Replies to post #6071 on Sector Investing

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From Briefing.com: 1:22PM Weekly Wrap: The market momentum continued unabated. The S&P 500 index was up every day this week. It was the fifth straight week the index was up.

There was very little news in this holiday-shortened week. The biggest market mover by far was the release of the Fed's November 1 FOMC minutes on Tuesday.

The minutes reflected concerns by some members that further rate hikes risk "going too far." In addition, the minutes hinted that the wording of the next policy statement would change.

The market thus saw the first light at the end of the tunnel for the current round of tightening.

The FOMC minujtes continued to reflect concerns that the summer increase in energy prices might translate into widespread inflationary pressures, but that was nothing new. The prospect that the Fed is within striking distance of a "neutral" fed funds rate is new.

Financial stocks, which had already been on a tear, provided further leadership to the overall market on hopes that interest rate hikes in 2006 will be limited.

All of the ten major S&P sectors were higher this past week. Energy, technology, telecommunications, and industrial did particulalry well.

Industrials were helped by a big move in Deere, which on Tuesday reported earnings above expectations. Boeing made a strong move after announcing a big order last weekend.

General Motors, which is in the consumer discretionary sector, had a mized week after announcing plant closures and layoffs in an effort to become more efficient.

Retail stock fared well this week On Tuesday, the National Retail Federation raised their forecast for holiday spending to a 6% gain over last year from a previous 5% forecast. The rationale was, of all things, the recent decline in gasoline prices.

Wal-Mart supported this bullish outlook by confirming their November sales forecast and then stating that they would be extremely price competitive over the holidays. The stock continued its recent rally.

Oil closed the week at $58.71 a barrel, up from $57.27 last week on reports of a cold front moving to the Northeast. A cold winter could hamper holiday spending by raising heating costs.

The only economic release this week was the weekly new claims data. The trend in claims has been low enough such that a November nonfarm payroll gain of over 200,000 is expected to be reported December 2.

The market tone clearly remains upbeat. A classic year-end rally is taking hold, and there are widespread expectations it wil continue. Much of it may already have happened, as the S&P is up 5.1% so far this month. Still, the near-term downside may be limited.

 
 Index      Started Week  Ended Week  Change  %Change  YTD  
 DJIA         10766.33     10931.62   165.29     1.5 % 1.4 %  
 Nasdaq        2227.07      2263.02    35.95     1.6 % 4.0 %  
 S&P 500       1248.27      1268.25    19.98     1.6 % 4.6 %  
 Russell 2000   672.22       683.60    11.38     1.7 % 4.9 %

12:37PM Semiconductors Hldrs Trust edges higher to test Wednesday's high at 37.60 (SMH) 37.58 +0.42: -Technical- Also note Wednesday's high lines up with the Oct peak. Next level of interest are the Sept highs along 37.73 area.

9:21AM Citigroup (C)

49.34: As the Chinese economy continues to expand by leaps and bounds, global financial institutions are investing more in the region hoping bank's profits will benefit from increased borrowing. Bank of America (BAC), HSBC, and the Royal Bank of Scotland all have increased ownership of Chinese lenders within the last year. The move has been quite profitable since according to Bloomberg, earnings have risen over 30% for all the five publicly traded Chinese banks. Citigroup, a suggested holding in our Active Portfolio, may have to pay more to raise its holding in Shanghai Pudong Development Bank. People involved in the transaction estimate the global financial institution may have to pay $800 mln - three times their initial investment.

Shares in Pudong Bank, the second largest publicly traded lender on the mainland, have risen 21% to date - the strongest move amongst the banking industry. Third quarter profits gained 31% to 510.2 mln yuan ($63 mln). This was its fifth consecutive year of profit gains for the bank, which operates 335 branches nationwide. Pudong is forecasting profit growth of 18% per annum over the next five years. Its bad-loan ratio is an impressive 2.2% as of the end of September, compared to 4% for China Construction Bank, the nation's third largest lender. BAC agreed back in June to buy a 9% stake in CCB for $3 bln. Citigroup paid $67 mln for a five percent stake in Pudong back in January of 2003. The investment has proved quite profitable, now worth an estimated $766 mln.

Citigroup is also bidding for control of Guangdong Development bank, but it needs Pudong's approval after its initial agreement included a condition that it would not invest in another bank. Pudong has agreed to a waiver, as long as Guangdong, the second largest lender in the southern Chinese provinces, does not directly compete with the bank.

---Kimberly DuBord, Briefing.com

9:11AM Merck (MRK)

30.81: Less than a month removed from being found not liable for a wrongful Vioxx-related death, Merck & Co. is now focused on gaining an upper hand by winning its third case. Now knotted 1-1, the nation's second largest drug maker begins a new trial next week in a Texas federal court. Initially scheduled to be heard in New Orleans, the trial has been relocated to Houston, after Merck became concerned that southern Louisiana residents in the wake of Hurricane Katrina's devastation would be unfit for jury duty. As a reminder, Houston is where Merck lost its first case on Aug 22., when jurors awarded more than $250 mln in damages to the wife of a 59-yr old marathoner who was taking Vioxx in 2001 at the time of his death.

Fortunately for Merck, the latest of its litigation series appears to be the weakest of the Vioxx cases to date. Nonetheless, U.S. District Court Judge Eldon E. Fallon, whose courtroom has consolidated roughly half of the 6,500 lawsuits filed against Merck, denied the company's request in pre-trial hearings last week to limit some scientific studies that showed Vioxx can pose cardiovascular risks after just a few weeks of use.

After a clinical study hinted at increased risks of heart attacks in patients who took the arthritis painkiller Vioxx for at least 18 months, Merck withdrew the drug from the market. Even though the study did not establish any increase in the threat of death from Vioxx and the first three cases involve patients who took Vioxx for less than 18 months, shares lost 27% on Sep. 30, 2004 - the day of the withdrawal. The stock bottomed out at $25.50 a share on Oct. 7, 2005 but are still off about 4.0% year to date.

---Brian Duhn, Briefing.com

9:08AM Deflation in Japan Persists

The Nikkei closed higher for the seventh consecutive day as investors bet Japan's economic turnaround is taking root. The dollar extended its gain against the yen after the Japanese Finance Minister, Sadakazu Tanigaki said, deflation "persists." Tanigaki-san further stated the central bank must cooperate with the government to end seven years of falling prices. The Finance Minister spoke after consumer prices dropped more than expected, even as the national prices were unchanged.

The yen has weakened dramatically since the end of the summer, moving from the 100 level to almost 120. With interest rates near zero in Japan, the yen continues to loose ground against the dollar, as the Federal Reserve Bank has raised its benchmark rate seven consecutive times this year. There is considerable pressure on the Bank of Japan not to raise rates prematurely, possibly reversing Japan's tenuous economic recovery. Core prices in Japan were flat in October, following a decline of 0.1% in September. Prices in Tokyo, which is home to one in every ten citizens, fell 0.3% in November more than economists predicted.

On October 31st, the BOJ's Governor Toshihiko Fukui said declines in consumer prices will probably stop by year end, causing a chance for a shift in the bank's policy for the next fiscal year starting on April 1st. Prime Minister Junichiro Koizumi said just last week it's "too early" for the central bank to change its current policy. For now, investors are betting the Japanese revitalization will endure driving the Nikkei to a high of 14,866 - a level not seen since May of 2001.

---Kimberly DuBord, Briefing.com

9:51AM XL Capital (XL) Sandler O'Neill downgrades Buy to HOLD. Sandler O'Neil downgrades XL citing that the co did not prevail in arbitration dispute with Winterthur.
9:50AM Synopsys (SNPS) JP Morgan initiates NEUTRAL. JP Morgan initiates SNPS saying that while new product introductions come at an opportune time in the contract renewal cycle, they remain concerned about market share losses and lingering patent litigation.

9:49AM Total System (TSS) Fulcrum upgrades Sell to NEUTRAL. Fulcrum upgrades TSS citing downside risk is limited and the valuation better reflects the risks. Firm notes future catalysts include the MBNA/BAC and Citibank decisions, and 4Q05 earnings.

9:49AM Fairmont Hotels (FHR) UBS reiterates NEUTRAL. Target $34 to $39. UBS raises their FHR tgt to reflect the potential sale of the co. They note that the stock has moved higher since Carl Icahn announced his push to see the co explore strategic alternatives, including sale of the company. They believe a sale of the co has a high probability.

9:48AM FelCor Lodging (FCH) UBS reiterates BUY. Target $17.5 to $19.5. UBS raises their FCH tgt based on a slightly higher EBITDA valuation multiple, because they believe that going through 2006, the portfolio transition to more urban hotels continues to generate above average profits.