Wednesday, October 10, 2007

Tech Wins; Earnings News Disturbing

The Dow took it on the chin today after Alcoa (AA) missed the mark, announcing their 3rd quarter results on Tuesday after the bell. The S&P and NYSE Composite took minor hits, while the NASDAQ actually had a nifty little gain.

Dow 14,078.69 -85.84; NASDAQ 2,811.61 +7.70; S&P 500 1,562.47 -2.68; NYSE Composite 10,264.50 -15.81

Here's the rub: Techs are good bets even if the economy falls into recession, while larger, mainstream corporations will have trouble maintaining profitability. Outside of the giants like Microsoft, Cisco and Intel, which have huge employee bases, many tech firms are already lean, plus, technology has become essential to our day-to-day existence.

Big retailers, banks, consumer, industrial and manufacturing outfits, like many of the Dow stocks, are abundant employers, have heavy legacy and pension costs and will struggle if the economy takes a nosedive.
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Truth be told, the economy isn't so hot to begin with, Wall Street knows this and Alcoa was just the very tip of a rather large iceberg. Alcoa's number was an easy one to hit and they missed - narrowly (.02), but missing an easy target is punishable by... well, investors treated the company to a 2.5% haircut on Wednesday (-0.99 to 38.73).

Larger misses of easy targets will result in near-death penalties and tech will become the new flight to quality, that being quality of earnings. By and large, techs are still growing, industrials are staid and solvent, but profits may become tough to find.

Losers outnumbered gainers by an 11-9 margin, though new highs still held a rather sizable edge over new lows, 408-131. The latter measure may be stalling out. If earnings are generally lackluster, it tells investors two things: 1. the whole economy may be in need of a rest (recession), and, 2. stocks are overpriced. Result: widespread selling. Don't say you heard it here first. Many others are saying the same thing.

Commodities continued to trend higher. Oil rose $1.04 to $81.30. Gold was up $2.90 to $746.00. Silver added 0.09 to $13.67.

On the earnings outlook, Chevron (CVX) warned prior to the market open; international Paper (IP) and PetSmart (PETM) also warned during the Wednesday session; Valero (VLO) warned after the close, and Thomson Financial advised that the S&P 500 will likely post, "third-quarter earnings growth in the low single digits." Overall, it's not a pretty picture as this earnings season gets underway.

Monsanto, predicted to lose 0.17 cents in their fiscal 4th quarter, actually lost 0.18, without counting one-time charges. Shares dropped 0.74.

Ruby Tuesday (RT), operator of a chain of mid-priced restaurants, reported after the close. The company saw its quarterly profit trimmed by 49% and lowered their annual estimate. The stock was being pounded in after-hours trading, down nearly 10%.

There was good news. Host Hotels (HST), Infosys (INFY), and Costco (COST) all posted results beyond Street estimates, but the good is being overshadowed by ominous signs from more than just a few companies.

Boeing (BA) was the major mover on the Dow, losing 2.77 on the day after the company announced delays in the delivery of their 787 airliners due to supply disruptions.

If you're short this market, you stand to do well. Others, most of whom have standard positions via funds or 401k's, would be advised to move to safer positions. If this first salvo of earnings news is any indication, cash will be king throughout the remainder of the year and into '08.

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