Sector Investing

[ReturntoSender]

From Briefing.com: 5:15 pm Weekly Wrap

It was a very good week for the stock market. There was a modestly bullish underlying tone and a sharp decline in oil prices helped provided a broader push.

Oil closed the week at $52.99 a barrel, down from $56.31 a barrel last week. The bullish implications for inflation and the economy were clearly a factor in the positive tone this week. When oil dropped sharply on Thursday, the S&P posted its biggest gain of 9 points.

The S&P was up four out of five days, however, and the only decline was a one point loss on Tuesday. It wasn't exactly a raging bull, but the tone was clearly upbeat.

The limited amount of news this week helped. The only major economic release was a solid 0.9% gain in December retail sales. Excluding autos, the gain was 1.0%. The November gains were 0.6% for total retail sales and 0.7% excluding autos. These back-to-back gains indicate that the housing slowdown hasn't had much impact on consumer spending. Real GDP growth in the fourth quarter probably held up at over a 2% annual rate, providing good momentum into the first quarter.

The December US treasury data also deserve a mention. The December surplus of $44.5 billion brought the trailing twelve month deficit down to just $208 billion. That is down to 1.5% of GDP (through fourth quarter estimates). It is down sharply from 3.8% of GDP when the deficits exceeded $400 billion in late 2003. The US federal deficit has been cut by more than half in a little over three years. When state surpluses are included, the national deficit shrinks even further.

This past week technically kicked off earnings season. Alcoa had a good report, as did Genentech. But the real action starts next week after the Monday holiday. The flood of earnings reports will dominate market action next week.

There were a couple of earnings warnings this past week, but not enough to alter overall expectations. Sprint, AMD, SAP, and Tellabs all warned of lower than expected profits.

That didn't alter the forecasts which call for about 10% growth in operating earnings for the S&P 500 in aggregate for the upcoming fourth quarter numbers. First quarter estimates are currently at about 8%. This reflects a slowdown in growth from the 22% level of the third quarter and the estimated 15% for all of 2006. The degree to which companies guide estimates for 2007 will have a tremendous impact on the market outlook the next couple of weeks.

The market remains surprisingly resilient to any downturn. The fundamentals remain good, as economic growth is apparently steady, if a bit below long-term trend. Earnings growth is slowing, but decent. There is nothing to suggest a sharp pickup in inflation. The 10-year note yield did rise to 4.78% this week, but remains well below levels that would start to hurt the stock market outlook.

Next week, it will be all about the earnings reports.

 
 Index       Started Week Ended Week Change % Change YTD  
 DJIA         12398.01    12556.08   158.07    1.3 % 0.7 %  
 Nasdaq        2434.25     2502.82    68.57    2.8 % 3.6 %  
 S&P 500       1409.71     1430.73    21.02    1.5 % 0.9 %  
 Russell 2000   775.87      794.26    18.39    2.4 % 0.8 %

4:20 pm : More evidence that a soft landing for the U.S. economy remains on track helped extend Thursday's broad-based buying efforts. The Dow finished in record territory again while the Nasdaq hit a new six-year high.

December retail sales checking in with their biggest gain (+0.9%) since July - providing further evidence that the consumer is alive and kicking - was the biggest reason behind Friday's impressive follow-through effort. Retail sales (ex-autos) were also stronger than economists expected, rising 1.0% - the largest increase since January. Not only did the data alleviate concerns about the slowdown in housing curtailing consumption, but the absence of significant weakness increased the likelihood that Q4 GDP estimates will be revised higher.

Of the eight sectors closing in positive territory, Energy led the charge (+2.6%). The return of Energy's leadership, following four straight down days that had the sector down 3.5% for the week and off more than 8% already this year, more than acted as an offset to the 2.1% bounce in oil prices.

After plunging 13% so far this year and selling off over the last four days, a rebound of some sort in oil prices was not a big surprise. It is also worth noting that oil was still down nearly 6% for the week and is 33% below record levels reached last July.

Materials turned in the day's second best performance; but its 1.1% advance still didn't provide as much support as continued upward momentum in Technology. The more influential sector was in focus Friday after Advanced Micro Devices (AMD 18.27 -1.91) said Q4 revenue will miss expectations. AMD's warning prompted several analyst downgrades and initially renewed concerns about earnings prospects of other chip makers.

However, ongoing fears of missing out on an extended tech rally overshadowed AMD's expected revenue shortfall. Case in point, rival Intel (INTC 22.13 +0.21) was down as much as 1.4%, but the stock, which is also a recommended holding in the Briefing.com Active Portfolio, bounced back to close up nearly 1%. Fellow Dow component and tech bellwether Hewlett-Packard (HPQ 43.57 +0.93), which is a big beneficiary of the ongoing price wars between AMD and Intel, surged 2.2% to a multi-year high.

Building on Thursday's impressive 3.5% advance, Microsoft (MSFT 31.21 +0.51) hitting a new 4 1/2-year high also lent notable support for all three major averages for a second straight day. DJ30 +41.10 NASDAQ +17.97 SP500 +6.91 NASDAQ Dec/Adv/Vol 1147/1900/2.15 bln NYSE Dec/Adv/Vol 1113/2140/1.50 bln

9:00AM Magma Design says third and final patent in California litigation accepted for reexamination (LAVA) 8.76 : Co says that the third and final patent at issue in its lawsuit with Synopsys (SNPS) has been accepted for reexamination after the U.S. Patent and Trademark Office found "substantial new questions of patentability as to all 54 of the patent's claims". As a result, co says all three patents at issue in the companies' California litigation are under reexamination and on a path that could result in their invalidation.

8:53AM Ultratech: Thales Fund Mgmt files 13D showing 11% stake (UTEK) 12.12 : "We are the largest shareholder in your company with over 2.5m shares (representing 11.0% of the shares outstanding, per our 13D-filing of today to which a copy of this letter is attached). We believe that Ultratech has unique, market leading technologies that are severely undervalued at its current stock price... Both Advanced Packaging and Laser Spike Annealing have significant growth prospects, and if the current underperformance continues into 2007 we will have to conclude that these opportunities can be better monetized as part of a larger organization. To that end, we hope that the board as well as senior management will be open-minded and proactive in contemplating a sale of the company as a way to maximize shareholder value.

4:41AM ASE Test Ltd. announces new Chief Financial Officer (ASTSF) 11.01 : Co announces that it has appointed Mr. Kenneth Hsiang as its new Chief Financial Officer effect January 11, 2007.

09:16 am Advanced Micro: Nollenberger Capital reiterates Sell . Target $13 to $8. Nollenberger cuts their tgt on AMD to $8 from $13 saying after the co preannounced lower than expected 4Q06 results. The firm says AMD appears to have rested too long on its laurels in 2006 and is now quite vulnerable in 2007 in terms of CPU/GPU market share as well as ASP declines. The firm suspects AMD's server A.S.Ps are also under duress. They caution longer-term AMD bulls that,the 4Q miss is not a mere aberration due to supply constraints or some form of an Intel "price war." The firm believes AMD's pain is chronic and will only get worse as 2007 progresses, as the co is vulnerable from both a manufacturing and product positioning perspective. Firm reits Sell.

09:28 am Samsung Electronics

Samsung Electronics, one of the world's largest semiconductor and consumer electronics makers, reported an 8.5% drop in fourth quarter profits as a weak environment for flash memory and flat screens offset strong memory chip growth. The ramp in flash capacity has greatly increased industry-wide pricing and inventory concerns heading into the first quarter, weighing heavily on stocks. While not unexpected, Samsung's results underscore a weak flash and LCD market that will likely linger into a seasonally weak first quarter.

Samsung earned 2.346 trillion won ($2.5 bln) in net profits and revenues of 15.69 tln (up 1.2% year/year) in the quarter that ended on December 31st - inline with consensus estimates. This compares to 2.563 tln won earned in the previous year and 2.187 trillion last quarter. Samsung has been converting flash capacity to DRAM on the eve of Microsoft's (MSFT) O/S Vista debut. A strong DRAM market likely stemmed the downside in the quarter given the fact that gross and operating margins actually improved sequentially.

The company noted healthy seasonal PC shipments, up 13% sequentially, as well as greater adoption of DDR2 shipments for PCs, boosting its semiconductor division's profits. This underscores our positive view on the DRAM market, which we feel is poised for extended seasonal growth.

Samsung is expected to regain its footing in the second half of the year as the supply/demand picture improves. The company's net profit is likely to rise 16% to 9.2 tln won from 7.93 tln in 2006 for the full year, according to Reuters Estimates. Still, this figure is well short of the company's 2004 record of 10.79 tln. The stock recovered lost ground following its results after announcing a $2 bln share buyback program.

--Kimberly DuBord, Briefing.com

07:50 am Adv. Micro Devices (AMD)

20.18: As its name implies, chip maker Advanced Micro Devices works to be ahead of the innovation curve in its business. It has made some terrific strides in that regard, but today, it is drawing attention for being ahead of the pack in issuing a revenue warning for its fourth quarter.

AMD didn't give any color as to the factors contributing to its top-line miss, but it did add that its gross margin and operating income were impacted by significantly lower microprocessor average selling prices that offset a significant increase in unit sales. The company clarified that fourth quarter operating income, excluding ATI and acquisition-related charges, will still be positive but substantially lower than the third quarter.

Following its third quarter report, AMD said it expected the fourth quarter to be "seasonally strong." Recent seasonal growth in the period has ranged from 6-13% with an average of around 10%, so there is no mistaking that AMD's guidance is a disappointment. It's not as big a disappointment, however, as the consensus estimate of $1.84 billion implies since that estimate includes ATI.

A Jefferies analyst appearing on CNBC said his revenue estimate, excluding ATI, was $1.45 billion.

AMD's news is likely to weigh on Intel (INTC), which is a suggested holding in Briefing.com's Active Portfolio, yet one can't help but wonder in the absence of guidance from Intel if it managed to gain at AMD's expense. Intel, which has seen its market share erode in the face of AMD's progress, has left little doubt that it is intent on regaining the lost share by leveraging the strength of its updated product suite.

We raised the latter point in our review of AMD's third quarter report and cited it as a factor for why we would avoid AMD's stock. Our cautious view has been validated by AMD's warning. Although one can't take for granted that Intel will deliver a positive surprise, it is the name we would want to own between the two companies given that it is now ahead of the curve with its product line-up and has the financial muscle to withstand an intense pricing environment.

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