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Did the Market Overreact to AT&T's Bad News?


T has been losing traditional phone customers for years so it's curious the firm is blaming a weak economy now.

Editor's Note: We asked Professor Udall to comment on the news out of AT&T (T) yesterday and if he could see a silver lining in the company's statements about weak consumer demand.

I'm trying to get a handle on this news myself. It sounds like much more is being made of this news (T losing legacy home customers) than should be. This can happen in good markets due to competitive forces and other factors. Though they cite terminations due to non-payment, I suspect the weakness could also be part and parcel with the fact that T's lower priced DSL subscriptions fall into the end market food chain.

T's home based services are relatively weak offerings compared to Verizon's (VZ) ultra high speed services and the 10-15 mbs services offered by competing cable Multiple System Operators, or MSO's. Also, T has been losing traditional phone customers for years so I think it's curious the firm is blaming a weak economy for these declines now.

As far as T is concerned I would favor VZ over T -- as well as still liking the now decimated bandwidth suppliers. T recently raised capex and just weeks ago placed a large order with Cisco (CSCO) for core routers. If anything, T's consumer weakness points to the hole in its product portfolio which it is attempting to plug with its U-verse product family.

All that being said this market is on a razor's edge, panicky trading has been evident for days and weeks under the surface of the averages. My viewpoint on the above is based on logic, reasoning and a consideration of all sides, whereas the market's reactionary trading on a sense of doom and general panic to any additional sign of economic vulnerability.

With so many people calling for a recession, general market weakness just isn't a surprise, nor is companies seeing softness in consumer trends. What is surprising is that this news (not new or a big surprise), can cause such dynamic moves in stocks which seem to have so much bad news already priced in.

Furthermore, a behind the curve Fed adds to bear market fuel. A few months ago I articulated how far I felt the Fed was behind the curve and after some distinct disagreement at the time, I am finding more and more people moving into that camp.

I have avoided calling a bottom in the broad market and will not at this time. However, this action on T's mildly poor news (the company didn't guide lower and talked up other parts of its business) says to me that we are close from a time-to-bottom standpoint. However, I don't know how much lower this market may be pushed down in the next few hours or days. The fact that mildly negative news can cause such selling pressure still signals a wide potential range to how much lower the market could fall.

I know many don't agree but I think we have gone way past the point of any rational selling for many growth companies. That is a positive for bulls as this kind of selling doesn't end without at least minor capitulation and we have seen that on many stocks. Today and in recent days we have seen some signs of capitulation in large cap and the market averages.

Again as mentioned previously, the market just wants to sell bad news at any price and the risk of continued selling until the Fed blinks is quite high.

In fact, I fully believe had the Fed speeches yesterday signaled a Fed that fully acknowledges the issues facing the markets and some flexibility in dealing with those issues -- the news from T would have had minimal to no impact.
Position in CSCO

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