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Earnings Week

(January 20, 2002)

The earnings season started off with a bang last week, as big names such as Ford (F), General Motors (GM), JP Morgan Chase (JPM), Citigroup (C), Intel (INTC), Microsoft (MSFT), and IBM reported their latest quarterly earnings. The slide began on Wednesday, as Intel announced capital spending was to be cut to $5.5 billion in 2002 from $7.3 billion in 2001. Obviously, Intel doesn’t see much of a recovery in the semiconductor industry in 2002. Chip-manufacturing equipment makers like KLAC, AMAT, and NVLS all took a hit in Wednesday’s trading.

Thursday began on the back of Citigroup’s earnings and ended with a deadcat bounce. The slide continued Friday as speculators digested the earnings reports of MSFT and IBM.

IBM’s numbers were hardly impressive. Fourth quarter income declined 13 percent year-over-year while sales fell 11%. Only the software division showed a slight up-tick while most of the other divisions literally suffered an all-out breakdown in their revenues.  Following is the breakdown (no pun intended):

Technology revenues -- which includes microelectronics, and hard disk drives -- fell 30.2 percent, to $1.88 billion.

Personal and printing systems -- which includes desktop computers, mobile computers, printers, and retail store solutions -- fell 32 percent, to $2.91 billion

Enterprise systems -- which includes server products, disk storage products, and tape storage subsystems -- fell 13.2 percent, to $4.07 billion.

Software division revenues rose 6 percent, to $3.78 billion.

Global Services revenue -- which includes computer maintenance, systems integration, product support services, and consulting -- fell 1.4 percent, to $9.06 billion.

Enterprise investments -- which are products for specialized customer use -- fell 21.9 percent, to $336 million.

In addition, IBM spent another $1 billion in purchasing their own stock, which comprised nearly 40% of their net income. IBM fell nearly $6 in trading on Friday.

MSFT was hit for nearly $4 as earnings miss estimates due to a legal charge and as CFO John Connors dispelled any notion of a strong economic recovery anytime soon.

Elsewhere, less significant in the short-term but maybe more so in the long-term, Standard & Poor’s lowered its outlook of JPM to negative from stable after the 1907 lender of last resort reported a loss of $0.18 per share in the latest quarter due to exposure in Enron and Argentina. Rumor has it that Alan Greenspan personally called S&P and asked them to not downgrade JPM. If JPM were downgraded, it would trigger higher debt payments and could potentially cripple them. Indeed, this is an ongoing issue worth watching. If the economy recovers in the second half of this year, then this is a non-event. Seems like JPM is also betting on a second-half recovery, as it seeks to buy an $8.2 billion credit card portfolio from Providian Financial. That being said, one better hope the economic recovery will materialize. Otherwise, this $8.2 credit card portfolio may be the final nail in the coffin for JPM leading to a downgrade.

The oldest automaker, Ford Motors (F), reported a $5.07 billion quarterly loss on Thursday evening. This triggered an immediate debt downgrade from Moody’s (from A3 to Baa1—its lowest investment grade rating) and a revised outlook from S&P to negative from stable. Ford is expected to pay as much as Lucent did last August when it sells $3 billion in convertible securities next week. Any further downgrades from here would be a disaster, as a glance at their 12/31/2001 balance sheet reveals $153 billion in financial debt alone. Total liabilities are $276.5 billion with a mere $7.8 billion in stockholders’ equity. This is down from approximately $18.6 billion as of 12/31/2000.

Earnings season heats up this week with a host of big names reporting. Following are some notable names:

Tuesday: Amazon, Bank of America, Ariba, Commerce One, Freddie Mac, International Paper, Johnson & Johnson, Lucent, and Motorola.

Wednesday: Amgen, Boeing, Broadcom, Caterpillar, Corning, DuPont, Dynegy, Exxon Mobil, Halliburton, LSI Logic, Merrill Lynch, and Qlogic.

Thursday: Biogen, BMC Software, Eastman Kodak, EMC, Gateway, JDS Uniphase, McDonalds, MedImmune, PMC-Sierra, Qualcomm, and Verisign.

Friday: Lockheed Martin and Sony.

Questions to consider: How did the latest Christmas season contribute to the “profitability” of Amazon? Will technology companies forecast better sailing ahead—calling for a bottom for the umpteenth time? In light of the Enron debacle, how would investors react to the earnings report of Dynegy? Dynegy could report a 1,000% improvement in earnings, but if those earnings are not “real,” then they don’t really matter, right? We would keep a close eye this week. For now, we are not changing our bearish stance on the market.

Finally, Merrill Lynch could also bear watching, as the correlation between Merrill Lynch’s stock price and the performance of the Nasdaq has been highly-positively correlated in recent years.

Percentage Change in Merrill Lynch's Stock Price and the Price of the Nasdaq (1/1/2001 to Present)



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