Cisco is a Bellweather Stock.

Cisco is a bellweather stock. The current health of the economy and the strength of the stock market can be derived from the action based on tomorrow's earnings report from Cisco (CSCO). I believe that the continuation of the recent bull run is dependent on Cisco so a lot is riding on the market in this regard.

Cisco reports earnings after the bell closes May 8, 2007 at 4:00 PM EST. Analysts are expecting EPS of $.33 and average revenue expectation of $8.76 Billion.

Now, I have to remind everyone that since the follow through day on March 17, 2007, we have had continued record breaking run on the Dow, NASDAQ, and S&P 500. It is to be reminded that the current bull run is on the heels of divergence between fundamentals of the economy (which is terrible) and the technicals of the stock market (which is breathtaking). That is a cause for concern but remember, TREND is always your friend and technically there is nothing to suggest that we are breaking down from this "up" trend. But it is always important to remember that we are setting ourselves for a correction, and that is a good thing and invited. On the other hand, this market run has left a lot of market players shrugging their shoulders and wondering why they have not benefited much. Many have been gun shy from the February 27th market meltdown, which was quick, scary, and intense. So a lot of people are scratching their heads and wondering how this market can continue to go up day after day without a meaningful pull back. All I can say is that you cannot argue with the market or the tape. Thus this rally in the market has left a lot of people eager to get into the markets but are too scared to. This tells me that this market may yet still have legs. But, the Bellwethers have to deliver and Cisco has its work cut out for them tomorrow.

CRITICS
Critics of Cisco say that the bullishness in this stock has already been priced in and that their domestic enterprise division which comprises over 45% of Cisco's business yet delivers only 4% growth has been slowing. The market expectations for Cisco is too high and that a potential exists for Cisco to disappoint the 2Q earnings results. Also, the market is frothy at this point with unprescedented strong run from big cap stocks while leaving the small caps virtually out of the recent rally. Finally, the old adage "sell in May and go away" has some statistical significance since 1929. I am sure many of you investors out there remember the gut wrenching correction in May 2006.

PROPONENTS
Cisco was virtually ignored during last quarter's stellar earnings. The earnings beat analyst estimates and Cisco gave a bullish forecast. Yet the stock did nothing and began to correct down with the low point being $24.82. Now, many stocks including Apple (AAPL), Google (GOOG), Crocs (CROX), Mastercard (MA), Intuitive Surgical (ISRG) also rolled over on bullish earnings report only to report this quarter with similar earnings report and they gapped up and continues to appreciate in price. Additionally, the current market favors large and mega cap stocks to do well on decent earnings report. Look at the likes of Texas Instruments (TXN), Caterpiller (CAT), Honeywell (HON), Microsoft (MSFT), and many more. They all have been the beneficiaries of excess liquidity that exists in the market today despite the divergent fundamentals of the economy which many would argue that the market has already priced this in and that we are not going into a recession. Additionally, Cisco is highly levered to the global economy and the recent weakness in the dollar against the world currencies that matter have boosted Cisco's profitability and that will be evident in this quarter's earnings report. Furthermore, the components to manufacture Cisco's routers, VOIP devices, Video on Demand (Scientific Atlanta) components, and Video teleconferencing devices will increase gross margins and thus boost profitability. Additionally, recent Cisco acquisition of Webex should continue to be accretive to Cisco's endeavor to venture into leadership role in Video teleconferencing, corporate telephony systems, and give a presence in software to run all of these exciting technologies. While the domestic enterprise division still comprises 45% of the entire revenue of Cisco and that it certainly is a cash generating business and not a growth engine, Cisco has done much to transform itself for the new demands apparent for high bandwidth video conferencing, video on demand, and higher bandwidth requirement for internet evolution in terms of MP3 downloads, MPEG and other video format down loads on the internet. With the advent of the popularity of social networking sites and copy cats that are modeling after the sites such as Youtube, Myspace, and many others, Cisco has reinvented itself in the 80's as a telephone switch maker to the Internet router manufacturer in the 90's to Internet Content backbone provider in the 21st Century. Thus it is easy to see why I am so bullish and I am a PROPONENT for Cisco for the short and long term. We should see the fruits of Cisco's hard work in transforming itself and even at $167.97 billion market cap, we are no where near the market cap that was given during the internet bubble era. There is tremendous room for growth and this quarter's earnings will prove just that.

I am expecting EPS of $.38 on Revenues of $9.1 billion with Cisco continuing to wax optimisim. I am heavily levered to June $27.50 calls and I own 1023 contracts. I am also levered to the May $30 call and I own 200 contracts.

Good luck everyone.