U.S. techs deteriorate in broad sell-off; Dow higher
By Julie Rannazzisi
CBSMarketWatch
Thursday May 2, 4:35 pm Eastern Time
NEW YORK (CBS.MW) -- The Dow stretched its winning streak to three straight days Thursday, riding on strength in its financial and consumer components. But jitters about earnings growth continued to hamper the Nasdaq, which declined for the eight time in the past ten trading sessions.
The morning's batch of economic numbers didn't help sentiment as they signaled that conditions in the labor market remain challenging. Market watchers will get a better glimpse of the job situation with the release of the April employment report on Friday. Non-farm payrolls are seen climbing 51,000 while the jobless rate is expected to rise to 5.8 percent from the previous 5.7 percent.
Industry numbers showing the best month-over-month growth rate in chips in almost 16 years failed to help the semis. The sector, in fact, was among the biggest decliners in the technology group.
The overall market got some modest fuel from the paper, bank, oil service, deep cyclical and brokerage sectors, with the latter deriving its bid from an upbeat analyst note. Sellers surfaced in the biotech, airline and natural gas segments.
The Dow Jones Industrial Average (: ^DJI - news) edged up 32.24 points, or 0.3 percent, to 10,091.87, propped up by shares of Citigroup, J.P. Morgan Chase, Procter & Gamble, Hewlett-Packard and DuPont. But losses in Microsoft, Intel, AT&T, Boeing and United Technologies capped the upside.
Michael Paulenoff, co-founder of 2Mstrategies.com, feels the dollar's recent fallout against the euro could soon create a difficult situation for equities.
He feels that once the euro climbs above 91 cents to the dollar -- euro/dollar was recently trading at 90.21 cents -- the pain of owning U.S. securities will become unbearable for European investors. Any stock dumping would have the harshest effect on liquid, big-cap names -- which foreigners tend to concentrate on.
Another big question mark for stocks is the timing and magnitude of a rebound in capital spending. Uncertainty over when a turnaround will occur has rendered tech investors gunshy.
Paulenoff said capital spending will need to pick up soon since consumers can only hold up demand for so long without the participation of corporate America.
The Nasdaq Composite (: ^IXIC - news) lost 32.67 points, or 1.9 percent, to 1,644.86 and the Nasdaq 100 Index (: ^NDX - news) gave up 42.06 points, or 3.3 percent, to 1,225.37.
One firm was less sanguine on earnings growth compared with the start of the year.
CIBC World Markets told clients it "tempered its optimism" on an S&P 500 earnings recovery. The firm, in fact, reduced 2002 S&P 500 EPS estimates to $55 from $61 and its growth recovery forecast was sliced to 20 to 25 percent from 35 to 40 percent. The firm's 2003 growth projection stands at 15 to 20 percent and its earnings estimate at $65 a share. CIBC favors industrials, technology and banks for earnings growth potential into mid 2003 and the healthcare and energy groups thereafter.
The Standard & Poor's 500 Index (: ^SPX - news) shed 0.2 percent while the Russell 2000 Index (: ^RUT - news) of small-capitalization stocks advanced 0.5 percent.
Terry Danish, technical strategist at Investec Ernst & Co., notes that while buyers have been strong enough to reverse intraday and hourly trends -- as Wednesday's glaring turnaround in the Dow demonstrated -- the market's more important short- and intermediate-term trends remain under pressure.
He feels small- and mid-cap stocks remain healthy on a technical basis but also concedes that the group is "extended" due to its recent run-up.
"While near-term weakness may develop in these areas, we expect to see a new round of purchase opportunities as some of the excesses are trimmed and select issues move back towards intermediate-term support," he concluded.
Volume amounted to 1.35 billion on the NYSE and to 2.03 billion on the Nasdaq Stock Market. Market breadth ended mixed, with advancers squeaking past decliners by 18 to 13 on the NYSE while losers outpaced winners by 18 to 17 on the Nasdaq.
Separately, Trim Tabs said corporate liquidity remained bearish, though it acknowledged that IBM's $3.5 billion buyback announcement this week would improve the near-term situation. But Trim Tabs expressed concerns about Big Blue's ability to implement the buyback.
The fund flow tracker notes that the new offering calendar remains "incredibly robust," especially in light of the stock market's poor performance.
"That robustness points to the overwhelming potential supply of new shares that will soak up any new cash inflow into the equities market," Trim Tabs said.
Economy's progress will be slow
Michael Kenneally, chief investment officer at Banc of America Capital Management, feels the economy will "work its way" to a better place throughout the year, though he expects the healing process to be slow.
"Businesses will likely remain cautious during this recovery, which could result in only moderate consumer income growth. Escalating energy prices will [also] pose a potential drag on growth. [And] corporations seeking to avoid the taint of Enron will likely opt to issue very conservative earnings reports and guidance. As a result, growth could appear even slower," he told clients in a research note.
The latest economic data clearly show signs of recovery, particularly in manufacturing, since factory output is rising as inventories are being restocked, Kenneally said.
But the key question is whether this progression will continue beyond the initial restocking. "For the U.S. economy to launch a true expansion, consumers as well as businesses will need to spend and invest."
Patrick Adams, who manages the Choice Long-Short Fund, believes the recovery under way has the "feel" of a typical one.
"All pickups will be spotty in nature and won't affect every sector in the same way. I think there's too much focus on every little wiggle [in the data] right now," Adams said. He's confident the economy is on the right track and points to improvements in semiconductor demand.
Adams' purchases are clustered within economy-sensitive groups like the financials and consumer cyclicals while many of his shorts have been in the biotech and big-cap pharmaceutical groups.
Claims fall; layoffs up 10% in April
The day's data lineup included weekly initial claims, which fell 10,000 to 418,000 -- the lowest level since mid-March but a smaller decline compared with economists' expectations. The less jumpy four-week moving average slipped to 435,750 from 454,250.
Maury Harris, chief U.S. economist at UBS Warburg, notes that while the claims figures continue to be distorted by the new extended jobless claims program, it remains unclear whether that explains the higher-than-expected level of claims.
"The bottom line is that the job market shows no sign of improvement. These data reinforce our expectation that the April jobs report will include another rise in the jobless rate," Harris wrote in a note.
Additionally, job cut announcements jumped 10 percent in April, according to outplacement firm Challenger, Gray & Christmas, after falling to a 10-month low in March.
Finally, March factory orders rose 0.4 percent in March, higher than the flat reading that had been expected by economists. But the week's kingpin will arrive on Friday in the shape of the April employment report. and check economic calendar and forecasts.
SIA reports 7.2% gain in March chip sales
An initial spike in chip stocks (: ^SOXX - news) gave way to selling as the remainder of the tech sector deteriorated.
The Semiconductor Industry Association (SIA) reported that worldwide sales of semis rose 7.2 percent in March from February levels in its highest monthly sequential increase since April 1986.
The boost came from DRAM sales, which jumped a record 82.4 percent thanks to stepped up demand and price increases from the depressed levels of 2001.
And the industry watcher said March-quarter sales were "another sign that the industry is rebuilding from 2001," with growth witnessed in all major geographic regions except Japan, which came in at flat levels.
"The growth rate indicates that inventory build-up has been worked through and that product demand is now beginning to pick up," the SIA added. The industry tracker forecasts second-quarter growth in the single digits followed by stronger growth rates in the second half of the year.
SG Cowen points out that solid showing in March reflected the sharp increase in DRAM prices, which are expected to pull back from current levels.
UBS Warburg feels the fundamentals of the chip industry will improve thanks to a seasonally better second half of the year for PC sales, an eventual start of a recovery in the PC replacement cycle in the second of half of the year and improving economic conditions.
Warburg points out that both Intel (NasdaqNM: INTC - news) and Micron Technology (NYSE: MU - news) will be "key players in the PC food chain" that'll benefit from the replacement cycle. Intel fell 2.7 percent and Micron erased 5.4 percent while Advance Micro Devices lost 1.6 percent.
Chip equipment makers were especially hard hit, with leader Applied Materials off 5 percent, KLA-Tencor down 6.4 percent, Novellus Systems off 4.3 percent and Teradyne off 5.2 percent. Gerard Klauer Mattison upgraded both Teradyne and AMAT to reflect improving fundamentals.
In the hardware space, Sanford Bernstein upped shares of H-P (NYSE: HWP - news) to an "outperform" from a "market perform" on belief the stock represents "compelling" long-term value. H-P said it would complete its merger with Compaq Computer (NYSE: CPQ - news) on Friday and that the combined company would begin trading under the new ticker "HPQ" beginning next week. H-P climbed 1.4 percent and Compaq gained 1 percent.
Xerox dumped; brokers gain some turf
Xerox (NYSE: XRX - news) skidded 11.9 percent after Moody's Investors Service took a hatchet to its credit ratings late Wednesday on concerns over free cash flow generation in its core non-finance business relative to its debt burden. Xerox responded to Moody's action, labeling it "inconsistent with the company's progress and momentum."
The brokerage group saw some upside action after Salomon Smith Barney upgraded Lehman Brothers (NYSE: LEH - news) and Merrill Lynch (NYSE: MER - news) to "buy" ratings from "outperform" and upped its view on Goldman Sachs (NYSE: GS - news) to a "buy" from a "neutral." Lehman put on 3.5 percent, Merrill 2 percent and Goldman 1.9 percent.
Lehman was Salomon's top pick on belief that the broker's stock price is "cheap" and that its earnings are less likely to disappoint in the current environment thanks to a deep fixed-income platform. On Merrill, while conceding there's overhang from legal issues, Salomon feels the recent slide in shares reflects all potential costs in resolving the issue.
Read Movers & Shakers for the latest individual stock action.
Treasurys backpedal
Government bonds gave back all of Wednesday's gains and then some, with losses clustered in the long end of the yield curve.
The 10-year Treasury note shaved 11/32 to yield (: ^TNX - news) 5.10 percent while the 30-year government bond fumbled 12/32 to yield (: ^TYX - news) 5.595 percent.
In the currency sector, the dollar recovered a tad against its major counterparts after getting clocked on Wednesday. The greenback rose 0.4 percent to 127.87 yen after reaching a four-month low Wednesday. And the euro gave back 0.4 percent to 90.28 cents.
The European Central Bank left short-term rates unchanged at its policy-setting meeting Thursday. |
