Daily State of the Markets 02/11: Not Good Enough

Good morning. Anyone who has been around this game a while (which we will define today as since the tech bubble began) is likely familiar with Mr. John Chambers and that little networking company he's been running. While Cisco (Nasdaq: CSCO) is perhaps best known as being the backbone of the internet and probably responsible for that wireless network you've got running in your office or at home, from a financial perspective Cisco is known for beating its earnings estimates.

In the late 1990's, "Chambo" became famous for miraculously reporting earnings that beat the street by a penny, quarter after quarter, after quarter. And for those of you that have been keeping score at home, you will likely agree that in more recent times Cisco's margin of excess has been more along the lines of a two cent "beat".

To the uninitiated, beating the street's estimates by $0.02 on a regular basis probably sounds like a recipe for stock price gains, especially when you toss in the consistency of the top line "beats" as well. But, as anyone who has owned Cisco Systems lately is painfully aware, simply beating the street just isn't good enough anymore for Mr. Chambers and friends. You see, when a company uses words like "severely challenged" on a conference call when describing the outlook for the upcoming quarters, those two pennies of excess EPS don't mean much. And as one might expect, shares of Cisco paid for its sins to the tune of -14% yesterday.

Why should I care, you ask? (After all, didn't we have an instant replay of yesterday's thrashing the last time Mr. Chambers announced his results? And besides, who really cares about an aging tech company anyway?) In short, because in the old days a report like the one we saw yesterday would have put the entire market on its heels. Lest we forget, in late 1999, Cisco carried a valuation that was greater than something like 20 of the 30 Dow stocks combined. So, a bad day for Chambo would have meant a VERY bad day in the market.

Although the times have definitely changed and Cisco Systems clearly does not command the attention it did a dozen years ago, the bears did their level best to turn back the clock Thursday morning. Sure, the CDS (credit default swaps - remember them?) spreads were said to be "blowing out" in Portugal. And it is true that the talk about inflation and interest rate hikes in the emerging markets was ongoing. But coming into the opening bell on Thursday, Cisco's "issues" and whether or not they were "company specific" remained the talk of the town.

As has been said a time or twenty, "It's not the new, but how the market reacts to the news that matters." So, when the bears were able to gain some traction with the Cisco news (and a little help from Akamai (Nasdaq: AKAM)), it felt like the market's character might finally be starting to change. And before you could figure out what the next generation of switching products actually is (or whether or not the profit margins are higher - and they are), stocks were down and the S&P 500 was testing its 10-day moving average - the horror!

However, as the what-turned-out-to-be false rumors of Hosni Mubarak's resignation began to hit the wires, it became clear that the bear camp's argument that Cisco still matters to the overall market simply was not good enough to keep the dip buyers on the sidelines for very long.

While the bears were once again thwarted into the close yesterday, they are nothing if not persistent. For after the bell, our furry friends could be heard espousing the idea that stocks are likely to struggle in the near-term because Mr. Mubarak has apparently decided to stick around a while. So, will this be good enough to get a little dance to the downside started? We tend to think that this won't be good enough either, but we will promise to keep an open mind.

Turning to this morning... Futures are lower in response to weakness across the pond and a general disappointment that the Egypt situation has not been resolved. In addition word that China has increased reserve ratios for some banks is also weighing on sentiment

On the Economic front... The U.S. Trade Deficit rose in December to $40.58 billion, which was a smidge below the consensus estimate for a deficit of $41.1 billion. The November reading was revised to $38.32 billion from $38.3 billion.

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

* Major Foreign Markets:
o Australia: -0.62%
o Shanghai: +0.34%
o Hong Kong: +0.53%
o Japan: -0.11%
o France: -0.39%
o Germany: -0.02%
o London: -0.07%

* Crude Oil Futures: +$0.35 to $87.03
* Gold: +$0.20 to $1356.50
* Dollar: lower against the Yen, higher vs Euro and Pound
* 10-Year Bond Yield: Currently trading at 3.648%

* Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: -4.47
o Dow Jones Industrial Average: -28
o NASDAQ Composite: -5.05

Wall Street Research Summary

Upgrades:

* Southern Company (NYSE: SO) - BofA/Merrill
* BioCryst Pharmaceuticals (Nasdaq: BCRX) - BofA/Merrill
* International Flavors (NYSE: IFF) - Barclays
* Waddell & Reed (NYSE: WDR) - Citi
* AllianceBernstein (NYSE: AB) - Citi
* Fluor (NYSE: FLR) - Citi
* Interpublic (NYSE: IPG) - Deutsche Bank
* Ameriprise Financial (NYSE: AMP) - Goldman Sachs
* Healthsouth (NYSE: HLS) - Morgan Stanley
* United Technologies (NYSE: UTX) - Target increased at Oppenheimer
* Radware (Nasdaq: RDWR) - Oppenheimer

Downgrades:

* Chipotle Mexican Grill (NYSE: CMG) - BofA/Merrill
* Expedia (Nasdaq: EXPE) - BofA/Merrill, Benchmark
* Orbitz (NYSE: OWW) - Benchmark
* Wright Medical (Nasdaq: WMGI) - Canacccard Genuity
* Blue Nile (Nasdaq: NILE) - Citi
* Alexion Pharmaceuticals (Nasdaq: ALXN) - Citi
* Spirit AeirSystems (NYSE: SPR) - Credit Suisse
* Sprint Nextel (NYSE: S) - Goldman Sachs
* Wright Express (NYSE: WXS) - Goldman Sachs
* Cisco Systems (Nasdaq: CSCO) - JPMorgan
* Micron (NYSE: MU) - Wells Fargo

Yesterday's Earnings After the Bell

Cephalon CEPH $2.19 $1.91
DaVita DVA $1.13 $1.12
Expedia EXPE $0.32 $0.36
Kraft KFT $0.46 $0.46
Panera Bread PNRA $1.21 $1.17
Rackspace RAX $0.07* $0.10
Republic Services RSG $0.42 $0.42
Wynn Resorts WYNN $0.91 $0.68

Earnings Before The Bell

Coca-Cola Enterprises CCE $0.28 $0.28
SCANA Corp SCG $0.74 $0.76
WABCO Holdings WBC $1.01 $0.90

* Report includes items that make comparisons to the consensus estimate questionable

Long positions in stocks mentioned: none

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