MarketView for August 10

Summary  

Fear returned to Wall Street on Wednesday, sending the S&P 500 to another 4 percent decline, triggered by worries that Europe's debt crisis could engulf French banks and with derogatory effects on the U.S. financial markets. And as is becoming a too frequent a case, trading was once again marked by sharp moves on heavy volume. For a fifth straight day, the Dow industrials fluctuated in a range of more than 400 points. Wednesday's drop came a day after stocks rallied on the Federal Reserve's pledge to keep interest rates near zero for at least two more years.

Even after Tuesday's snap-back rally, the S&P 500 is down almost 18 percent from its 2011 closing high set April 29. Worries over the strength of French lenders triggered a selloff in European and domestic banks. Rumors about SocGen's financial health, which the bank denied, sent its shares tumbling 14.7 percent. Bank of America lost 10.9 percent to $6.77 and Goldman Sachs slid more than 10 percent to $110.34.

The losses came against a backdrop of lethargic economic data, the downgrade by Standard & Poor's and the inability of lawmakers to address worries that another recession may be on the way.

About 15.1 billion shares traded on the major equity exchanges, almost double the year's estimated daily average of 7.8 billion, with volume once again rising sharply in the last hour of trading, and the market closing near its session lows. Of late, overleveraged investors with losses on their books have been forced to sell shares near the end of the day. Slides in the value of stocks may increase the cash needed in margin accounts, which can spark further selling.

Disney fell 9.1 percent to $31.54 a day after the entertainment company's quarterly results failed to reassure investors that it could do well in a weak U.S. economy. The only good news was that after the closing bell, Cisco saw its share price rise about percent after its quarterly results edged past Wall Street's scaled-back expectations.

Mutual Funds Suffer Largest Outflow Since 2009

Investors pulled the most money out of domestic mutual funds in the week ended August 3 since the depths of the stock market collapse in March 2009, with net redemptions of $16.9 billion, data from the Investment Company Institute showed on Wednesday.

For a second straight week, each major fund category tracked by ICI, a U.S. mutual fund trade organization, showed net outflows of cash, illustrating investor anxiety over future economic growth. The estimated data does not capture withdrawals after the downgrade by Standard & Poor's.

Last week's outflows were the most since the week ended March 11, 2009, when ICI reported net outflows of $21.65 billion. The largest net outflow -- nearly $60 billion -- occurred in the week ended October 15, 2008.

Net redemptions of $2.86 billion for fixed income funds was the worst week since late December 2010, while equity funds, with net outflows of nearly $13 billion, had their worst week since late May of last year.

Cisco Beats Reduced Estimates

Cisco forecast slim revenue growth this quarter, a pleasant surprise to investors bracing for a sharp pullback in global technology spending. The world's leader in Internet networking equipment predicted in-line sales growth of 1 to 4 percent this quarter after posting quarterly results on Wednesday that edged past Wall Street's scaled-back expectations.

The Street took that as an early sign that tough measures to return the Silicon Valley giant to growth -- including layoffs and asset sales -- were taking hold. There had been some concern that Cisco would follow rivals Juniper Networks and Brocade Communications in lowering projections.

Cisco lost about a third of its market value in 2011, punished by flagging growth and the loss of market share to aggressive rivals like Juniper. The company, which depends on government spending for about a fifth of its revenue, said in July it would cut 15 percent of its workforce and sell a set-top box factory in Mexico as part of an effort to slash annual expenses by $1 billion.

CEO John Chambers told analysts he foresaw "gradual improvement" in the business, while warning again of a challenges for global public sector spending in coming quarters. That came after the company chalked up better-than-expected sales, profit and margins in the fiscal fourth quarter. As a result, the company’s share price rose as much as 10 percent in extended trading after closing down 2.3 percent before falling back a bit to trade up 8 percent at $14.81.

Cisco has warned since last year that government spending cuts would include network equipment, and that a deal last week to reduce the federal budget deficit could reduce the company's revenue. Investor sentiment also worsened after rivals Juniper and Brocade cut back their outlooks as the economic picture darkened, sending the share prices of both companies falling.

Cisco’s first-quarter projection translated to revenue of about $10.86 billion to more than $11 billion. The consensus had been for about $10.95 billion in the fiscal first quarter ending October. Gross margins came in at 62.7 percent, falling from 63.9 percent in the fiscal third quarter, while net income fell 36.3 percent to $1.2 billion or 22 cents a share, from $1.9 billion or 33 cents a share a year earlier. Excluding certain items, the company earned 40 cents share, just above the 38 cents expected on average.