When Bad News Turns Good

Jul 12 2001

Yesterday I left the trading desk at mid-morning to do a spot for TechTV on biotech. Good thing their studio is within walking distance. It was bad enough that once I got there, I had to wait 45 minutes to do 45 seconds of live TV. But the worst of it was that I had to talk about my favorite sector - biotech - right while it was getting massacred ... again.

When I got back to the desk, the equity markets all looked various shades of awful. But I drew some encouragement from seeing that a whole spectrum of non-equity markets were all doing the right things - even though the stock market didn't seem to have noticed. At 12:30 p.m. EDT, I wrote about it:

"The equity markets look bleak, but there are signs of hope gathering. It's no coincidence that gold, bonds, the euro, the yen and fed funds futures are all higher today."

No coincidence, indeed. All of these markets were showing symptoms of relief from the Fed-imposed liquidity squeeze that has intensified since the Fed Open Market Committee's last rate cut on June 27 - which the market has come to interpret as the last rate cut in this easing cycle. Yes, it took what has nearly been a stock market meltdown to make it happen, but it happened: The market is finally guessing that maybe the Fed is listening again. Even if nobody's home in Washington, at least the market thinks that someone may have turned on a light in the attic yesterday.

The best part was that, for the first time yesterday, the August fed funds futures registered the markets' assessment of a virtual certainty that the FOMC will cut the fed funds rate by at least 25 basis points by no later than its Aug. 21 meeting. What's more, now there's better than a 50-50 chance that it will cut the rate sooner - or that it will cut the rate by more than 25 basis points. Further, the contracts for February of next year are showing only that the funds rate will be at today's levels - all last week it was forecasting that it would likely be higher.

As the day progressed, slowly but surely a few key stocks started to creep up - almost furtively. One that caught my attention was Microsoft, which traded higher almost all day, even when the Nasdaq indexes were making new lows. Microsoft traded up most for most of Tuesday, too, and went into the red only at the end of the session, when the whole market collapsed. I just figured it was due - the stock has been hammered since its favorable ruling by the U.S. Court of Appeals last week.

And some of it was certainly because of the news, released at noon PDT, that Microsoft would be offering manufacturers more flexibility in the way Windows XP could be installed on their boxes, and offering users more flexibility in the decoupling of the Internet Explorer browser from the operating system. It was all presented in Microsoft's press release, not so subtly, as a good faith gesture that could be the prelude to a speedy settlement with the Department of Justice in the residual issues of the antitrust case.

But as everyone now knows, the real news was the bombshell that was released right after the market closed. It masqueraded as "bad news," with a headline blaring that Microsoft "expects to report a net investment loss of $2.6 billion in the fourth fiscal quarter of 2001 ... particularly in the cable and telecommunications industries."

OK, like, who's surprised by that? Probably a good thing that they admitted it.

But then the really good news came out. Microsoft said it expects "to report revenue in the fourth fiscal quarter in the range of $6.50 to $6.60 billion, somewhat higher than management's previously expected range of $6.30 to $6.50 billion." Huh? Did it say "higher"?

And finally, the really, really good news came out. "Additionally, management expects results from operations to be in line with previous guidance." Holy Dog! Why didn't they just come out and say that in the first place?

They aren't going to warn! Microsoft is not going to warn!

One more time: Microsoft is ... NOT GOING TO WARN!!

In the 30 seconds it took for this inconceivable reality to sink in - Microsoft is not going to warn! - the stock was up four points, and the Nasdaq futures were trading 50 higher. Wait, that's 60. No - that's 70! What a great way to kick off earnings season .

So now we finally get to see what this stock market is made of. We've seen it process enough bad news to gag a maggot - and it's managed to hold on above the lows of March and April.

But this is where it really gets interesting. How will the market process good news? Tough to say ... because there hasn't been any for a long, long time.

This is the test we've been waiting for. If this can't make a secondary bottom - then nothing can!