Apple, Cisco, and the Nasdaq
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Not too hot, not too cold, investors and traders alike continue to see the stock market and economy as just right. If there was ever a day that was destined to end in with losses, it was last Thursday, February 10.


That was the day after Cisco (Nasdaq:CSCO) gave analysts a very disappointing look ahead.


Not one to spin his outlook as a positive, Cisco CEO John Chambers said “Unfortunately, we believe that our concerns in the public sector will continue to be challenging in the developed world for the next several quarters..."


And, on the U.S. market, he said “The challenges at state, local, and eventually federal level in our opinion will worsen over the next several quarters...”


Yikes. For an economy that has been highly dependent on government and corporate spending, Chambers' outlook wasn't very encouraging. But on a day when Cisco was pounded for around 15%, and Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT) and Apple (Nasdaq:MSFT) all finished in the red, the Nasdaq as a whole actually posted a gain.


Now, Apple alone accounts for 20% of the Nasdaq 100 (the 100 largest stocks on the Nasdaq). Throw in Google (4.2%), Microsoft (3.6%) and Cisco 1.6%, and you're looking at 30% of the Nasdaq 100. Nearly one-third of the Nasdaq 100 was lower on Thursday, easily the most influential tech companies, and the Nasdaq managed a gain for the day.


That's a remarkable show of strength. No doubt, the virtuous cycle prompted by wireless devices that we've discussed is helping to support the tech space. Still, if the market leaders like Apple and Google can't participate in a rally, it should make one wonder...


*****I can't think of many more worthless pursuits that trying to call a top to the rally we've enjoyed since the final days of August (?!?). Every time some strategist or guru calls a top, he or she gets mowed down by the relentless advance.


But please note, this rally has been a more gradual advance than the rally that started in March 2010 and culminated in the infamous "flash crash" of May 6, 2010.


I may not be wildly bullish anymore, but I'm certainly standing in the way either.


Google has a forward P/E of 15 and a PEG ratio of 1. Apple's even cheaper, with a forward P/E of 13.5 and a PEG of .76. Are the heavy weightings of these two stocks (and select others) offsetting more expensive components of the Nasdaq and S&P 500? Sure, makes sense. But at the same time, analysts have under-estimated earnings for the last two straight years. And revenues have also began to beat analyst expectations.


*****It's easy to look at Cisco's warning about spending and assume the issue is company-specific. After all, this was the third consecutive quarter that Cisco has disappointed.


Still, it would be a big mistake to simply ignore the spending issue, both from consumers and from state and federal government. There is a looming budget fight brewing in Congress. Inflation may be the "headline" issue right now, but it’s the potential for less spending that is the biggest threat to stock valuations right now.


*****The Treasury is reporting that debt servicing costs for the national deficit will rise to 3.1% in 2016 from current levels of 1.3% in 2010. Outstanding government debt is now $8.96 trillion, up from $5.8 trillion at the end of 2008.


Clearly, the Treasury is forecasting higher interest rates when it calculates future debt servicing costs. Right now, those costs are not debilitating because interest rates remain low. But that's not going to last as the economy recovers.


In addition to supporting the economy, there should be no doubt that part of Bernanke's insistence that rates stay low for the foreseeable future is due to the costs the government would incur. In other words, government spending is on borrowed money and borrowed time.


This is another way to look at spending. And it seems inevitable that, at some point, spending cuts will be a necessity. We should be thinking in terms of weeks or months, instead of months or years.


*****Most of the big, influential earnings reports are done. But this is a big week for economic data. Tomorrow we get retail sales and the Empire Statemanufacturing survey. Housing starts, building permits, industrial production and capacity utilization for January come in on Wednesday. Then on Thursday, we get CPI, initial unemployment claims, leading indicators and the Philadelphia Fed manufacturing survey.


And amidst it all, the U.S. dollar is rallying. Let's stay on our toes...

Posted 02-14-2011 2:21 PM by Ian Wyatt