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Rally Bulls Trip Over Cisco

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      11-07-2002           High     Low     Volume Advance/Decline
DJIA     8586.24 -184.80  8766.22  8549.82 1.74 bln   1095/2106
NASDAQ   1376.72 - 42.30  1400.08  1371.47 1.70 bln   1125/2239
S&P 100   460.59 - 10.47   471.06   458.13   Totals   2220/4346 
S&P 500   902.70 - 21.06   923.76   898.68 
RUS 2000  383.15 -  9.58   392.73   382.82 
DJ TRANS 2350.62 - 63.10  2410.55  2347.27   
VIX        35.28 +  0.80    35.91    34.36   
VXN        53.90 +  3.84    54.71    52.29
Total Vol   3,649M
Total UpVol   597M
Total DnVol 3,021M
52wk Highs    93
52wk Lows    106
TRIN        2.35
PUT/CALL    0.88

Rally Bulls Trip Over Cisco
By Jim Brown

Just when bulls thought everything was coming together to launch a year end rally the cautions from Cisco caused a face plant on Thursday. The Cisco skid knocked the Dow back to 8550 intraday and 1371 on the Nasdaq. The markets were tripping over century marks left and right but in reality it was just a normal post Fed event.

Dow chart - Daily

Nasdaq Chart

It was a small comment from John Chambers. "I am more worried about the current quarter than I was the last quarter." With that comment and guidance that 4Q revenue would be flat to down as much as -4% instead of a +$100 million increase, he helped take the markets back down to Friday's closing levels. They did spin it well with much higher margins and promises of major profits when the economy recovers. Still the markets were ripe for a sell off and sell they did.

IBM did not help the Dow with news that they were going to issue more stock, $1.5 billion worth, to prop up their ailing pension plan. This follows UTX taking the same step recently. Pretty good trick if you can get away with it. Let the investors take the hit on stock dilution and the company gets to play it's "get out of debt card" with no penalty. IBM dropped -2.59 on the news.

Economically it was not a bad day. Chain Store sales rose +3.1% in October which surprised analysts. This was double the expected gain. Retailers blamed it on cooler weather finally appearing and causing stronger sales in sweaters, jackets and coats. If this trend continues when the holiday season starts in two weeks investors will be thrilled. Consumers must have put in on a charge card because Consumer Credit jumped +$9.9 billion from an expected $5.5 billion. This is another sign that consumers are not dead but they are running out of cash. Once the credit lines are maxed out for the holidays the 1Q-2003 is going to be tough. But paying that piper will not happen until the 2Q.

Jobless claims fell by -20,000 and -13,000 more than expected. Continuing claims drifted up slightly but analysts were positive that maybe the job loss cycle was easing. Nonfarm Productivity came in at +4.0% and only slightly less than expected at 4.3%. This was more than double the Q2 numbers at only +1.7%. Even more surprising was the +5.9% growth in the manufacturing sector. Productivity in the durable goods sector grew +8.8%. This does not do any good for new jobs yet but it will grow profits as the economy picks up steam. Workers are working more which increases productivity. When they can't work any more hours employers are forced to hire more workers and the cycle begins again. Rapid increases in productivity tends to be a leading indicator for coming economic gains. Wholesale sales increased again but only by +0.1% while inventories increased slightly by +0.5%. This was the fourth month of gains and it has not happened since 2000. The wholesale industry is poised for growth and with a very low 1.22 inventory-to-sales ratio it is in great shape.

After the close today QCOM flaunted its success despite the news that China would be developing its own CDMA technology. QCOM beat street estimates by +4 cents on a +34% rise in revenue. QCOM said it expected revenue to increase another +15% to +22% for the current quarter with earnings in the 35 to 38 cent range. Their earnings this quarter were 31 cents. QCOM jumped nearly $2 to 36.38 in after hours. This could help the chip sector tomorrow.

The Fed surprised everyone yesterday with a unanimous 50 point rate cut. I have to admit I was totally in denial that they would take that giant step. They said geopolitical risk, spending, employment and production trends were sufficient to justify the cut. The risks were weighted to further economic weakness but with the 50 point cut that risk had been eliminated and the risks going forward were balanced. In short, take this 50 points and choke on it because there is not going to be any more. The wording was blunt and while the U.S. markets were appreciative the size and wording was actually for the rest of the world. The Fed was saying we are committed to strong growth and we are going to do it without you but we would love for you to help. The timing was critical but the message fell on deaf ears. The United Kingdom, Korea and ECB all met today and none of them cut rates. Greenspan is probably spinning in frustration tonight that everyone else ignored the clear challenge. Don't spit on Superman's cape and don't thumb your nose at Greenspan. When the U.S. is roaring back with +5% growth and other countries look to Greenspan for help that phone call may not be answered.

Despite the Cisco news, the IBM share issuance, earnings warnings from COST and MIKE and a dumping of Yahoo stock, today was just a bout of typical post Fed profit taking. The rate cut was priced into the market and with no future cuts on the horizon the markets had to relieve pressure. Helping the markets today were raised guidance from FD, ANN, GPS and JCP when retailers were supposed to be in the tank. There was a rumor about Taiwan Semiconductor getting a 40,000 wafer order. This rumor was dismissed as not likely but Goldman Sachs said there have been several reports of rush orders for PC chipsets for better than expected holiday order fills. Goldman believes TSM will raise guidance for the 4Q from improving conditions. Surprise! Cisco also said it was seeing stronger growth in switches and that goes directly into the coffers of BRCM, MRVL, ALTR and XLNX. Even John Deere raised guidance to 26 cents from the Multex consensus of 2 cents. JPM actually came out and strongly denied the gold derivative rumors that have been plaguing the bank for months. They lost -1.46 on the news but the entire sector was down and they should begin to see gains as shorts exit for greener pastures.

Just another post Fed profit taking day. That view could change in an instant if the days lows (Dow 8550, Compx 1371, OEX 458, SPX 899) fail tomorrow. As long as the market can hold at the open there is a good chance it will close higher. If those levels fail then we could finish much lower and possibly in the Dow 8350 level. The QCOM news should help the tech sector and a positive report by Disney after the bell should help the Dow. The bulls did not get slaughtered today. They just ran out of news events to bet on.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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