Slower Growth Cheered By The Street

Morning News of Note:

• Gapping Up
  Gapping up on strong earnings/guidance: GNSS +21% (also upgrades from Roth and Stanford), AMMD +11%, ONNN +9.5%, GPN +6.3%, SPSX +6.2%, MHK +6.3%, VSEA +5.2% (also Needham and BofA upgrades), FORM +4.1% (also BofA upgrade), PLAY +3.7%, DRIV +3.4%, SRCL +3.2%, LWSN +2.7% (also Deutsche upgrade), APC +1.5%... Other News: ISIS +6.6% (clinical study on a treatment for Lou Gehrig's disease prolongs life in rats), RMBS +5% (accepts $133.6 mln in damages from Hynix), EMIS +3.1% (profiled in BWeek Inside Wall St section), MDG +3%, LBIX +2.5% (extends recent momentum), CRME +2.5% (same), BBY +1.9% (Raymond James upgrade), HAL +1.2%... Mining stocks are trading higher one weaker than expected GDP: AAUK +2.9%, RTP +2.3%, N +1.5%, NEM +1%... Under $3: PXPL +22% (hearing newsletter mention).
• Gapping Down
  Gapping down on disappointing earnings/guidance: RACK -33% (also Piper downgrade), SWIR -30% (also downgrades from Piper and Morgan Joseph), FORD -28%, VLCM -20% (also Wachovia downgrade), USPI -17%, MEE -16% (also Credit Suisse downgrade), MFE -15%, SPRT -14% (also Miller Johnson downgrade), CKCM -14%, ANDE -9.5%, SOHU -8.4%, MRCY -5.5%, DTE -3.8%, FII -3.3%, CVX -2.9%... Other News: GTOP -31% (Phase III MyVax data; also RBC downgrade), LNCR -7% (BofA downgrade), SINA -5%, SMSI -3.7% (extends yesterday's 12% drop), ISRG -2% (extends yesterday's 11% drop), BIDU -2% (extends yesterday's 21% drop), BMY -1.8% (JP Morgan downgrade), SHPGY -1.5%, RTRSY -1.3%, LSI -1.4%, UARM -1.3%... Under $3: CNXT -4.7% (reports JunQ; also Credit Suisse downgrade).
• Morning News Summary
  WSJ: Congress may let hedge funds manage more pension money... Chico's FAS (CHS) falls out of fashion with investors. Reuters: Sony (SNE) Q2 games division losses may exceed Q1... FBI raids office of Bristol-Myers (BMY) chief executive... AP: Judge OKs $90 mln 'click fraud' settlement.
• CHS Chico's FAS falls out of fashion with investors - WSJ (21.90 )
  The Wall Street Journal reports Chico's FAS (CHS) has been so successful that there may not be many new customers left to attract. The reversal in Chico's fortune revolves around the question of whether the co can sustain its success as the expansion of its original brand slows while they develop three other brands it has created or acquired in the past three years. The retailer attributes these problems to a few discrete issues. It says it is fixing bad color choices and improving its selection of cold-weather clothing for its northern U.S. stores. It is expanding some Chico's and White House/Black Market stores, with more space for cash registers and dressing rooms to shorten lines. For the first time in years, the number of new sign-ups to Chico's loyalty program is slowing, spelling trouble for future sales growth, as most of its sales come from these regular shoppers. Finally, Piper analyst Neely Tamminga believes that Chico's concept may be hitting a saturation point and shares could command a lower P/E.
• GOOG Judge OKs $90 mln 'click fraud' settlement - AP (382.40 )
  AP reports An Arkansas judge Thursday approved a $90 mln settlement between Google (GOOG) and advertisers who claimed Google improperly billed them for ''clicks'' that didn't lead to genuine customers seeking their products. Miller County Circuit Judge Joe Griffin called the settlement ''fair, reasonable and adequate'' and downplayed claims it hurt small advertisers. More than 70 objections were filed, with smaller companies saying they didn't have the resources to prove ''click fraud'' losses. By settling claims made in the plaintiffs' class-action lawsuit, Google will give advertising credits that are the equivalent of a $3.80 refund on every $1,000 spent in its advertising network during the past 4 1/2 years.
• RACK Rackable Systems: Another strong quarter with conservative guidance as usual - Thomas Weisel (34.91 )
  Thomas Weisel says RACK had another great quarter, with revs of $88.6 mln and pro forma EPS of $0.28. Firm said RACK reported solid gross margin of 23.7% (excluding options), 69bp higher than their est of 23.0%. Previous gross margin guidance was 22-24%, and the co reiterated that guidance for future quarters with a caveat that higher Intel mix in 2H could be a drag on gross margin. Cautious guidance for next quarter and full year guidance, as always-but note shift back to INTC Woodcrest causing some purchase delays near term. Firm is raising their ests to the higher end of co guidance. Sources of investor and Thomas Weisel's concern are: 1) Fear of broken growth story-but firm believes strong re-acceleration is likely in 4Q and beyond as new salespeople ramp. 2) Fear of margin erosion-but they believe high leverage is likely with a rev acceleration, thus, a return to the 12-15% OM range from the 10% is expected in 3Q06.

Market Comments: The markets are rallying, both the stock and bond markets. Q2 GDP came in at +2.5%, below expectations of +3.0%. So the economy has slowed, and that is pushing bond yields lower. The 10-year broke below 5.0% this morning. And remember that the fed funds rate is 5.25%. So the odds of another rate hike are falling again.

The fact that the Fed is almost certainly done is also helping push stocks higher, in addition to rumors that a cease-fire in Israel might be in the works.

These two factors are masking the damage inflected on many individual stocks that reported less than stellar earnings and saw plunges in their stock prices. I am long RACK, but fully hedged my position with puts before earnings. The stock is down so much (-35%) that I actually made money overall.

As for the market, I don't want to sound like a broken record about strong opens, but we saw what happened yesterday. So color me skeptical.

long GOOG; net long RACK