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Market Wrap

Intel Misses Estimates But Nobody Cares!

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      07-16-2002           High     Low     Volume Advance/Decline
DJIA     8473.11 -166.10  8635.66  8406.45 2.11 bln   1211/1881
NASDAQ   1375.26 -  7.40  1407.59  1364.88 2.37 bln   1699/1766
S&P 100   448.81 -  8.36   457.90   446.70   Totals   2910/3647
S&P 500   900.94 - 16.99   918.65   897.13 
RUS 2000  407.27 -  1.81   413.48   404.74 
DJ TRANS 2434.10 +   .30  2643.15  2652.64   
VIX        42.05 +  2.75    42.85    39.95   
VXN        67.94 +  0.09    69.38    66.57
Total UpVol 1,659.3M
Total DnVol 3,011.8M
52wk Highs   65
52wk Lows   407
TRIN        1.10
PUT/CALL     .76

The king of the chip sector, Dow component and Nasdaq big cap missed estimates by two cents and announced they were cutting another -4,000 jobs due to lowered expectations. INTC traded UP in after hours. Traders stood around the office in shock as we watched the time and sales roll across the screen. Simply amazing! The master spin-doctor of all time appeared to be CEO Craig Barrett. He spun the tale of a tough quarter and tough times ahead into a story about reducing costs and gaining market share despite a weak economy. Investors bought it and the market dodged a bullet.

Chart of the Dow

Chart of the Nasdaq

Chart of the S&P

The markets started the day off with economic numbers that were better than expected with Industrial Production soaring to +0.8% and Capacity Utilization growing slightly to 76.1%. Excellent numbers on the surface but the markets had something else on their mind. Greenspan took center stage at 10:AM with his state of the economy testimony. Traders were taking no chances for more bad news and the Dow sold off more than -200 points before the speech started. Greenspan made numerous references to an expanding economy despite the apparent slowness. This helped put traders more at ease and the markets came back to positive territory by midday.

It was not to be however and they sold off again on worries of more corporate accounting problems and fear of Intel earnings. That fear obviously priced in significant bad news. When the bad news was announced there was no frantic sell off. Intel countered that they did not miss and instead hit their own lowered estimates. (spin) The -4,000 job cuts, drop in capex spending and reduced margins were just adjustments to help the company run smoother. Isn't that always the case? CFO Andy Bryant was cornered on CNBC and forced to admit that he "had no idea when/if a recovery would come in the PC sector". His answer was "we will keep reducing costs and protecting capacity until a recovery appears". He also admitted the estimates going forward depended on some recovery to prior sales levels. Don't hold your breath Andy!

Motorola also announced after the close and posted the largest net loss ever. Their loss including charges for the 2Q was -$2.3 billion or -$1.02 a share. Excluding the charges which included everything but the company dog the company made a profit of two cents compared with an expected loss of four cents. Granted this is a bogus number since they can't write off a couple billion every quarter. The company posted sales losses in almost every division of -25% to -47% but managed to generate positive cash flow of about $520 million. Good job if they can keep it up! The chip unit posted a net loss of -$1.3 billion.

PC news was flowing after the bell with Apple Computer posting earnings inline with their lowered guidance but they warned again for the current quarter. The company said consumer demand in the current back to school quarter was weak and demand in Europe and Japan was especially weak. Surely this weakness has not ignored Intel or IBM either. Remember, Andy Grove at Intel said their 3Q estimates were based on a possible uptick in sales for the back to school quarter.

Maybe I am just too bearish but am I the only one that sees the indicators of a bad 3Q around every corner? Even the non-tech sectors are complaining. Caterpillar warned this morning that earnings for the second half would be less than expected due to a weaker than expected economic rebound that failed to boost capital spending. They said field agents continued to quote prices but nobody wanted to commit any money until the economy recovered and their own business picked up.

Whirlpool said that its quarterly earnings rose about 20% but that full year estimates might be below analyst estimates for the full year. The problem is falling housing starts and they expect second half sales to be flat to +2%. Maytag also lowered guidance for the 2H on Monday with lowered sales expectations. Home product supplier Home Depot affirmed estimates this week but also said there was pressure on sales in May/June. We picked their competitor Lowes as a put play tonight due to falling sales in the sector and rumors about decreasing sales. One analyst in the office was in Home Depot over the weekend and was talking to an employee about the lack of customers. The employee said sales had fallen off -25% in the last month and there were simply no customers. When I was in HD two weeks ago there were clerks standing around everywhere in groups just waiting for somebody to ask for help. While this is pure speculation since I have no seasonal trend basis to compare this with it just seems like retail is grinding to a halt. Seasonal trends like back to school computer sales at the wholesale level confirm this and Maytag and Whirpool may be the leading indicators for the home sector. Housing starts for June are due out tomorrow morning.

Several pension funds have filed suite against several banks including JP Morgan Chase to recover $318 million they lost in WCOM bonds in the weeks before the company disclosed the accounting fraud. This is the first of many such actions which will be taken by WCOM creditors hoping to find some deep pockets. JPM fought off liquidity rumors this morning to regain ground at midday but ended down -1.58 at the close. While I expect they have disclaimers three feet thick when selling corporate bonds this should point out that we are a long way from out of the WCOM woods. There will be losses surfacing on corporate balance sheets for months to come.

Trading tomorrow is going to be exciting. Exciting in that we have no clue what traders are thinking but it appears they are ignoring bad news. You can't tell that by the -166 point Dow drop to 8472 but you can by the only -7 point Nasdaq loss. If everybody thought Intel would warn then why has the Nasdaq been the strongest index for a week? You can't tell me we all expected Intel to miss by two cents. Still the stock finished higher in after hours. I guess you would call it a relief that they did not paint a picture of gloom and doom like many of the current analysts. In my mind it was a good case of spin control but maybe retail investors have not thought this out. Also, according to Greenspan the biggest problem facing the markets is the accounting scandals still to come. If the ones we have seen recently are not bad enough then what is in front of us? The market dropped before his speech because they were afraid of what he was going to say. I don't know what they feared but his "irrational exuberance" speech still ranks up in the top five of all time and it was given when the Dow was at 6300. If they expected an "irrational pessimism" speech today they were disappointed. He agreed things were bad in the market but improving slightly in the economy. It was not the cheerleader speech many had hoped for.

This means tomorrow the markets will be left to chew on the Intel spin and the prospect that IBM will make a bigger splash after the close. Fortunately for my sanity I see that the futures are dropping at 8:30 so maybe I am not the only one that saw a cockroach disguised as a butterfly. It was a major earnings miss and lowered guidance! Deal with it! I suspect also that the overseas markets will see our -166 point Dow drop and the Intel miss and not be bashful about selling off overnight. Of course that is just one traders opinion!

Enter Very Passively, Exit Aggressively!

Jim Brown

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