Sector Investing

[ReturntoSender]

From Briefing.com: 4:43 pm Weekly Wrap

Upbeat economic news gave the stock market a boost this week. Corporate news was very limited and other factors had only minor impact.

There were two big economic releases. The first was one that usually gets little attention -- third quarter productivity. The unit labor cost component of that data was revised sharply lower. For the second quarter, the change in unit labor costs was revised to a -2.4% annual rate of growth from 5.4%. The third quarter was revised to 2.3% from 3.8%. These sharply lower numbers were due to a downward revision to compensation over the same period.

The lower quarterly changes in unit labor costs dropped the year-over-year change 2.9% from a previously reported 5.3%.

This is important because it implies that the cost of output for business is not being pressured nearly as much by rising wages as was previously thought. This is bullish for the inflation outlook.

The economic outlook got a further boost on Friday with the November employment data. Payrolls were up 132,000. That was above expectations of a 100,000 gain. The two prior months were revised upward a net 42,000. That left payrolls a total 74,000 above the expected level. The average monthly gain the past three months is 138,000. The steady rise in payrolls implies that consumer spending power will also continue to rise. That realization helped reduce recession fears.

Other economic data this week included a stronger than expected ISM services index reading of 58.9 for November, and a drop in weekly new claims for unemployment to 324,000 for the week ended December 2 from 358,000 the prior week.

The good news on inflationary pressures and employment were the major factors behind the stock market gains this week.

Also helping were the continued end of year seasonal trends. December has been the strongest month of the year over the past fifty-five years. There are concerns about a possible January consolidation, but most traders remain upbeat about the remainder of this month.

The corporate news was very light. Pfizer stock took a beating when it pulled a key drug under development. Eli Lilly guided profit estimates lower, but Merck reaffirmed their forecasts. Bank of New York and Mellon Financial announced a merger.

Bond yields rose this week in response to the employment data, and the 10-year ended at a still very low 4.55% from 4.43% the week before. Oil prices declined slightly to $62.13 a barrel from $63.43, but were rarely much of a market factor.

 
 Index      Started Week Ended Week  Change % Change  YTD  
 DJIA         12194.13    12307.49   113.36    0.9 %  14.8 %  
 Nasdaq        2413.21     2437.36    24.15    1.0 %  10.5 %  
 S&P 500       1396.72     1409.84    13.12    0.9 %  12.9 %  
 Russell 2000   781.17      792.56    11.39    1.5 %  17.7 %

4:20 pm : After a choppy start to end the week, investors eventually garnered enough notable leadership in some key sectors to finally embrace a strong November jobs report and snap a two-day losing streak for stocks.

Given the Fed's increased policy guidance from "incoming" data, today's employment report -- the last key piece of data policy makers will get their hands on before they meet next Tuesday -- garnered added attention.

Before the bell, the Labor Dept. showed that nonfarm payrolls rose 132K in November (consensus 105K) while payrolls figures for October and September were upwardly revised to account for a net gain of 42K new jobs. With investors concerned about the pace of economic growth, continued payroll gains will keep consumer spending rising at a decent clip against moderate wage growth. Hourly earnings rose just 0.2%, below the 0.3% economists were anticipating, providing additional evidence of the Fed's sought after soft landing.

With all of the S&P 500's impressive 13% year-to-date advance occurring over the last four months, however, concerns that the market has gone up too far too fast initially left investors questioning whether today's solid employment data had already been priced into equities.

Fortunately for the bulls, early trepidation about overbought conditions was put to rest as the morning played out. After briefly using an unexpected decline in consumer sentiment as the latest excuse to take some money off the table, Citigroup (C 51.87 +1.16) spiking to a new 2 1/2-year high helped lift the indices into the green for good. The Dow component surged 2.3% amid speculation of a management change and a possible break-up.

Perhaps giving Citigroup an added boost was some rotation out of rival Bank of America (BAC 51.58 -0.91), which Merrill Lynch believes is interested in acquiring Barclays (BCS 58.53 +2.74). Investors bidding up shares of investment banks in anticipation that several Wall Street firms (e.g. GS +2.5%, LEH +1.3%, and BSC +1.0%) will post record earnings results next week provided additional support for the most influential of S&P sectors -- Financials.

U.S. Treasury Secretary Henry Paulson later praising the payrolls number and saying the economy is growing at a sustainable clip during a CNBC interview offered investors an additional vote of confidence.

Of the seven other economic sectors trading higher, Technology was another influential leader to the upside. Two days of profit taking sparked some bargain hunting interest and helped investors look past some warnings in the chip space. Xilinx (XLNX 24.83 -1.61) plunged 5.3% after lowering its Q3 sales forecasts. A 1.9% surge in the sector's largest component -- Microsoft (MSFT 29.40 +0.55) -- was the biggest reason behind the sector's outperformance.

Investors also applauded a late-day reversal in oil prices. Crude for January delivery, which was up nearly 2.0% earlier at two-month highs, closed down 0.6% near $62/bbl. Forecasts of milder weather conditions trumped concerns earlier in the day about potential supply disruptions tied to unrest in Nigeria. However, removal of key leadership from the Energy sector tarnished the earnings potential of a key contributor to profit growth for the S&P 500 and acted as somewhat of an offset. DJ30 +29.08 NASDAQ +9.67 SP500 +2.55 NASDAQ Dec/Adv/Vol 1507/1546/1.81 bln NYSE Dec/Adv/Vol 1653/1602/1.28 bln

4:05PM Research In Motion does not currently anticipate a material adjustment to the preliminary Q2 operating results reported on Sep 28 (RIMM) 127.69 -1.06 : Co provides this status update pursuant to the alternative information guidelines of the Ontario Securities Commission. The co's management-initiated, voluntary review of stock option grants is ongoing. As previously disclosed, the Audit Committee of RIM's Board of Directors has made a preliminary determination that a restatement of RIM's historical financial statements will be required. The co does not currently anticipate a material adjustment to the preliminary second quarter operating results reported on Sept 28, 2006 or to current or future financial years' operating results. As the review of the co's historical stock option practices has not yet been concluded, the co has notified the O.S.C that it does not anticipate that it will be in a position to file its restated historical financial statements or its financial statements for the second quarter of fiscal 2007 on or before December 17, 2006. If these filings are not made by Dec 18, 2006, RIMM will report on the status of its continuous disclosure obligations to the O.S.C pursuant to the mgmt cease trade order issued by the O.S.C on Nov 7, 2006. On Dec 21, 2006, the co intends to announce preliminary operating results for the third quarter of fiscal 2007. The co expects that the potential impact of any restatement on GAAP and preliminary operating results for the third quarter of fiscal 2007 will be immaterial.

3:58PM Market View: Positive week but Nasdaq lags (TECHX) : A volatile start to the day in the wake of the jobs data with the market finding its footing in the first 45 minutes near short term retrace supports of the Dec 01-Dec 07 advance. The rebound, however, stalled out in late morning with choppy/weaker action noted thereafter. The week as a whole was positive with the small- and mid-caps along with the S&P 500 setting minor new all time or multi-year highs with the Dow falling just shy of achieving the same feat. Action in the tech dominated Nasdaq indices, while higher as well, proved more consolidative as big cap names (ORCL, MSFT, INTC, YHOO, EBAY etc.) have struggled after setting Oct highs. Groups that underpinned today included: Broker/Dealer +1%, Healthcare +0.8%, Media +0.8%, Oil Service HOLDRs +0.7%, Software +0.7% and Coal +0.7%. New two week highs in the 10-yr yield pressured Home Construction -2% with Semi (SOX) -1.1% and Transports -0.7% also weaker.

2:04PM Jabil Circuit provides update on its form 10-K filing (JBL) 28.44 -0.39 : Co announces that it was not able to file its annual report on Form 10-K for its fiscal year ended August 31, 2006 by Nov 29, 2006, the date by which the applicable rules of the SEC required Jabil to file its 2006 Form 10-K in order for it be considered to have filed it in a timely manner. As previously disclosed, Jabil is involved in several shareholder derivative and purported securities class action lawsuits in connection with certain historical stock option grants. Jabil is also responding to an informal inquiry from the SEC and has responded to a subpoena from the U.S. Attorney's office for the Southern District of New York that relate to such grants. Separately, a Special Review Committee of Jabil's Board of Directors was appointed to review the allegations in certain of the derivative actions. Jabil said it is cooperating fully with the Special Review Committee, the SEC and the U.S. Attorney's office. In light of these developments, Jabil, through its legal counsel, assisted by accounting advisors, has been evaluating its historical stock option grant practices. The evaluation is not complete.

9:10AM Varian Semi Board of Directors increases co's existing stock repurchase program by $100 mln (VSEA) 40.55 :

09:02 am National Semiconductor (NSM)

23.92: Shares of National Semiconductor traded lower on Friday, after the Santa Clara-based chip maker reported a 20% decline in second quarter profit, and issued third quarter revenue guidance below analysts' expectations. At the current price level, the stock, which has shed 8% since the beginning of the year, is trading at roughly 20.1x this year's projected earnings.

Briefing.com currently has an Overweight rating on the Technology sector, as strong consumer end markets continue to drive chip demand.

For its most recent quarter, National posted net income of $91.4 million, or $0.27 per share, down from $114.7 million, or $0.32 per share, a year earlier. The result, however, fell in line with analysts' expectations, according to Reuters Estimates.

On the top line, revenue fell 7.8% year/year to $501.6 million, primarily due to lower shipments to distributors who reduced their inventories during the quarter, and an approximately $21 million decline in foundry revenues for previously sold Cordless and PC Super I/O businesses as originally projected, the company said. On a sequential basis, National's revenues were down 7.4%. Meanwhile, the company reported gross margin of 58.9%, which was lower than last quarter's 61.7%, but was an increase over the 57.2% posted a year ago.

Looking to the third quarter, National said it anticipates revenues will decline 8% to 11% sequentially from the second quarter, or approximately $446 to $461 million. Analysts are currently looking for $496.1 million in revenue, according to Reuters Estimates.

--Richard Jahnke, Briefing.com

08:47 am Hewlett-Packard (HPQ)

39.86: Last night Dow component Hewlett-Packard confirmed that it reached a settlement with California's Attorney General in a civil lawsuit that arose from HP's use of some questionable, and perhaps criminal, investigative practices that were employed to uncover the source of a boardroom leak.

Former Chairman Patricia Dunn and former ethics head Kevin Hunsacker have both been indicted on criminal charges related to their role in the investigation. Dunn and Hunsacker have both pleaded not guilty.

As for HP, the leak investigation and how it was handled proved to be a public relations nightmare. Fortunately for shareholders, it did little, if anything, to disrupt the company's business. Subsequently, there hasn't been any fallout in the stock, which is actually up 9.0% since the story broke in the public realm in early September.

The settlement calls for HP to pay $14.5 million and to implement a series of measures to ensure the company's internal investigations are conducted in accordance with California law and with the company's high ethical standards. As part of the settlement, there was no finding of liability against HP and it has been agreed that the Attorney General will not seek civil claims against HP or against its current and former officers, directors and employees.

News of the settlement has had little impact on HP's stock, which makes sense considering the stock was unaffected by the investigation imbroglio. That point notwithstanding, the settlement can be considered a good thing as it is one less distraction for management.

--Patrick J. O'Hare, Briefing.com

09:49 am Advanced Micro: Banc of America Sec reiterates Neutral. Target $27 to $23. Banc of America cuts their AMD tgt to $23 from $27 after last night gross margins were reported worse than anticipated. Firm thinks several factors (detailed within) will likely continue to pressure GMs n-t, and will not be alleviated until at least cross-over from 90nm to 65nm is achieved (2Q07). In the meantime, they think Dell will continue to soak-up AMD's dual core capacity (at a discount), while AMD finds itself juggling between meeting high demand and transitioning to 65nm. Although AMD should be able to recoup two points of GMs in 4Q, they think GMs will stay pressured for sometime. Firm affirms preference for INTC.

09:48 am Apple Computer: Banc of America Sec reiterates Buy. Target $79 to $84. BofA raises their tgt on AAPL to $84 from $79 following earnings. The firm says one major issue they identified yesterday was gross margins. - mgt did indicate that gross margins would be down q/q about 100 basis suggesting that their thesis on recent product price cuts negatively impacting margins is appropriate - though the firm believes that they may have overestimated the magnitude. The firm is modestly increasing their gross margins by 10-30 basis points in the back half of the year, though largely offset by higher op ex, leaving operating margin little changed.