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Market Wrap

Fifty-Four Warnings In Two Days, Are We There Yet?

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        7-3-2001        High      Low     Volume Advance/Decline
DJIA    10571.11 - 22.61 10595.13 10531.52  .62 bln   1594/1350	
NASDAQ   2140.80 -  7.92  2148.18  2123.75  .88 bln   1604/1846
S&P 100   638.55 -  1.41   639.94   636.22   Totals   3198/3196
S&P 500  1234.45 -  2.27  1236.71  1229.43             
RUS 2000  496.83 -  1.56   499.04   495.00 
DJ TRANS 2809.37 +  2.87  2817.06  2790.05 
VIX        20.95 +   .66    21.41    20.84 
Put/Call Ratio      0.64

Earnings warning season is racing to a close with real earnings starting next week but the last minute flurry of companies trying to sneak in before the doors shut is accelerating. Actually a more accurate reason for the flood of warnings this week is they don't think anyone is watching. Since the majority of investors are on vacation and away from stock TV, they timed their announcements to avoid as much negative press as possible. Of course, sometimes it does not matter when you warn if your warning is bad enough. ISSX is a prime example dropping more than -$20 after saying they would post a loss instead of a +.15 gain analysts had expected.

Dupont, which warned after the close on Monday, was high profile and as a Dow component impacted the market negatively. They joined Eastman Chemical in saying the growing weakness in Europe and Asia and higher costs in energy and raw materials as the reasons for their shortfall.

The Nasdaq held up remarkably well considering the huge number of warnings in tech stocks. The software sector was hit hardest with warnings from BVSN, CHKP, RATL, ITWO and EPNY. Is there anybody left? BVSN said it would post a wider than expected loss, its CFO resigned and it has cut nearly a third of its workforce to counter the effects of the economic slowdown. They said customers were postponing purchases and European demand was especially weak. Companies in the same segment who have yet to warn are OMKT, VIGN and BLUE. I would think they would be short/put candidates but stocks in low single digits don't have far to fall.

ITWO CEO, Greg Brady, said he was disappointed that ITWO was not able to make what he believed were conservative profit targets. They are also laying off -10% of their workforce and said they would cut deeper if business did not improve soon. CHKP said they would hit earnings estimates but revenue would be about -$10 million below the estimates of almost $150 million. CHKP dropped -6.36 to $44.56 on the news. EPNY warned it will post a larger than expected loss after a slowdown in international sales. You know the rest.

Rational Software lost -5.25 or -20% to $22.12 on news that it would miss earnings estimates slightly but revenue would drop substantially. Almost every analyst covering RATL cut their estimates. JPM said the most troubling aspect was the change in business outlook since the analyst meeting which was just held in mid-June. The acceleration of weakness in this sector was a concern and the revenue shortfalls from these stocks were forcing a re-evaluation.

Compuware warned after the close that revenues would be less than expected but earnings would top forecasts. An investor nightmare? Revenues are down but earnings are up? Is this good or bad? Normally bad. Earnings can be up because of a better tax rate due to write offs, reduction in expenses due to closed plants, lay offs, etc. Some restructuring is good but when the economy turns up they need to be in a position to capitalize on it. Without growing revenues investors should look elsewhere.

Payless warned today that heavy markdowns and slow sales would push 2Q and full year earnings "well below year-ago results and Wall Street estimates." They said the sales improvements they had expected for June failed to appear and sales are running "considerably below expectations." The keyword here is "considerably." PSS lost -7.63 on the news.

With more lives than Morris the cat, the GE/HON deal has finally died. The EU officially voted unanimously to kill the deal. The HON board was rumored to be meeting Tuesday to replace the current CEO with the past CEO from Allied Signal. Reportedly the board was upset with the current CEO for multiple reasons besides the handling of the GE merger.

Qualcomm gained +$6 on news that another in a series of technology licensing agreements with Nokia. The cross-licensing deal expands a previous agreement and gives Qualcomm a stronger foothold in the CDMA marketplace. QCOM has also been working on licensing with wireless manufacturers for the next generation of CDMA as well. Each new level of agreements gives Qualcomm another new stream of royalty payments for years to come.

OPEC agreed today in Vienna to leave oil output the same in anticipation of Iraq resuming oil production soon. Oil has fallen recently to the $25 level which is slightly lower than the $28 OPEC would like to maintain. There was quite a bit of talk about cutting production to boost prices at the next meeting.

Economic reports continue to point to a possible improvement with the Factory Orders jumping +2.5% and beating analyst estimates of +1.5%. All sectors except computers and communications rose with autos gaining +3.5%. Semiconductor orders rose but shipments continued to fall. Still inventories are not falling as fast as needed to forecast a quick upswing in business. Shipments may be up but with inventories down only .5% there is still weakness in the manufacturing sector.

In a shortened pre-holiday session trading volume was weak as expected. The fact that the Nasdaq only dropped -8 points with the flood of warnings was a good sign. The Russell 2000 fell as expected to 496 after closing around 510 in the pre-weekend shuffle. Profit taking in the small caps is underway and yet the Nasdaq is holding. The volume on Thursday is also expected to be light and with the non-farm payrolls on Friday many investors will want to continue waiting on the sidelines until after that report is published and probably until Monday to avoid being jerked around by the low holiday volume. The markets still lack direction and advancers/decliners finished in a dead heat at 3198 to 3196 for the day. Market sentiment is building on the bullish side for techs but investors need to vote with their money before we will get real confirmation. We may not be there yet but we could be getting close. One word of caution, the VIX has collapsed to levels not seen since last summer when the markets rolled over and died. This should be a warning we take to heart and watch closely.

The good news for today is this. You get to sleep late on Wednesday and not worry about losing money on an earnings warning before the bell. Happy 4th!!!

Enter passively, exit aggressively!

Jim Brown Editor

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