For a slow day in August there was an avalanche of news that confused investors and stopped a rally cold. After moving up to a high of 10478 and +63 points the Dow pulled back to support at 10400 again. The Nasdaq bounced off resistance at 2000 and closed near the lows of the day in front of earnings from AMAT, BEAS, NVDA, NTAP and CKFR.
Internet giant AOL was clobbered by several reports that it would cut up to -1000 more jobs on a continued drop in advertising revenue. The Washington Post started the rumor with Morgan Stanley and Lehman Brothers adding their two cents as well. Lehman analyst Holly Becker cut revenue and cash flow estimates and Morgan Stanley followed suit. AOL dropped -3.34 to close at 39.70 after they failed to squash the rumor. The drop impacted the advertising related stocks including YHOO and DCLK but failed to push AMZN or EBAY into the negative column. It did set a negative tone for the markets.
Adding to that negative sentiment was a warning from Wal-Mart which announced flat earnings and lowered expectations for the future. WMT dropped to a low of $51.13 at the open but gained ground on the better than expected retail sales. Wal-Mart tends to gain market share in tough times and despite the warning they ended up gaining fractionally for the day. Retailer Home Depot also announced earnings and beat the street by two cents. Sales rose +16% and they affirmed estimates of $.33 for this quarter.
Another drag on the Dow was MSFT which fell -1.14 after rumors surfaced that a glitch in Intel hardware could delay the release of the Xbox video game player. Microsoft said the device would ship on schedule with up to 1.5 million units delivered by year end. The key here is when will they actually ship, on schedule or ramp up later in the year after the bugs get worked out. NVDA also traded down -2.34 on worries that they would see delays in delivery of the finished product. After the close NVDA beat estimates by two cents and announced a 2:1 stock split.
AMD lost a significant client today as well as over -$1.00 to $15.50. IBM announced that it has stopped selling desktop PCs in the United States with AMD processors and may also drop those chips from computers sold in Asia. They said consumers simply prefer Intel and they were dropping the second choice as a cost cutting measure.
You would expect banks to be trading up with expectations that the Fed would cut rates again next Tuesday but after Citicorp said it would cut another 3500 jobs over the next twelve months there was a shortage of bank investors. Many fear the Fed is so far behind the curve that banks will be hit by a flood of bad loans and bankruptcies before times get better. Big banks did get some relief today after the central bank in Japan announced it was going to pump new money (as in print more) into the economy. Since interest rates are basically zero in Japan their options are limited to pump up their country. The Nikkei hit a 17 year low on Monday and without some major stimulus there are tougher times ahead. Some analysts estimate that banks in Japan are hiding $350 billion in bad debts which they will not write off. Japan is the second largest economy in the world and faces serious challenges that the prime minister has failed to address. More than once the U.S. markets have tanked on Japan's problems.
After the close today Applied Materials announced earnings that beat the street by two cents and on flat revenue. They also said they expect an upturn in the first half but next quarter could still be flat. BEAS also met estimates but rose in after hours even after warning about revenues for the rest of the year. They said they would still make their earnings estimates due to higher gross margins and strong cost cutting. NTAP met estimates of a penny but revenue was about $15 million short. They said they would cut 200 employees in the first layoff in NTAP history. They said future quarters would be flat based on their visibility that while the economy has not turned up it has bottomed. They are seeing extreme pricing pressure in larger accounts by EMC but committed to beat them at their own game. Looks like a war they will both lose.
Ford continued to fall to another 52-week low after UBS Warburg cut them to a "sell" and said they may cut the dividend to pay for the Firestone problem. Ford closed at $22.98. ENE dropped almost -$3 to $39.80 after CEO Jeffery Skilling resigned. While he had been CEO for only six months he had been at Enron for over ten years. If you are a CenturyTel (CTL) shareholder you are in for a pleasant surprise on Wednesday. AllTel made a cash bid of $43 for the company after being turned down by the board of CenturyTel. This was a 40% premium over the closing price.
Our economy is still being held up by the retail consumer but only barely. The Retail Sales headline number was flat at zero but still ahead of the expected -0.2% loss. Causing the biggest drop in the numbers was a huge drop in gasoline prices and auto sales. Without those two items the number would have posted a +0.6% gain. With job losses still a factor, TYCO announced a cut of 11,300 jobs today, consumers are being pressured to spend less. With tax checks now being spent by the millions the August numbers should however show an increase.
The economic news for Wednesday will be headlined by the Industrial Production numbers. Estimates are for them to be down slightly to -0.3% but still better than last months -0.7% numbers. Short of a bad miss this is not a market mover and all eyes will be on the CPI on Thursday instead. With the Fed meeting only four trading days away the speculation will increase on the size of the next rate cut but most traders think it is already priced in anyway.
The Dow is almost perfectly flat for the week with only a -4 point drop total for the last two trading days. The price magnet appears to be 10400 and with a -67 point drop off the high of the day things did not look promising. The Nasdaq has gained a net +8 points for the week and the lower high trend was still in progress. That was before the days after the bell earnings. BEAS, AMAT and NVDA gave the Nasdaq futures a very slight bounce but the S&P futures were flat. It is too close to call with both indexes selling off from the days highs but finishing basically flat. The axiom, "don't short a dull market" would definitely apply to this weeks trading. There is no real reason to buy but nobody is really selling either. Investors would be cautioned to wait patiently for positive signs that a new trend is forming before venturing into the market. That trend probably will not appear until after the Fed meeting next Tuesday where only a 25 point cut could give investors an upset stomach. The economy may have bottomed but we cannot be that sure about the markets.
Enter passively, exit aggressively!