Sgt. Chambers Crashes The Party

Upgrades, downgrades, safe havens, momentum plays, news already built-in, bottoms, tops, new economy, old economy, blah blah blah! Enough already.

There is only one market with one way of looking at things and one way of evaluating valuations. There is also only one economy, not two or three as we have been led to believe. McDonalds Corporation is subject to the same economic cycles of supply and demand as Cisco and Juniper. Coca Cola and Sears are subject to the same cycles as
Siebel Systems and PMC Sierra. Am I making this point clear?

“Wall Street, The Great Game.” Remember that show on CNBC? Unbelievable. We are led to believe that the “default” direction for this market to move is up, up and away. Just listen to the bullish analysts, strategists, and fund managers on CNBC. You would believe that any episode of weakness or stock declines should be viewed as an
anomaly that will quickly resolve itself to the upside. Be assured, they have done everything short of putting hypnotists on television to assure us that we should be feeling very comfortable about the stock market and should actually be buying more stocks here at these “cheap” levels. Tom Galvin? Have you ever seen a market that wasn’t a screaming “buy”?

Oh yes. I almost forgot about online personalities at other Websites (you know who you are) who told us to buy retail and department-store stocks when they were 25%-30% higher and now again tell us to buy at these cheaper prices because they agree with the “bad weather” excuse. These are the same guys who told us to buy Merck
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In the “I think I’m going to be sick!” department today, Cisco has coughed up a monumental hairball for Q3. In a statement by CEO Chambers, Cisco expects slowdown expanding globally. Cisco will take 3Q
“excess inventory” charge of $2.5 billion while seeing 3Q pro forma net in “very low” single digits. They also stated that Q3 revenues will come in at 30% below Q2 and announced 8,500 layoffs. Chambers was quoted as saying “this may be the fastest any industry our size has ever decelerated with weakness continuing to get worse in markets such as Korea, Taiwan, Australia, and Japan.” This is amazingly significant information from one of the largest, most influential corporations in the Nasdaq. This is a shortfall of monumental proportions.

Tomorrow, I fully expect the devoutly bullish and the analysts to talk their way out of this news by offering an excuse such as
“Keep buying technology stocks because things can’t possibly get any worse than they are, we really mean it this week, and, oh yeah, the global weather has been so bad lately that, er… yeah, people haven’t been buying routers or fiber optics stuff. Yeah, that’s the
ticket!” As such, the technology sector may experience a blistering rally because the Tom Galvins and Jonathan Josephs of the world keep chanting
“Just buy ’em, baby!”

However, with Naz futures trading down almost 30 points from their 1665 close it seems like the lunatics that have taken over the asylum may have to return to their cells, at least in the early going. 

As I write this, Cisco also is warning that Q4 revenues will be flat to down 10%, or a range of roughly $4.3-$4.7 bln versus consensus of $5.6 bln. As Chris Farley used to
say,”That’s gonna leave a mark.”

So Cisco comes out and warns for the next two quarters while saying that the global economy is getting weaker and weaker. Yet the investor is supposed to rejoice that the worst is over and continue with the “buy the dip aggressively” mentality. Does anyone else see a recipe for disaster here, or is it just me?

Some suggested excuses that Chambers could use on the conference call to whip the lunatics into a buying frenzy could be:

a) “The dog ate our reports last quarter that predicted this downturn…sorry”

b) “It’s all your fault for extrapolating that crazy market cap we had by thinking we would keep up our
30%-40% a year growth up forever!”

c) “The new economy is in a new type of recession that should lead to a new type of buying opportunity for the new type of technology investor.”

d) “Don’t worry about this small matter of earnings and revenues, we promise we’ll serve great food at our next analyst meeting.”

e) “We’re now taking market share away from Juniper Networks, take that you pencil-neck
Kriens!”

f) “Don’t worry, be happy!!!”

g) “The weather around the world was responsible for the horrific results and dismal outlook for the rest of the year. We are forecasting that it will be very cloudy around the world for the rest of the year and that should cause a general unwillingness to venture out and buy our products.”

And of course the final possibility that just seems to work like a charm…

h) “Hey, it can’t get any worse than it is now… wait…I meant it could get a lot worse by around
25%-30% but you know how hard it is to miss those bottoms.”

There you have it, folks. The script for the bulls tomorrow is becoming clearer as the evening progresses. 

Yes, the index has had a strong rally. Yes, many stocks have gone up considerably from their lows. No, it probably won’t last very long. The Nasdaq chart is showing us some churning action the past few days which seems to me that it was intending to play “short
buster.” The two gaps down and subsequent rallies off those levels are usually instances that frustrate the heck out of shorts and cause them to throw in the towel. Interesting to watch what this index does in the face of Cisco’s warnings for Q3 and Q4.

Some names to watch:

Long Side: Healthcare and tobacco continued to go up and look like they are going to go higher if you don’t look at their technicals. Even though their chart formations look decent, they are rallying on severely divergent technicals and are not worth the risk.

Short Side: If tech breaks down tomorrow because of
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The market pundits have everyone believing that any type of bad news could be shrugged off without further damage. Let’s see.

Have a good night and hope to see many of you at Saliba’s seminar this weekend. 

Goran