Stocks pulled back on Tuesday from the one-year highs set just a day earlier as financials and healthcare issues dragged the market down. The S&P 500 retreated 0.3% to close at 1073.19, ending its winning streak at six consecutive days. The Dow Jones Industrial Average shed 14.7 points to finish the day at 9871.06. In a reversal of Monday's trade, the Nasdaq was the lone gainer among the three major U.S. indexes, adding 0.1% to 2139.89 as investors cheered news of another multi-billion dollar acquisition from Cisco Systems (CSCO).
The Dow and S&P 500 rose on Monday as speculation swirled that third-quarter earnings reports would be at least as positive as the market seemed to be pricing in and that speculation seemed to be well-founded after the bullish numbers from aluminum giant and Dow component Alcoa (AA) and a rosy update from Black & Decker (BDK) yesterday.
Then came the third-quarter earnings report from Dow member Johnson & Johnson (JNJ). The world's largest health products maker reported profits of $1.20 a share, a fair bit above the average analyst estimate of $1.13 a share, but 5 cents of that is attributable to a lower tax rate and the rest to cost-cutting. The company raised its 2009 earnings guidance to $4.54 to $4.59 a share from a range of $4.45 to $4.55, but none of that good news was enough to lift J&J shares on the day.
Proving that investors are going to demand a lot more out of third-quarter earnings than they demanded in the second quarter, J&J shares slumped on the day because the company's revenue tumbled by 5% from the year-earlier period. In other words, cost-cutting, lower tax rates, favorable foreign currency exchange rates and other such catalysts will not be enough to prop up stocks this time around. It is all about the top line in the third quarter and companies that disappoint on that front will not be greeted warmly by the Street.
One can pick and choose why healthcare issues were down today. Either blame Johnson & Johnson or blame the Senate Finance Committee for finally passing a healthcare reform package. That news broke late in the trading day, but it was still enough to weigh on health insurers like Aetna (AET) and Unitedhealth Group (UNH), both of which finished down on the day.
The White House is still a long way from getting a bill that can be signed into law as there is something along the lines of five different bills that need to be melded into one comprehensive package, but the reality is, and President Obama noted as much, that we are closer to healthcare reform than at any point in the past. That is not good news for healthcare-related stocks as the sector has been held hostage by the healthcare reform legislation over the past several months.
As the healthcare legislation advances, it might pay to keep an eye on the Pharmaceutical HOLDRs ETF (PPH), which holds the likes of J&J, Abbott Laboratories (ABT) and Pfizer (PFE). The ETF was down day, but again it is hard to discern if that was because of J&J's earnings report, the news out of Capitol Hill or both.
As I mentioned earlier, financials also weighed on stocks today and that may not a good sign on the eve of J.P. Morgan Chase's (JPM) earnings report. Oh yeah, Citigroup (C) and Goldman Sachs (GS) report on Thursday and Bank of America (BAC) chimes in on Friday. And with an avalanche of bank earnings slated for next week, investors might get nervous about the financials if bad news comes out in advance of their earnings updates.
Speaking of Goldman, as it was the primary driver behind the down day in its home sector, the stock was, wait for it, DOWNGRADED to ''neutral'' from ''buy'' by highly-regarded banking analyst Meredith Whitney. For those of you that actively follow the financials, and who does not, a downgrade for Goldman might represent something along the lines of heresy and Whitney's downgrade might be troublesome as she gained plenty of acclaim for being well ahead of the curve by making some bearish calls on financials before many of her colleagues.
A downgrade for Goldman is a rare event to be sure. I ran a quick scan for the last time this happened and according to Yahoo Finance, JP Morgan lowered its rating on Goldman in April. Since then, the last six analyst actions prior to Whitney's call have been five upgrades and an initiation of coverage. It should be noted that in addition to Goldman trading fairly close to its 52-week high, Whitney's third-quarter earnings estimate of $4.46 a share for Goldman is still well above the consensus estimate of $3.70 a share.
Goldman is a best of breed stock and the chart below illustrates its rapid run higher, so a little breather would not be such a bad thing for the shares. Then again, if Thursday's earnings report blows estimates away, the breather may have occurred today and Goldman is likely to resume a run to $200 a share.
Goldman Sachs Chart
With an eye towards technology (and this is going to serve as a segue for what you really want to hear about) Cisco was back to its acquisitive ways, snatching up Starent Networks (STAR), which makes equipment used to speed the transmission of data to Blackberries and iPhones. Cisco is paying $2.9 billion for Starent and today's purchase will likely bolster hopes for renewed mergers and acquisitions activity both inside and outside of Silicon Valley.
And speaking of technology, a little company by the name of Intel (INTC) reported third-quarter results after the close today and the rosy report is sure to lead the Dow and Nasdaq to higher opens on Wednesday morning. The world's largest maker of microprocessors said that both profit and sales slid 8% in the third quarter, but the numbers came in ahead of analyst estimates.
Intel earned $1.9 billion, or 33 cents on sales of $9.4 billion. Analysts had been calling for a profit of 28 cents a share on sales of $9.4 billion. While the profit beat is nice, the better-than-expected revenue figure is the real story. As I have been saying (and others have been saying as well), the companies that report top-line growth are going to be rewarded.
I am not in the business of making predictions as to exactly where a stock is going to open at tomorrow, or any other day for that matter, but Intel touched a new 52-week high of $20.60 today before closing at $20.49. After the earnings report, the shares were up nearly 5% in after hours trading to $21.45, a level not seen since September 2008. So it is fair to say that Intel could make a real run to $22 and beyond as early as tomorrow.
The real story here is Intel's gross profit margin, which was 57.6% of sales. The previous forecast was 51%-55% of revenue. Gross margin is a vital metric for a manufacturing-intensive company like Intel because it tells investors how well Intel is controlling costs. Apparently quite well, thank-you very much. Intel also guided higher on fourth-quarter sales, saying the figure would come in around $10.1 billion, give or take $400 million. Using the ''take'' scenario, Intel would still have fourth-quarter revenue of $9.7 billion and that is better than the consensus estimate of $9.5 billion.
Looking back to the second quarter, it was Intel's bullish earnings report that helped fan the flames of the market rally and that very well may be the case this time around as Intel is the first major technology company to report and the stock is indeed a bellwether. Intel's off to a good start, but its 2009 fortunes will likely be decided by the holiday shopping season and sales of the new edition of Windows, which start on October 22nd. Intel cautioned that consumer demand for personal computers has been robust, but that corporate spending has been tepid and that a pick-up in the latter category is not expected until 2010.
As I mentioned on Monday, another earnings report that will be closely watched going into Wednesday is that of CSX (CSX), the third-largest U.S. railroad operator. CSX said third-quarter earnings tumbled by 23%, but that shipping demand was not as weak in the third quarter as it was in the second quarter and the worst of the recession is probably over.
CSX earned 74 cents on revenue of $2.29 billion. Analysts expected a profit of 71 cents a share on $2.32 billion in revenue. Since CSX gets a fair bit of its revenue from moving automobiles from the factory to the dealers, ''Cash for Clunkers'' probably provided a boon to the profit and revenue figures that will not be seen in the fourth quarter and that makes it hard to predict what lies ahead for the stock.
With an eye toward tomorrow, there are two significant earnings reports before the bell that could join Intel in shaping Wednesday's trade. Pharmaceuticals giant Abbott Laboratories (ABT) is expected to earn of 90 cents a share on sales of $7.76 billion. It will be interesting to see if Abbott can do what J&J could not and that is beat on the top-line.
Not to knock Abbott, but J.P. Morgan Chase will probably the more important of the before-the-bell reports on Wednesday. The second-largest U.S. bank is also a Dow component and despite the fact that the company is obviously in a completely different industry than Intel, J.P. Morgan joined the chipmaker in reporting better-than-expected second-quarter results and those bullish results lifted the market higher.
An encore performance from J.P. Morgan Chase tomorrow combined with the bullish report from Intel could set the Dow ablaze (in a good way) for Wednesday's trade. Analysts are expecting the bank to earn 49 cents a share on revenue of $24.8 billion and as the first major bank to report results, this report promises to be closely scrutinized.
With the stock currently trading near its 52-week high, tomorrow's earnings report could send J.P. Morgan's share closer to resistance at $47, a price not seen in over a year. Support can probably be found at the 50-day moving average of $43.23.
JP Morgan Chart
Looking at the charts, not a lot has changed since I visited with you on Monday. The Dow gave back some of Monday's gains, but the reality is the index is little changed through the first two trading days of this week. That promises to change tomorrow as Intel and J.P. Morgan Chase will give traders plenty of opportunity to drive the Dow higher.
We already know the good news from Intel. If J.P. Morgan joins the party, the Dow should easily traverse 9900, if not 9925 tomorrow. Who knows? Maybe the index will move even higher. Either way, if Dow 10000 is truly in the cards, Wednesday's trade will go a long way toward legitimizing that possibility.
It is kind of the same song regarding the S&P 500. Today's scant losses have the index resting at just about even through the first two days of the week, but that is sure to change tomorrow. I do not want to overemphasize one trading day over another, but tomorrow would be an ideal day for the S&P 500 to shed its lethargic ways and get back above 1080.
Frankly, asking for 1080, assuming that Abbott and J.P. Morgan join Intel with positive reports, is not asking for a lot. A move above 1085 would certainly be preferred and helpful in getting the index to the all-important 1100 level. The catalysts could be there and that means investors will not be in the mood for excuses.
S&P 500 Chart
The Nasdaq was the lone gainer on Tuesday, but again, this is an Intel story as far as Wednesday's trade is concerned. Frankly, it will be nice to see a stock not named Apple (AAPL)or Google (GOOG) chip in on the Nasdaq and Intel should do just that tomorrow. It is doubtful that Intel alone could lift the Nasdaq to 2200 tomorrow, but move into the 2150 area would be a nice starting point. Save for some surprise catalysts, Intel will be the Nasdaq's big driver on Wednesday and that should have the index pointing up.
There has been plenty of chatter over the past few weeks that stocks have become overvalued and that the market rally is losing steam, but even with the P/E ratio for the S&P 500 resting at 20.4, its highest level since 2004, Goldman Sachs is saying plenty of stocks still look cheap. If the market sees more Intel-esque earnings reports, that may pare the number of ''cheap'' stocks, but it is not likely to derail the rally.