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From Briefing.com: 6:09 pm Weekly Wrap

The stock market ended September in impressive fashion. The Dow failed to close at a record high, but that was about the only disappointment.

The S&P 500 index was up four of the five days this past week. There was not a whole lot of news. The trend reflected the underlying bullish sentiment that has produced the steady rally since Federal Reserve Chairman Bernanke's testimony on July 19. The market concluded at that time that the Fed was probably done raising interest rates. That conclusion has underpinned the positive sentiment.

Also bolstering the market is the conclusion that earnings growth remains on track, even while a general economic slowdown is occurring. Forecasts for third quarter operating earnings for the S&P 500 in aggregate call for a 14% gain. That figure has held steady the past two months despite signs that economic growth is slowing. There is reason to believe that the forecast does not represent undue optimism.

Over the past few weeks, the number of companies warning of lower than expected earnings for the third quarter has been very low. This suggests that Wall Street estimates are not too high. Warnings normally pick up in the final weeks of the calendar quarter, but that was not the case the past two weeks.

The economic data this past week supported the idea that a soft landing for the economy is developing. August existing home sales dipped 0.5%, but new home sales were up a surprising 4.1%. There is no question that the housing sector is very weak, but it apparently is not crashing either.

Durable goods new orders for August were weaker than expected as they fell 0.5%, but the September PMI manufacturing survey jumped to 62.1 from 57.1 in August. Signs of slower growth are showing up in manufacturing, but as in housing, there is no sign of a crash.

The inflation news was steady. The August core PCE deflator was up 0.2%. This favorite inflation measure of the Fed was up 0.1% in July after three straight months at 0.2%. But before that in March was a 0.3% reading. The current trend at or a bit below 0.2% reflects a steady or perhaps slightly downward trend that should keep the Fed from raising rates further. The Fed probably expects inflation to moderate slightly in the months ahead as the economic slowdown starts to impact pricing decisions.

Second quarter real GDP growth was revised slightly lower to a 2.6% annual rate from 2.9%. That is entirely consistent with the hoped for soft landing.

Oil prices ended the week at $62.90 a barrel. That was up from $60.55 the week before, but it is still low enough to be perceived as supportive to the stock market rally, particularly as gasoline prices continue to drift lower. The 10-year note yield ended the week at 4.63%, little changed from 4.60% the prior week.

The combination of expectations of continued low interest rates and strong earnings growth is a good underpinning for the stock market rally that has occurred. The attempt by the Dow to push into record territory reflects these strong fundamentals. This market, unlike the previous Dow record, is not pumped up by hot air.

Of course, there are plenty of legitimate concerns for the stock market. The greatest fear is that a housing crash will lead to broad economic weakness and end the earnings growth trend. There are also geopolitical issues to be concerned about, and there are some concerns about inflation. For now though, the market is steadily climbing the wall of worry.

 
 Index      Started Week Ended Week Change % Change YTD  
 DJIA         11508.10    11679.07  170.97    1.5 % 9.0 %  
 Nasdaq        2218.93     2258.43   39.50    1.8 % 2.4 %  
 S&P 500       1314.78     1335.85   21.07    1.6 % 7.0 %  
 Russell 2000   718.63      725.59    6.96    1.0 % 7.8 %

The stock market got back on track this week. The profit-taking from the prior week ended, and good fundamentals gave an added boost to the recent bullish sentiment.

The week was dominated by macro-economic issues. The economy, inflation, and oil prices were the key factors. Corporate news was limited.

On Monday, Saint Louis Fed President Poole said the economy "is not really fragile, it's robust." A key concern for the stock market in recent weeks has been that economic growth might be slowing dramatically. That would cut into earnings growth. Poole's comments served as a reminder that in fact most economic series have showed continued strength. There has been significant weakness in housing, but even there recent weekly data have shown a pick-up in mortgage applications. There is no crash.

The August retail sales data on Thursday reflected the resilience in the economy. Sales were up just 0.2%, but that followed a strong 1.4% jump in July. Data on new claims for unemployment for the week ended September 9, also released on Thursday, dropped to just 308,000. This provided evidence that the labor market is not experiencing serious weakness.

On Friday, August industrial production was reported to have dropped 0.1%, but that was due to a drop in utility output of 0.8% that will probably be aberrant. The September NY Empire State index of manufacturing picked up a bit to 13.8 from 11.0 in August. There is no evidence that manufacturing will experience a sharp downturn.

Friday also saw the report of a pick-up in consumer sentiment for September. This reflected the recent sharp drop in gasoline prices. Oil prices on the global market fell this week to $63 a barrel from $66 a barrel last week. Further declines at the pump are coming.

The concerns about a sharp slowdown in economic growth eased this past week.

There was also good news on the inflation front. The August core CPI was up 0.2%. That was in line with expectations, but still marks the second straight month of a modest increase at that level after four straight months of a 0.3% increase. The lack of an uptrend in core inflation was a great relief to the stock market. The total CPI was also up only 0.2%. There is even an excellent chance of a drop in total CPI next month, as the recent drop in gasoline prices could pare 0.5% off the index.

The inflation news further convinced the financial markets that the Fed will not raise rates at the policy meeting on Wednesday. Fed funds futures incorporate only a 19% chance of any further rate hike this year, and then assume a rate cut in the first half of next year.

The macro-fundamentals all supported the underlying bullish tone. Economic growth is clearly slowing, but there is no evidence of a severe slowdown. The inflation data are steady, but that is good enough as it is expected that inflationary pressures will ease in the months ahead in reaction to slower economic growth. Oil prices are down. The Fed is not expected to raise rates again.

It is therefore not surprising that the S&P was up four out of five days this past week.

The corporate news included good earnings reports from brokers Lehman Brothers, Goldman Sachs, and Bear Stearns. Best Buy and Adobe also posted good numbers. There were no major earnings warnings.

Board room maneuvers made the news as Bristol-Myers and Hewlett-Packard dealt with CEO departures. Merck faced more negative studies on Vioxx. And Ford announced yet more major cuts as they strive to improve margins.

The next two weeks bring the risk of an increased level of earnings warnings. Companies that are going to miss Wall Street estimates typically announce such near the end of the calendar quarter. But the underlying tone in the stock market is moderately bullish, supported by good fundamentals.

3:05PM Asyst announces appointment of new interim Chief Financial Officer (ASYT) 6.91 -0.08 : Inside today's 8-K the co announces Richard H. Janney was appointed effective as of Sept 25, 2006, as interim Chief Financial Officer and interim Principal Accounting Officer of Asyst.

1:01PM Powerwave announces sale of Arkivator Falkoping AB (PWAV) 7.79 +0.28 : Co announces the sale of its contract manufacturing business, Arkivator Falkoping AB, for a purchase price of approximately $27.1 mln, to IGC Industrial Growth Company. The transaction closed today, September 29, 2006. The transaction maintains the full operations and employees of Arkivator. The purchase price was payable in cash, with $1.5 mln payable over three years.

6:08AM Dell updates Sony battery recall information (DELL) 22.97 : Co announces that additional information was received regarding affected battery packs containing cells manufactured by Sony (SNE), which has led to an increase in the number of recalled batteries from 4.1 mln units to approximately 4.2 mln units. To ensure that all potentially affected batteries are identified and returned to DELL, the co is requesting that customers recheck their batteries if they have not ordered or received a replacement battery. Since the announcement, DELL has received almost 200 mln hits to its Web site.

09:33 am Chipmos Technology: Merriman Curhan Ford initiates Buy. Merriman initiates IMOS with a Buy saying although sentiment surrounding the the PC space has been difficult over the last several months, they believe it is improving and that the valuation metrics surrounding ChipMOS have not yet reflected this. The frim says as investor sentiment around the end-markets improves and ChipMOS continues to post solid earnings as expected, they believe the stock could trade at more than 1.1x book value and 4.6x their out-year EPS estimate, which is a discount to the competition.

11:50 am Swift Transportation (SWFT)

23.15 -0.05: Trucking company Swift Transportation issued an earnings warning for the third quarter, saying it has been negatively impacted by continued softness in the truckload freight environment and a driver shortage. The combined effect of those forces leads Swift to believe it will deliver earnings in the range of $0.38-0.42 per share before taking into account a one-time impairment charge related to its translucent trailers. According to Reuters Estimates, analysts were expecting a third quarter profit of $0.48 per share.

Strikingly, Swift's stock has held up remarkably well in the wake of the warning, as has the broader market which might have found reason to be spooked by the company's warning since transports are considered to have leading indicator status. In Swift's case, the primary commodities it transports include retail and discount department store merchandise, manufactured goods, paper products, food products, beverages and beverage containers, and building materials. In 2005 Wal-Mart (WMT) was its biggest customer, accounting for 15% of operating revenue.

A glimpse at the trucker's stock chart, though, reveals why it is showing resilience today. The simple answer is that the market already seemed to be wise to this particular trucker's struggles. That is the message anyway in the stock's 31% drop in price from its July 3rd high, a short position as of September 12th that represented 14.2% of the company's float, and the recognition that the Thomson FN consensus estimate has been trimmed from $0.51 to $0.46 in the last 30 days.



To Swift's credit, its revised earnings expectation still translates into growth of 15-27% from the year-ago period. That's respectable in its own right and that understanding seems also to have softened the market's blow today.

It is worth noting that Swift typically experiences a seasonal increase in volume during the third quarter as customers prepare for increased demand during the holiday period. With an acknowledgment that the volume pick-up has been slow to develop this quarter, it would seemingly be cause for worry that the holiday selling season will be a disappointment. Briefing.com doesn't believe that will be the case.

In all likelihood, the slowness is a function of retailers and others being more attentive to their inventory situation so as not to put themselves in a position where they have to be overly-aggressive with promotional activity to move merchandise. That prudent approach will be helpful to their bottom-line, even if it doesn't help Swift's as much. Additionally, with Swift's top 25 customers accounting for 56% of its revenue last year, Swift's business is still concentrated enough to suggest its problems aren't a harbinger of a material economic slowdown.

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

10:10 am Corinthian Colleges (COCO)

10.37 -1.48: Shares of Corinthian Colleges scraped a new 52-week low on Friday, after the for-profit education company reported a higher fourth quarter profit, but provided guidance for the fiscal first quarter and full-year that fell short of Wall Street's estimates. The swooning stock, which has traded in a 52-week range of $11.33 to $15.36, fell more than 11% in early market trading, based on the announcement.

Corinthian Colleges was previously expected to report quarterly results on August 29, but delayed reporting due to the review of its historic stock option grants. The ongoing investigation into the company's stock option grant practices, along with a host of other regulatory issues, underscores our bearish opinion on the stock.

For the latest quarter, Corinthian Colleges posted net income of $9.1 million, or $0.10 per share, compared with $1.8 million, or $0.02 per share, in the year ago period. Excluding stock options expense and other one-time items, earnings were $0.15 per share, two cents better than the Reuters Estimates consensus. Revenue, however, missed analysts' estimates, falling to $235.6 million from $239.3 million last year. Analysts were expecting revenue of $242.7 million.

Total student population fell 2.4 % year/year to 64,544, while new enrollments increased slightly to 20,210 from 20,168 last year. Excluding the effect on enrollments caused by the closure of its New Orleans campus and the steps taken to slow enrollment in the Georgia market due to accreditation issues, new enrollment grew by 2% in the quarter, the company said.

Meanwhile, Corinthian Colleges offered a disappointing outlook for the current quarter and fiscal year. The company said it expects earnings of $0.03 per share for the first quarter and between $0.50 and $0.55 per share for the full year. That compares with analysts' expectations for earnings of $0.11 per share and $0.62 per share, respectively.

--Richard Jahnke, Briefing.com

09:27 am Hewlett-Packard (HPQ)

35.97: Hewlett-Packard, which is currently entangled in a boardroom spying scandal, said late Thursday that it extended its previously announced tender offer to buy Mercury Interactive Corp. until midnight on October 13. The $4.5 billion tender offer for the business software maker was previously set to expire on September 28. As of midnight yesterday, approximately 71.8 million shares had been tendered in and not withdrawn from the other, company said.

Hewlett-Packard also announced today that it will acquire high-end gaming PC maker Voodoo Computers, giving it a foothold in the lucrative video game market. The Palo Alto-based company did not release terms of the deal, but said it expects it to close by November 2006. Following the transaction, Hewlett Packard said it will form a separate business unit within its Personal Systems Group focused on the gaming industry and will keep the Canadian company's brand and distribution model.

Separately, a host of Hewlett-Packard executives took center stage yesterday at a congressional hearing related to its spying probe that charged company HP directors and outside investigative sources with pre-texting to obtain personal telephone records. The scandal has already claimed three board members, including former chairwoman Patricia Dunn, and three top company executives.

Hewlett-Packard's chairman and CEO Mark Hurd, who is largely credited with the company's turnaround, as well as other top executives, testified before the U.S. House subcommittee, but denied having any direct knowledge of the methods used in the probe and did not assume blame for the investigation, aimed at tracing a boardroom leak. Other executives, including former general counsel Anne Baskins, who announced her resignation early yesterday, asserted the Fifth Amendment right against self-incrimination.

--Richard Jahnke, Briefing.com

08:25 am Research In Motion (RIMM)

86.06 Once again, Research In Motion's quarterly results reached berrylicious status, sending the stock up by nearly 20% in the after-hours to $102.55 per share. The market reacted to the BlackBerry maker's juicy results that easily bested expectations in the second quarter, forecasting continued strong subscriber growth in the future.

RIMM reported net profits of $140.8 mln or 74 cents per share for the quarter that ended on September 2nd - three cents better than the GAAP Reuters Estimates consensus of $0.71. Last year, the Waterloo, Ontario-based company earned a profit of $111 mln or 56 cents per share. RIMM added 800,000 subscribers, shipping 1.4 mln devices in the quarter, well above consensus estimates of 709k net adds and management's guidance of 675-700k. Gross margins and R&D spend was inline with guidance, but SG&A increased in higher branding and marketing expenses.

RIMM's second and third quarters, which include the back to school and holiday selling seasons, are its strongest. The company released several new products including what RIMM calls its best product ever - the BlackBerry Pearl. The smartphone is multi-media heavy, offering music and camera functions in addition to its famous wireless email capability. The reaction to the Pearl, offered by T-Mobile, has been exceptional with higher than expected net subscriber additions, according to the company.

The Pearl is a strategic shift for RIMM, which is looking to move into the high-end consumer market in an attempt to expand its enterprise-heavy market share. The move into Nokia (NOK) and Motorola's (MOT) territory hasn't been taken lightly. Motorola, a suggested holding in our Active Portfolio, has released its own smartphone, the "Q," that offers the same capabilities as the Pearl and could pose a competitive threat. We argued in June that shares represented an attractive entry point. The stock has rebounded substantially and is near recent highs once again. We would remain buyers on weakness as it will mostly likely be a berry merry holiday season.

For the third quarter, RIMM forecasts revenue of $780-$820 mln and earnings of $0.88 per share to $0.95 per share. Consensus estimates, which will likely be revised higher following Q2 results, are $700.23 mln and $0.77 per share, respectively. The company also stated Q2 results were preliminary, pending a "potential restatement" related to non-cash charges associated with past option grants.

--Kimberly DuBord, Briefing.com