From Briefing.com: Updated: 07-Nov-02 - General Commentary
News could not have been better for stocks today as a) Pitt resigned SEC post b) Republican's swept elections, and now control both chambers of Congress and c) the Fed surprised the market by cutting the funds rate by 50 rather than the expected 25 basis points. What should have been better was how the sector/market responded to the news. While Nasdaq closed up nearly 18 points, and just off its intra-day high, index fell shy of its recovery high and shy of the August high.
Now we wouldn't be at all surprised to see some residual gains in early trading today, but at this point traders need to ask themselves where the catalyst for the next leg of this advance is coming from. Technicals are overextended; the election outcome is decided and the Fed has moved and declared that it won't do so again for some time.
With Q3 earnings, the election and the Fed now behind us the market must turn its focus to the economy, Q4 earnings and the volatile geopolitical scene. Clearly, the economy is softer than hoped for or the Fed wouldn't have felt compelled to cut rates aggressively. And will stimulus work on consumer that is already stretched thin and increasingly nervous about job security? Q3 earnings are virtually in the bag and, while the year/year numbers weren't awful, there's no evidence of a pick up in end-user demand and without that the recovery is tenable. Finally, with Republican's sweeping to victory on the strength of President Bush, Briefing.com maintains that the threat of a military resolution to the Iraqi conflict has risen considerably.
In other words, the news cycle is apt to turn more bearish just as the technical indicators suggest a peak. Now it's possible that momentum could carry the indices further than we expect, but at this juncture the risks are greater than the potential reward.
Briefing.com not looking for another big downturn. But we do expect a return to the middle of the range.
After the close, Cisco (CSCO) reported earnings that beat the consensus estimate by one cent (as usual)... However, management sounded a cautionary tone regarding the capex outlook and guided future estimates slightly lower. Stock was up a bit in early after hours trading, though well off its high. Nothing in the report or the call, that's likely to influence sector significantly in either direction.
Robert Walberg
11:57AM Altera, Xilinx sell off following Cisco report : ALTR and XLNX are conspicuously weak today even as the SOX gets hammered (-6.8%); Wachovia said in a pre-open note that they see a sluggish outlook for comm IC/PLD suppliers ALTR, BRCM, MRVL, and XLNX given CSCO's cautious Q2 rev outlook coupled with the increase in raw material inventory; moreover, firm says CSCO highlighted its intention to replace PLDs with ASICs in order to further reduce its component cost base, which would adversely impact ALTR and XLNX since they supply about 50% of the PLDs into CSCO.
11:17AM Advanced Micro confirms Q4 sales outlook (AMD) 6.98 -0.25: Confirms Q4 forecast of 20% sequential rev growth, citing seasonal patterns, the benefits of a better balanced inventory in the supply chain, and expected significant Flash memory sales improvement; also, co says it has already begun implementing actions in Q4 that are expected to significantly reduce its quarterly breakeven point in 2003.
9:59AM S&P 500 extends slide : -- Technical -- Has recently extended today's decline with initial support at 910 being probed. A minor secondary floor is at 907 with the bottom of the recent range at 905. Sustained action above intraday resistance is at 915/916 needed to improve tone.
9:51AM Nasdaq Composite weak but in range : -- Technical -- Index falters in early dealings but has thus far been able to hold near a minor support in the 1393/90 area. Short term need to see sustained upticks through 1400/1405 to improve the bias. Failure leaves the door open to the bottom of the three day range near 1380. A break here exposes a near term retracement at 1366.
9:07AM JP Morgan initiates coverage on semi equipment stocks : JP Morgan initiates coverage on the semi equipment group, saying corporate free cash flow issues and access to capital constraints are likely to drive a slow IT and capital spending recovery; firm also believes that DRAM prices, fab utilization rates, and equipment orders are likely to trend lower; says "blue chip" equipment stocks should reach trough levels in the next qtr or two. Top picks are CYMI and KLAC.
8:25AM QLogic cut to Neutral at First Albany on valuation; target $36 (QLGC) 44.15: First Albany downgrades to Neutral from Buy based on valuation; raises CY03 est to $1.23 from $1.14 and FY04 to $1.27 from $1.17 based on expectations of continued operating leverage, and raises price target to $36 from $28.
8:10AM Taiwan Semi rumor probably not true - Goldman Sachs (TSM) 9.31: Goldman Sachs says that channel checks lead them to dismiss recent chatter of a 40k wafer order from a large graphics customer, although the co said that it has seen some rush orders recently for PC chipsets and a moderate improvement in operating conditions; while firm believes the co may raise Q4 guidance, they would not chase the stock here.
7:21AM SIA says chip demand growth was distorted - FT : The Financial Times reports that the Semiconductor Industry Association's annual review concluded that the global semi industry will have to learn to live with permanently lower long-term growth rates in the future; SIA added that worldwide demand for chips is barely expected to exceed the boom year of 2000 over the next 4 years, and conceded that the tech bubble had distorted the true picture of long-term demand growth for semis. However, the SIA said it believed a turnaround in demand for semis had now taken hold, and still expected a rapid rebound in sales after the recent bust.
11:05AM Cisco Systems (CSCO) 12.45 -0.51: With its stock up 60% from its Oct. lows, it is fair to say the market had high hopes for Cisco Systems when it reported its fiscal Q1 (Oct) results after the close yesterday. By most accounts, CSCO didn't disappoint. With respect to its outlook, though, it was another matter.
For fiscal Q1, CSCO reported a pro forma profit of $0.14 per share that was a penny ahead of the Multex consensus estimate. On a GAAP basis, net income was $618 mln or $0.08 per share versus a net loss of $268 mln, or $0.04 per share, in the yr-ago period. Gross margins were an impressive 69.3%, which was above prior guidance for a mid-60% level, and net sales of $4.845 bln topped the Multex consensus estimate of $4.809 bln.
As the aforementioned blurbs hit the wires, it was little surprise to see CSCO extend its advance in the after hours session. At one point, in fact, shares of CSCO were up approximately 6.0%. By the time the company's conference call ended, however, its stock was showing a modest loss.
Mercifully, CSCO adhered to feedback and limited last night's call to a mere 1 1/2 hours. It took that time, as it always does, to provide a review of the just-completed quarter, to comment on industry developments, and to offer guidance. Accordingly, no one can ever blame CSCO for not being thorough on its call, but in essence, there was about 30 minutes of commentary, in aggregate, that really caught the market's attention.
In that span, it was apparent that the service provider market remains weak, that CSCO is doing better than its peers, and that visibility remains quite limited. To wit, CSCO's CEO, John Chambers, acknowledged that there is a good chance of more waves of capex reductions by service providers. Additionally, he said he is more optimistic heading into fiscal Q2 (Jan) than he was heading into fiscal Q1 (Oct) with respect to the areas CSCO can control and influence; however, he noted that he is more cautious on the external market heading into fiscal Q2 than he was heading into fiscal Q1 because customers' visibility has tightened even further.
Consequently, CSCO projected fiscal Q2 revenues to be flat to down 3-4% on a sequential basis and gross margins to be in the 66-68% range. The revenue forecast was considered a disappointment for a couple of reasons. First, it seemed rather conservative for a period that is typically strong for the networking industry, and secondly, it implies revenues will be in the range of $4.65-4.85 bln, which is below the current Multex consensus estimate of $4.91 bln.
All things considered, CSCO is holding up relatively well today, supported by its strong balance sheet and the understanding that it is well-positioned to capitalize on an eventual industry upturn. Even so, the inability to see clearly when that upturn might be, combined with its cautious outlook for fiscal Q2, provide ample reason to take some money off the table.-- Patrick J. O'Hare, Briefing.com
9:38AM Technical Levels : When we reviewed the Nasdaq last Wednesday -- on October 30th with the index at 1,300 -- we were looking for follow through on the current leg higher. As it turns out, it didn't take long for the additional upside to materialize. Last night, the Nasdaq finished the session at 1,419 which amounts to a one-week gain of roughly 9.2%. Yet while that's all well and good, the more immediate question at this point is where the Nasdaq might be headed from current levels.
Now for better or worse, we've been harping on an important level of resistance currently facing the Nasdaq. Namely, the index faces notable overhead in the range of 1,419 to 1,423 -- a level which matches up precisely with yesterday's close. For those that haven't been following closely, this area is notable as it coincides with three points of interest over the prior five years -- 1) the September 11th-induced reaction lows which bottomed at 1,423, 2) the reaction lows of October 1998 which bottomed at 1,419 and 3) the ordinary course of its original uptrend during the Summer of 1997.
Also note that in a more immediate context, the 1,419 to 1,423 area also happens to mark almost the exact top of the prior leg higher. In fact, the prior buy wave closed on August 22nd at 1,422.95. So while this level is important going back as far as last September, we started looking towards it in the present context through a piece written on October 17th with the Nasdaq at 1,279.
When you add it all together, the Nasdaq is sitting on a one-week 9.2% advance, and it's also bumping up against notable longer-term resistance. So where does this lead us? Well, the first take away is that in the very near-term, the index may be somewhat extended following its recent 120-point move. Yet while a period of consolidation might be in order, also keep in mind that the underlying strength in the index has been significant -- it might be asking too much to expect a substantial pullback from current levels.
This leads us to our second, and more important, point. Namely, on an intermediate-term time frame, the underlying strength which has pushed the Nasdaq towards resistance at 1,423 should follow through leading to additional upside. So over the next day or two, perhaps the next several days, don't be surprised if the markets experience a shallow pullback. Just remember that assuming a pullback does materialize, it should probably be viewed as consolidation within the context of a broader move higher.
Now getting to the straight technical levels, look for notable support in the broad range of congestion at 1,394 to 1,401. That area is followed by additional support at chart congestion around 1,380 and 1,360 -- a break of those two levels would open the way to a more important floor in the range of 1,347 to 1,350. To the upside, keep an eye on notable resistance in the range of 1,419 to 1,423 which we've already addressed ad nauseam. If the Nasdaq should somehow continue straight higher, look for less significant but notable resistance in the range of prior chart congestion at 1,448 to 1,452 -- Mike Ashbaugh, Briefing.com
11:10AM Cisco Systems (CSCO) 12.51 -0.45: After close yesterday, company posted Q1 earnings a penny above consensus but slightly lowered Q2 revenue expectations, and the stock is trading down 3.5% as a result. Before open, Banc of America reiterated Buy, saying CSCO is a leading tech recovery play, although company's growth will be limited by that of the overall economy; firm's model assumes only a slight economic recovery. Also, Bear Stearns reiterated Peer Perform, saying valuation appears to be full; believes, at current valuation, investors may grow weary if Cisco does not begin to show some incremental growth.
10:26AM Skyworks (SWKS) 8.44 +0.20: Stock trading to the upside following upbeat analyst comments. Lehman Brothers upgraded to OVERWEIGHT from Underweight, saying that, while concerns on handset sell through remain, SWKS' valuation looks attractive, trading at 1.7X 2003 CY sales of $683 mln which is relatively cheap vs peers like RFMD who trade at 2.7x 2003 CY sales of $547 mln. Given SWKS larger revenue base and better operating structure going forward, firm thinks this large a valuation discrepancy is unjustified and was largely attributable to the financing overhang which has been alleviated; on Tuesday, company announced a $200 mln convertible offering, and with financing situation now resolved, firm believes overhang is gone which should make shares more appealing to wider base of investors. Also, WR Hambrecht upgraded to BUY from Hold rating with price target of $11.
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