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From Briefing.com: Market Update

Weekly Recap - Week ending 24-Jun-11

What a long, strange trip it has been -- and we're only talking about the last five days for the equity market. Once again, things were volatile, only this week it wasn't due entirely to Greece.

Greece was certainly a big part of the trading equation, but if you'll allow us some acronymic license, the FOMC, the IEA, and the GOP also played prominent roles as well.

To begin, the week started on an upbeat note. The major averages advanced Monday and Tuesday on light volume in an anticipation trade rooted in the belief that (a) the Greek prime minister and his new cabinet would survive a no confidence vote at midnight on Tuesday and (b) the FOMC's policy directive and subsequent remarks from Fed Chairman Bernanke at the press conference would have a calming effect in an angst-ridden environment.

Participants got it half right. The Greek prime minister and his cabinet survived in a party-line vote, yet the FOMC and the Fed chairman in particular failed in their supporting role.

The Fed's failings were as much about what it said as what it didn't say. In truth, the policy directive read almost exactly as conventional wisdom said it would.

There was an acknowledgment that the economic recovery was unfolding more slowly than previously expected, but that the slowdown reflected in part factors that are likely to be temporary. Commodity-based inflation pressures are expected to dissipate; QE2 will be complete at the end of June; and economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The added wrinkle for the market is that Mr. Bernanke acknowledged at the press conference that the Fed does not have a precise read on why the slow pace of economic growth is persisting. Furthermore, the Fed's central tendency projections for real GDP growth in 2011 and 2012 were lowered from their April projections, yet the Fed chairman downplayed the likelihood of QE3 coming to fruition anytime soon.

Mr. Bernanke said the Fed is in a position of waiting and watching the incoming data to determine its next move (or non move). That is a fair and defensible position, but the market nonetheless would rather think the Fed is in a position of being ahead of the curve, particularly at this sensitive time for the employment picture and the Greek debt crisis. The sense that it isn't created some nervousness that the Fed isn't waiting and watching as much as it is waiting and wishing for the data to confirm its temporary slowdown views.

The market had been little changed for most of Wednesday, but it rolled over after the press conference and closed at its lows for the day. We suspect the late sell-off, which carried over into a 200+ point decline in the Dow early Thursday, emanated also from the unsatisfying thought that the market is going to be handcuffed by the economic calendar here and abroad for an extended period of time.

Sure enough, weaker-than-expected readings for purchasing manager indexes in China and the eurozone on Thursday, along with another disappointing initial claims report in the U.S., helped grease the wheels of Wednesday's closing slide.

At its low on Thursday, the S&P 500 was down 1.9% as the weight of the Fed's debatable outlook and the aforementioned data flattened investor sentiment. It didn't help matters either that press reports indicated GOP leaders walked out of budget deficit negotiations with Vice President Biden, saying talks had reached an impasse. That may just be political gamesmanship, but in this uncertain period, it can also be labeled poor timing.

The market needs closure on the issue of the debt ceiling being raised by August 2 and the current deficit attention disorder that is afflicting both parties is clouding the prospect of the debt ceiling being raised in time. Undoubtedly, the ratings agencies aren't too keen on the latest developments.

Still, it would be remiss not to add that the Treasury market barely batted an eye, even if the equity market did, at word of the impasse. That is because it continues to be fueled by safety trades related to Greece and signs of an economic slowdown, while at the same time persisting in the belief that a debt ceiling compromise will be achieved before it's too late. The yield on the 10-year note fell seven basis points this week to 2.87%.

Another big storyline from Thursday was the news that the IEA is releasing 60 mln barrels from strategic petroleum reserves (30 mln from the U.S.). That decision, it was said, flowed from worries about longer-lasting supply disruptions in Libya, although it was interpreted by many to be a tactical strike against speculators who are long the oil market. Oil prices, which were already down sharply in response to the data, remained under pressure in the wake of the announcement.

Crude oil futures for August delivery, which sat above $114 per barrel at the start of May, settled the week just under $91 per barrel.

Attention will now be paid to whether the IEA intervention, and the threat of more to come, can keep prices from rising sharply from current levels. That will be a tall order if incoming economic data show improvement or further uprisings in the Middle East develop.

For now, though, the drop in oil prices has to be considered a positive change at the margin insomuch as it is helping to bring down gas prices and helping to quell inflation expectations.

But, wait, there was still more when it came to Thursday's action. We said earlier the S&P 500 was down as much as 1.9%, yet it ultimately ended the day down just 0.3%. The reported catalyst for the recovery bid was news that Greece reached an agreement with the EU and IMF on a new five-year austerity plan.

We're not sure why it would react so strongly to the Greece headline. We guess it was the type of thing that sounded just good enough for a market that tested key technical support at the 200-day moving average to force weak-handed short sellers to cover their positions. It beat the alternative, we suppose, of hearing on a day like Thursday that they failed to reach an agreement.

The fact of the matter is that the Greek parliament still hasn't passed the plan. That vote comes next week and the outcome is as up in the clouds right now as the Greek gods. In brief, nothing got settled Thursday, but the idea that things didn't get any worse with respect to Greece held sway in the rebound effort.

The recovery vibes didn't last long though. Despite an upward revision to Q1 GDP (to 1.9% from 1.8%) and a durable orders report showing renewed growth in orders for nearly every sector in May, the market struggled on Friday. Basically, it gave back most of the ground it made up in Thursday's late rally, which is consistent with our thought that we were not quite sure why the market rallied like it did on the Greece headline on Thursday.

Friday's selling led to a 1.2% decline in the S&P 500 that left it down 0.2% for the week. The Dow Jones Industrial Average slipped 0.6% for the week, but the Nasdaq, S&P 400 Midcap Index, and Russell 2000 rose 1.4%, 1.4% and 2.1%, respectively.

Notwithstanding the concerns about Greece and an economic slowdown, risk aversion was not the default trade in the equity market.

Cyclical sectors outperformed noncyclical sectors by and large and growth stocks outperformed value stocks. The sustainability of those trends in the coming week will likely hinge on Greece's austerity vote and the economic data that the Fed and everyone else are watching day-by-volatile day.

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

 
 Index	  Started Week	Ended Week   Change  % Change  YTD % 
 DJIA	    12004.30	 11934.58   -69.72     -0.6    3.1 
 Nasdaq	     2616.48	  2652.89    36.41      1.4    0.0 
 S&P 500	     1271.50	  1268.44    -3.06     -0.2    0.9 
 Russell 2000  781.75	   797.79    16.04      2.1    1.8

3:16PM Semi/Technology SMH/XLK continue to lag, Nasdaq Comp -37 sets new low -- Dow -107, S&P -14 just above their lows (QQQ) :

Diodes (DIOD) announced an agreement to invest in Eris Technology. has announced that it will offer to its shareholders and employees up to 10 mln shares of common stock at NT$39 per share to raise NT$390 mln (~$14 mln). Diodes has agreed to purchase any shares not purchased by Eris' shareholders and employees and Eris' founders have agreed to sell Diodes any shares necessary to ensure that Diodes will obtain a minimum of 8 mln shares, which represents an ~ 24% ownership in Eris after the capital increase.

UTStarcom (UTSI) and UTStarcom Holdings announced the proposed merger to reorganize the co as a Cayman Islands company was approved by the stockholders of UTStarcom at the annual meeting.

1:05 pm Tech Sector Over One Percent Lower; Comcast added to Goldman's Conviction Buy List (CMCSA)

The tech sector is trading lower today, trailing losses in the broader market. Semiconductors are showing relative weakness in the tech space with the Philly Semi Index trading 1.7% lower. Among chips in the index, MU (-12.9%) is the notable laggard. Among other major indices, the S&P 500 is trading 0.8% lower while the NASDAQ is trading 0.9% lower. The QQQ, meanwhile, is trading 1.3% lower. Among tech bellwethers, ORCL (-3.9%) and CSCO (-2.0%) are under pressure.

In earnings, ORCL (-3.9%) reported a slightly better-than-expected quarter and issued inline guidance. Elsewhere, MU (-12.9%) posted a miss and TIBX (+0.5%) reported a beat and upside guidance.

In news, COOL (+4.2%) will be added to the Russell Microcap Index. In M&A, there was a report from the WSJ that BBBB (+5.8%) may be acquired by buyout firm.

Among the more notable analyst ratings changes this morning, CMCSA (0.0%) was added to the Conviction Buy list at Goldman and CTCT (+1.7%) was upgraded to Neutral at Dougherty.

There are no notable tech names set to report results today after the close.

09:55 am MU Results Fall Short of Expectations (MU)

Micron (MU $7.44 -0.99) reported third quarter earnings of $0.07 per share, $0.10 worse than the Capital IQ Consensus Estimate of $0.17.

Revenues fell 6.5% year/year to $2.14 billion versus the $2.37 billion consensus.

The company's consolidated gross margin improved to 22 percent for the third quarter of fiscal 2011 from 19 percent for the second quarter of fiscal 2011 due primarily to decreases in manufacturing costs. Revenue from sales of DRAM products was 7 percent lower in the third quarter of fiscal 2011 compared to the second quarter of fiscal 2011 due to a decrease in sales volume.

09:52 am ORCL Guides Q1 EPS In-line (ORCL)

Oracle (ORCL $31.26 -1.20) reported fourth quarter earnings of $0.75 per share, excluding non-recurring items, $0.04 better than the Capital IQ Consensus Estimate of $0.71.

Revenues rose 11.9% year/year to $10.78 billion versus the $10.74 bln consensus.

Both GAAP and non-GAAP new software license revenues were up 19% to $3.7 bln. Both GAAP and non-GAAP software license updates and product support revenues were up 15% to $4.0 bln. Both GAAP and non-GAAP hardware systems products revenues were down 6% to $1.2 bln. Non-GAAP operating income was up 19% to $5.2 bln, and non-GAAP operating margin was 48%.

"In Q4, we achieved a 19% new software license growth rate with almost no help from acquisitions. This strong organic growth combined with continuously improving operational efficiencies enabled us to deliver a 48% operating margin in the quarter. As our results reflect, we clearly exceeded even our own high expectations for Sun's business. In addition to record setting software sales, our Exadata and Exalogic systems also made a strong contribution to our growth in Q4. Today there are more than 1,000 Exadata machines installed worldwide. Our goal is to triple that number in FY12. In FY11 Oracle's database business experienced its fastest growth in a decade. Over the past few years we added features to the Oracle database for both cloud computing and in-memory databases that led to increased database sales this past year. Lately we've been focused on the big business opportunity presented by Big Data."

On the conference call after hours yesterday, the company guided its first quarter earnings in the range of $0.45 to $0.48 versus the Capital IQ Consensus Estimate of $0.46; sees revs growth of +9% to 12%.