Everything is red now but the SOX and it is just barely hanging on. From Briefing.com: 7:35AM Cisco Systems EPS estimates raised by most firms (CSCO) 12.05: -- Update -- Cautious revenue guidance for the Oct qtr is leading most analysts to trim revenue estimates for Cisco this morning, but better than expected gross margins are leading most firms to up their EPS estimates for Cisco's Oct quarter and new fiscal year; prior consensus estimates of $0.12 and $0.52 appear likely to go to about $0.13-0.14 and $0.58-0.59.
7:17AM CSFB underweight communication ICs : CSFB notes that Cisco's (CSCO) second straight quarter of 500 bp gross margin improvement indicates that the company is increasing its already significant leverage in the component business, driving down prices for component companies, and indicating that when business does accelerate, these cos might not see much benefit; CSFB remains Underweight on the comm IC and optical component sectors as a result.
10:45AM Fed Policy : Fed rate cut forecasts have been in vogue over the past week; both Goldman Sachs and Lehman have made high profile forecasts of substantial rate cuts by year-end, and they are joined today by high-priced D.C. consultants Johnson-Smick which reportedly sees a 50 bp cut at next Tuesday's meeting (Johnson is a former Fed governor). Despite these high profile forecasts, the market remains more sanguine, with fed funds futures contracts putting the possibility of even a 25 bp easing next week at right about 50%. Though it's foolish to rule anything out for next week's meeting, betting against this Johnson-Smick call would seem to be obvious. For eight years now, the Fed has been moving in the direction of increasing transparency. This has included announcing policy actions (for those of you in the under-30 crowd, it hasn't always been this way!), immediately announcing the votes at FOMC meetings, and usually telegraphing its actions. This latter point is key - the Fed rarely goes against market expectations at policy meetings. When the fed funds futures contract indicates that a given action is a low probability outcome, the Fed tends to comply. The probability of action has to get close to 50% for the Fed to move; if it isn't there and the Fed wants to move, they tend to make public pronouncements which will push the probability in their direction. With the probability of a 25 bp cut now at 50%, this action is certainly possible, though it is notable that the probability has been hovering closer to 30% in recent weeks and policy makers have said nothing publicly to push this probability higher. Furthermore, the fact that a 50 bp cut is a very low probability outcome virtually rules this out as a likely action. Given the Fed's desire for transparency and the fact that recent economic data have been consistent with their long-held outlook for an uneven recovery (see "Tips for Dips" on Stock Briefs for more), the best bet is that the Fed will simply move to an easing bias at this meeting, and delay the rate cut decision until the Sep 24 meeting, at which time it will have much more information about the significance of the July economic numbers and the state of the stock market. With a decent Retail Sales report likely to be released on the morning of next week's meeting and most forecasters not expecting a rate cut until the September meeting, the Fed should be able to buy another six weeks of time without risking significant market repercussions. - Greg Jones, Briefing.com
10:18AM Technical Levels : While it's difficult to suggest yesterday's rally was 'impressive', there were certainly elements of the move that raised a few eyebrows. Admittedly, total volume traded -- at 1.5 billion shares -- was something of a disappointment. It was nothing close to the 2.5 billion shares experienced during the prior leg higher, and far from what would conventionally signal a trend change. Yet at the same time, the internal volume statistics were definitely worth consideration. Advancing volume outpaced declining volume by nearly 11 to 1 at the market close -- and on an intraday basis, that same ratio generated readings as high as 19 to 1. For those less familiar, a ratio of 9 to 1 or better is generally considered to signify extreme buy interest. That is, buy interest on the order of what might reverse a well established trend. From a less statistical standpoint, in our last review we addressed the issue of individual stocks blowing up on a daily basis. The general point being that it's difficult for the markets to rise when each day, traders are faced with several different 'legitimate names' losing 20%-30% of their market value. Well, Tuesday's rally injected something of the inverse element into the equation. A long list of formerly viable investments carved out single-day gains ranging from 8% to 15%. That's not exactly the kind of one-day loss you want to see if you're sitting on a short position. Yet it is the kind of price action that may embolden prospective longs currently riding the fence and conversely, dissuade those shorts beginning to lose their commitment. Put another way, yesterday's price action definitely served as a shock to the current sentiment picture despite the lean total volume stats. Whether this shock qualifies as anything of significance on a longer-term basis remains to be seen. So getting to the straight technical outlook -- a look at the Nasdaq's six-month chart illustrates the current picture relatively well. Setting aside the fact that the chart looks like garbage, it is arguably positioned as well as it has been over the prior six months. Aggressive traders are likely to favor a 'cautiously long' approach over the next several sessions. This bias should remain intact so long as key support at 1205 holds on a closing basis. To the upside, watch for formidable resistance in the range of 1290 to 1296, followed by another notable ceiling at 1328. -- Mike Ashbaugh, Briefing.com
9:40AM Cisco Systems (CSCO) 13.16 +1.09: We wrote plenty about Cisco's earnings report yesterday afternoon and won't bore you with another analysis today. But the Cisco report did highlight an important issue in the news these days: pro forma vs GAAP accounting. In past commentary, we have argued that ignoring pro forma numbers now is just as ill-advised as ignoring GAAP numbers two years ago. Sometimes pro forma numbers tell a company's story more accurately than GAAP, and sometimes they don't. Cisco is an example of the latter: bad pro forma accounting. The company reported GAAP earnings of $0.10 and pro forma of $0.14. Most of that four cent gap was due to acquisition-related charges: $288 mln for the amortization of purchased intangible assets and $28 mln write-off of in-process research and development. These acquisition-related charges are of course standard fare for Cisco, which has made acquisitions a primary element of its growth strategy. It is for precisely this reason that it is inappropriate for investors to exclude these charges when judging Cisco's financials. Excluding acquisition-related charges for Cisco would be like excluding R&D expenses for other companies. For Cisco, acquisitions take the place of internal R&D. Cisco itself makes it clear that part of its strategy is to acquire technology rather than market share, which is another way of saying that it complements its internal R&D with acquisitions. Since the continuation of this strategy has been critical to its sales performance, it is absurd to view acquisition-related charges as "one-time" or "extraordinary" when they are clearly ordinary. Having made that case, we would not argue that Cisco missed its number yesterday. The consensus estimate of $0.12 assumed that these charges would be excluded, and thus were comparable to the $0.14 pro forma actual. Had there been a GAAP consensus, it would have been $0.08 and Cisco still would have beaten by two cents. The key point here is that in judging Cisco's ability to generate earnings and cash flow in the future, investors should look at Cisco's numbers including acquisition-related charges. - Greg Jones, Briefing.com
9:11AM Stocks to Watch : The futures are pointing to a higher open, thanks in large part to Cisco Systems' (CSCO 12.05) report last night. The networking giant beat estimates and guided in-line for OctQ. However, because it did not warn, the guidance was seen as good news. The report is helping the Nasdaq as well as the overall market. CSCO +8.7%, JNPR +8.4%, CIEN +8%. Cisco EPS estimates being raised by most firms... Financials may lag in the wake of Morgan Stanley cutting 2002-03 ests below consensus and lowering price targets for Citigroup (0 30.40) and Merrill Lynch (MER 32.35) to reflect tough mkt conditions... Bucking the trend is Prudential (PRU 30.38) as it beat by 3 cents... Ballard Power (BLDP 12.68) is up 15% as it will to unveil a 'breakthrough' power generation system today... TiVo (TIVO 2.59) is jumping 57% as it boosts its revenue outlook... TMP Worldwide (TMPW 12.78) is down 21% as it cut its outlook amid soft recruiting demand... Clorox (CLX 36.67) beats by $0.02 and raises guidance... Some good news from a couple of retailers may help the group: Polo Ralph Lauren (RL 19.90) beats by $0.03 and reaffirms outlook while Ethan Allen (ETH 29.70) beats by $0.03... S&P 500 futures are trading 14 pts above fair value while Nas 100 PMI is +20.73. -- Robert J. Reid, Briefing.com
9:45AM Adobe Systems (ADBE) 17.60 +0.21: Before open, JMP Securities initiated with Market Outperform rating and price target of $22. Due to large existing customer base and formidable distribution channels, firm believes Adobe will ultimately weather the tough IT selling environment much better than most software vendors. Firm thinks Adobe Acrobat is key to driving overall revenue and EPS growth for company; would be even more bullish upon seeing traction of incremental growth drivers: 1) Increasing sales leads via system integrator partnerships, leading to higher mix of license sales among enterprise customers; 2) Existing customers upgrading to newest Macintosh OS X platform. |
