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From Briefing.com: 6:07PM Swing Trader: A Relief Rally? : -- Technical -- The markets gapped higher Wednesday morning and managed to stage a decent uptrend throughout the session. Market Breadth was mixed as Advancers outpaced Decliners about 2.9 to 1 (a nice change of pace after multiple "bad breadth" days in March). New Lows, however, continue to exceed New Highs. Tomorrow marks the end of Q1, so we may continue to see an upward bias follow through headed into Friday's job report...(continued)

Close Dow +135.23 at 10540.93, S&P +16.05 at 1181.41, Nasdaq +31.79 at 2005.67: Bulls rallied behind falling oil prices, encouraging economic data, technology leadership, oversold conditions and an improving overall sentiment to lock in gains of more than 1.0% across the board... The Dow (+1.3%), aided by upticks in 29 of its 30 components, recorded its first triple-digit gain in nearly a month while the Nasdaq (+1.6%) closed above the psychological 2000 mark for the first time in more than a week...
Falling crude oil prices ($53.99 /bbl -$0.24), in the wake of strong inventories data, eased inflationary pressures ahead of tomorrow's Feb Personal Income and Spending report and Friday's March employment report... Crude oil inventories rose 5.4 mln barrels (consensus +2.5 mln) and distillates fell only 1.1 mln barrels (consensus -1.5 mln), offsetting a larger than expected 2.9 mln barrel decline in gasoline inventories (consensus -1.8 mln)... At their lowest levels of the day, oil prices were off as much as 3.2% (or down 9.5% from highs of $57.60/bbl reached just two weeks ago), before losses were pared in the last half hour of trading... Also contributing to the bullish bias was a final read on the Commerce Dept.'s Q4 GDP report, which checked in at 3.8%...

While the figure was left unchanged versus economists' higher expectations of 4.0%, the data signaled a pace of economic growth that was not too strong to warrant more aggressive Fed tightening at the FOMC's next meeting (May 3)... With the market arguably being oversold following three weeks of declines and a day that saw the Dow and S&P hit two-month lows and the Nasdaq mimic weakness not seen since last October, renewed buying interest and end of the quarter window dressing created bargain hunting opportunities in virtually every sector...

Information Technology (+1.6%) led the charge in the wake of better than expected Q2 earnings from Micron Technology (MU 10.48 +0.36), as all 10 economic sectors enjoyed gains of more than 1.0%... Strength in Computer Storage (+3.2%), after Morgan Stanley initiated coverage of EMC Corp (EMC 12.39 +0.41) with an Overweight rating, coupled with strong gains in Hardware (+2.5%), Software (+2.1%) and Networking (+2.1), also helped technology advance...

Internet Retail (+4.4%) and IT Consulting & Services (+6.8%) - two of this year's Top Ten worst performing groups - were the best performers, while Airlines (+2.6%) - another poor performer in 2005 - surged amid falling oil prices and a Merrill Lynch upgrade on AMR Corp (AMR 11.03 +1.10)... Financial (+1.1%), which got a boost amid a management shake-up at Morgan Stanley (MWD 55.28 +1.67), along with Health Care (+1.4%), Materials (+1.4%) and Energy (+1.5%), despite lower oil, were also influential leaders to the upside... Even Treasurys climbed, shrugging off modest selling pressure early on following the unrevised GDP figure, as the benchmark 10-year note finished up 4 ticks to yield 4.55%...

The only notable group that sold off was Multi-Line Insurance (-1.4%), led by weakness in American International Group (AIG 57.16 -1.04), which admitted to improper accounting practices and delayed its 10-K filing again... Meanwhile, the dollar inched lower against the euro (1.2923) and weakened against the yen (107.48) for the first time in nine sessions after Q4 GDP grew less than anticipated, lifting gold futures $429.50/oz. (+0.2%) toward their highest levels in a week...DJTA +1.7, DJUA +1.4, DOT +2.3, Nasdaq 100 +1.9, Russell 2000 +1.7, SOX +2.3, S&P Midcap 400 +1.2, XOI +1.3, NYSE Adv/Dec 2475/808, Nasdaq Adv/Dec 2128/945

9:10AM Gapping Down : CGTK -41% (says drug candidate failed to meet primary endpoint), TTEK -20% (guides lower), WAT -16% (guides lower; Merrill downgrade; Baird downgrade), APN -16%, LANV -11% (profit taking after 71% move yesterday), XPRSA -7.6% (guides Q1 EPS below consensus), ABTLE -7.2% (controller to resign; stock may get delisted), VARI -3.3% (Baird downgrade), RECN -2.4% (reports FebQ), TEVA -1.4% (adverse court ruling).... Under $3: FMDAY -25% (reports JanQ), CNR -9%.

8:59AM Gapping Up : TZOO +11% (Susquehanna upgrade), KOSP +20% (in settlement talks with BRL), ZOLT +11% (announces large wind energy contract), IMH +11% (REIT announces dividend), MERX +7.6% (beats by $0.11, guides MayQ above consensus), AMR +6.1% (Merrill upgrade), ORCT +5.3% (sets date for 3-for-1 split), INSP +4.1% (JP Morgan upgrade), ANTP +3.8% (bounces after 19% drop yesterday), LEXR +3.3% (prices convertible offering), CTIC +3.2%, JCOM +3.2% (jitters on tax concerns may present an entry point - Rodman; co sends email to analysts), BOOM +3.2% (recent momentum), RTP +2.9%, MU +2.8% (reports FebQ), APOL +1.7% (CSFB upgrade).... Under $3: JCDA +35% (wins contract from large telecom co), DFIB +17% (wins contract), TMTA +10%.

12:00PM MCI (MCIP) $24.20 +0.42 (+1.8%) MCI is trading up today and is currently above the value of the Verizon (VZ) bid. The market clearly believes that Qwest (Q) will increase their bid again in an attempt to prevail. We think this speculation is extremely risky, for several reasons. The first is that it is possible that Qwest simply won't make another bid, but there is no way to calculate that risk. However, there are ways to calculate what a successful Qwest might look like and then try to judge whether Qwest can actually put together a successful bid. We think the odds of Qwest being able to put together a bid the MCI board would accept are extremely high, which makes a speculative position in MCIP right now very risky.

First of all, unlike many other acquisition fights, the Qwest doesn't simply have to be higher than Verizon's. MCI has twice chosen a Verizon bid over a Qwest bid. The first VZ bid was more than 20% lower than Qwest's revised bid. The accepted VZ bid is still more than 10% lower than Qwest's. As we have pointed out in recent articles, the problem for the MCI board has been a lack of faith in the future value of Q stock. We tend to agree, as a combined VZ/MCI is a much more powerful telecom company going forward than a Q/MCI company. The nonstop decline of Q stock since the February 3 Qwest bid for MCI hasn't done much to strengthen a view that Q stock is good "currency" either.

Could Qwest convert their bid to an all cash deal? Such an offer would probably be hard for the MCI board to turn down, provided the This would be almost impossible to finance, given the current level of Qwest's debt, their unprofitability, and their eroding revenue trends. The long list of prior accounting problems wouldn't help sell bonds either.

Secondly, the acquisition agreement that MCI has already signed includes a $250 million breakup fee paid to Verizon if MCI changes their mind and accepts a new Qwest bid. That means that any Qwest bid would have to be at least $250 million higher than a Verizon bid simply to have a net equal result for MCIP shareholders. Since MCI has approximately 325 million shares outstanding, the breakup fee amounts to about $0.77 per share of MCIP. With the Verizon bid valued at $23.50, the real gap between the VZ bid and the current Q bid is actually just $1.73 per share, or 9.3%, not the 11% most people are quoting.

In addition, the new acquisition agreement signed between Verizon and MCI states that Verizon can call for a shareholder vote to approve their acquisition, without waiting for the MCI board of directors to call for a shareholder vote. This would place the decision on which bid is "better" squarely in the hands of shareholders. The proxy for such a vote could probably be legally structured to be an up/down vote on the Verizon deal only, and not a vote for one acquisition bid or the other. If that were the case, it is almost certain that Verizon could win a shareholder vote.

Finally, Verizon wants MCI and will have it. That determination is very clear. (We agree with the strategic value of MCI for Verizon - see Tuesday's Ahead of the Curve column for why.) As the much stronger financial entity, Verizon can easily top any increased bid that Qwest might make now. At best, Verizon might increase their bid by a $1.00 per share in cash, giving today's speculators a reward of just $0.30 per share. The more likely way Verizon would top any new Qwest bid would be to increase the ratio of VZ shares for Q stock. In fact, increasing the stock ratio to 0.5 would only increase the number of VZ shares issued by 30 million (from 132 million to 162 million). With 2.8 billion shares outstanding, such an increase is only a 1% additional dilution for Verizon - well worth it for the strategic value that MCI brings.

For all these reasons, the speculators betting that Qwest will increase their bid for MCIP who are taking positions today are not likely to see a lot of return from the purchases at the $24.20 level - even if they turn out to be right and Qwest submits another bid. Qwest's board is meeting today, in fact, and whether they throw in the towel or decide to try again might be known by the end of the day. - Robert V. Green
11:30AM MicroStrategy (MSTR) 54.95 -0.72: Many point to MicroStrategy as the stock that caused the actual bursting of the bubble way back in the year 2000. The stock dropped about 100 points in a single day, a drop that barely shows up when you take a look at a graph that covers the last five years. When one goes back a bit further, you can see that the stock was at levels that were nothing less than astonishing, but the stock subsequently fell back to earth, and remained there for a long time.

The reason the stock fell about 100 points in a single day was that it was not accurately reporting its revenues. The company was reporting the gross revenue as opposed to a more accurate net revenue number. At the time, many investors were using a price to sales valuation as they did not fully understand all the dot com's and other businesses that were out there. This valuation metric led many to try to do anything within their power to make that topline as large as possible. It should be noted that MicroStrategy was not the only company to do this - 24/7 Media was also guilty of this misleading reporting, and also fell significantly as investors realized what they were doing.

MicroStrategy is a maker of business intelligence software. That is a group that has seen a lot of interest lately. The software that the company makes helps companies mine the data that they have compiled on customers over the last several years. It also produces reports that help the company analyze customer behavior and basic business trends. This helps the company focus its efforts on the business lines or products that have the highest profitability or the highest amount of sales. This better understanding of its business and customers leads to improved performance and hopefully higher earnings.

The concept of data mining, combined with analysis and reporting tools is not really a new one and there are several competitors in the space. Companies such as E.piphany and Cognos are also in the space, and competition has become a bigger concern. As Briefing.com has been saying for some time now, the software industry has reached maturity, and another supporting argument is when companies like MicroStrategy begin competing with the Customer Relationship Management companies that are expanding into their core reporting and analysis business.

The MicroStrategy story is one that has split the opinions of many of the brokerage firms. A quick look at the Briefing.com upgrades/downgrades page shows that over the last month the stock has been upgraded 3 times, but downgraded 3 times as well. Recent management departures and the resignation of their auditors serves to further cloud the picture, something most analysts and investors do not like.

After reporting a blowout quarter in late January, the stock soared and has since slid back to the levels it was at prior to the earnings release. Simply put, the market was pleased with the good quarter, but expectations have waned and many are pointing to limited potential upside in future releases. This suggests that the stock will remain in a trading range as investors attempt to gauge where the business is headed.

10:40AM Chemical Stocks : Chemical stocks reaccelerated in January on expectations that demand would continue to drive companies' pricing power, resulting in further margin expansion, with the commodity cycle peaking in early 2006. The Diversified Chemicals group, which includes Dow Chemical (DOW), DuPont (DD), Eastman Chemical (EMN), Engelhard (EC), Hercules (HPC), and PPG Indus (PPG), was up 11% year-to-date by the beginning of March, but has since retraced a good deal of the upside. The question is where do Chemicals go from here?

Before we look ahead, let's take a look back. The industry has suffered from weak fundamentals over the past few years. Companies built out capacity in the 1990's for demand that never materialized, creating an overcapacity environment. Ever since, these companies including the largest, Dow and Nova Chemicals (Canadian, NCX), have been removing inefficient high-cost production capacity in order to compete with foreign producers offering cheaper products.

The environment finally started to strengthen going into 2004 and accelerated throughout the year. The industry is now is the second half of a cyclical upturn, which is expected to continue into 2006. One of the best ways to determine demand strength is through railcar loadings, as about 10% of rail tonnage is chemicals (over 40% is coal). Loadings have moved into positive territory following a drop-off at the end of Dec, which may be attributed to pre-buying by the converters and the Chinese New Year. A good indicator of economic activity is the Baltic Dry Index, which tracks shipments of bulk dry goods. This index peaked in Dec and has trended downward through Jan, and has now stabilized at its 50-day moving average. These indicators demonstrate the slower start to the year than expected. This in turn caused the pricing environment for polyethylene and ethylene to slow in the first few months after coming off a record Q4. Producers were expecting export demand to return quickly, but lower export and lackluster domestic demand caused the weakness in prices.

The weak dollar has exaggerated gains by the US producers, providing their products with a greater competitive advantage. DOW, the largest US manufacturer, is a great benefactor of the dollar as it has over sixty percent of sales overseas. Looking at Dow specifically, the company is enjoying considerable pricing power due to strong end-market demand. Its Q4 earnings (Jan) topped estimates by $0.15 as selling prices rose 28% y/y boosting gross margins by 120 basis points. This trend is likely to continue. Dow has done an admirable job cutting costs and diversifying its production internationally to lower-cost regions in order to offset energy price inflation. However, a key risk for Dow is its asbestos exposure.

The caveat to the story (there is always one) is the price of natural gas and oil. Natural gas represents 70%+ of cash costs of production for some commodity chemicals and prices have risen substantially over the last year. The chemical companies are consumers of gas, which is used in the production of the key building blocks of petrochemicals, as well as its derivatives including methanol, ethane, propylene, ethylene, and polyethylene. Switching costs is just too high for these companies and some may choose to just shut down older production plants if costs run too high. The diversified companies will be best positioned to pass through high costs.

It has been a slow start to 2005, and with cost headwinds, margin expansion may be limited for the first quarter. It all depends on the demand side of the equation. Dow's CEO called the recent lull in prices "an aberration," indicating the trend is already reversing itself as demand improved in March, resulting in stronger market conditions in Q2. We would suggest caution for the near-term, but if shares show exaggerated selling it may be a good point for longer-term investors to step in. The majority of these companies report Q1 earnings at the end of April. --Kimberly DuBord, Briefing.com

8:59AM Page One - Still Fragile, Even with a Bounce in the Dollar : Stock futures suggest an up open. We're not at all convinced that this bounce will be any more sustainable than the up open yesterday. The market remains fragile to any bad news.

So far, the news today is not bad. Hewlett-Packard has confirmed that Mark Hurd will be the new CEO. Bear Stearns and First Albany have upgraded the stock. Micron reported earnings and revenue above expectations for the fourth quarter, but many analysts expressed concerns about pricing power and margins for the company. CarMax reported earnings in line with expectations.

Oil continues to hover near $54 a barrel. According to the WSJ, Warren Buffett was told briefly in advance about a transaction that is now at the center of a regulatory investigation into an insurer he controls.

Fourth quarter real GDP was left at 3.8% with the second revision to the data, while the deflator (inflation measure) was raised to 2.3% to 2.1%. This data will have little impact, if any, on expectations for 2005 or the stock market.

None of the above alter the underlying concerns in the market about inflation. The PCE deflator in the personal income data tomorrow and the average hourly earnings data in the employment release on Friday have far greater potential to affect perceptions and move the market. The market will have a hard time advancing much ahead of the employment report.

Meanwhile, for those who haven't noticed, the dollar has rallied against the euro. After all the agonizing from the talking heads about the weak dollar and the supposedly bearish implications for the stock market, you would think there could be at least some notice of the turnaround (isn't this bullish?!).

As regular readers know, Briefing.com strongly disagrees with the idea that a controlled decline the dollar is bad for US stocks. In fact, a declining dollar increases US corporate profits. The weak dollar is absolutely not some sort of report card on the US economy mystically implying that the economy is actually weak despite 4% real GDP growth (compared to 1% Euro-area growth). The dollar was weak in large part because or relatively low overnight interest rates compared to euro rates, and is bouncing because US rates are on the rise. Investors should learn to ignore the ridiculous prattlings from the bears who could find only the weakness in the dollar to support their hopes that the US economy and stock market would crash. The dollar trends have actually correlated inversely with the short-term trends in the stock market due to the overriding impact of interest rates on each. Dick Green, Briefing.com

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