The market lost ground today after economic reports and several corporate executives suggested the recovery may not happen until 2004. Where have I heard that before? Maybe in July 2000, 2001 and 2002. It is the month where expectations meet reality and for the last three years it has been the blind date from hell.
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The string is unbroken at 21 weeks and it does not look like it will change anytime soon. The Jobless claims soared to 439,000, +14,000 over consensus estimates and last week's number was revised up to 434,000. Continuing claims rose to 3.82 million and a level not seen since the early 1980s. This 20-year high was not received well by Wall Street. The insured jobless rate rose to 3.0%. Analysts trumpeted their seasonality claim for the increase this week. They have been trying to find an excuse for each of the last 21 weeks to no avail as the numbers continue to disappoint each week. This is also setting up another negative number in the Jobs Report for July. The lack of a recovery is being shown in the lack of jobs and the continued layoffs by companies still trying to cut costs from lack of demand.
Chain Store Sales showed a slight improvement of +2.4% but the gains were not broad based. WMT sales rose +2.7% but TGT only gained +0.8%, JCP +0.1% and KSS fell -2.4%. Several retailers issued profit warnings today after a lackluster month. The survey showed that most gains came from heavy promotional selling with high discounts which could hurt the bottom line as we saw with the earnings warnings. Additionally much of the sales gains came from the Harry Potter book and several new video releases. Those are one time events, not month to month improvements in general volume. Barnes and Noble said half of their +10.5% sales increase was due to the Potter book. Most retailers said their inventories are above plan which means they have not sold as much as expected and that old inventory will have to be heavily discounted to make way for the fall merchandise. Tax rebate checks and lower tax withholding beginning in July should help retailers get rid of the excess inventory but unemployment is still a problem.
Import/Export prices were about the only friendly report today with Import prices rising +0.8% and export prices falling by -0.2%. This is due to falling energy prices and the falling dollar. Considering the May import number was revised down to a drop of -0.8% the gain for June only produced a breakeven. Still the report was seen as evidence that deflation is less of a problem than earlier thought.
The MAPI Survey today fell to 60 for the 2Q, down from 63 in Q1 and 67 in Q4. The new orders index fell to 53 from 67. While this still shows growth most would argue that the magnitude of the drop is significant and could be seen as a warning for Q3. 77% of the survey participants reported operating under 85% of manufacturing capacity. The capital-spending component fell to 54 from 62 and indicates the potential for limited spending in the 3Q. While the overall survey still showed limited growth it did show that that growth was continuing to slow.
From Briefing.com: On Friday, the market had a more favorable disposition in terms of earnings expectations as General Electric (GE 28.12 -0.07) didn't knock the cover off the ball with its earnings report. Nonetheless, since there was some concern GE might lower its FY03 guidance range altogether, there was some relief that the Dow component only narrowed its guidance to the lower end of its prior forecast. Specifically, the guidance was narrowed from $1.55-1.70 to $1.55-1.61 (consensus $1.60). A sense that the worst is over for GE placated the market and helped the indices recoup a large portion of the losses they incurred following Yahoo!'s (YHOO 32.19 -0.37) report.
Other helpful factors specific to the tech sector were the upgrade of Intel (INTC 23.34 +0.43) by Thomas Weisel Partners to Outperform from Peer Perform and Prudential starting coverage of the IT Hardware Sector with a Market Outperform rating. While there was clearly a bullish bias in Friday's trading, conviction on the part of buyers wasn't too strong as volume at the NYSE (1.21 bln) and the Nasdaq (1.52 bln) was the lightest of the week, which isn't entirely surprising given all that lies ahead for the market come Monday.
Next week will be chock full of economic data and earnings reports from influential companies, and will be influenced by the semi-annual testimony on monetary policy and the economic outlook from Fed Chairman Greenspan to the House Financial Services Cmte. on Tuesday and the Senate Banking Cmte. on Wednesday. For now, caution remains our watchword as next week (July 14-18) promises to be the real make or break week when it comes to determining market direction over the near- to intermediate-term.
Key tech companies scheduled to report their results include Intel (INTC; after the close Tues.), Motorola (MOT; after the close Tues.), Seagate Technology (STX; after the close Tues.), Teradyne (TER; after the close Tues.), EMC Corp. (EMC; before the open Wed.), Advanced Micro Devices (AMD; after the close Wed.), Apple Computer (AAPL; after the close Wed.), IBM (IBM; after the close Wed.), Nextel (NXTL; before the open Thurs.), Nokia (NOK; before the open Thurs.), SAP AG (SAP; before the open Thurs.), Unisys (UIS; before the open Thurs.), Microsoft (MSFT; after the close Thurs.), PeopleSoft (PSFT; after the close Thurs.) and LM Ericsson (ERICY; before the open Friday).
For the rundown of consensus estimates for each company, and others, you'll want to visit Briefing.com's Earnings Calendar. Our In Play page will be your best source for all of the breaking headlines on actual earnings reports.-- Patrick J. O'Hare, Briefing.com
4:56PM Weekly Wrap : The bulls were running in the streets of Pamplona this week and they were also running on Wall Street. Once again, the major indices closed the week higher than where they began it and they had the technology stocks largely to thank for it.
Bolstered by a spate of positive considerations on Monday, the market started the week on a banner note. In particular, the market was heartened by the lack of terrorist incidents over the holiday weekend, the Nasdaq easily clearing the top of the trading range it was confined to in June, a Goldman Sachs survey that suggested businesses will start spending more on technology, and an article in The Financial Times that intimated Microsoft (MSFT) is considering paying a special dividend of more than $10 bln.
Microsoft downplayed the special dividend talk, but it did cause a stir later in the week with an announcement that it will no longer issue stock options, and instead, will start granting Stock Awards - or restricted stock - in a bid to attract, and retain, top talent. The added thrust of this unconventional compensation approach for a technology company was the pronouncement that MSFT will begin expensing all equity-based compensation, including previously granted options, starting in FY04 (began this month). Concerns about lower profitability put MSFT's stock on the defensive, but for the most part, MSFT garnered praise for its decision and its stock hung in there just fine.
The same can be said of the broader market as it remained resilient to selling efforts. A rash of M&A activity that involved the storage, trucking, and auto parts industries, the leadership from the tech sector, and continued enthusiasm about the economic outlook served as underpinning factors. There were, however, a couple of hiccups along the way as the negative response to the earnings reports from Alcoa (AA) and Yahoo! (YHOO) served notice that companies face a tall task in living up to the very rosy expectations that have been built into stock prices.
Frankly, neither Alcoa nor Yahoo! had a disappointing Q2 report, but their guidance wasn't strong enough to light the market's fire. Heck, Alcoa noted that it hasn't seen signs of market improvements and Yahoo!, which was trading at 100x est. FY03 earnings ahead of its report, provided Q3 and FY03 revenue guidance that was essentially in-line with current consensus estimates. The market had been hoping for upside guidance from Yahoo!.
On Friday, the market had a more favorable disposition in terms of earnings expectations as General Electric (GE) didn't knock the cover off the ball with its earnings report. Nonetheless, since there was some concern GE might lower its FY03 guidance range altogether, there was some relief that the Dow component only narrowed its guidance to the lower end of its prior forecast. Specifically, the guidance was narrowed from $1.55-1.70 to $1.55-1.61 (consensus $1.60). A sense that the worst is over for GE placated the market and helped the indices recoup a large portion of the losses they incurred following Yahoo!'s report.
Next week will be chock full of economic data and earnings reports from influential companies, and will be influenced by the semi-annual testimony on monetary policy and the economic outlook from Fed Chairman Greenspan to the House Financial Services Cmte. on Tuesday and the Senate Banking Cmte. on Wednesday. For now, caution remains our watchword as next week promises to be the real make or break week when it comes to determining market direction over the near- to intermediate-term.
A read of our Looking Ahead Story Stock will provide added detail on next week's relevant happenings.-- Patrick J. O'Hare, Briefing.com
Close Dow +83.55 at 9119.59, S&P +9.43 at 998.13, Nasdaq +18.04 at 1733.90: Following yesterday's session of consolidation, buyers returned to the market this morning and bid it higher... The broad-based advance was spearheaded by influential sectors such as biotech, financial, drug, paper, retail, and computer... As a matter of fact, for the majority of the session disk drive and airline sectors were the only laggards of note... The latter was weak following UBS's downgrade of Southwest (LUV 17.66 -0.37) to Reduce from Neutral and AirTran (AAI 11.17 -0.88) to Neutral from Buy saying valuations are getting stretched despite the fact that the discounters continue to gain share aggressively... As the session progressed and buyers lost some of their enthusiasm, the semiconductor, networking, and tobacco sectors dipped into the red and exerted additional downward pressure on the market... The tobacco sector was on the defensive on account of a Wall Street Journal article indicating that Moody's Investor Services believes the rise in popularity of deep discount cigarettes will have an further effect on pricing pressure...
Among the companies mentioned as being subject to "continued erosion in operating performance and credit ratings" was Altria (MO 41.44 -1.76), which proved to be the biggest drag on the Dow for the majority of the session... Counteracting MO's pull lower was Home Depot (HD 33.18 +0.75), which benefited from Banc of America's upgrade to Buy from Neutral, indicating that the retailer has corrected its merchandising miscues and is a better operating company than it has been in years...
Despite the intra-day melt-down, the market regained its legs in the last hour and closed the session up 0.9-1.1% and with gains of 0.5%, 1.3%, and 4.2% for the Dow, the S&P 500, and the Nasdaq, respectively, compared to last Friday's closing levels... On the economic front, the reports of the day went largely unnoticed, but included the PPI report, which checked in at 0.5% (consensus 0.3%) and ex-food and energy at -0.1% (consensus 0.1%), as well as the Trading Balance report at -41.8 bln (consensus -41.5 bln)... Elsewhere, after starting the session in negative territory, Treasuries improved their stance and closed the day with gains across the yield curve and the 10-yr note up 6/32, bringing its yield to 3.63%... NYSE Adv/Dec 2221/1018, Nasdaq Adv/Dec 2009/1151
12:31PM Looking Ahead : It's not a stretch to say that next week will be a make or break week when it comes to determining market direction over the near- to intermediate-term. The Earnings Calendar is littered with key companies reporting results for the June quarter and the Economic Calendar is replete with a series of reports that will lend perspective to the pace of activity following the Iraq war. On top of that, Fed Chairman Greenspan is scheduled to deliver his semi-annual testimony on monetary policy and the economic outlook to Congress on Tuesday and Wednesday.
With respect to Greenspan's testimony, the Treasury and equity markets will be wanting to hear different things. The former will want to hear the Fed Chairman provide some indication that the recent jump in yields has been unwarranted given the challenges that still confront the economy; meanwhile, the equity market will hope to hear him talk up the improving economic conditions, downplay the threat of deflation, and make note of the favorable implications of tightening credit spreads and rising equity prices.
Greenspan is likely to offer a little of something for both markets, but on balance, we believe his comments will be weighted mainly toward the prospects for economic improvement with an acknowledgment that business investment remains the missing ingredient to a more meaningful rebound. Any fireworks surrounding his testimony should be set off on Tuesday before the House Financial Services Cmte. since the market is well aware that the second day of testimony, which will be before the Senate Banking Cmte., is typically a reiteration of what was said the day before.
When it comes to earnings, a number of industry groups will be represented next week, but clearly, the financial, technology, and airline industry groups will have the biggest impact on the proceedings as a host of companies from those respective areas will tell it like it was for Q2 and share how it will be in the months ahead. Key names in that regard include, but are not limited to, BAC, C, FNM, MER, WFC, WM, ONE, JPM, BK, WB, INTC, MOT, STX, TER, EMC, AMD, AAPL, IBM, NOK, SAP, MSFT, PSFT, ERICY, AMR, DAL, and CAL.
Of the economic data that is released next week, the Retail Sales and Consumer Price Index reports for June would qualify as the most important. There is a chance, though, that both will carry less than their usual weight with the market as their release coincides with Greenspan's testimony. The other reports that will draw some interest will be the NY Empire State Index, Industrial Production and Capacity Utilization, Housing Starts, Initial Claims, the Philadelphia Fed Index, and the Preliminary Univ. of Michigan Sentiment report for July.
Greenspan's testimony is the key event next week, but following closely behind will be the SEMICON West trade show. That show was brought to the forefront of investor interest this week when Goldman Sachs suggested on Monday that it thought the chip equipment stocks could outperform over the next two weeks as the market anticipated/reacted to what it expects will be an upbeat show. Thus far, the Goldman Sachs call has been on the money. Finally, Dell (DELL) will be holding its annual shareholder meeting on Friday.-- Patrick J. O'Hare, Briefing.com
11:26AM RMBS: Infineon seeks appeal in Rambus case 18.81 -0.35: Silicon Strategies reports that Infineon Technologies A.G. said it has filed an appeal with the U.S. Supreme Court seeking to overturn an appellate court ruling absolving Rambus Inc. of fraud for failing to disclose pending SDRAM patents to the JECEC Solid State Technology Association panel while the body was drafting an industry SDRAM standard. An Infineon spokeswoman said the German chipmaker is asking the Supreme Court to find that lifting a fraud verdict against Rambus "is a clear disregard of the appellate procedure."
9:42AM Powerwave upped to Buy at Adams Harkness (PWAV) 7.94 +0.14: --Update-- The upgrade from Mkt Perform follows last night's earnings report. Firm says it expects network expansion announcements from operators such as Cingular, AT&T, and Sprint to offer potential upside to revenue, positively impacting valuation and perception of the group. As such, firm upgrading rating to Buy with a $10 price target, based on 2.5x FY04 sales estimate, a 16% discount to the comp group mean of 3.0x estimated FY04 sales.
8:37AM PWAV upgraded to Overweight at ThinkEquity (PWAV) 7.80: ThinkEquity analyst raising the rating for PWAV to Overweight and increasing the price target to $10 in light of the co's Q2 results. Despite the market remaining "difficult", the analyst believes co is looking to new opportunities within Europe and N. America to fuel growth for PWAV in 2H03. In addition, the expanded relationship with ERICY should also serve as an impetus to help accelerate growth for 2004.
8:25AM Prudential initiates coverage of IT Hardware sector : Prudential initiates coverage of the IT Hardware sector with a Mkt Outperform rating; firm anticipates a modest recovery in IT demand beginning in 1H04, and expects demand to build through 2H04 and accelerate into 2005, with U.S. large corporate rebounding first followed by small- and medium-sized businesses, Europe, and Asia Pacific, with a 6-9 month lag. In addition, firm sees growth in Windows- and Linux Intel-based servers at the expense of proprietary RISC/UNIX platforms (benefits DELL), and believes another trend is the drive toward more strategic IT and business process outsourcing (IBM best positioned, HPQ gaining momentum). Initiates coverage of CDWC, DELL, IBM, IM, HPQ, and TECD with Buy ratings, and GTW, AAPL, and SUNW with Hold ratings.
Intel (INTC) 23.34 +0.43: Thomas Weisel upgraded to Outperform from Peer Perform, as checks suggest growing optimism that an IT recovery is under way, which is likely to result in a gradual uptick in demand for IT products in 2H03 and a stronger spending environment in 2004; firm believes the secular shift from desktop PCs to notebooks is accelerating, and it expects margin expansion to be the catalyst for INTC's EPS growth over the next several quarters; target is $30.
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