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MARKET > Commentary Wednesday, May 09, 2001
by: S.P. Brown

The Cisco Skid

According to an old investor aphorism, there are two kinds of businesses in this world: ones that have trouble and ones that are going to have trouble. Guess what Cisco Systems investors (Nasdaq:CSCO)? Your company is mired in the latter category.

As hard as this may be to fathom (particularly for those investors betting the kids' college education last year that the company would become the first firm ever to sport a trillion dollar market cap), Cisco's track record of posting ever- expanding sales and earnings came to an abrupt halt after an 11- year run. What's more, it did more than just come to a halt, it reversed course.

Yesterday Cisco reported it lost $2.69 billion, or $0.37 per share, for the three months ended April 28, which didn't exactly compare favorably with earnings of $641 million, or $0.08 per share, in the same year-ago period. Excluding a number of one- time items, namely restructuring charges and inventory write- offs, Cisco earned $0.03 per share.

However, more discouraging to the Cisco faithful was the top-line growth (there wasn't any). Quarter-to-quarter sales dropped for the first time in Cisco's history, declining 29 percent, to $4.73 billion from $6.7 billion recorded the same time last year.

To be fair, much of yesterday's bad news was already priced into Cisco's stock. In fact, investors and traders were anticipating the poor quarterly performance to the point they pressured the Internet routing giant's stock to a two-and-a-half year low of $13.68 last month. Still, that did not stop the market from getting a few more licks in today, as Cisco closed the session down $1.29 to $19.09.

Unfortunately for many long-suffering 401k investors, Cisco won't be hitting $60 again anytime soon. The new complaint among analysts is that the company lacks visibility, meaning analysts are unsure how to value Cisco since its CEO, John Chambers, refused to force feed them his outlook for the coming year. Sadly, this means many Cisco analysts will need to cut back their CNBC appearance schedule and start performing actual analytical work again. (Lord, help us all.)

Cisco's lousy outing weighed heavily on the Nasdaq Composite Index (COMPX). The tech-laden market barometer gapped down 36 points at the open and then spent the remainder of the day vacillating between 2,140 and 2,180 before ending the session down 42.94 points, or 1.95 percent, to 2,155.83.

Not that Cisco was the sole cause of the COMPX's malaise. Also pressuring the COMPX were tech heavyweights Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC), which finished the day off $1.66 and $1.63, respectively.

As for the go-go Old Economy issues, they, too, opted for a respite. The Dow Jones Industrial Average (INDU) closed the day down $17.05, or 0.16 percent, to 10,866.46, posting its fifth loss in six days. Pressuring the INDU (in addition to Microsoft and Intel) were Home Depot (NYSE:HD), AT&T (NYSE:T) and Walt Disney (NYSE:DIS). Among the upside movers were Alcoa (NYSE:AA), Procter & Gamble (NYSE:PG), Merck (NYSE:MRK) and Exxon Mobil (NYSE:XOM).

Another notable upside mover was Caterpillar (NYSE:CAT), which gained $0.15 to $52.00 to set a new 52-week closing high. This throwback to the Paleolithic age has been on a tear for the past month, moving higher by 24 percent. Fortunately, more investors and traders are paying attention to basic-industry stocks like Caterpillar. Keep in mind, cyclicals are often the first to rally after the market has hit a bottom.

With that said, most of the major cyclical sectors moved higher with Caterpillar today, and none more so than the gold sector. The CBOE Gold Index (GOX) surged ahead 7.5 percent to post a new 52-week high of 40.66.

As for the downside, the networking issues lead the way once again. In addition to Cisco, Juniper Networks (Nasdaq:JNPR), JDS Uniphase (Nasdaq:JDSU) and Extreme Networks (Nasdaq:EXTR) all made for the nether regions today.

Fortunately, the same cannot be said of the Splittrader Current Play list. Of the eleven stocks gracing our compendium, seven closed the day in the black. Leading the way was today's Play of the Day, Cross Timbers Oil (NYSE:XTO), which gained $1.10 to close at $27.95.

In the Treasury arena, long-dated issues recovered after stumbling out of the gate. The 10-year Treasury note ascended 1/2 to yield 5.18 percent while the 30-year government bond gained 26/32 to yield 5.675 percent. On the short end, the two- year note gained 3/32 to yield 4.06 percent.

On the economic front, there was little worth noting. In fact, there will be little worth noting tomorrow, too, aside from the weekly jobless claims report, which, incidentally, is expected to post above its four-week moving average of 405,000.

The most significant economic news for the week will be released Friday with the April retail sales report and the Producer Price Index (PPI). The market consensus is calling for PPI to have risen 0.3 percent in April, up sharply from a 0.1 decline in March, while core PPI is expected to have increased 0.1 percent, unchanged from its March showing. Meanwhile, retail sales for April are expected to have gained 0.2 percent for the month, up from a 0.2 decline in March.

Taken in aggregate, the recent slate of economic data is showing a reemerging economy. To that end, a survey of 27 economists by the National Association for Business Economics calls for 2 percent growth in 2001 and 3.1 percent growth next year, which means a recession appears unlikely.

As for trading this market, I don't expect much price action tomorrow or Friday. Traders are positioning themselves ahead of the Federal Reserve's FOMC meeting next Tuesday, which is expected to bring another 50-basis point interest rate cut, at least according to the fed funds futures market, which is priced for a 70 percent chance of said event occurring.

Of course, the million dollar question is whether the market has already priced the half-point interest rate cut into security prices. At this point, it probably has, so I doubt that either major market has much upside potential over the next few trading sessions.

Another reason the markets lack upside potential is resistance. On Monday the INDU was again stopped short of 11,000. This has happened every time the blue-chip average has attempted to close above this level over the past eight months.

As for the New Economy, the COMPX isn't without it's resistance, either. Once again, the COMPX is trading below 2,200, which has proven to be a brick wall for the index over the past three months. In fact, the COMPX has not closed consistently above this level since February.

Nevertheless, there are stocks that will move over the coming few sessions regardless of overall market action, which is why you need to keep abreast of our Current Play list.

S.P. Brown


Copyright 2001

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