Does Wall Street need a Xanax? Judging by this week's choppy trading you would think that the third-quarter earnings season was off to a terrible start. But it wasn't, of course. With 160 of the S&P 500 reporting, 110 of them beat earnings expectations, 25 missed and 25 were in line. The positive bias in tech stocks was even stronger: 20 beat, five were in line and just one -- Intel ( INTC) (more about that later) -- missed. "The market isn't translating this into stronger gains; it's a disconnect," says First Call analyst David Dropsey. "Investors keep changing their minds about what to worry about." And worry they are. Consider the list of concerns tossed off by an investor who manages a small-company oriented growth fund: "The yield curve is flattening, consumers are tapped out, rates are still going up, and Bush may not be able to lower taxes," he fretted. "The consumer sees the value of his house going down and the price of gas and heating oil going up. It's not a good combination." On the other hand, the strong bottom-line performance of tech issues belied top-line misses that could weaken the traditional end-of-year rally. Case in point -- IBM ( IBM). Big Blue zipped past earnings expectations by 13 cents a share -- but
sales fell short of the $21.71 billion that Wall Street targeted by more than $100 million. Excluding 2004 revenue from IBM's PC business, which the company sold May 1, third-quarter revenue increased a modest 4% from the same period a year ago. Looked at on a four-quarter rolling basis, growth in each of the last two quarters was 1.4% and 0.48%, says analyst Richard Williams of Garban Institutional Equities. Of particular concern, he said, was the slowdown in global services revenue on a four-quarter basis, which fell to 0.62% in the third quarter, "the first time this metric has been below 1% growth in more than six periods. Considering the high-margin nature of this source of revenue we wonder how well IBM's earnings can maintain going forward if this trend persists," he wrote in a note to clients.
Then there's Intel. The world's largest chipmaker has the unhappy distinction of being the only tech company in the S&P so far to
post a bottom-line miss in the quarter. It's worth noting, however, that it was precipitated by a two-cent charge stemming from the settlement of a long-running patent dispute with MicroUnity, a tiny Silicon Valley chipmaker. Without the charge, Intel would apparently have beaten by a penny. Intel, by the way, has been complaining all week that it wasn't fair to characterize the miss as such because the charge was not included in the company's guidance or First Call estimates. The point is arguable, but as it happens the market's sour reaction to Intel's quarter was really keyed to light sales guidance (off by about $100 million) for the fourth quarter; as well as a bevy of secular worries, including interest rates and the overall health of the economy, said Sunil Reddy, a senior portfolio manager with Fifth Third Asset Management. So, is the economy really that bad, or are investors losing more sleep than they should? Lakshman Achuthan, managing director of the Economic Cycle Research Institute, looks at the Long Leading Index, essentially a basket of key indicators, as well as the shorter-term Weekly Leading Index. There are real concerns, he says, but the chances of a recession in the next few quarters are low. Achuthan predicted that the economic fallout from Hurricane Katrina would not be prolonged and he says the latest weekly leading indicators, now at a five-week high, bear that out. He notes that consumer confidence has been weakening, but says companies are still bringing healthy balance sheets and hefty cash balances to the table. "Corporate spending is a good backstop to consumers." Inflation, though, is a serious concern. "We have to take the Fed seriously. The inflation cycle is intact and I don't see a peak." And that, says Achuthan, means the Fed will continue to raise interests rates for some time, much to the displeasure of Wall Street. And if that makes you nervous, take a Xanax.
Dumb EnoughNot to intrude on the
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