Nasdaq's Worst Day Since 9/11

With the market gripped by near-panic over what might happen next in the unfolding financial crisis, the Nasdaq Composite Wednesday plunged 109.05 points to 2098.85, a decline of 4.94%. It was the worst one-day drop for the tech-heavy index both in terms of points and percentage lost since September 17, 2001, the first trading day after the market shutdown that followed the attacks on the World Trade Center and the Pentagon - seven years later to the day.

While not quite a drop of historical size - there have been 28 worse drops on a percentage basis on the index since 1971, and 58 bigger drops on a point basis - it adds to a growing sense on the Street that investors have only now begun to understand the severity of the trouble that has been created by the downturn in the housing and mortgage markets.

The Nasdaq is now down 553 points for the year, a drop of 20.87%.

Unlike the stock market retreat in 2001, which started in the technology sector, the current malaise is centered on the financial services industry: we’ve seen the collapse of Bear Stearns, the acquisition of Merrill Lynch (MER), the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE), Chapter 11 filings by Lehman Brothers (LEH) and IndyMac and various other financial trauma. But tech is taking a beating of its own, as economies sag around the globe. Already this week we have had ominous warnings from Dell (DELL), Nortel (NT) and Ingram Micro (IM);  tech is being hit hard. But it is possible that for tech, at least, things may still get worse. In particular, the enterprise technology sector seems vulnerable to the shrinking of the financial services sector. As I noted earlier, we’ll get a fresh read on the situation tomorrow when Oracle (ORCL) reports results for its fiscal first quarter ended in August.

Tom Berquist, CFO at the privately held open-source database provider Ingres, and a former equity analyst with Goldman Sachs, fears that the impact of recent events on the tech sector could stretch well into 2009 and beyond. He sees a two-step hit: Before the end of the year, he says, we’ll see further cuts in demand for laptops, research services and end-user software that is sold on a per-seat basis. After that, comes the second hit, with reduced demand for servers, storage and software maintenance. He envisions a revival of the 2002 software industry debate over “shelfware,” software licensing that are purchased by never actual put into use.

Berquist does say the sharp slide in stock prices eventually could accelerate tech industry consolidation, but he also notes that consolidation has its finite limits, and doesn’t generally occur in the middle of a downturn. He also sees big trouble in the downturn for anyone in need of capital - both the equity and debt markets are now largely shutdown. Were you planning to go public any time soon? Better find a new plan.

Berquist, who provides software to a wide range of companies, including some banks, says his customers “are freaked out right now.” He notes that bank revenue and spending plans have not changed as much at this point as their market caps have, but he notes that there will be bigger hit to come as companies begin laying people off. Berquist says his biggest concern is how far the trouble spreads beyond financial services. He notes that in the final quarter of 2001, after the 9/11 attacks, spending on tech goods and services came to a grinding halt as companies attempted to assess the health of the economy.

Asked to dust off his analyst hat, Berquist advises that investors “need to be underweight technology,” and predicted that there will be further movement of capital out of tech and other economically-sensitive sectors and into health care and other areas that are less cyclical. But he adds that, “you can debate if anyplace is safe right now.” If you are going to maintains a stake in tech, he advises to move towards big cap names: As was the case after the bubble popped in 2001, IT departments are likely to reduce the number of vendors they work with to cut costs.