrow? I hate to say I told you so (maybe not hate), but I warned in this very column on October 1 that I thought some of the fiber stocks were vulnerable. Specifically, I mentioned Corning (GLW), JDS Uniphase and Ciena, all of whom got whacked for double-digit losses today. What's more, I still think these stocks are vulnerable to more selling, regardless of what Gruntal's Joe Battipaglia says. (I've noticed that Mr. Battipaglia has been conspicuously absent from CNBC over the past few weeks.)

The fact is the sky is not the limit. Investors long in Yahoo (YHOO), Rambus (RMBS), Qualcomm (QCOM), Rambus (RMBS) and RF Micro Devices (RFMD) have learned that painful lesson over the past six months. I wouldn't be surprised if investors in the volatile fiber optics sector aren't about to learn the same lesson over the next six months.

Self-congratulatory back patting aside, I still think we are in for a recovery soon, particularly in the COMPX. The index is fighting to regain its long-term trend began back October 1998. What's more, I think the downside is limited to 3,000 (the double bottom formation). The fact is most of the sell- off in its largest components (Microsoft, Intel and Cisco) has already occurred. Remember, the COMPX is a market-weighted index, a sell-off in JDS Uniphase doesn't have the same impact as a sell-off in Intel.

With all due respect to the fiber optic crowd, as I said on Sunday, I still believe an earnings warning from Cisco, which will report earnings on November 6, is the only train that could permanently derail the much-anticipated fourth-quarter rally.

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