From Briefing.com: Last night, we mentioned the Fed's Beige Book was set for release Wednesday at 14:00 ET -- almost in passing. Yet as it turned out, each of the six districts covered by the Beige Book demonstrated 'mixed or better economic conditions.' Put another way, none of the six districts reported a worsening of conditions, which fits with this general notion the U.S. economy is slowly, but steadily, improving. So for the time being, an absence of bad news seems to be sufficient to drive this market.
Now from a technical perspective, recall we shifted towards a more bullish immediate bias last night. The Nasdaq had reestablished a posture above that longer-term resistance at 1619, and was just slightly positive for the week as well. Note the index finished Wednesday's session at 1646 which was a good match with our final resistance identified this morning at 1645.
Looking towards Thursday, there are several economic reports scheduled for release tomorrow morning. In fact, depending on how you count, there are as many as six separate reports all scheduled for release tomorrow at 8:30 ET. We won't get too far into the details on this page, but potential highlights include data on Retail Sales, Business Inventories, and Initial Jobless Claims for the prior week.
On the corporate earnings front, the schedule remains light with one notable exception. The always entertaining, and sometimes market moving, software company Oracle (ORCL) is set to report Thursday after the close. Look for anything unusual in the company's guidance, one way or the other, to set the software sector off Friday. For a more detailed look at upcoming reports, please visit Briefing.com's Earnings Calendar and . -- Mike Ashbaugh -- Briefing.com
Close Dow +128.33 at 9183.22, S&P +12.64 at 997.48, Nasdaq +18.35 at 1646.02: What started out as a lackluster session proved to be anything but that... As a matter of fact, the indices closed the day along their respective session highs, with gains ranging 1.1-1.3% and the Dow above 9100... However, the bulk of the gains were realized in the last hour of the session and the finish mark says little about the intra-day action, which was much more reserved, with the blue-chip averages trading in a range with mild gains and the Nasdaq oscillating around the unchanged line...
The advance of the latter was kept in check by the lagging semiconductor sector, which was under pressure as a result of negative brokerage commentary and multiple earnings warnings from the likes of Texas Instruments (TXN 18.90 -1.49) and Cymer (CYMI 31.75 -0.89)... Nevertheless, the market proved to be resilient enough to make progress despite the sizeable losses of the semiconductor sector due to considerable strength and buying interest in the homebuilding, transportation, defense, utility, oil, retail, paper, financial, drug, and biotech sectors...
The latter, in particular, benefited from a batch of good news, including announcement of Genzyme (GENZ 47.96 +1.68) and Biomarin (BMRN12.50 +0.50) receiving approval for Aldurazyme, medicine for patients with the genetic disease mucopolysaccharidosis I, and news of Boston Scientific's (BSX 59.41 +4.49) plan to file its Taxus drug-eluting stent for premarket approval with the FDA on or about June 23... The homebuilding sector proved to be the strongest S&P 500 leader to the upside, with gains of over 7%, following better-than-expected earnings of $2.05 per share by Lennar (LEN 75.05 +5.30) and speculation of a 25 bp cut, and possibly a 50 bp cut at the next FOMC meeting on June 25...
Speaking of the economy, the Fed's Beige Book was released at 14ET... The report did not bring forth much new information, indicating that although some signs of increased economic activity in April and May have been detected, the conditions remained sluggish in most of the twelve Federal Reserves Districts... Elsewhere, the Treasury market finished the session down 6/32, with its yield at 3.21% in the face of the equities' rally...NYSE Adv/Dec 2388/921, Nasdaq Adv/Dec 1880/1291
2:50PM Window Dressing : When you start talking about earnings warning season, that means you must be nearing the end of a quarter. In this case, it would be the end of the second quarter (a.k.a. Q2 or the June quarter). For some market participants, that realization means the July 4th holiday is drawing near; for others, namely fund managers, it means that it is time to dress-up their portfolios for marketing purposes.
The unofficial term for the dress-up period is window dressing. That term is used to describe a tactic employed by fund managers who are looking to improve the appearance of their portfolios by ensuring that the companies whose stocks have performed the best in the quarter, or year-to-date, occupy a spot in it. Conversely, they'll also be looking to shed the stocks of companies that have underperformed.
With that in mind, some of the high-flying stocks that are now drawing downgrades based on valuation may hold in better than one would expect over the next couple of weeks as they garner support from window dressing efforts. These would be stocks in any number of groups given that Q2, for the most part, has been a very good period for the market that has been accented by broad-based leadership
11:23AM Cymer cut to Neutral from Outperform at CSFB (CYMI) 31.15 -1.49: -- Update -- Firm's price target goes to $30. Believes risk/reward given execution risk makes entry more favorable at 10x firm's peak earnings in the mid-20s.
11:27AM Ratings Review - Semiconductors : Few groups have been as hot as the semiconductor group during the market rally, but increasingly, analysts are starting to throw some cold water on the fire. Today, Morgan Stanley is doing its part to cool the group down with a downgrade of the sector to In-Line from Attractive.
The firm shifted to a more cautious sector stance due to a belief that the risk-to-reward relationship is becoming less favorable given the sharp stock price increases in recent months and the potential that near-term earnings risk may increase. We should add, however, that Morgan Stanley did acknowledge that it thinks industry fundamentals are improving.
The latter contention aside, Morgan Stanley's reservations about the existing risk-reward relationship have stymied a number of semiconductor stocks today for a couple of reasons. First, it follows in the wake of some disappointing guidance from Texas Instruments (TXN 18.46 -1.93), which fits with the firm's concerns about near-term earnings risk. Secondly, it comes from Mark Edelstone, one of the more widely-followed, and respected, analysts covering the semiconductor sector.
Briefing.com is in agreement that the semiconductor stocks are over-extended, and with earnings warning season about to heat up, we would suggest using the latest rally effort as an opportunity to take some profits considering the stocks have been driven to a point where there is little room for disappointment.-- Patrick J. O'Hare, Briefing.com
10:29AM Texas Instruments (TXN) 18.51 -1.88: After the bell last night, Texas Instruments (00C), the designer and manufacturer of semiconductor products, announced that sales in 2Q03 were tracking to the lower end of previous guidance. The shortfall in sales is primarily due to reduced sales of semiconductors to its wireless customers. As a result of this, the Company lowered its sequential revenue growth estimate from 7% to 5% and lowered its projected EPS to $0.06 from $0.08 per share. Both EPS estimates are "plus or minus a few cents."
Current consensus estimates, which Briefing.com expects to come down in the near future, have the Company earning $0.08 per share and posting revenues of $2.33 bln in the coming quarter. Analysts had expected sequential revenue growth of 6.5% for 2Q03.
Another reason for the shortfall in earnings stems from restructuring charges for an operating facility in Japan. TXN stated that there was a reduction of about 250 jobs at that plant, which ended up boosting restructuring charges to $55 mln from the previous projection of $40 mln. Management stated that TXN's other business segments, sensors & controls and educational & productivity solutions remain on track to meet original expectations.
With three weeks left in the quarter, the Company is hoping for a pickup in business, yet management had enough visibility at this juncture to state that it expected lower gross margins in the quarter. TXN went on to state that 3Q (Sep) is historically the best quarter for gross margins, and it expects that trend to continue. At the same time, the Company did not want to estimate if the excess inventory would produce a large hit to 3Q revenue. The inventory issue also provided an interesting question of whether analysts should build in deferred revenue or expect a charge or a loss. It was a question that management didn't answer.
Analysts noted that with Motorola (MOT) and Nokia (NOK) lowering estimates, SARS was to blame. TXN stated that SARS did play a role in the slowdown in sales and noted that China represents about 15% of its Asian market. In trying to get a handle of possible 3Q effects, analysts questioned the amount of inventory that had backed up, but TXN noted that its distributors would have that number and it didn't have that kind of visibility.
On the heels of this announcement, several brokerages downgraded the stock this morning, as prospects for the third quarter remain unclear. The lack of visibility in the business and the decline in wireless revenue seems to be outpacing the decline in shipments. This generally leads Briefing.com to believe that ASPs and/or margins will come under pressure in this quarter, and likely, the next as well. This negative outlook is something that investors should be cognizant of when looking to make an investment, especially when the stock already carries a lofty 28x PE for the next fiscal year. --Brian Bolan, Briefing.com
10:05AM Dell Computer COO backs guidance despite SARS impact on China - Reuters (DELL) 31.13 -0.76: COO Kevin Rollins said that he stood by the co's financial outlook, despite the impact that SARS has had on the tech mkt in China. Overall, Rollins said that he does not see demand picking up, although he said that there is an improved sentiment about technology at the moment.
9:23AM Nasdaq technical levels : -- Technical -- From current levels, the index has notable initial support in the range of 1619 to 1621, followed closely by an additional floor ranging from 1611 to 1614. To the upside, look for initial resistance in the vicinity of 1630 to 1632 followed by a less significant level at 1638.
9:09AM CTI Molecular initiated with Mkt Perform at Wachovia (CTMI) 18.36: Wachovia initiates coverage with a Mkt Perform, as the co's near-term catalysts are more negative than positive; firm cites proposed Medicare cuts this July, 2004 ests that may need to come in, PETNet weakness and slowing growth in PET scanner placements, and a back end-loaded seasonal earnings pattern; firm sees a 6-12 month valuation range of $19-$22, and their DCF valuation is $15, reflecting the cash-hungry nature of CTMI's business model.
9:06AM Qualcomm: SARS impact more pronounced in wireless -- SG Cowen (QCOM) 33.63: In a comment this morning on QCOM, SG Cowen says it expects the SARS impact on wireless to be greater than other tech sectors, and likely more than a one-quarter issue. Says that inventory exiting Q1 is abnormally high and companies with longer lead-times (13 weeks for QCOM) will likely see impact in Q3 instead of Q2. Firm expects Q3 guidance for sector to be negative.
8:58AM Oracle upped to Buy from Hold at Wells Fargo Sec (ORCL) 13.02: --Update-- The upgrade is based on fundamental changes and improvements in the co's competitive and strategic positioning. After many years and attempts, believes Oracle finally has effectively expanded its product story from largely a database and technology tools company to a highly integrated software solutions company. As a result, believes this change significantly enhances co's growth potential and competitive positioning versus IBM and Microsoft, measurably expands the overall market opportunity, and provides customers a compelling cost of ownership and ROI argument. Firm's new 18-month price target is $18.00.
8:46AM Taiwan Semi downgraded at Merrill Lynch (TSM) 10.39: Merrill Lynch in Asia downgrades to Neutral from Buy based on valuation, as the stock has exceed their $8.90 target; also, the lack of forecast upgrades from either fabless or OEMs raises the risk of a correction.
8:35AM LM Ericsson cut to Sell at Fulcrum; target $7 (ERICY) 11.35: Firm expects wireless operators to continue to reduce capital investment throughout 2003 and into 2004 resulting in a 24% decline in Ericsson's revenue in 2003 and an 11% decline in 2004. Fulcrum's $7 target is based on 0.9x revenue and would imply 38.9x consensus 2004 EPS.
8:00AM Silicon Labs estimates, target cut to reflect negative wireless trends (SLAB) 27.30: Morgan Stanley reduces estimates given the negative trends in the wireless handset markets. Firm's 2003 est goes to $0.90 from $0.95 and 2004 is lowered to $1.10 from $1.20. Given the lower estimates, firm reduces price target to $45 from $50. Firm reiterates its Overweight rating on view that valuation remains attractive.
7:51AM Merrill Lynch says biotechs poised to move higher; CSFB raises targets : Merrill Lynch says the recent bout of profit-taking is probably over and biotechs are now likely to move higher; firm cites the following factors: 1) money flow into mutual funds has turned increasingly positive while new stock issuance has remained minimal, 2) the FDA has become more accommodating, 3) the recent spat of positive news flow should continue, 4) valuations remain well within the historical range, and 5) window dressing into the end of the qtr should bode well for the group. Separately, CSFB raised their price targets on AMGN, IDPH, GENZ, BGEN, MEDI, DNA, HGSI, MLNM, NBIX, ICOS, MYGN, and GILD.
7:44AM Semiconductor sector cut to In-Line from Attractive at Morgan Stanley : While Morgan Stanley believes that industry's fundamentals are improving, firm also thinks the sharp share price rise in recent months and the potential that near-term earnings risk may increase suggest the reward-to-risk relationship is becoming less favorable.
7:40AM Texas Instruments cut to Sell from Hold at Deutsche; price target cut to $16 (TXN) 20.39: -- Update --
7:25AM Texas Instruments downgraded following warning (TXN) 20.39: -- Update -- Banc of America Sec is downgrading stock to Neutral from Buy after co guided Q2 sequential rev growth to the 5% range from previous forecast of 7%. BofA is lowering its 2003 est to $0.34 from $0.38 and 2004 to $0.75 from $0.80. (Briefing Note: An hour before the close yesterday, Briefing.com reported market chatter that TXN would warn ahead of today's presentation at the Bear Stearns conference).
7:14AM IBM added to Merrill Lynch's Focus List (IBM) 81.71: Merrill Lynch adds IBM to their Focus List, saying they would use the weakness caused by the SEC investigation to add to positions; although the SEC will likely look into rev recognition practices outside POS terminals, firm would be surprised if the findings have a significantly negative impact on the shares from here; also, concerns about offshore services are overdone, and surveys indicate that IBM should gain share in most product areas. Maintains $97 target.
7:07AM Cymer guides Q2 revs below consensus (CYMI) 32.64: Company lowers Q2 revenue guidance to $58-61 mln (approx 12% lower than previously guided revs of $67.6 mln) vs Reuters Research consensus of $67.3 mln due to ongoing slowness in semiconductor industry. According to CYMI CEO, "As a result of this revenue shortfall, we now expect gross margin to be in a range of 13 percent to 17 percent for the second quarter, in contrast to 17 percent to 22 percent in our April guidance." Co says visibility remains limited, and volatility remains high.
6:58AM European Summary : European indexes showing solid gains despite lower guidance from Texas Instruments (TXN) last night. Infineon Technologies (IFX), Europe's second-biggest chipmaker, gained 3.4% after Smith Barney raised its recommendation for the shares to Outperform from In-Line. The world's largest mobile phone maker Nokia (NOK) stuck to its full-year global handset market growth forecast, and said it was on track to meet its 3G market share target for its networks unit... UK +0.8%, Germany +0.93%, France +0.97%.
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