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From Briefing.com: 4:14 pm Weekly Wrap

The previous Weekly Wrap concluded with "it may (be) a struggle to post further significant gains through the first half of the year." That certainly was the case this past week. The factors mentioned last week - lowered profit expectations for 2006 and inflation risks - were prominent again this week.

The major event was the Fed meeting on Tuesday. The Fed raised the fed funds target 1/4% to 4 1/2%. That was fully expected. They also changed the language in the policy statement to read "further policy tightening may be needed." Previous statements said that "further measured policy firming is likely to be needed."

That wasn't much, especially as some change was expected to at least give new Fed Chairman Bernanke some latitude to chart a new course. The statement also blew off all signs of economic weakness in housing and fourth quarter real GDP with the statement that "the expansion in economic activity appears solid."

The market quickly came to the conclusion that another rate hike was likely at the March 28 meeting. Hopes that the Fed might have reached the end of the tightening cycle dissipated.

Concerns that the Fed would raise rates even past the March 28 meeting accelerated as the week progressed. A 0.6% decline in fourth quarter productivity announced on Thursday was seen as a problem in that productivity gains help curtail the inflationary impact of rising wages. That became even more of an issue on Friday. The January employment data showed a 0.4% increase in hourly earnings for the second month in a row. This reflects a modest uptrend. The unemployment rate also fell to 4.7% from 4.9% in December.

The employment data suggest that any slack in the labor market is fading. That could lead to higher wage increases and cost-push inflationary pressures. By the end of the week, the fed funds futures were assuming not just a 1/4% rate hike in March, but a 70% chance of another 1/4% rate hike after that.

The earnings reports this past week continued to be uninspiring. The list of disappointments included Eastman Kodak, Schering-Plough, Altria, and Sara-Lee. The biggest losers, however, were high flyers Google and Amazon.com. These companies had decent fourth quarter reports, but the outlook for 2006 troubled investors.

There were also plenty of good earnings reports. Energy companies had fantastic reports. But overall, the reports were consistent with the view that 2006 earnings estimates may have to come down even further.

The economic data this past week was good. The stock market wasn't thrilled, because strong data is seen now as potentially inflationary. January payrolls were up 193,000 and the two prior months were revised significantly upward. The labor market is strong. January same store sales for retailers were very strong. Auto sales for January were up significantly. Clearly, first quarter real GDP growth is going to rebound sharply. As noted above, however, that may not be great news for stocks.

Oil prices were a surprise bullish factor this week. Despite the continuing concern over Iran's nuclear ambitions, oil ended the week a little over $64 a barrel, down from $67 last week.

The market obsession right now is inflation. Any signs of inflation will raise concerns that the Fed will keep raising rates. That will keep the stock market in check. The 10-year note yield has already gone from 4.39% at the start of the year to 4.55% on Friday. That reflects concerns over inflation and the likelihood of further Fed tightening.

There are still positives for the market. Acquisition levels remain high. Dividend increases and stock buyback programs are providing support. Until the market becomes convinced that inflation is not picking up and that the end of the Fed rate hikes can be seen, however, the upside for stocks is limited.

 
 Index      Started Week Ended Week Change  %Change  YTD  
 DJIA         10907.21    10793.62 -113.59   -1.0 %  0.7 %  
 Nasdaq        2304.23     2262.58  -41.65   -1.8 %  2.6 %  
 S&P 500       1283.72     1264.03  -19.69   -1.5 %  1.3 %  
 Russell 2000   732.22      724.22   -8.00   -1.1 %  7.6 %

4:20 pm : Friday's stock market spent the session in the red. The January employment report fanned inflation fears and rate hike worries, and a disappointing fourth quarter earnings report from Amazon.com (AMZN 38.29 -4.45) contributed to the market's struggle. In addition, a spike in the price of crude weighed upon sentiment.

The hourly earnings component of the jobs data received the most attention. Hourly earnings rose a slightly more than expected 0.4% in January, and the December figure was revised to 0.4% from the originally reported 0.3%. The data suggest a firming wage trend, and a lower than expected unemployment rate of 4.7% underpinned concerns over a tight labor market. The hourly earnings trend heightened inflation fears, and fed the argument that the Fed may continue raising interest rates. For its part, Briefing.com expects a 25 basis point hike at the FOMC's March meeting. On the heels of the Fed's ambiguous policy directive, today's data spurred further uncertainty that gave investors reason to anticipate even further monetary tightening. The other closely-watched element, non-farm payrolls, rose a less than expected but very solid 193K. When also taking into account the upward revision to the December data, the payroll change was consistent with expectations for approximately 3.5% real GDP growth during the first quarter.

Selling pressure was broad-based and left all but one economic sector with a loss. Rate-sensitive areas were especially affected by the jobs data, but a recovery in the Treasury market helped them move off of their lows. A rally in 30-year bonds, ahead of next week's auction and anticipation of decent foreign demand helped that market gain ground after its early sell-off. Bonds were also aided by the ISM index, which reflected lower than expected growth.

The Technology and Energy sectors were the worst faring. Crude futures closed 1.1% higher, at $65.37 per barrel, as concerns over Iran's nuclear ambitions continue to affect the energy market. The Energy sector did not catch a bid from the crude action, and levied a weighty 1.1% loss. Amazon.com dragged the Technology sector 1.1% lower. Failing to meet the street's high expectations, the company joined the likes of Yahoo (YHOO 33.48 -0.77), eBay (EBAY 40.41 -1.17), and Google (GOOG 383.00 -13.04) last night. Internet related issues were particularly weak, but selling was wide-spread and left a majority of the S&P 500's tech stocks trending lower. The semiconductor and computer hardware industries were also areas of significant weakness.

Telecom was today's lone bright spot, but its 0.4% advance did little to counter the declines across the broader market.DJ30 -58.36 NASDAQ -18.99 SP500 -6.81 NASDAQ Dec/Adv/Vol 1686/1316/2.22 bln NYSE Dec/Adv/Vol 1956/1311/1.75 bln

09:45 am Nice Systems: Banc of America Sec initiates Buy. Target $60. The firm says that shares of top quality cos can have their own independent worth that can not be derived just from its parts. It is their opinion that FO is evolving into such a firm. Its valuation discount to the mkt has narrowed from 27% in 2002 to approximately 5% last year. In time, they believe that FO will move to a mkt multiple and perhaps even gain a premium valuation.

09:45 am Microtune: Needham & Co reiterates Buy. Target $6 to $6. Target raised following Q4 results, as firm believes TUNE appears to have a very strong position in two major digital TV growth drivers for 2006 and beyond: Digital over-the-air TV and cell phone broadcast TV. They believe Microtune is winning very prestigious design wins in these areas, likely to significantly increase 2007 revenue growth. This is all on top of a slightly profitable base business founded in the cable TV (modem + set top box) and automotive areas.

09:43 am Stratex Networks: Ferris Baker Watts upgrades Neutral to Buy. Upgrade is following Q3 results. They believe the Alcatel licensing deal could bring a new stream of high-margin revenue, and the technology that brought the deal promises higher margins for Stratex products.

09:43 am Superior Ind: Prudential upgrades Underweight to Neutral. Target $15 to $15. Firm believes the potential takeout price target of $24 based on scenarios from their merger model. They say a key attraction is Nara's relatively strong presence in the New York City market, with over $400mm in deposits.

09:42 am JC Penney: Piper Jaffray reiterates Outperform. Target $69 to $69. Firm believes recent industry consolidation has enabled JCP to transform itself into a next generation department store, providing customers with everything from apparel and home furnishings to fine jewelry and hair salons. As a result, they think JCP stores have become "one-stop shops" at a time when convenience and service have never been more important to the customer.

09:41 am Cerner: Piper Jaffray reiterates Outperform. Target $50 to $50. Firm is citing the quality of Q4 earnings. They believe the stock traded down in the aftermarket because of lack of earnings upside. They view any weakness as a buying opportunity - the business is tracking ahead of their model before accounting adjustments, and the accounting adjustments only serve to improve the quality of results.

09:40 am Cohu: Needham & Co downgrades Buy to Hold. Downgrade is based upon near term uncertainty and a very lumpy, less predictable business. They feel it is safer to wait on the sidelines to determine if the order downdraft is a one quarter phenomenon or a longer term trend.

09:39 am Intuitive Surgical: Piper Jaffray reiterates Market Perform. Target $85 to $85. Firm is saying the co posted another good quarter of above consensus estimates. They think the introduction of the new da Vinci S system will create near-term revenue uncertainty as the accounts in the sales pipeline evaluate whether to upgrade to the new system. Their field checks indicate the new system is much easier to set up, has significantly greater utility, and will likely be preferred by most of the U.S. accounts that would have purchased systems with fourth arms. They are forecasting that the new system mix will improve to 70% by year end, but delays in upgrading and fulfilling new orders will cause the year to be back-end loaded.

09:38 am Wet Seal: Sanders Morris Harris upgrades Hold to Buy. Target $10. Firm expects the co's buying, planning, and allocation road map to be more proactive than reactive in 06. Furthermore, with a more stable and vastly improved balance sheet, they believe the co will continue to get better pricing terms, and it should also be able to build its import program.

09:35 am Amazon.com: Deutsche Securities reiterates Hold. Target $44 to $44. Target cut following Q4 results below their expectations, with $2.977 bln in revenues, (vs. their $3.025 bln estimate) and true cash EPS at $0.39, (assumes cash taxes paid at a 7% tax rate), below their estimate of $0.43. They note that as a similar theme to the previous quarters, AMZN continues to reinvest back into R&D (with incremental investments increasing), and no sustainable operating leverage (or return on investment) evident in the near term. As for the stock, they remain on the sidelines for now and believe the stock will likely trade in the mid-to-high $30 levels.

09:33 am bebe stores: Sanders Morris Harris reiterates Buy. Target $20 to $20. Firm ups target following Jan comps, as they believe certain elements of the current fashion trends, such as shorts/crops, dresses, sexy jackets (a signature item), and pencil skirts, are working in bebe's favor.

12:14 pm Ryder System (R)

42.00 -1.75: For 19 consecutive quarters, Ryder System (R) topped analysts' expectations. Unfortunately for the global leader in truck leasing, that winning streak came to an end this morning after fourth quarter earnings checked in a penny shy of the Reuters Estimates consensus. On a positive note, Q4 earnings of $0.93 per share, which excluded charges for accounting changes and a benefit from a reduction in insurance reserves, still represented a second straight quarter of higher earnings and organic operating revenue growth in every segment -- a feat not experienced simultaneously in several years.

Total revenue rose 13.3% year/year to $1.54 bln, matching forecasts. Ryder's Fleet Management Solutions (FMS) business segment revenue grew 7% to $1.0 bln, driven by higher fuel services revenue, while revenue in its Supply Chain Solutions (SCS) segment grew 31% to $483 mln, driven by increased volumes and expanded business in all industry groups. According to management, such consistent performance provides momentum for achieving its business objectives for 2006.

For Q1, the company established an EPS forecast of $0.65 to $0.70 (consensus $0.67). For fiscal 2006, earnings are expected to grow 10-14% year/year to between $3.77 and $3.92 per share (consensus $3.77), which excludes a benefit of $0.08 and $0.10 in stock compensation expensing. Full-year guidance is based on a lower number of diluted shares outstanding, principally driven by Ryder's recently announced $175 mln share repurchase plan.

While we maintain an Overweight rating on the Industrials sector, with an emphasis on transportation stocks, we believe the rails offer the most attractive risk/reward characteristics. To wit, Burlington Northern Santa Fe (BNI) is a suggested holding in our portfolio for active investors.

-- Brian Duhn, Briefing.com

12:04 pm THQ, Inc. (THQI)

26.61 +0.41: THQ Inc., the world's No.3 video game publisher, on Friday said third quarter earnings fell from a year earlier on lower sales, but exceeded Wall Street's estimates. The Agoura Hills, California-based company also issued downside guidance for the fourth quarter and offered a mixed outlook for the full year, as it continues to grapple with a transition to next-generation gaming hardware. Similarly, rival Electronic Arts on Thursday reported lower quarterly earnings, and provided a bleak forecast for the current quarter, due to slower sales and continued investment in the transition.

For the third quarter, THQI earned $47.6 million, or $0.72 per share, on sales of $357.8 million. That compares with earnings of $62.9 million, or $1.05 per share, on sales of $400.3 million in the year ago period. Still, the results, which represented a 32% and 11% decline on the bottom-line and top-line, respectively, topped the Reuters Estimates consensus for earnings of $0.65 per share and revenue of $319.8 million.

In terms of guidance, THQI sees earnings of $0.02 per share in the current quarter on sales of $135 million. Analysts, on average, are expecting earnings of $0.10 per share on $149.27 million. For the fiscal year, a period viewed as a transition year for the industry, the company forecasted EPS of $0.67 (consensus $0.68) and revenue of $790 million (consensus $769.4 million). The company also established initial guidance for fiscal 2007 of EPS growth of 34% to 50% and sales growth in the range of 14% to 20%.

While transition-related issues continue to weigh on THQI, and the industry, longer-term growth prospects remain encouraging. Given the company's proven ability to develop successful game titles and strong market leadership position, it is well positioned for further growth as the industry continues to evolve and adapt to next generation gaming systems.

--Richard Jahnke, Briefing.com

11:56 am California Pizza Kitchen (CPKI)

32.06 -0.61: After Thursday's close, California Pizza Kitchen reported Q4 earnings of $0.29 per share and total revenues of $125 mln, matching the Reuters Estimates consensus on both the bottom and top lines. However, fourth quarter results didn't surprise anyone since the company announced preliminary figures in early January when management blamed a smaller year/year increase in comparable sales growth due to remodeling initiatives and hurricane-related store-closure days.

The aforementioned warning contributed to a 4.0% decline in the stock that day, offering a blow to the Consumer Discretionary sector, and raised concerns about management's handle on CPKI's operations, since only 11 of its 188 restaurants were located in Florida, where Wilma struck in late-October.

The bad taste left in shareholders' mouths, though, didn't last long. Two weeks later CPKI hit an all-time high of $34.50. In conjunction with the fourth quarter report, management said they remain focused on revenue growth, margin expansion at the operating line, and quality development across all of CPKI's concepts, and subsequently, issued upside guidance.

For Q1, the company already added two new restaurants and it expects comparable restaurant sales growth of 5.0% to 6.0% to result in earnings of $0.27-0.28 (consensus $0.26). For fiscal 2006, management sees EPS of $1.35-1.39, excluding the effects of stock-based compensation expense and the impact of a lease accounting pronouncement; the Reuters Estimates consensus is $1.33.

-- Brian Duhn, Briefing.com

10:31 am Electronic Arts (ERTS)

54.50 +0.92: In the midst of a transition to next-generation gaming consoles, Electronic Arts on Thursday reported lower third quarter earnings that missed already diminished expectations, and offered a somber outlook for the current quarter as it continues to invest ahead of revenues.

The world's largest video game publisher, along with other publishers, has been hurt in recent months by lower sales and increased investment in new gaming platforms, such as Sony's PlayStation 3, Nintendo Co.'s Revolution, and the recently released Microsoft Xbox 360. While the investment phase in the transition is not over, the steady transition to new hardware, combined with the company's strong game franchises and market leading position, continues to support a positive long-term outlook on Electronic Arts, as compared to its smaller rivals.

Net income, excluding one-time items, was $268 million, or $0.86 per share, in the third quarter. That compares with earnings of $391 million, or $1.23 per share, in the year ago period and the Reuters Estimates consensus of $0.90 per share. Revenue fell 11% year/year to $1.27 billion from $1.43 billion. Although the third quarter is typically the industry's biggest selling season, consumers largely delayed video game purchases ahead of the release of new gaming hardware. Accordingly, game sales for the current PlayStation 2, Xbox, and Game Boy Advance, declined 25%, 35%, and 37%, respectively, in the most recent quarter.

As the company, and consumers, continue to focus on next generation software, near-term results are likely to remain sluggish. To that end, the company issued downside guidance for the current fourth quarter. Specifically, it forecasted earnings to be in the range of $0.06 to $0.14 per share and revenue of $550 to $600 million. That falls below the current analyst estimate for earnings of $0.15 per share on revenue of $630.24 million.

--Richard Jahnke, Briefing.com

10:23 am Maytag (MYG)

17.85 -0.17: As anticipated, Maytag reported its second consecutive quarterly loss. However, surprising to loyal shareholders was that the nation's third largest appliance maker failed to follow in its soon-to-be parent Whirlpool's (WHR) footsteps with better than expected results. Maytag reported a Q4 (Dec) loss of $0.31 per share which, even after backing out multiple non-recurring items, still checked in 18 cents worse than the Reuters Estimates consensus of ($0.13). Consolidated sales rose 6.6% year/year to $1.24 bln (consensus $1.25 bln).

While Maytag posted solid top-line sales growth during the quarter with increases in all of its major appliance product categories, especially refrigeration, Chairman and CEO Ralph Hake wasted no time in saying, "I am extremely disappointed that our positive sales gains in major appliances were more than offset by our overall high cost structure." In particular, operating results were hurt by lower utilization of manufacturing capacity, a disappointing performance in floor care due to continued volume decline and price erosion, as well as higher distribution costs.

Management said it will address profitability over the next several quarters by continuing to pursue business improvement initiatives and expects to evaluate alternative strategies for the company's floor care product line (e.g. an underperforming Hoover vacuum unit) and commercial businesses (e.g. Dixie-Narco vending machines), including their possible sale. It will be interesting to see if Maytag's sale to Whirlpool will proceed with the "open optimism" Hake cited in late December upon the merger's endorsement at a special shareholders meeting, which was accompanied by Hake adding, "we have to have an ending to have a new beginning."

Whirlpool is expected to close its $21 a share cash and stock ($1.68 bln) bid for Maytag as early as this quarter and is awaiting regulatory approval from the Justice Dept.

--Brian Duhn, Briefing.com

09:18 am Amazon.com (AMZN)

42.74: Amazon.com on Thursday reported fourth quarter profit fell 43% from a year earlier on accelerated shipping discounts, sending shares plunging in pre-market action. Excluding non-recurring items, the results topped analysts' estimate, but revenue fell short of expectations. As the company continues to invest in new technology and promotions to drive sales growth and cash flow - a repeated theme for the past six quarters - expectations are that profit margins will continue to contract. As such, we would remain on the sidelines until greater clarity can be had into the company's return on investments.

For the fourth quarter, Seattle-based Amazon.com said it earned $199 million, or $0.47 per share, down from $347 million, or $0.82 per share, a year earlier. The results included a one-time tax benefit of approximately $38 million, compared with a $239 million one-time tax gain last year. Excluding these charges, the company would have earned $0.26 per share - five cents better than the Reuters Estimates consensus of $0.21.

Despite the sharp decline in earnings, Amazon.com reported fourth quarter revenue jumped 17.2% year/year to $2.98 billion on strong holiday demand. However, the results fell short of analysts' estimate of $3.08 billion. North American segment sales were up 21% to $1.68 billion in the period, while International segment sales grew 13% to $1.29 billion. Excluding the unfavorable impact of foreign exchange rates, net sales for the segment were up 23%. Overall, top-line growth was offset by increased shipping promotions through Amazon Prime, the company's membership program which allows members to get unlimited express shipping for an annual fee of $79, as well as investment in developing new innovative programs to attract new customers.

Looking to the first quarter, the company expects nets sales of $2.14 to $2.29 billion versus the consensus estimate of $2.28 billion. That represents year/year growth between 13% and 20%. For fiscal 2006, the company forecasted revenue in the range of $9.85 to $10.45 billion. According to Reuters Estimates, analysts are expecting revenue of $10.15 billion.

--Richard Jahnke, Briefing.com

09:12 am Weatherford (WFT)

43.28: Anyone wondering where all those windfall profits (well not all) are going, just take a look at the oil services industry. Weatherford, the fourth largest services company, generated the highest annual revenues in the company's history. Soaring activity levels around the globe, with particular strength in North America and the Eastern Hemisphere, outperformed rising rig counts.

With demand outpacing supply, service companies have been able to institute multiple price book increases. Weatherford's operating margins widened 120 basis points since the third quarter and 290 points over last year's period. Revenues in the fourth quarter grew 14% sequentially and 26% yearly (ex-acquisition) to $1.2 bln. The two cent beat in EPS doesn't fully demonstrate the accelerated top line growth, earnings momentum, and operating leverage these companies are experiencing. The greatest risk is soaring cost pressures from equipment to labor. Expenses for WFT grew to 21.8% of sales from 18.7% last year.

We remain bullish on the entire group with holdings in our Active Portfolio - BJ Services (BJS), Grant Prideco (GRP), and Transocean (RIG) - ranging from oil services, to equipment, to deep-sea drillers.

--Kimberly DuBord, Briefing.com