Cisco Sounds the Alarm Bell

When the competitors of Cisco Systems, Inc. (NASDAQ/CSCO) reported weaker first-quarter 2012 earnings, market participants bid up Cisco’s stock believing that Cisco was taking market share away from its competitors.

Polycom, Inc. (NASDAQ/PLCM), a videoconferencing company, reported weaker first-quarter earnings. This competitor to Cisco noted that lower government spending caused revenues to decline more sharply than anticipated.

The company also provided its earnings outlook for 2012. It noted that the economic landscape looked weak. It cited business in North America and in Asia as being weak. This earnings outlook flies in the face of those who say that the U.S. economy will remain strong, despite what the rest of the world is doing.

Juniper Networks, Inc. (NYSE/JNPR) is a major communications equipment maker, the main competitor of which is Cisco Systems. Juniper’s earnings outlook for 2012 was provided with a very cautious tone. The company believes that the slowing U.S. economy and the European debt crisis are preventing telecommunications companies from spending, which in turn will affect its bottom line.

Many traders thought it is easy to blame a weak U.S. economy and the European debt crisis on a weak earnings outlook when Cisco is taking market share.

Cisco System reported earnings last week, which were fine, but its earnings outlook for 2012 painted the picture of a very nervous business sector that was unwilling to spend on Internet gear and a weaker global economic environment.

Despite the cash large corporations have on their balance sheets, they are not spending. Cisco noted that the European debt crisis not only meant weaker consumer and business spending in Europe, but it is also preventing large corporations from spending here in the U.S. and in Asia because of the perception of a coming global economic slowdown.

Yes, business in Asia was strong in the quarter for Cisco, but the company is uncertain about its earnings outlook in Asia going forward. Cisco is considered a leader in the technology space and its earnings outlook is a barometer of how the economy is doing.

Cisco also noted that weak government spending in the U.S. and in Europe—with the European debt crisis—was also an issue that was going to persist in 2012.

Due to Cisco and other technology firms’ weak earnings outlook, Internet technology spending growth worldwide has been slashed by many forecasters and analysts for the remainder of 2012.

There are clear signs the U.S. economy is weakening considerably (see: The Missing Economic Recovery), especially when considering the earnings outlook for the remainder of 2012 from key companies within the S&P 500. (Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Where the Market Stands; Where it’s Headed:

After a great start to the year, May is proving to be a terrible month for stocks. The Dow Jones Industrial Average has dropped 518 points since the beginning of May.

Corporate insider selling of stock is at a record high. I’ve written repeatedly about the recessions amongst European countries and about the slowdown in China. Now corporate America is pulling back on its corporate earnings forecasts for the remainder of 2012.

Is this the end of the bear market rally that started back in March of 2009? We’ll soon see, dear reader, we’ll soon see.

Note on Gold:

Reports in the media have it that investors are unloading their gold and running for the “safety of the U.S. dollar.” I don’t buy this at all. Firstly, central banks have been big buyers of gold bullion in 2012. Central banks just don’t turn around and dump gold they just bought.

Secondly, the only “security” in the U.S. dollar is the fact that it’s a currency backed by a central bank that will simply print more of it in the event more dollars are needed. Money printing is something Germany has held the European Central Bank back from.

So you tell me, dear reader. Would you rather own a currency that is limited in circulation or one that is issued by a country that just prints more of it as needed?

Finally, after years of rising gold bullion prices, we are seeing a meaningful correction in the gold market. Gold is up five percent from where it traded one year ago. It’s all in the way you look at it and where you see inflation and the U.S. dollar in the next two to three years out.

I’m in the camp that sees the glass as half-full. When I could, over the past decade, during the bull market in gold bullion, I have been buying gold-related investments as the price of the metal corrected. I believe this strategy has worked well for me.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.