Posted: 11 Aug 2010 03:09 PM PDT

Reading headlines alone, one might wonder if two headlines from today on Cisco were from the same quarter.

Bloomberg reports Cisco Misses Estimates on Sluggish Corporate Spending

Meanwhile, the Wall Street Journal reports Cisco Profit Jumps 79%

Cisco Systems Inc. said fiscal fourth-quarter profit jumped 79% on rebounding revenue, although margins slid for the second consecutive quarter.

In a call with investors, he said he expects the current quarter's sales should rise 18% to 20% over a year ago as he warned that a return to normal economic conditions would take longer than previously expected. Wall Street forecast a 21% gain in the quarter's revenue.

Mr. Chambers said that the term "unusual uncertainty" was an accurate way to describe the current environment, noting that customers have exercised "an unusual amount of conservatism and caution." Cisco's significant reach into the guts of many businesses make it a good proxy for broader corporate spending.

Revenue jumped 27% to $10.84 billion. In May, the company projected sales would increase 25% to 28% from a year ago.

Analysts' latest estimates were earnings of 42 cents a share on revenue of $10.88 billion, according to Thomson Reuters.

Gross margin declined to 62.7% from 64%.

Sales increased 31% for the company's products segment, which makes up a bulk of Cisco's revenue, while service sales were up 12%.

Priced For Perfection

Frequently it's not the news that matters, it's the market's reaction to it. In this case Cisco is getting hit pretty hard after hours.

Across the board, stocks are priced for perfection. And when stocks are priced for perfection, small slips matter. Expect to see more stock market reactions like this on any miss, even when profits are up 79%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Economists Cut Growth Estimates

Posted: 11 Aug 2010 11:11 AM PDT

Now that it's perfectly obvious to everyone on the planet that the recovery is not much more than burnt toast, Economists Cut U.S. Growth Forecasts

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.

"Simply put, job growth in the private sector hasn't improved as we would've expected," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "The consumer continues to contribute to growth but at a subpar pace."

"Unemployment is high, income growth has been pretty slow," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who lowered estimates for growth and spending. "Household wealth is a lot lower than it was three years ago."

"The pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Federal Open Market Committee said in a statement after meeting yesterday.

Revised Estimates Still Too Optimistic

Why was everyone so optimistic in the first place? There was no real reason for it. The answer of course is Fooled by Stimulus.

However, the economists still don't get it. Second half GDP is likely to be closer to 0% than 2.55%. Negative GDP is plausible.

Did the Recovery Stall?

Not really. Caroline Baum explains in Economy Lost Momentum While I Was Pulling Weeds

The post-mortems on the July employment report made me realize I'd missed the recovery.

While I was watching my garden grow, the U.S. economy "lost momentum," according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.

Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

Inventory accumulation accounted for more than half of gross domestic product growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.

The Federal Reserve's near-zero percent interest rates and $2.3 trillion balance sheet, almost three times its pre-crisis level, haven't translated into growth in broad money and credit. Banks are holding $1 trillion in excess reserves in their accounts at the Fed.

On the fiscal front, the government threw huge sums of money at the economy. It paid people to buy cars and homes. It paid them to weatherize their houses, maybe the same ones the government paid them to buy. It paid them to buy appliances for the houses the government paid them to buy. And it paid banks to modify mortgages.

What did we learn from this exercise? That, by golly, if someone were planning to buy a home anyway, an $8,000 tax credit acts as an inducement to do it that much sooner!

So, yes, if the goal is to put money in the pockets of people who will spend it, as Democrats in Congress are wont to say, then the $862 billion fiscal stimulus has been a smashing, but not lasting, success.

What Now?

The key question, as always is "What Now?"

Geithner, Obama, and Krugman all want more stimulus to keep the recovery going. However, as Baum explains, you can't keep something going, that was never going in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Economists Cut Growth Estimates

Posted: 11 Aug 2010 11:11 AM PDT

Now that it's perfectly obvious to everyone on the planet that the recovery is not much more than burnt toast, Economists Cut U.S. Growth Forecasts

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.

"Simply put, job growth in the private sector hasn't improved as we would've expected," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "The consumer continues to contribute to growth but at a subpar pace."

"Unemployment is high, income growth has been pretty slow," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who lowered estimates for growth and spending. "Household wealth is a lot lower than it was three years ago."

"The pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Federal Open Market Committee said in a statement after meeting yesterday.

The post-mortems on the July employment report made me realize I'd missed the recovery.

While I was watching my garden grow, the U.S. economy "lost momentum," according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.

Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

Inventory accumulation accounted for more than half of gross domestic product growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.

The Federal Reserve's near-zero percent interest rates and $2.3 trillion balance sheet, almost three times its pre-crisis level, haven't translated into growth in broad money and credit. Banks are holding $1 trillion in excess reserves in their accounts at the Fed.

On the fiscal front, the government threw huge sums of money at the economy. It paid people to buy cars and homes. It paid them to weatherize their houses, maybe the same ones the government paid them to buy. It paid them to buy appliances for the houses the government paid them to buy. And it paid banks to modify mortgages.

What did we learn from this exercise? That, by golly, if someone were planning to buy a home anyway, an $8,000 tax credit acts as an inducement to do it that much sooner!

So, yes, if the goal is to put money in the pockets of people who will spend it, as Democrats in Congress are wont to say, then the $862 billion fiscal stimulus has been a smashing, but not lasting, success.

Front Running the Fed - Who Knew?

Posted: 11 Aug 2010 07:51 AM PDT

Curve Watchers Anonymous is paying close attention to the following snip from the Bloomberg article Pimco Calls Fed Rate Policies 'Good for Risk Assets'

The central bank said in a separate statement that it will announce a purchasing schedule today and that its buying will be concentrated "in the two- to 10-year sector" of the maturity spectrum, though it will also buy other maturities as well as Treasury Inflation Protected Securities.

Clearly no one could have possibly known that in advance. Or could they?

On August 6 in Two Year Treasury Yields Drop Below .5% First Time Ever; 30Yr/10Yr Spread Widens Again I commented...

The following chart shows the yield curve over time.

click on any chart for sharper image

The chart depicts weekly closes. 10-year yields did slightly exceed 4% in April but those highs do not show in the above chart. Thus, the decrease in yields is even more dramatic than shown.

Note the huge rally on 5 and 10 year treasuries as compared to the 30-year long bond. It appears as if someone is putting on a long-10 short-30 spread.

Shortly after the FOMC meeting but before I saw details of what the Fed would be buying I commented on Quantitative Nothingness and the Yield Curve's Reaction

Yield Curve as of 2010-08-10

7-year Sweet Spot

Once again the yield curve flattened with the "sweet spot" this time being the 7-year treasury. The 30-year long bond barely budged.

Normally, the further out one goes the bigger the rally (or loss) in response to economic news. It will be interesting to see if the 30-year long-bond can catch up.

Yield Curve May 2008 Through August 10, 2010

click on chart for sharper image

A couple things stand out on the above chart.

1. The 5-year treasury yield is approaching all-time record lows and is now back to where it was in January of 2009.

2. The spread between 10-year treasuries and the 30-year long bond continues to widen

I suspect a major player continues to put on a long-10 short-30 trade. I can easily be wrong on that. The question is "where does the spread go from here?"

Yield Curve as of 2010-08-11

Today, one day after the FOMC announcement, the yield curve looks likes this.

Once again the 7-year treasury is in the sweet spot.

Yield on the 5-yer treasury is headed for an all-time record low, and the 10-year note yield is looking increasingly likely as well. So much for the idea that the bull market in treasuries is over.

Hypothetical Conversation

Here is a hypothetical conversation between Ben Bernanke and Jamie Dimon, CEO of JPMorgan, that explains the action in the middle of the yield curve recently.

Hello Jamie, this is your buddy Ben, Ben Bernanke. Here's the deal. We are going to announce a brand new policy called "Quantitative Nothingness".

We intend to keep the Fed's balance sheet intact, exactly where it is today. However, we are going to do that in an interesting way. I can't tell you exactly what we are going to say but ... here's a helpful hint: "Invest in the middle of the yield curve."

With that hypothetical conversation out of the way, I do need to point out I am not a fan of conspiracy theories. I also want to point out once again that the Fed the most influence in the direction of the trend, and that the middle of the yield curve was begging to be flattened given the weak economy. Besides, hints like that simply don't happen, do they? So whocouldanode?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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