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From Briefing.com: 6:01PM Swing Trader : On Tuesday morning, the market gapped open above Monday's highs and that was pretty much the high of the session as sellers regained control. Semiconductors were one of the weakest groups throughout the day dragging the Technology sector down with it. Biotech also gapped higher initially after Monday's late-day buying spree, but failed to show a convincing follow through as it closed down on the day. Strong earnings from LEH helped the stock breakout above its 95 resistance area on high volume, but did little for the Brokers (XBD) as a whole. Watch for more earnings this week from BSC, MWD, and GS to spark some momentum...(continued)

Close Dow -59.41 at 10746.10, S&P -9.08 at 1197.75, Nasdaq -16.06 at 2034.98: High bond yields, oil prices near record highs, tech weakness and an Anthrax scare weighed on sentiment, diluting decent economic data and a strong earnings report from Lehman, and closed the major indices in negative territory... While Treasurys found early buying interest following smaller than expected gains in Feb. retail sales data, continued selling pressure again lifted yields on the 10-year note above an arguably undesirable 4.5%...
Feb. retail sales of +0.5% (consensus 0.6%) and retail sales ex autos of +0.4% (consensus +0.8%) came in below forecasts; gains just large enough not to raise inflation concerns, as upward revisions to January's data showed that consumer spending trends clearly remained strong... Meanwhile, Net Foreign Security Purchases checked in at $91.5 bln, well above Street expectations of around $58.5-59.0 bln, initially mitigating worries about foreigners' willingness to buy U.S. Treasuries... But upon further analysis, the second largest increase ever largely came from Caribbean banking centers (also known as hedge-funds) and not from the more notable central banks widely expected and accepted to finance the U.S. current account deficit...

As a result, the benchmark 10-year note fell to its worst levels of the session and closed down 8 ticks to yield 4.54% as surging oil prices also invited inflationary pressures... Crude oil futures closed at $55.05/bbl (+$0.10) amid ongoing oil supply concerns ahead of OPEC's final decision on production quotas at tomorrow's meeting in Iran... Confirmed reports midday that samples from a Pentagon mail facility tested positive for Anthrax also added to the eroding interest for equities, assisted in a negative reversal in market internals that never recovered...

Fed Chairman Greenspan's warning that rising budget deficits posed a major threat to economic expansion, as "the federal budget is on an unsustainable path," also added a sense of nervousness... Meanwhile, technology was weak across the board, with Semiconductor (-2.1%) pacing the way to the downside after Merrill Lynch said growth in semi space would likely be stalled for much of the year... Software, Disk Drive and Networking also lost in excess of 1.0% on the day while Telecom Services, Energy, Consumer Staples and Utility were influential leaders to the downside...

Financial was weak despite strength in Brokerage (+0.3%) after Lehman (LEH 96.19 +2.87) handily bear analysts' Q1 expectations while Food retail (-2.4%) closed lower after Albertsons (ABS 20.10 -0.77) missed analysts' Q4 expectations and guided FY06 earnings below consensus... Biotech also lost ground, led by weakness in Amgen (AMGN 58.61 -1.82), which lost a U.S. appeals court ruling over Enbrel, and profit taking in Genentech (DNA 54.00 -1.00) while a rally in Steel stocks (+1.9%) minimized losses in the Materials sector...

Retail (+0.3%), however, eked out a modest gain, led by strong follow through from Office Depot (ODP 21.70 +0.95) after it named a new CEO a day earlier... The dollar, which was weak early on after Feb. retail sales rose at a slower than expected pace, closed higher against the euro (1.3304) after the Treasury's TICS report surged to its second highest level ever... Separately, Jan Business Inventories rose a strong 0.9% (consensus 0.9%) and the Mar. NY Empire State Index checked in at 19.6 (consensus 19.9), but the dated inventories data and less noteworthy regional manufacturing survey were basically overlooked...DJTA -1.0, DJUA -0.5, DOT -0.4, Nasdaq 100 -0.9, Russell 2000 -0.6, SOX -2.1, S&P Midcap 400 -0.5, XOI -1.1, NYSE Adv/Dec 1120/2210, Nasdaq Adv/Dec 1162/1954

11:26AM Suspicious packages being investigated in DC postal facility; update on Pentagon mail scare : Fox News reports that suspicious packages are being investigated at a DC govt mail facility... B Street postal facility is closed until further notice, and the all-clear was given at a "news building".... Also, Fox News reports that the mayor of DC capital offered all workers at a local postal facility a three-day course of antibiotics Tuesday after it was determined that the post office had been the source of anthrax-tainted mail sent to two military mail facilities in Virginia a day earlier. The city's chief medical officer reported no cases of the illness in local hospitals, but called distribution of the antibiotics the "proper first step." On Monday, sensors at two military mail facilities in the Washington area detected signs of anthrax on two pieces of mail, but the mail had already been irradiated, rendering any anthrax inert. (See yesterday's 14:46 comment for the first mention of this, as well as anthrax plays CPHD, VICL, VXGN.PK, MEDX, AVAN, and UDTT.OB.)

10:13AM Sector Watch: Semi Index -SOX- continues to weaken breaks 50/200 day ema 422.72 -7.54: -- Technical -- The group opened on the plus side but quickly rotated lower and has recently pushed slightly below its 50 and 200 day ema at 424.85/424.21. The weakest performing components this morning are: MU -2.2%, NVLS -1.9%, TXN -1.7%, AMD -1.6%, XLNX -1.5%, AMAT -1.4%, BRCM -1.4%, LLTC -1.3%. Next support for the SOX is in near 421 with the late Feb reaction low at 419.57.

9:25AM Gapping Down : DCAI -18% (to merge with MDKI), ZICA -8% (reports Q4), GEOI -7.6% (profit taking after 44% move yesterday), ABLE -3.2% (profit taking after 25% move yesterday), HNR -3.2%, BOOM -2.3% (profit taking after 12% move yesterday).

9:14AM Gapping Up : Gapping up on strong earnings/guidance: PDLI +4.9% (also Smith Barney upgrade), ABIX +15%, IOTN +10%, SONS +3.9%, CMVT +2.1%, LEH +2%, RCL +2%... Other News: DNA +4.8% (positive Avastin news; Piper upgrade; Jefferies upgrade; tgt raised to $100 at CSFB), MDKI +49% (to merge with DCAI), TIVO +26% (Tivo and Comcast are discussing a partnership - WSJ), VIAC +7.3% (co and Genzyme announce collaboration agreement), CTIC +6.4%, ZOLL +5.6% (Piper upgrade), L +4.1% (to spin-off Ascent Media and Discovery), ORCT +3.9% (extends yesterday's 10% move), ONXX +3.3% (up on Avastin news; Lehman upgrade), PIXR +2.5% (new Disney CEO may mend fences; release of Incredibles on DVD today).... Under $3: CLTK +34% (to sell assets to Mimix), REDI +13% (signs 20 customers), GNTA +12% (leukemia drug gets orphan drug status), CMGI +11%, CIEN +2.6% (Smith Barney upgrade).

4:23PM Lehman Brothers Holdings (LEH) 95.88 +2.56: The Investment Banks and Brokerage group within the S&P 500 has far outpaced the rest of the Financial sector up 5.8% year-to-date. Investors have been flocking to these stocks since last November. This week the Brokers will report Q1 results, which are expected to be quite good driven by strong capital markets, increased merger and acquisition activity, and a robust IPO market. The top performing stocks within the group YTD are Lehman Bros (LEH) +10.7%, Goldman Sachs (00) +7.36%, and Morgan Stanley (MWD) +7.19%.

Lehman Bros is the first out the gate. The number five securities firm reported profits rose 31% in the first quarter on gains from fixed income trading and investment banking fees. Earnings came in at $2.91 per share, $0.71 better than the Reuters Estimates consensus of $2.20. Earnings rose 48% just since last quarter. Revenues soared 21.2% year/year and 32% quarter/quarter to $3.81 bln, topping consensus estimates by over 20%. Results for the quarter hit a all time record for the firm. Lehman attributed the record growth to strong market environment, driven by positive economic growth, improving corporate profits, strong corporate balance sheets, positive equity markets, and measured rate hikes from the Fed. Clearly, the positive momentum from the November period continued for the quarter.

Growth was broad-based across each of its three divisions. The bulk of its revenues are generated from its Capital Markets segment (70% of total), which grew 21% y/y and 48% q/q. The majority of the growth was driven by record fixed income business including mortgages and interest rate products. Investment Banking (18%) grew by 34% y/y and 12% q/q due to strong debt and equity underwriting. M&A activity declined 6% q/q due to record Q4, however, Lehman continues to expand its presence in this business with results the second best in four years. Lehman is involved in four of the top 10 deals in the US. Investment Management (11%) rose 5% y/y and down 3% q/q reflecting an increase in assets under management and market appreciation.

Pre-tax margins grew by 150 basis points from the fourth quarter to 34.3%. Return on common equity was 24.5% up from 21% last year. This was an impressive quarter as the company was able to leverage strong top line growth into profits. Lehman enjoyed resiliency across each of its business, and feels it's well positioned, with additional scale and higher market share, to maintain positive momentum. Expenses rose 19% including a 23% rise in head count, mostly on the front end within the Capital Markets business.

Lehman's blowout quarter, while partly company specific, provides quite positive expectations from its peers reporting throughout the week including Goldman and Morgan Stanley on Thurs. Bear Sterns (BSC), the sixth largest securities firm, comes out on Wed, but is expected to suffer lower profits due to reduced revenues from bond sales, investment losses, and trading.

This was truly a remarkable quarter for Lehman. Beating consensus estimates by a third, which are derived from analysts within the same business, shows just how phenomenal it was. The huge upside was driven by surprisingly strong fixed income activity. During its conference call, management's comments were quite bullish for the rest of the year driven by global economic growth and continued market share gains. Further, LEH expects capital markets to become a greater percentage of the global markets due to the growing acceptance of debt financing, as a substitute for bank borrowing. The company also noted that its M&A pipeline has doubled and its equity pipeline is now 30% higher than November levels. Although Q1 is seasonally a strong quarter, Lehman's share momentum and broad-based growth lays the ground work for growth ahead. Shares are trading at 12x forward earnings - in-line with its peers. ---Kimberly DuBord, Briefing.com
2:32PM Albertson's Inc. (ABS) 27.97 +0.38: Albertson's, the second largest food-drug retailer in the US reported Q4 results boosted by its purchase of Shaw's Supermarket and Bristol Farms. Albertson's reported earnings of $194 mln, or $0.52 per share adjusted for hurricanes and lease accounting. This is up from $130 mln, or $0.35 per share last year, but still a penny shy of the Reuters consensus estimate. The acquisition of Shaw's and a new national merchandising program, coupled with the recovery from the So. California labor strikes that ended in February of last year, helped increase revenues by 29.3% year/year to $11.08 bln above the $10.88 bln consensus.

Same-store sales for the quarter rose 5.3%. Albertson's was the only supermarket chain involved in the strike to regain its pre-strike market share. Despite top line growth, the company was unable to turn this momentum into profits, as it increased promotional spending and cut prices in order to entice customers back into stores. Gross margins held steady at 27.8%. ABS noted during its conference call, that despite higher spending it was able to maintain margins through higher profitability from Shaw's, along with its cost savings plan. ABS continues to face a challenging competitive environment, particularly in So Cal and Dallas/Ft. Worth markets, which both required more investment.

The company was on a buying spree last year with the acquisitions of Shaw's (April 04) and Bristol Farms (Sept 04). ABS noted both are going well with regard to the integration process even transferring several key Shaw's senior level executives into ABS. Bristol, a specialty retailer, offers ABS increased presence in So. California. Albertson's operates under banners including Acme Markets, Jewel-Osco, OscoDrug, and Sav-on.

The stock is likely to suffer downside pressure following the miss and reduced guidance for the full year. The latter is quite disappointing considering analysts already cut FY06 estimates following the company's preannouncement on Feb 25th when it lowered Q4 and FY05 guidance. It sees earnings for FY06 of $1.37-1.47 per share, excluding $0.04 in stock option expense, well below the Reuters Estimates consensus of $1.57. ABS expects full year comp store sales to be positive.

The competitive environment continues to be challenging for the drug and food retailers, particularly from heavy-weight Wal-Mart (WMT), which is knocking at customers' doors. This quarter, ABS was able to drive the top line through heavy promotion and acquisitions regaining lost market share, yet the company was not able to convert sales into earnings. We maintain our position that investors shy away from the group, as the outlook for the grocers remains challenging. Increased competition will drive retailers to lower prices and increase spending eroding margins. The only bright spot in the group is Whole Foods (WFMI), which has been able to drive growth through product differentiation, operational efficiency, and execution.---Kimberly DuBord, Briefing.com

12:02PM Travelzoo (TZOO) 50.77 +2.87: One of the most volatile stocks over the past year has been Travelzoo. The stock jumped from single digits to triple digits, then slid back to $50 a share only to make a recent run. It is safe to say that run came to an end on March 11, and was almost decapitated yesterday afternoon as the stock dropped from the $52 range to a handle that started with $48.

Late in the day, an SEC filing noted that Travelzoo CEO Ralph Bartel had sold shares in the open market, including sales on March 11 of 167, 879 shares at $56.31 and then yesterday he sold 517,121 shares at $48.08.

The sales should not really come as a surprise, as the CEO noted that he would be selling some of the shares that he owns. Before the sale, Bartel owned 84% of the outstanding stock of Travelzoo. That meant that there was a very thin float. The float, or number of shares actually available for trading, was often pointed to as the reason for the run-up in share price. The story was that as momentum players latched onto the idea they would dive in and force the shorts to cover, which would in turn bring in more momentum players. It was a day trader's playground.

This vicious cycle of shorting and covering and momentum players took the stock very high, very quick. Now with the CEO selling shares, but really not that many in the big picture of things, the stock is free to run around again. Shorts have new ammunition on their side as they point to the fact that the CEO was happy to get out around $50 a share, but this is of course the wrong type of thinking that got them in a short and cover scenario in the first place.

If no one else has noticed, let us be the first to inform the shorts, and other investors for that matter, on how Travelzoo trades. First of all, it does not trade based on fundamentals whatsoever. Any notion that this stock moves based on its revenues or earnings is a wrong notion. This stock moves on the whim of the momentum crowd and now that a proverbial shoe has dropped, there is less pressure on the stock from which short side momentum players can gain a foothold. Of course that shoe is the selling of shares by the CEO, but do note that only 685,000 shares caused the stock to drop around 20%. Now the power of the momentum swing is beginning to be understood.

Travelzoo has been the exact blueprint of what most wealthy entrepreneurs should do. Start the business with mostly their own capital, releasing a precious few shares to the public. Make sure the business sees some growth (nothing out of control, but growth just the same) and add to that a pinch of profitability and you have the recipe. The just deserts for following the recipe have been around $34 million for just 685,000 shares for Mr. Bartel. We would have to imagine that there will be several more layers put on his cake, and the bulls and the bears will continue to chase each others tail at the zoo.

10:56AM TiVo (TIVO) $5.82 +1.99 (+52%) Wait. Rewind that. This changes everything. TiVo announces a deal with Comcast today under which they will essentially license customized software for Comcast DVRs. This is an extremely smart shift in strategy - and one which is long overdue.

In an Ahead of the Curve article on December 4, 2004, entitled "TiVo: Increasing Loss/Subscriber Trend Not Good," we strongly questioned TiVo's strategy of focusing on their own TiVo-owned customer base instead of exploiting the extremely good business model of partnership deals, already proven by the DirecTV deal. In fact, we wrote "...the entire company should probably be adjusted to acquire as many partnership subscribers as possible, including more than those that DirecTV provides. That model holds promise, financially."

In addition, we specifically stated "a second partnership deal, perhaps with a cable vendor, needs to be established to provide leverage against DirecTV dictating terms when their contract expires" and "remaining capital could then be allocated towards subsidizing the operations of the company."

It seemed unlikely (then) that TiVo would adopt this strategy, however, based on statements by Cofounder-CEO Mike Ramsey, who was still clinging to the "lost dream" of revolutionizing TV. But then Ramsey "resigned" (plans to step down as soon as replacement is hired) and soon after President Marty Yudkovitz resigned. Did the board decide that Ramsey's vision really was a "lost dream?"

Seems accurate to view things that way, given today's announcement. This is a reversal of prior strategy. In addition, if you combine today's announcement with TiVo's "profitability" statements last week, however, a better picture of the TiVo emerges - with implications for the "TiVo-owned" customer base. That market is no longer top priority.

After last quarter's earnings report last week, we were baffled by TiVo's statement that they would reach profitability in 2006. Combined with the huge increase of rebates (as percentage of revenue, Q4 was 76% of revenue, versus Q3's 65%) and the disturbing trends of increasing expenses/subscriber as the company gets bigger, it seemed impossible for TiVo to become profitable - given the strategy of making the TiVo-owned customer the top priority. The cost of acquiring TiVo-owned subscribers was just too high. Many analysts agreed, as our Story Stock of March 11 described.

With this deal, however, it becomes clearer how TiVo can reach profitability. The Comcast deal has extreme leverage, since TiVo will not be building hardware boxes. This is a software-only deal. Licensing software is scalable. Although the financial terms of the deal have not been revealed, it can be assumed that Comcast will absorb the marketing costs to their base, and perhaps the servicing costs as well (answering the "this thing doesn't work" questions). The revenue to TiVo will probably come without high operational costs, unlike the TiVo-owned subscriber model. But the service won't begin until early 2006.

To reach profitability this year, there is only one obvious deduction, after putting together all of these "clues." Expenses are going to be cut harshly at TiVo, perhaps even in the current quarter. The huge marketing effort towards building the TiVo-owned base will be cut back. In the last six months, sales and marketing cost $25+ million. One year ago, sales and marketing for six months was just $8 million. The huge rebates to get TiVo subscribers to cross the line will be deemphasized. At 76% of revenue, it was a huge expense. That will slow the growth of TiVo-owned subscriber base, but who cares? The future for TiVo lies with deals like this.

The stock is up 50% this morning, but if TiVo announces layoffs in the marketing staff or an end to rebates, it will probably go up even more. But until the financial deal with Comcast is visible, accurately forecasting TiVo's financial future is hard. If it amounts to just $1.50 per month (DirecTV pays $1.30/month) per subscriber and TiVo gets 100% of Comcast's 8.5 million subscribers with digital cable, the total revenue would be $32 revenue quarterly. While that is double current revenues, 100% penetration is impossible. It implies that TiVo needs more of these cable deals - a lot more. They have made the right strategic shift, but they still have a long way to go. Its probably still better to just "TiVo" the stock chart and watch it later, unless you like the Speculative channel a lot. - Robert V. Green

9:04AM Page One - Trading Range and Choppy Conditions Continue : The market is looking for direction. Yesterday, the entire market rallied when Genentech announced results for its Avastin cancer drug. The market simply needed a push one way or the other. This morning, there is no major push yet.

Stock futures indicate a slightly lower open. Oil prices are at $55 a barrel ahead of the OPEC meeting on Wednesday. Bond prices are near flat as the 10-year note yield has temporarily settled near 4.50%.

The economic news remains good. February retail sales rose 0.4%, which was less than the expected 0.5%, but the January increase was revised upward from -0.3% to +0.3%. The level of sales in February was thus above expectations. Sales excluding autos rose 0.4% following an upwardly revised 1.0% in January, which reflects a good trend in underlying consumer spending. The March NY Empire State index was about as expected at 19.6, suggesting continued manufacturing growth.

The corproate news is light, but that isn't so bad. There aren't any significant earnings warnings to rattle the market. Lehman Brothers reported earnings of $2.91 a share, well ahead of the expected $2.20. Revenue was way ahead of expectations. Brokers continue to do well, supported by mergers and market conditions. Bear Stearns reports tomorrow morning, and Morgan Stanley on Thursday.

The late market move yesterday was surprising, and not based on solid fundamentals. It fits our definition of "choppy." We expect these choppy conditions to persist for the near term, with down moves just as likely as up moves. The trading range continues, as reflected in the chart below of the S&P 500 index for the past three months.



Dick Green, Briefing.com