Warnings Woes Wreak Havoc on Stocks

After rallying on the comments of Federal Reserve Chairman Alan Greenspan yesterday, the markets turned down sharply in trading today, as investors got back to the business of earnings, which continue to be the primary driving force in the markets.

Unfortunately, early morning earnings warnings by Xerox (XRX) and Daimler Chrysler (DCX) that future earnings should be adjusted downward provided a very volatile trading atmosphere on the New York Stock and NASDAQ exchanges. In other words, all market indices were broadly down at the close of trading today.

Xerox Corporation (XRX) announced today that it earned 30 cents a share for the second quarter. This met the estimate of analysts that had revised earnings downward from 42 cents earlier. Revenue was reported to be $4.7 Billion, which is down 4 percent from the second quarter of last year. Company executives further warned that there would be a need for significant downward adjustments to expectations in the future. Xerox finished the day at $15, down 3.25 points, or 17.50%.

Daimler Chrysler (DCX) warned early in the trading session that its full year profits would be lower than the previous year due to higher incentives paid and increased costs to introduce it new models. However, the worlds 5th largest carmaker reported earnings per share were up 18 percent to 1.74 euros beating analysts estimates of 1.69 euros per share with sales rising 17% to 43.74 billion euros. This positive news allowed the automaker to post a gain of $1.94 to $53.56, up 2.51% for the day.

The Dow Jones Industrial Average (INDU) finished the day at 10,516.48, a loss of 183.49 points, or 1.7 percent. The big losers were Hewlett-Packard (HWP), which fell $5.38 to $110. The other big loser was JP Morgan (JPM), which slide $4.75 to close at $131.44.

As for new-economy fare, LSI Logic (LSI) took a beating in trading today after comments by Lehman Brothers analyst, Dan Niles, stated that the revenue figure for the quarter "was $20 million light due to near-term execution issues". Meanwhile, Bear Stearns downgraded the stock to an "attractive" rating from a "buy". Analysts noted that the company had guided estimates for sequential growth at 8-10 percent but had come in at 4.7 percent indicating a possible change in "credibility issues". LSI fell $8 on the day closing at 32.50, posting a 19.75% loss.

The NASDAQ composite (COMPX) lost most of yesterday's 47-point gain, closing at 3986.90 down 42.67. Declining issues led advancing issues 2308 to 1543 with 1067 unchanged. After opening lower at 3998, the composite fell as much as 122 points to 3906 in early trading, which was fueled largely by analysts downgrades of key stocks.

Moreover, weakness in the chip making industry was apparent in the Semiconductor Index (SOX), which fell just over 70 points for the day in an amazing one-day decline of 6.34%, added to the COMPX's decline.

Amazon.com (AMZN) was hit hard by a downgrade by Lehman Bros. The firm cut their rating on the stock to "neutral" from "buy", citing "ongoing concerns which have intensified in recent quarters" and otherwise expressing their concern that the online bookseller can continue to grow and justify its current price without more diversification in its product. Amazon closed at $36.06 down $1.56 for the day, but up $2 from its low of $34.06. After the bell, Amazon announced a loss of 33 cents, which was two cents better than analysts' estimates. Revenues came in at 585 million, a figure, which is below street estimates of 585 million.

Remedy Corporation (RMDY), a Mountain View California customer management and infrastructure software firm, lost 46% of its value in very heavy trading of almost nine million shares. This came after the company announced second-quarter earnings of $9.9 million or 29 cents a share, up from last year's profit of $6.2 million or 24 cents per share. This came in a penny ahead of estimates. However, these results were not good enough for analysts from two brokerage firms, CIBC World Markets and Banc of America. Lowering their recommendations from "strong buy" to "buy". Banc of America, which also lowered its price target to $65 per share, stating that the results were disappointing based upon sales force turnover and new products not gaining expected traction. RMDY opened $16.72 points lower today and fell an additional $4.63 during trading to close at $22.38, down $19.72, or 46.84%.

Rambus (RMBS) got hit hard today after Intel (INTC) announced that it was designing a chipset for its upcoming Pentium 4 processors, ending its exclusive supply relationship with Rambus. In response, Rambus' stock closed down $9.50 to $75.50 and was noted as one of the most heavily traded issues on the NASDAQ, with more than 11.8 million shares changing hands.

Analyst venom also hit shares of Vignette (VIGN), a maker of electronic-business software. Banc of America sent up a red flag fearing that because the accounts receivable of this company have ballooned to over $106 million from last quarter's figure of $55 million, its future profitability might be hampered. ING Barings created more selling when it downgraded the stock to "buy" from a "strong buy" citing concerns of a more competitive selling environment and off- balance sheet licensing, which could slow significantly. Vignette shares fell $4.88 to $38.75 a loss of 11.17% on volume of 8.9 million shares.

Despite a strong second quarter performance of $2.6 million, or 11 cents per share for Aware Inc (AWRE), the stock fell 7.4% to $49. The designer and developer of DSL technology, stated that earnings were up significantly from last years 4 cents per share gain and 2 cents ahead of analyst estimates, with revenues of $7.2 million.

Going forward, the COMPX appears to be range-bound between 3,820 and 4,300, so the downside appears to be limited. Unfortunately, for the older-economy issues, the INDU fell through its 50-dma support of 10,818. The next serious support level is 10,300.

The general consensus is that the major indices will continue to oscillate in the manner they have over the last few days, until investors can get clear sense on where the market is heading. In other words, expect more volatility.

Good luck! And remember not to fight the market trend.

M Fairbourn
Research Analyst

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