Market Dispatches

Market Dispatches2/6/2008 7:30 PM ET

Cisco's drab outlook may hurt stocks

The networking company's shares fall 7% after it says it expects slowing growth in Europe and the United States. Inflation worries and economic uncertainty gut a morning rally, with the Dow losing 65 points. Disney's earnings push its shares up 4.8%.

Stocks could face a tough open on Thursday after networking equipment maker Cisco Systems (CSCO, news, msgs) cut its revenue forecast due to softness in the U.S. economy.

Cisco shares were down 7.3% to $21.40 in after-hours trading after the company said it expects revenue in its third quarter, which ends on April 30, to grow only 10%. Wall Street had forecast 15% growth. Cisco offered the new guidance in a conference call with analysts.

The shares had closed down 0.8% to $23.08 in regular trading. The stock market overall had moved lower as well.

Cisco's lower guidance was striking because it came after the company reported a 16% revenue gain in its second quarter to $9.8 billion and a 15% earnings increase to 58 cents a share.

Plus, the company said the situation was so fluid it wouldn't offer guidance about fourth-quarter revenue.

The comments of CEO John Chambers initially dragged down other technology shares in extended trading. Hewlett-Packard (HPQ, news, msgs) shares fell to as low as $41.20 but recovered to $43.01, up 2% from a regular close of $42.16.

IBM Corp. (IBM, news, msgs) dropped 0.8% to $102.75. Microsoft (MSFT, news, msgs) fell 1% to $28.23. (Microsoft is the publisher of MSN Money.)

Cisco is the world's top maker of the routers and switches that direct traffic on data networks used to run offices. Its shares have fallen about 28% since November, when Chambers said the company was seeing dramatic decreases in orders from U.S. banks.

Cisco had a decent quarter, Chambers noted. But orders, particularly in the U.S. and Europe, started to fall enough that the company had to cut guidance. It may take a couple of quarters for revenue growth to return to the long-term trend of 12% to 17% a year, Chambers said.

The market can't hold onto a rally

Cisco's report came after a day that saw the Dow Jones industrials finish down 65 points to 12,200.

The Nasdaq Composite Index was down 31 points to 2,279, and the Standard & Poor's 500 Index fell 10 points to 1,326.

The end of regular trading was a disappointment because the market had opened strongly after a serious drubbing on Tuesday that saw the Dow fall 370 points.

Stock Charts (Year)

Cisco Systems
Graphical chart for CSCO
Walt Disney
Graphical chart for DIS
The blue chips had been up as much as 125 points this morning on the strength of strong earnings from Walt Disney (DIS, news, msgs) on Tuesday night. Disney closed up 4.8% to $31.50 on the report.

But weakness in technology, financial and energy stocks pulled the indexes lower. Tech shares were pulled lower by pressure on Apple (AAPL, news, msgs), Qualcomm (QCOM, news, msgs), Research in Motion (RIMM, news, msgs) and Microsoft.

Energy stocks fell as crude oil finished at $87.14 a barrel in New York, down $1.27. Crude is down 5% this month and 9.2% this year.

Three factors combined to gut today's morning rally:

  • There was overall weakness in financial stocks, set off in part by a report that Merrill Lynch (MER, news, msgs) shares might get downgraded by Standard & Poor's because of the subprime-mortgage mess. Merrill Lynch was down 2.6% to $53.07.

  • Bear Stearns analyst Peter Nesvold unsettled investors in his downgrades of Ford Motor (F, news, msgs) and General Motors (GM, news, msgs) when he said that "facts are changing at an accelerating rate." He cut his ratings on the stocks because he sees weakening consumer purchasing power. GM was down 2.9% to $25.71; Ford fell 1.9% to $6.31.

  • Inflation reared its head. This issue was raised by Charles Plosser, president of the Philadelphia Federal Reserve Bank. Inflation, he said in a Birmingham, Ala., speech, was higher than the Fed wants, and he wasn't sure a slowing economy would help the situation.

The financial markets read Plosser's comment as a warning that additional interest-rate cuts may be limited. The stock market, in particular, has been expecting the Fed to cut rates again at its March 18 meeting.

It cut rates twice in January. The Fed's key federal funds rate -- the rate banks charge each other for overnight loans -- is now at 3% from 4.25% at the end of December.

Falling oil prices helped airline and transportation stocks. Delta Air Lines (DAL, news, msgs) was up 5.4% to $17.95; Continental Airlines (CAL, news, msgs) added 2% to $28.78. The Dow Jones Transportation Average ($DJT) jumped 0.3% to 4,688, and the Amex Airline Index ($XAL.X) was up 3.3% to 37.31.

Plus reports late today from The Wall Street Journal suggested that talks between Delta and Northwest Airlines (NWA, news, msgs) were heating up. A deal could be announced next week. Northwest shares, up 3.9% in regular trading, added 3.3% to $19.07 in after-hours trading. Delta rose 3.3% in after-hours trading to $18.55.

The market's desultory performance came after big declines in Asian markets today -- a reaction to Tuesday's sell-off. Japan's Nikkei 225 Index ($N225) slumped 4.7%, to 13,099. But European stocks held their own. London's FTSE 100 Index ($GB:UKX) finished unchanged at 5,875, while the German DAX 30 Index ($DE:DAX) closed up 1.2% to 6,848.

Energy prices -- New York close
 Wed.Tues.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$87.14$88.41-$1.27-5.02%-9.21%
Heating oil (per gallon)$2.4188$2.4465-$0.0277-4.57%-8.70%
Natural gas (per million BTU)$7.9940$7.9420$0.0520-0.99%6.83%
Unleaded gasoline (per gallon)$2.2399$2.2621-$0.0222-3.00%-10.07%

Disney's twinkling earnings

Disney's profit fell 27% to $1.25 billion, or 63 cents per share -- down from the $1.70 billion, or 79 cents per share, the company earned in the same quarter a year ago. The results still beat Wall Street's expectations of 52 cents per share.

Disney's successful "Hannah Montana" television show, which is broadcast on The Disney Channel, and its "High School Musical 2" DVD helped boost revenue 9% to $10.45 billion.

Chief Executive Officer Bob Iger said that costs at the company's ABC network have to come down because the writers strike kept Disney from making more shows to sell.

Disney, for one, doesn't seem to be sweating over a recession. "We aren't going to forecast the economy, and at this point the trends don't tell us enough to predict precisely how the remainder of the year will unfold," Chief Financial Officer Tom Staggs said on a conference call with analysts. Sales at Disney's resorts business rose 11% to $2.77 billion in the quarter, and the company said that 85% of its cruise lines are already booked for the year. "We are pleased with the current pace of business at our parks," Staggs said, adding that the company will "respond quickly to changes in market conditions if they occur."

Time Warner to spin off AOL dial-up

Time Warner (TWX, news, msgs) shares jumped today after CEO Jeff Bewkes today announced some changes for AOL.

Bewkes said Time Warner will separate AOL's dial-up Internet-access business from the rest of the division, which includes ad sales and its Web portal.

"We need to complete AOL's business-model transition," Bewkes said on a conference call.

Time Warner shares were up 2% to $15.71 today.

Stock Chart (Year)

Time Warner
Graphical chart for TWX
Operating income at the AOL division fell 70% to $274 million, with subscribers dropping 29% to 9.3 million in the quarter. AOL has been a thorn in Time Warner's side in recent years. The irony is that AOL was the acquirer in 2001 when the two companies merged in a $164.7 billion deal.

Two years after AOL and Time Warner joined forces as AOL Time Warner, the company removed AOL from its corporate name, a reflection of how much the dot-com bust had hurt AOL.

Today's announcement came after the media giant reported fourth-quarter earnings of $1.03 billion, or 28 cents per share -- a 41% decline from the $1.75 billion, or 44 cents per share, that Time Warner earned a year ago. The results missed Wall Street's estimates by a penny.

Overall sales rose 2.4% to $12.6 billion.

Bewkes also said that the company plans to reduce corporate costs by 15%, which would save the company $50 million. The new CEO questioned whether Time Warner should keep both its Warner Bros. and New Line film studios.

Bewkes also said that that it will likely reduce its 84% stake in Time Warner Cable (TWC, news, msgs), which it spun off a year ago. Bewkes said he expects more defined plans for Time Warner's cable business in April, when it reports first-quarter earnings.

Time Warner forecast earnings from continuing operations of $1.07 to $1.11 per share for 2008; the consensus estimate is $1.11 per share for the full year.

Yahoo keeps the door open

Yahoo (YHOO, news, msgs) Chief Jerry Yang e-mailed employees today to thank them for staying focused as the company deliberates a $44.6 billion offer from Microsoft.

Yang said that the company is "thoughtfully evaluating a wide range of potential strategic alternatives" and "no decisions have been made."

Microsoft's $31-per-share bid on Friday has led rival Google (GOOG, news, msgs) to question the antitrust potential of a Microsoft-Yahoo combination. Google also offered its "help" to Yahoo in fending off the software giant, according to multiple reports.

Most analysts expect a Microsoft-Yahoo deal to go through, although the regulatory process could take a while.

Shares of Yahoo fell 1.4% to $28.57 in midday trading. Google shares fell 1% to $501.71.

Rio Tinto says nyet to BHP Billiton

Australian mining giant Rio Tinto (RTP, news, msgs) rejected a sweetened bid from rival BHP Billiton (BHP, news, msgs) this afternoon, calling it too low and not in the best interest of shareholders.

BHP had sweetened its hostile bid for rival to $147.4 billion after offering $142 billion for the company in October. BHP Billiton had until today to boost its bid; Rio Tinto had rejected the original offer as too low as well.

BHP shares were down 4.9% at $66.16 in New York today; Rio Tinto was down 2.9% to $409.37.

BHP hit a hurdle last week, when Aluminum Corporation of China (ACH, news, msgs) and U.S. aluminum company Alcoa (AA, news, msgs) invested $14 billion into Rio Tinto for a 12% stake in the company.

Rio Tinto said that it "will consider the terms of the proposal carefully." If the BHP deal goes through, it will be the biggest merger in the mining industry.

Prices of commodities like gold and copper have jumped over the past year, giving mining companies more flexibility to make deals, while the credit crunch has slowed mergers and acquisition activity for most other sectors.

In January, M&A business in the U.S. totaled just $116 billion, down 19% from a year earlier, according to Thomson Financial.

Productivity surprise

Productivity in the U.S. slowed in the fourth quarter of 2007, but the numbers were better than economists had predicted.

Nonfarm productivity rose at an annual rate of 1.8% in the fourth quarter, a slowdown from the revised 6% pace in the third quarter but better than the expected 0.5% increase.

Unit labor costs, which are a gauge of inflation, rose 2.1% for the quarter, following a 1.9% decline in the third quarter. Economists had been looking for a 3.8% rise.

Short hits from the markets -- 4 p.m.
 Wed.Tues.Chg.Month chg.YTD chg.
13-week Treasury bill2.040%2.145%-0.1059.09%-35.03%
5-year Treasury note yield2.674%2.664%0.010-5.38%-22.60%
10-year Treasury note yield3.614%3.587%0.027-0.69%-10.43%
30-year Treasury bond yield4.374%4.342%0.0320.46%-1.91%
U.S. Dollar Index76.30076.2850.0151.35%-0.52%
British pound in dollars$1.9619$1.9627-0.0008-1.49%-1.37%
Dollar in British pounds £0.5097£0.50950.00021.51%1.39%
Euro in dollars1.46331.46330.0000-1.59%0.12%
Dollar in euros€ 0.6834€ 0.68340.00001.62%-0.12%
Dollar in yen ¥106.36¥106.38-0.02-0.05%-4.91%
U.S. dollar in Canadian dollars$0.995$1.006$0.0005-0.50%0.17%
Canadian dollar in U.S. dollars$1.006$0.994$0.00030.52%-0.15%
Crude oil (NYMEX) (per barrel)$87.14$88.41-$1.27-2.05%-9.21%

By Charley Blaine and Elizabeth Strott, MSN Money

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