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Wednesday, July 14, 2004
Good evening friends,
Market Recap
The Dow lost -38 points and fell below its 50 SMA again, moving this index from bullish to neutral. The Dow now sits between its 50 and 200 SMAs. The S&P is also between its 50/200 SMAs. The NASDAQ lost -16 more points and continues to move down toward that 1900 level of support discussed previously. Today's low was just 9 points shy and closed at 1914. With good earnings released after the bell, there may be a bounce in the NASDAQ soon. After today's close, we now have the Dow and S&P in a neutral condition with the NASDAQ still with a bearish bias.
Earning or Burnings?
Many earnings reports are coming in this week. After the bell AMD, AAPL, SNDK, and QLGC have released earnings. For the most part, earnings have been fairly good; it is the cautious forward guidance that the market needs to digest before stock prices can move. Some of these stocks are on roller coasters right after they report with conference calls causing even more movement.
Intel (INTC) reported very solid revenue numbers yesterday. Their profits nearly doubled, but investors seem to be hung up on the rising inventory issue. Last night's commentary mentioned how the reaction to their inventory levels could go either way. The sell off today was due to these inventory levels as well as margins decreasing in the upcoming quarters. INTC's results were actually very good. Their chief financial officer pointed to a recovery in their flash memory business, both prices and units sold seem to be recovering. The microprocessor business was down slightly in what was called a “seasonal drop”. Intel even guided up for the third quarter.
The problem was the interpretation of INTC's inventory numbers. Intel explained that inventories increased because of greater than expected production, not due to a decrease in demand. I personally think that the sell off in INTC is over done, but holding any stock through earnings is a gamble that may turn against you quickly.
How does a strong report turn into a stock sell off? For starters the Merrill Lynch down grade of the whole semi conductor sector did not help matters. Their reasoning is that they feel the upswing in the semi sector has peaked. I find that rather interesting given that Intel has guided higher for the third quarter and feels that they can continue to deliver double digit revenue growth and high profits. Andy Bryant, Intel's chief financial officer, was quoted saying "For the full year, we're on track to deliver double-digit growth in revenue, with high levels of profit and cash generation…"
In my opinion INTC is a great company and it is on my list of what I call the top 15 companies for you to own and for your children to inherit. In other words, this is money that you never intend to spend. If you have money that you want to invest for your children or grandchildren, I have a list of stocks to buy and hold over a very long term. These are not stocks you should be looking at daily. I will make the list available in a commentary coming up soon. These companies are in my opinion some of the greatest companies of all time.
The ANALyst, what a pain in the ...
Oh the games that analysts play! I think the INTC and chip sector down grades are textbook examples of the sheep being herded in the direction the analysts wants them to go. I would not be surprised to see the analysts come out within a month and start upgrading the semi conductor sector, citing strong third quarter sales and a vibrant back to school buying spree. This, of course, after they have loaded up on some of the cheap shares some of the weak hands sold today.
The Sideways Shuffle
The sideways market continues, and it will for a while longer in my opinion. The earnings numbers reported during the remainder the quarter and upcoming guidance maybe the only factors that may change this sideways market. Earnings drive the market for the most part, but this year it is a different trading environment with many other factors weighing on the market. With election uncertainly, high oil prices, weak dollar, terrorist threats, and other turmoil and anxiety in the market it will take a major event to really spur the market into action. The markets remain neutral for now.
I would like to see the bull return before the end of the year but at this point, I do not see anything to move the markets until some of these issues are resolved. The capture of Osama Bin Laden might be the spark this market needs. But then again, a major event like the capture of the Iraqi dictator did not spark the markets much at all.
The market is not logical. Speaking of earnings and the market not acting logical, I held my short position in QLGC into earnings thinking they would meet or disappoint but not exceed. I was correct, they met the estimates but the stock is up AH as I write this commentary. Go figure. All other stocks that have just “met estimates” have gone down in price and not up. Part of the reason was because SNDK, another storage company beat estimates by 30%, so QLGC may be up in sympathy. We will wait for the conference call to see if this gain holds up. This is just another example of the unpredictable, illogical market.
OTC BB Watch List
- None
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