Cisco and Carnage in the Market

Cisco's earnings
Good news. The results were solid and earnings were strong. Most improtantly, Cisco reported a book-to-bill ratio >1. In fact, underlying the report was an acclerating sales picture. In light of Juniper's struggling earnings, this is a sign that Cisco is winning the high end router market.

Sure, there were areas that could be picked apart. For example, the Accounts Receivables Days outsanding grew from 31 days to 35. The extra 4 days probably cost Cisco a few million in earnings.

For those who know me from elsewhere, I have commented before that Analysts were hugely overstating the impact of stock option expensing. The longer Cisco remains <$25, the more likely the expensing will be small and diminishing. (It comes down to the fact that the only options of value <$25 are from 1997~1998 and 2001~2005. The 1997 & 1998 options are more critical because of the volume due to the 4 splits. Regardless of the period (1997/98 or 2001~05), the options are barely $10 profit each at most at the strike price and $25 stock price. In effect, there just isn't much options exposure.)

Cisco's results were critical in light of the string of poor results. Commodities have begun their slide, as I predicted they would. That was bad for commodities, but excellent for oil sonsumers and manufacturers. Housing is slowing, which again was obvious, and which is bad for producers but excellent for homebuyers and renters.

Welcome to the contradictory and irrational ways of the market. Yesterday the fear was inflation, and so the market sold. Today, falling commodity prices and potentially falling home prices reduce the potential for interest rate hikes, and so the market sold.

It means that the market is locking in prices. And as always, it will be oversold before it comes back.

The central question we want to answer is have the fundamentals of our companies changed.
Well, in some slight ways, yes.
ET is enjoying a lot of this crazy trading activity.
Oil prices and commodity prices are slipping but remain above the critical levels where equipment demand will slow. Prices would have to slip another 30% for that to happen. Recent oil movements are due more to Iran interference and seasonally warmer weathers. Commodity prices are slipping but I think we have another year before the critical levels are within our sights.
Technology is strong, strong, strong.
AKAM is a who's who of online retailers and online information companies (Apple iTunes, Yahoo, Schwab & ET). I expect upside surprise.
Marvell should be super string based on the larger than expected sales of their end users (iPods, Seagate hard drives, Cisco gear)

So fundamentals remain strong. The only question is the degree to which market sentiment is adding to or subtracting from the stock premiums.