From Briefing.com: 4:20 pm : Caught within a tight trading range for Wednesday's entirety, the market's major averages reflected an altogether monotonous session. Holiday thinned volume and traders' fixation upon the flat yield curve resulted in tepid action on either side of the fence, but buyers ultimately dominated and the indices managed to reclaim some of yesterday's losses.
A blank earnings calendar and an absence of market-moving corporate news left investors without much trading catalyst. Nonetheless, six of the ten economic sectors finished higher. A 2.9% surge in the price of crude futures contracts, to just under $60 per barrel, incited broad-based buying that helped the market's top year-to-date sector erase more than half of yesterday's plunge. While the crude action fostered Energy's market-leading 1.4% gain, it went largely unnoticed by the broader market. Despite oil's rise, the Dow Jones Transportation Average outperformed. On a related note, Industrials (+0.3%) received an added boost from Boeing (BA 70.99 +0.46), which scored a $1 billion contract from the U.S. Navy. Supported by relative strength in retailers, the particularly energy price-sensitive Discretionary sector clung to a 0.3% gain from open until close. Target's (TGT 55.54 -0.04) reiteration of expected 4-5% December same-store sales growth, on the heels of Wal-Mart's (WMT 47.84 +0.11) reaffirmation yesterday, spurred enthusiasm ahead of next week's data stream that will reflect sales during the industry's crucial holiday shopping season. While not directly correlated with consumer spending, today's read on consumer confidence, which reflected a four-month high and a return to pre-hurricane levels, stood as further indication of a economic strength.
Following yesterday's inversion, the yield curve occupied the stock market's spotlight over the course of today's trading. Although the inversion, which was the first in five years and traditionally signals an economic slowdown, was not much of a surprise as the spread between the two and 10-year notes has been flattening for some time, it still served as a somewhat of a bearish backdrop for equities today. Yields across the Treasury market shifted in parallel fashion; amid very light trading that suggests the action lacked real conviction, the curve remained flat with both two and 10-year bonds yielding 4.37%. To that end, the market's most rate-sensitive areas, the Financial (-0.2%) and Utilities (-0.3%) sectors, fared worst. The former sector's vacillation dictated the indices movement within their range, but its decline was not enough to submerge the broader market. Technology's passive stance helped to further cap advances, but additional gains in the Consumer Staples (+0.1%), Healthcare (+0.1%), and Materials (+0.7%) joined the aforementioned gainers in keeping the market modestly higher.
DJ30 +18.49 NASDAQ +2.05 SP500 +1.63 NASDAQ Dec/Adv/Vol 1403/1640/1.22 bln NYSE Dec/Adv/Vol 1162/2146/1.06 bln
O2Micro Intl (OIIM) was granted 37 claims under US patent number 6,965,221 for its Direct Current to Direct Current converter Controller.
10:48 am Target (TGT)
55.73 +0.15: After Tuesday's close, Target Corp. reaffirmed its December same-store sales outlook, saying it expects results to be in line with its previous range of 4.0-5.0% based on actual sales at Target stores for the first four weeks of December and the company's outlook for the last week of the month.
According to ShopperTrak RCT Corp., the week after Christmas accounted for 10% of overall holiday sales last year and could account for as much as 14% this year given the ncreased popularity of gift cards.
With The National Retail Federation estimating that consumers will spend $18.48 bln on gift cards this holiday season, up 6.6% from a year ago, and The International Council of Shopping Centers expecting that 20% of gift card holders will redeem their cards this week, Target remains well positioned to report an improvement over last month's disappointing results, perhaps near the upper end of its forecasts. For November, the nation's No. 2 discount retailer reported same-store sales growth of 2.6%, which missed the downwardly revised Briefing.com consensus of 3.0% and trailed Wal-Mart (WMT) for the first time in 18 months. Target is scheduled to report December sales results on January 5.
While we maintain an Underweight rating on the Consumer Discretionary sector, we continue to like the long-term prospects for discount retailers like Target.
--Brian Duhn, Briefing.com
09:19 am United Parcel Service (UPS)
76.60: According to The Wall Street Journal, the Independent Pilots Association, which represents approximately 2,500 pilots at United Parcel Service, has stated that both parties continue to grapple over compensation and pension benefits. The pilot's union, which last Thursday threatened to ask to be released from federal mediation so it can strike, has cited three years of contract talks that have failed to produce an agreement.
Even though both sides say they have made progress over four days of negotiations, the world's largest shipping carrier continues to be a victim of its own success, as the union argues that, unlike the multitude of money-losing passenger airlines, UPS is highly profitable and therefore has the resources to further reward its pilots. According to UPS, their pilots, which earn on average more than $175,000 a year versus an industry average of $168,000, are being offered increased benefits at a time when their peers are seeing salaries and perks reduced.
The union expects the federal mediation board, which called for an indefinite recess last Friday, to decide in two weeks whether to require the sides to continue talks or to declare an impasse. As noted in the Journal, if a deadlock is declared, a 30-day "cooling-off period" would follow under the provisions of the Railway Labor Act, at which time pilots could potentially walk away from their jobs, be locked out or re-enter contract negotiations.
According to the Journal, a 15-day Teamster strike in 1997 cost UPS an estimated $750 mln in lost sales. Management, however, believes it will reach an agreement with no disruption in service to customers and strike a deal that will keep the company competitive, especially during a time when shippers are trimming delivery times and prices on many routes to gain a competitive advantage. Despite a slow start to the holiday shipping season, UPS last Tuesday reported handling a record 20 mln packages, due in large part to online sales and Asian imports. That record tally plays into our Overweight rating on the Industrials sector and our bullish outlook on transportation stocks in particular.
--Brian Duhn, Briefing.com
09:09 am Lucent (LU)
2.75: Although Lucent Technologies has produced its second annual profit after the downturn in the telecom sector, the company's overfunded pension plan is largely responsible for reinvigorating its turnaround, according to a report in The Wall Street Journal on Wednesday. The Journal noted that about 82% of this year's earnings are from the company's pension fund and not improved equipment sales, which raises concerns about Lucent's quality of earnings.
At issue are something called pension credits - the amount by which the pension fund's income exceeds its current expenses, according to the report. In fiscal 2004, such credits accounted for more than half of the company's reported $2 billion profit. The Journal added that without the $973 million pension credit in fiscal 2005, Lucent's $1.185 billion profit would have fallen to $212 million.
Over the past four years the company's pension credits have contributed $3.8 billion to Lucent's bottom line, lightening losses during the lean years and and making the turnaround seem rosier, the Journal reported. In its latest annual report filed with the Securities and Exchange Commission, Lucent's assets exceeded obligations by approximately $2.7 billion in its $34 billion pension fund. The Journal said that while the assets are likely to grow, the obligations aren't, indicating that the plan's ability to bolster the bottom line will continue.
Given the pension plan's large contribution to the bottom line, traditional valuation metrics are not reflective of the company's growth prospects and do not provide investors with a clear view of its turnaround progress. Considering the pension credits, Lucent's P/E ratio is 16.2x trailing twelve month earnings, well below its peer group. Excluding the contribution, the ratio increases to about 34.6x. However, with Lucent's pension credit expected to decline by $300 million next year, investors should get a better look at the company's ability to generate profits by selling its products.
--Richard Jahnke, Briefing.com
08:59 am A Copper Strike Threat
Copper futures hit a record high in London on news of a possible worker strike at Codelco - the world's largest copper producer. Workers are planning to strike at the state-owned Codelco mine in Chile unless the government agrees to discuss their requests for pay increases, according to union officials. Codelco's stockpiles monitored by exchanges in Shanghai, London, and New York have less than four days of global consumption, according to Bloomberg.
The copper pot continues to boil over with prices continuing to reach new historic highs. The bull market in metals is expected to continue well into 2006 as market conditions remain tenuous. Throughout the year, the threat of strikes has loomed over the copper market as workers see record prices and deficit global supplies and know they have more bargaining power. Also as a key industrial metal, prices moved after industrial production in Japan (the 4th largest consumer of the metal) increased a seasonally adjusted 1.4% from October. Chinese demand is expected to rise 8.6% next year to 3.8 mln tons according to the government - higher than the 8% growth expected.
Copper prices in London for delivery in three months rose over 1.4%, or $63.50 per metric ton, to $4,518 per metric ton. Prices have gained 43% year to date - the second best performing metal only to zinc on the LME adding 52%, according to Bloomberg. We remain committed to Phelps Dodge (PD), one of the world's largest producers, as a suggested holding in our Active Portfolio, which has gained 80% since we added it in 2004. Market conditions, while volatile, continue to support prices further strained by continued supply disruptions from worker strikes, mining operational problems, and environmental constraints globally. Looking into 2006, supplies should move into surplus levels as mining production comes online.
--Kimberly DuBord, Briefing.com
08:50 am German Confidence Rises
The euro gained the most against the dollar in two weeks after a strong consumer confidence report in Germany climbed to a six-week high. As Europe's largest economy, the German confidence report heightens expectations that, as the Euro economies strengthen, the European Central Bank will raise rates. According to futures, the market expects the ECB to raise rates twice next year. Borrowing costs were moved higher this month for the first time since the year 2000 to 2.25%.
German confidence rose to 3.8 in December from 3.4 last month, according to Gfk - Germany's largest market research company. A measure of consumers' expectations for the economy soared to the highest level in more than three years. Earlier this month, German business confidence jumped to a 5-year high and investor optimism rose to a level not seen in 12 years, according to the ZEW Center for European Economic Research. Economic recoveries in both Germany and Japan will likely propel their respective stock markets to the top of the best performing list in 2006.
The euro is currently trading at 1.1914 to the dollar, compared to 1.3613 at the same time last year. For the near-term, continued tightening by the Fed will support the dollar, but many expect the euro to strengthen against major currencies as the ECB continues to raise rates. Also out today is the Conference Board's Index of Consumer Confidence, which is expected to reach 102.5 in December from the prior month's reading of 98.9, according to a Bloomberg survey.
--Kimberly DuBord, Briefing.com
08:13 am Citadel Broadcasting: Citigroup upgrades Sell to Hold. Target $13 to $13. Firm notes that while CDL is not at bargain-basement prices like some of their Buy-rated stks, it does trade at a fair value vs. peers, considering guaranteed FCF returns to holders in the form of its 5.4% yielding dividend.
08:01 am Under Armour: Thomas Weisel initiates Peer Perform. Firm is saying they believe that there is tremendous growth potential, and the evolution of the company and financial model could take many paths.
07:28 am VCA Antech: Piper Jaffray reiterates Outperform. Target $28 to $28. Firm says they are now using their FY07 sales and EPS projections that are generally consistent with their long-term expectations for the company.
07:26 am Sunpower: CSFB initiates Outperform. Target $33.5. Firm is saying SunPower is the most efficient solar power producer at present and is well positioned to drive that efficiency even higher.
07:24 am Bank Mutual: Ryan, Beck & Co upgrades Mkt Perform to Outperform. Target $11.5. Upgrade is following the expiration of BKMU's 3-year post-conversion takeover moratorium in October 2006, they think that BKMU could be a likely takeover candidate. Firm puts takeout value at $15.
07:23 am Albertson's: JP Morgan upgrades Underweight to Neutral. Firm is saying that although a potential transaction does not appear to be in the cards anymore, at current valuations, the stock is reasonably valued (for the time being). The firm says that the potential for more material corporate changes - namely with the B.O.D. and sr. mgmt, might also limit material downside, and shareholder should become more active.
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