Stocks closed lower Wednesday as investors fled the tech sector after networking solutions giant Cisco Systems (CSCO) reported lower than expected earnings that lead to several brokerage downgrades. The Nasdaq, though still negative, finished well off its triple-digit intraday low.
Cisco posted $0.18 second quarter EPS (on a pro forma basis) on 55% higher sales. The company cited weak alternative U.S. service provider spending, but said its enterprise business was holding up well. Cisco also forecast third quarter revenues as flat to down compared with the second quarter.
The news weighed heavily on the market, especially networking companies such as Juniper Networks (JNPR) and Extreme Networks (EXTR).
"I think the problem in the Cisco earnings as it relates to the technology sector is the nagging belief that this demand driven slowdown goes beyond the current quarter," says Barry Hyman, market strategist for Ehrenkrantz, King Nussbaum Inc. He notes the company indicated that demand-driven concerns could be more drawn out and inventory concerns will go beyond the first calendar quarter. "And that's something that Wall Street just isn't ready for because it's not a scenario that envelops the positive bullish outlook for the growth sector and tech right now."
The Dow, which spent much of the day in positive territory sank into the red, losing 10.70 points, or 0.10%, to 10946.72 as even the tried and true blue chips succumbed to selling. The Nasdaq bounced back somewhat, finishing down 56.60 points, or 2.12%, to 2607.89. The S&P 500 ended down 11.49 points, or 0.85%, to 1340.77.
Hyman says the focus for investors right now is companies with consistent earnings. Since the Cisco story outlines the deepening problems in technology beyond the first quarter, investors are going to look for diversification and safety once again.
"The Cisco news sent shivers through the tech stocks resulting in a sell down below recent support zones," commented A.C. Moore, chief investment strategist at Dunvegan Associates, who explains that the worst of the news from the tech bellwether apparently was not discounted coming into the session. "So I think probably we'll see this filter through stocks for the next session or two and then from this oversold condition, perhaps stocks can gather again for a lift."
Treasuries ended lower. The Treasury auctioned another $11 billion in 10-year notes Wednesday. This offering is expected to see better demand than the lackluster 5-year sale Tuesday. The stock market has been the other focus so far, with the NASDAQ Composite off over 2% on Cisco System's disappointing earnings news in after-hours trading on Tuesday.
Stocks in the News
Boston Scientific (BSX) posted $0.22 vs. $0.26 Q4 EPS from operations on 11% lower revenues. The company says disappointing sales were due to issues related to its coronary stent and balloon pipeline.
DaimlerChrysler (DCX) posted 3.47 EUR vs. 6.21 EUR 2000 EPS from operations as second half losses in the North American market offset a 12% rise in revenues (on a comparable basis).
Humana (HUM) posted $0.16 vs. $0.15 (adjusted) Q4 EPS from operations on flat revenues.
Aether Systems (AETH) posted a $0.90 per share Q4 loss vs. an $0.18 loss as higher costs offset a sharp revenue rise. The company says it will increase revenue targets and plans to become EBITDA positive sooner than current estimates indicate.
The Financial Times-Stock Exchange 100 index, which rose 24 points Tuesday, finished Wednesday's session with a loss of 67.80 points (-1.08%) to close at 6225.60. The biggest contributors to the losses in the FTSE 100 were Vodafone, and British Telecom as techs weakened after the US's Cisco disappointed on the earnings front. British 10-year bond yield fell 3.0 basis points to 4.815% as a flight to safety was aided by expectations that the BoE's MPC will cut rates 25 basis points on Thursday.
The DAX Index, which rose 65 points Tuesday, ended down 81.17 points (-1.21%) at 6611.86. The CAC 40, which rose 29 points Tuesday, finished with a loss of 100.21 points (-1.71%) to close at 5752.14.
The Nikkei 225 snapped a four-day losing streak to edge up 0.7% higher at 13,336 at the close of trade. The triumphant turnaround was led by none other than telecoms giant NTT DoCoMo, up over 5%. Parent company NTT was also a big winner, up 6.2%. The rise of NTT was largely attributed to an Ministry of Finance announcement that they would not go forward with a planned sale of 1 million shares unless the market recovers. Not so lucky were Internet plays Hikari Tsushin and Softbank, down 4.2% and 3.2%, respectively. Hong Kong's Hang Seng meanwhile gained 136.23 points (+0.86%) to close at 16,049.47.
A middle-aged man carrying a gun at the Southwest gate of the White House was shot in the leg and taken to the hospital. Earlier reports said the man was 17. Bush and Cheney were in the White House at the time but were not affected by 11:36 am EST incident: wires, CNBC, CNN, Fox.
productivity gained 2.4% compared to a downwardly revised 3.0% in Q3 (from 3.3%), which is somewhat above the 2.0% median forecast and was the biggest gain since 4.3% in Q2 1999. Unit labor costs accordingly jumped 4.1% vs. an upwardly revised 3.2% in Q3 (from 2.9%). For the year 2000 productivity gained 4.3% compared to 2.6% in 1999, the largest gain since 4.5% in 1983. 2000 labor costs rose a paltry 0.7% vs. 1.8% in 1999: MMS
GM Hughes (GMH) and News Corp. (NWS) have intensified merger talks, with a deal possible soon. Under the plan, Hughes would merge with Sky Global to form an entity valued at $60 billion to $70 billion: WSJ.
France Telecom cut the offering price range for mobile-phone unit Orange by 17%, citing difficult market conditions: WSJ.
Ravi Suria, an influential convertible bond analyst at Lehman Brothers, published a report arguing that this may be the year in which both time and money run out for Amazon: NYT.
California energy negotiators have come up with a plan they say could aid the nearly bankrupt utilities while limiting the state's direct financial exposure: WSJ. By Alan Hughes