Be careful what you ask for, you might get it!
Investors have been hoping for a soft landing from the interest rate attack. Now that it appears the landing may be in front of us, stocks are weak because earnings are now being called into question. At least that is the excuse of the day. Our view is slightly different. Still the Nasdaq has been in a nose dive for two days an the Dow has been unable to make any progress and is languishing just under the magic 11000 level.
Just another fun day in the summer markets! The casualties are littering the roadside as we navigate toward Labor Day. To start the parade The Gap Stores (GPS) issued its second earnings warning in the last two weeks and said Q3 results would be below analysts estimates of $.41 to as low as $.35. Also Q4 results "might" be in danger of slippage as well. Investors began a giant clearance sale on GPS stock which dropped another -4.31 and is trading at only $27 instead of last weeks $38.
Other retailers took a hit as well after Lands End missed the reduced estimates with a loss of -.06 instead of a +.07 gain. The stock price has been cut by more than -50% from $61 to $28 in the last several months. Walmart, who announced earnings inline with estimates on Wednesday lost another -2.19 on top of a big loss yesterday. WMT closed at $51.44 which is a three month low. WalMart also announced an accounting change which would impact profits.
With Retail Sales due out on Friday it appears from the flood of bad news from the retail sector that the report may be favorable. Kmart also announced dismal earnings again today with only a +.05 gain compared to +.26 in the same quarter last year.
The losses were not limited to the retail sector with Adaptive Broadband posting a larger than expected loss of -$.17 and dropped -$2.50 in after hours. ICGE also announced earnings after the close and posted a loss of -$.70 vs a -$.06 for the same quarter last year. Sales surges +600% to $453 million but the stock dropped in after hours after analysts expressed concern that ICGE only had about six months of cash left.
The 800LB gorilla however was DELL which announced earnings of $.22 after the close and beating official estimates of $.21. DELL did not beat the whisper number of $.23 and revenue, although up from last year, came in on the low side of the high estimates. Dell said it was on track to post 30% growth for the remainder of the year. While 30% is good it is not stellar and far from the much higher numbers from quarters past. While analysts and investors know in their hearts that +50% growth cannot go on forever it is always painful to actually see the deterioration. Dell desktop sales declined to 51% from 60% in the same quarter last year but higher margin server sales increased. Dell said the results included income from investments but declined to say how much. Many analysts were worried that Dell's $8 billion in investments would provide income to offset falling sales and when the actual numbers are made available Dell stock could take another hit if the ratios show margin weakness. Dell dropped in after hours trading after the earnings announcement.
Drug users cheered the court ruling on Wednesday that caused many investors to undergo withdrawal. The ruling caused many to grab for their Prozac while selling Lilly. The ripples may continue for some time until the real results of the ruling are known. Still the drop in drugs and biotechs across the board had real and immediate impact to the markets. Biotechs like PEB and DNA got hammered along with Forrest Labs and company. The rush is on to see who has patent problems and who might be the next loser in this space. Some of the bigger possibilities are:
MRK - Vasotec, Pepcid, Prinivil, Mevacor
The biggest drug above is Prilosec which has almost $6 billion in annual sales and accounts for one third of AstraZeneca sales of $15 billion per year.
Mrs. Bezos, can Jeff come out and play? ToysRus scored a real win today when Jeff Bezos agreed to start selling their products. The second place toy website behind Etoys signed a ten year deal to allow Amazon.com to run their website in conjunction with the Amazon.com distribution centers. Amazon will market and ToysRus will ship the product to Amazon warehouses. ToysRus will continue to OWN the products and take the risks of inventory. Amazon will market and ship, something they are really good at doing. It looks like a win/win to me and Etoys worst nightmare just came to pass. With the tens of millions of Amazon customers being exposed to ToysRus products the odds are good Etoys sales will suffer. ETYS sank to a new 52 week low of $3.94 on the news. With a market cap of only $490 million maybe Amazon should have bought the industry leader, ETYS, instead? They have the cash as well as the stock. Oh well..surely they at least thought about it! Amazon has a market cap north of $11 billion.
Friday is economic report rich with both Retail Sales and the PPI report. The Retail Sales estimate is for a gain of +0.4%. Are consumers curtailing their spending habits or are gasoline prices gouging a hole in their budgets? Tomorrow we will know for sure. Anything less than the 0.4% will be viewed as more confirmation that the economy is slowing. The PPI is expected to come in unchanged and short of a blowout it is not expected to be a market mover. Most analysts already have the Fed on hold and bond yields significantly under 6% across the yield curve show the next interest move may likely be a rate cut. Incredible isn't it. Two weeks ago it was rate hike worries and now the market is discounting a possible cut (not in August) as the next move in the future. The current challenge for Alan and company is oil prices again. With crude up over +$2 in the last two days to over $31 again, we are far from out of the oil price crunch.
So when is the market going to get the picture? When is the fall rally going to explode on to the scene? Now that is a question for Regis on the Millionaire show. My answer, my final answer, ... any day now. As a news and event sentiment player I feel the Dow pull back from 11000 was just profit taking after seven days and +500 points of gains. The Nasdaq pull back from 3950 was also on profit taking AND fear of earnings. The CSCO earnings were not supposed to be a problem but cautious traders have learned to take profits ahead of unknowns. Same with today. DELL was scheduled to announce earnings that were not expected to ring any bells on the upside and had lots of possibilities to cause ripples on the downside. Add the Retail Sales and PPI before the open on Friday and you have the top three reasons to step to the sidelines over night. Now that all the high profile earnings are history and the PPI/RS on Friday will give us the last major economic news before the Fed meeting on the 22nd, then my final answer is "any day now." Friday could, reports permitting, be D-day. It is however a summer Friday which would put Monday high on the probability list. Did anybody notice that the Nasdaq came to rest exactly on previous support at 3750?
The convergence of all the moving averages this week along with the strong earnings news was just too much for the Nasdaq. Once we do power over the 3950-4000 level this same convergence will provide a huge support level and platform for the Fall rally.
The only seminar not sold out in August is the three day event in Detroit on August 28-30th. Check below for details.
Good luck and sell too soon.