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From Briefing.com: 5:02 pm Weekly Wrap

The market sagged this past week. The S&P 500 lost all of the gains from the previous week, and the Nasdaq lost even more.

There were no major reasons for the decline and no sharp moves. The recent momentum simply gave way as the S&P 500 index lost 5 points on three seperate days, 2 points on one, and managed a single up day of just 3 points.

The news this week was mixed. The economic reports brought good news on the inflation front, but there were soft economic reports. On Tuesday, it was reported that November PPI had surged 2.0%. That followed a 1.6% drop the prior month, however, and the big jump represented a rebound in a number of key categories, not any underlying price pressures. The core rate followed a very similar pattern of jumping 1.3% in November after a 0.9% October drop.

More significant was the flat November core PCE deflator reported on Friday. That mirrored the previously reported 0.0% for the core November CPI. The year-over-year change in the core PCE deflator dipped to 2.2%. This is the Fed's favorite inflation measure, and the year-over-year rate is sinking back towards the Fed's comfort zone.

The economic news was less bullish. November housing starts bounced 6.7% and appear to be bottoming. That is definitely good news. But there were signs of weakening trends in manufacturing and business investment. November durable goods orders jumped 1.9%, but excluding transportation the change was a weaker than expected -1.1%. The underlying trends in orders are weak, and the year-over-year increase in total orders is now just 0.3%.

The December Philadelphia Fed index reflected a declining manufacturing sector. It was -4.3 from 5.1 in November. This is just one regional monthly survey, but was taken as a signal of an overall weakening trend.

Also released this past week, but of little significance, was a slight downward revision to third quarter real GDP growth to a 2.0% annual rate from a previous 2.2% rate, a weekly unemployment claims level near recent trends of 315,000, and November personal income and spending increases in line with expectations.

The corporate news was slightly bullish. Morgan Stanley, FedEx, Accenture, Nike, General Mills, Micron, and Walgreen all had good earnings reports. Earnings warnings were light for this time of the quarter. Qualcomm and Palm were about the only noteworthy ones. None of the above had broad impact.

More significant was the fact that Oracle stock took a plunge on Tuesday after their earnings report on Monday afternoon. Revenue and profit were in line with expectations, but the company fell a tad short on a key line for new license revenue. The (over)reaction suggests some fragility in tech stocks. This, along with a sharp decline in Google stock, helps explain why the Nasdaq underperformed this week.

The soft trend this week hasn't done much to dissuade traders that a classic "Santa Claus rally" is likely. The market tends to rise in the final days of the year and the first couple of days in the new year. There are concerns, however, that a consolidation of some degree might hit in January.

Oil prices ended the week at $62.41 a barrel, which is still in a acceptable range for stocks. The 10-year note yield ended at 4.62%, little changed from 4.60% a week prior.

 
 Index      Started Week Ended Week Change % Change   YTD  
 DJIA         12445.52    12343.22 -102.30    -0.8 % 15.2 %  
 Nasdaq        2457.20     2401.18  -56.02    -2.3 %  8.9 %  
 S&P 500       1427.09     1410.76  -16.33    -1.1 % 13.0 %  
 Russell 2000   792.71      780.82  -11.89    -1.5 % 16.0 %

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.

6:32AM Amtech Systems announces proposed public offering of common stock (ASYS) 7.13 : Co announced that it plans to offer an aggregate of $15,000,000 of its common stock in a registered public offering through C.E. Unterberg, Towbin, as the managing underwriter. The aggregate offering amount includes proceeds that may be received from the underwriters for the purchase of shares of common stock to cover over- allotments, if any.

09:29 am Micron (MU)

13.49 After a disappointing fourth quarter, Micron delivered a quarter that would make even the Grinch smile. First quarter profits tripled, besting all expectations. A stellar improvement in profitably, coupled with healthy demand, solid pricing and an improved mix all contributed to the standout quarter. The largest memory chip maker released the results as an early Christmas present for shareholders, sending the stock soaring in the after-hours.

We recently argued on behalf of Micron given the Vista-induced demand growth, ramping NAND capacity, and its longer-term diversification strategy. This quarter, Micron delivered the goods, showing gains in each of these areas. Net income came in at $192 mln or $0.25 on sales of $1.58 bln, up 9% sequentially. EPS came in four cents above estimates.

The main driver of the upside was margin expansion achieved in the quarter. Gross margins reached 31%, compared to 24% in the preceding quarter. The gains were derived from improved DRAM pricing, gaining 15% sequentially due to a healthy demand environment and Vista-ready PC builds, positive mix towards higher-priced CMOS image products, and improving trends in the flash memory business.

NAND profitability improved despite a greater than 20% drop in prices due to the currently weak supply/demand environment. Micron is ahead of schedule in building out flash capacity, providing higher scale and fixed cost advantages and recently breaking ground on its fourth wafer fab in Singapore. While improvement in the money-losing flash business was a positive trend, the company cautioned that startup costs at the MU/Intel fab in Utah would likely have a negative impact on operating margins for the next two quarters, offset by positive impact from DRAM pricing.

While risks remain given cost and pricing pressures on profitability, we are retaining our positive view on Micron based on our outlook for the PC DRAM cycle driven by the Vista upgrade, in addition to improving flash operations and its longer-term diversification efforts. The stock trades at 16.8x forward earnings and 1.5x price to sales.

--Kimberly DuBord, Briefing.com

08:56 am Qualcomm (QCOM)

38.54: Qualcomm lowered its first quarter earnings forecast late Thursday, citing increased legal costs and deferred payment from a customer. Shares of the mobile chipmaker traded lower on the news, losing more than 2% in pre-market activity.

Qualcomm said expenses in the quarter have increased above expectations as it continues to defend challenges against its licensing practices and fees. Additionally, the San Diego-based company said it has not received payment from the Pantech Group of South Korea.

As a result, it now expects first quarter earnings to be between $0.41 and $0.42 per share, compared with its previous guidance of $0.42 to $0.44 per share and analysts' expectations of $0.44 per share. Revenues, however, are expected to be at the high end of its previous estimate of $1.98 to $2.08 billion, due to strong sales of its MSM chipsets.

Despite higher than anticipated chipset shipments, persistent legal issues with companies including Nokia (NOK) and Broadcom (BRCM), remain a cloud over the stock. Qualcomm shares have fallen nearly 10% since the beginning of the year, and are off about 27% since reaching a 52-week high in May.

--Richard Jahnke, 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.