Wall Street Beat: Markets roar back, but shadows remain

After turmoil on the stock exchanges in July and August, technology companies for the most part have come roaring back, kicking off the fourth quarter with a surge in share prices.

The Nasdaq Composite Index, seen as an indicator of confidence in the tech sector since it is so heavily weighted with IT vendors, hit a six-and-a-half-year high Monday. The index rose 39.49 points to close at 2740.99. Big IT vendors led the way. Google skyrocketed $15.28 to hit $582.55, Intel rose $0.51 to reach $26.37, and Apple jumped $2.87 to hit $156.34. Tech companies on other exchanges fared well too. For example, Hewlett-Packard, traded on the New York Stock Exchange, gained $1.19 to hit $50.98.

Despite the mid-quarter slump, the Nasdaq started to bounce back in September, gaining 4 percent for the month, and registering a net gain of 3.8 percent for the quarter.

The U.S. Federal Reserve Board decision to cut interest rates has eased concerns about a possible credit crunch, helping to reignite investor confidence. Everyone who follows the U.S. economy knows the story: The weakening U.S. housing market, mortgage payment defaults by home owners, and related worries about the credit market sent stock exchanges on a roller-coaster ride mid-quarter. IT company share prices were also hit because a tightening of credit typically dampens business and consumer spending across many sectors of the economy.

Fears about the economy, despite generally strong results from technology vendors this year, had a wide-ranging effect on IT. The overall value of technology mergers and acquisitions in the third quarter plunged to $52 billion, down from $255 billion in the second quarter, according to the 451 Group, in a report released this week.

Mergers and acquisitions activity is often seen as a sign of industry-insider confidence in technology. IT investors are reassured when vendors, venture capitalists, and leveraged buyout firms bet big on hot new technology.

“Who would have thought that the all-powerful tech buyout barons could be knocked out of the market by a bunch of over-extended homeowners? And yet, that’s what happened in the third quarter,” said 451 analyst Brenon Daly in a research note.

“An uncertain economic outlook, including whispers of a possible recession, derailed some companies’ plans to expand their businesses through acquisitions,” he wrote.

There is still lingering uncertainty underlying the gains made by tech companies as markets surged at the beginning of the week.

The Semiconductor Industry Association (SIA) this week said that global chip sales rose 4.5 percent year-over-year to $21.6 billion in August. Nevertheless, CitiGroup Global Markets Equity Research this week lowered its estimate for Advanced Micro Devices’ annual revenue to $5.86 billion from a prior forecast of $6.03 billion. CitiGroup said that Dell is reducing orders for the U.S. consumer market.

In addition, Morgan Stanley initiated coverage on Intel, AMD, and Nvidia this week, assigning them all “underperform” ratings, due to what it called an “increasingly aggressive price environment.” So despite the overall gains at the beginning of the week, by Wednesday, Intel fell $0.57 to close at $25.81, Nvidia lost $1.58, closing at $35.82, AMD slipped $0.29 to $12.91, and Texas Instruments fell $0.52 to $36.11.

As earnings reports roll in from bellwether companies over the next few weeks, IT investors will get a better sense of how the industry players are viewing the rest of the year.