Whats With the Mood Swing?

Sentiment about the economy has turned decidedly negative, causing investors to shun many stocks in our index.

Sentiment about the economy has turned decidedly negative, causing investors to shun many stocks in our index. The index fell 7.6 percent for the week ended Feb. 28—its fourth consecutive decline, down 28 percent year to date.

Federal Reserve Board Chairman Alan Greenspan reinforced the bleak outlook when he told Congress last week that current economic growth is "effectively at zero."

But Greenspan disappointed investors when he failed to indicate whether the fed would cut rates again before its next official meeting on March 20. His omission led to a sharp sell-off in stocks, especially those listed on the Nasdaq.

The biggest loser in our index was eLoyalty, a consulting and technology services firm specializing in customer resource management. Kelly Conway, president and CEO, told an IT services conference that he was not satisfied with the pace of closing new business deals in North America—although he said the companys pipeline was strong.

Following those comments Credit Suisse First Boston analyst Mark Wolfenberger lowered his 2001 and 2002 earnings and revenue projections for eLoyalty. Like many, he was surprised by the sober comments given the companys recent bullish outlook.

"Consulting and integration projects continue to experience pushouts [delays]," says Wolfenberger, adding that the Big Five are aggressively competing to take market share.

Proxicom, another favored consulting company, also lost some of its sheen following a second round of layoffs, equal to 5 percent of its workforce. Deutsche Banc Alex. Brown analyst Mark DAnnolfo downgraded the stock to a buy from a strong buy, but Proxicom is pushing forward on new strategies.

Even the star of consulting firms, DiamondCluster International, went dim. Steven Birer, an analyst at Robertson Stephens & Co., says demand is softening for wireless services, which Diamond hoped to capitalize on with its fall acquisition of European-based Cluster Consulting.

Hes not optimistic. "My new rule of thumb," says Birer, "is for services companies to miss their numbers two quarters after an acquisition. Its tough to integrate companies."

The effort, he says, distracts a company from its core business. DiamondCluster hopes to prove him wrong.