From Briefing.com: 6:51PM Weekly Wrap: The losing streak is over, it's all over! After losing ground for six consecutive weeks, the major market indices staged a powerful late week advance. DJIA rose by more than 7.5% in just the last two days this week, marking the first time in over two years that the bellwether index strung together two gains of more than 3%.
Much of the move attributed to short-covering as earnings news out of Yahoo! (YHOO), Aetna (AET) and General Electric (GE) meet or beat consensus estimates. More importantly, neither company guided lower for the future. Add in positive analysts comments on IBM (IBM) and for the first time in weeks, there was enough positive news to spook the shorts into covering positions.
With earnings season swinging into high gear next week, indices could have trouble sustaining current momentum. However, based on the strength and breadth of the two-day advance, it looks increasingly as though the indices have at least put in a trading bottom. Barring a big negative shock, Briefing.com expects the bias to remain bullish for at least the next week or two.
And if more and more companies report as expected or better earnings, it's just possible that we've just begun a year-end rally which could prove quite powerful. For all the earnings reports due next week, see Briefing.com's Earnings Calendar page.
Key points to consider for next week are: will the indices be able to take out their 50-day moving averages; will earnings news remain positive enough to keep shorts from stepping back in; will money continue to rotate out of an overextended bond market; will dollar continue to rebound; will housing data show strength of signs that the sector is finally tiring; and will we see the type of accumulation that has been sorely missing from prior recovery tries.
If most of the questions are answered positively, then the outlook for the fourth quarter will improve significantly. If, however, the indices quickly flame out and the fundamental story stays mixed, it will be difficult for indices to gain much ground from here.
3:58PM QLogic (QLGC) 22.02 +1.17: CSFB initiates coverage of the storage network leader with a Neutral rating and $23 price target; firm believes that QLGC is poised to benefit from the accelerating move toward standards-based, low-cost computing but believes competitive position is fairly represented in stock. Firm notes investment risks include the pace of future networked storage adoption and potential losses of OEM relationships.
3:03PM Major averages holding 20-day exponential moving averages : -- Technical -- Each of the major averages cleared its 20-day ema earlier today and each continues to maintain a posture above this level. For reference, the Dow's 20-day exponential moving average now rests at 7,801, the S&P 500's is 830 and the Nasdaq's rests at 1194.
2:00PM Semiconductors lead Nasdaq higher : -- Technical -- SOX posting a 10.1% intraday gain -- currently trading at 250, look for initial overhead at 256 followed by 264. To the downside, look for initial support in the area of 244. Sector components contributing to the move include: MU, MOT, MU, TER, MXIM, TXN, NSM, XLNX.
1:42PM RF Micro Device higher on CFO comments (RFMD) 6.94 +1.14: Stock adding to earlier gains on remarks from CFO saying co is "seeing strength" in its WLAN business and handset customers; says that "shipments for this quarter are tracking nicely". Company reports after close on Oct 15th.
1:37PM Marvell to hold conference call (MRVL) 13.17 -2.66 : -- Update -- Company will hold conference call to discuss ramifications in amendment to its product development agreement with Intel (INTC); Call to start at 2 ET Dial in: 913-981-5533
1:10PM Motorola (MOT) 10 +0.91: Stock sees further buying interest on analysts's expectations for a strong H202. Soundview believes co will meet expectations for Q3 and provide an in-line Q4 outlook; expects MOT's Q4 handset sales guidance will be reconfirmed with the commercial launch of CDMA and the GSM T720 underway in Europe and the U.K. CSFB similarly forecasts MOT to earn $0.05 on $6.7 bln in revenues in Q3 and believes there is minimal risk to their Q4 estimate of $7.5 bln and EPS of $0.14, with potential PCS upside offsetting weakness in BCS, SPS, and GTSS.
12:55PM Juniper Networks (JNPR) 4.90 -0.28: Shares have declined 5.4% despite last night's reaffirmation of Q402 guidance of loss of $0.01 per share and in-line Q3 earnings of loss of $0.02, albeit on slightly lighter than expected top line and quoting continued weakness in telecom spending. Prudential believes carrier spending will remain challenging into 2H03, is cautious on sales growth outlook; lowers Q4 and Y03 estimates despite company's in-line guidance; reiterates Hold rating, lowers price target to $6 from $10. Wedbush Morgan predicts continued lack of visibility in carrier capital expenditure; is positive on JNPR's market position and management; reiterates Hold rating; likes valuation, but suggests investors wait for material price weakness or change in telecom spending environment before purchasing shares.
12:50PM Microsoft (MSFT) 48.04 +1.66: Shares have been on an upswing over past week, advancing additional 3.6% in today's session on upbeat analyst commentary. Thomas Weisel's checks confirm surge in license sales in Q103, totaling about $600 ml, which firm views as one-time event; expects company to remain cautious on outlook, although increased license revenues should give MSFT confidence in turbulent IT setting; firm is impressed with MSFT's ability to outperform despite difficult macro setting; reiterates Strong Buy rating. Wells Fargo initiates coverage with Buy rating and price target of $55 based on impressive new product cycles, successful diversification of business, solid balance sheet, and potential for upside.
10:59AM Marvell defended by Wachovia (MRVL) 13.50 -2.33: Stock has sold off this morning after the co announced they would sell their own "Yukon" Gigabit Ethernet controller as a result of amending their product development agreement with INTC; Wachovia says this confirms their view that INTC is coming to market with its own G.E. controller product sooner rather than later, but that INTC does not have a competitive G.E. controller today; expects MRVL to partner with other high-volume players in the mkt, and to see improving gross margins as a result of an "all MRVL" G.E. controller.
9:58AM Nasdaq edges above 20-day exponential moving average : -- Technical -- Nasdaq edges above 20-day exponential moving average at 1191. To the upside, watch for subsequent resistance at 1200 followed by additional overhead at 1206. To the downside, look for initial support at 1188 followed by an additional floor at 1180.
9:50AM Michigan sentiment index falls again : The Univ of Michigan consumer sentiment index fell to 80.4 in early October from 86.1 in September, well below the 85.2 consensus. The continuing decline in confidence obviously raises the risk of weaker consumer spending ahead, though thus far spending and confidence have not been moving together. The market has given back some gains on this report but is still sharply higher: Dow +132, Nasdaq +23.
9:19AM General Electric gives Q4 guidance (GE) 22.60: -- Update -- On call, says it expects total Q4 revenues to be up approx. 5% and operating profit to be up approx. 15%
9:06AM Intel: judge rules Itanium processors infringe Intergraph patent (INTC) 14.18: -- Update -- Announces that a U.S. District Court has ruled that INTC's Itanium microprocessors infringe two patents owned by INGR. The accounting impact of this ruling will be addressed when the co announces its Q3 results on Oct 15.
7:50AM Intel estimates cut by UBS, Salomon (INTC) 14.18: -- Update -- UBS Warburg cuts its 2003 EPS estimate to $0.74 from $0.80 and reduces price target to $18 from $26. Salomon Smith Barney cuts 2003 to $0.70 from $0.79 and cuts target to $20 from $25; current 2003 Multex consensus is $0.76.
7:30AM Taiwan Semi, United Micro facing bleak Q4 - Digitimes : Digitimes.com reports that TSM and UMC have recently started lowering 0.35 to 0.5-micron processing prices for some customers by about 10-15% in a bid to hold on to customers amid intense price competition; in addition, their sources say the two co's face a bleak Q4 in which utilization rates are likely to slump by around 50-60%.
7:08AM Lucent announces further restructuring (LU) 0.70: Company reaffirms guidance of a 20-25% Q4 revenue decline but a larger loss due to restructuring charges; plans to reduce breakeven revenue point to $2.5 bln and sees a reduction of another 10,000 employees to 35,000 in 2003. And in a possible sign of things to come for other companies, LU will take a $3 bln charge due to a decline in pension assets in its management pension plan, citing weakness in equity markets.
6:59AM IBM upgraded by Lehman (IBM) 57.58: Lehman upgrades to OVERWEIGHT from Equal Weight; cites recent reduction in consensus earnings estimate and resulting ability to meet estimates, US stability offsetting European weakness, possible slight improvement in 2003 IT spending, and likelihood that any 2003 estimate cut will be modest ($0.05-0.10).
6:56AM General Electric meets estimates (GE) 22.60: Reports Q3 EPS of $0.41, a penny better than the Multex consensus of $0.40 but in line with the First Call consensus of $0.41; revenues rose 11% to $32.6 bln vs the $31.7 bln Multex consensus. Company maintains full year earnings target of $1.65.
3:11PM Yahoo! (YHOO) 13.27 +1.00: After the close of trading on Wednesday, Yahoo! reported better than expected Q3 earnings and provided a reassuring outlook. Since then, its stock has rallied 33%, evoking memories of glory days gone by. As we all know, though, times have changed. Nowadays, few people believe in the sustainability of such a move and that consideration suggests YHOO is ripe for a fall (Disclosure: Briefing.com has a business relationship with Yahoo!).
To be fair, any stock that rallies 33% in two days is ripe for a fall. When it comes to YHOO, though, you have to ask whether the strong move was even warranted. A number of analysts will tell you it was as there were several upgrades of the stock, and a number of bullish reiterations, following the YHOO report. In addition, there were several items in YHOO's report that suggested the company has turned the corner with respect to its business model.
Be that as it may, YHOO isn't exactly generating a significant amount of earnings per share. For its third quarter, YHOO reported a profit of $0.05 per share on a GAAP basis. For the year, it is expected to earn $0.16 per share. The argument for buying YHOO, of course, is that it has a significant amount of earnings potential. To wit, the company is expected to grow earnings per share next year by 56%, which translates into a profit of $0.25 per share.
Such EPS growth typically commands a premium valuation, but at 53.0x next year's earnings, YHOO sports a valuation that is still too rich for our liking given the uncertain macroeconomic environment that is highlighted by weak business investment. The company's Price-to-Sales ratio, at 9.3x trailing twelve month sales, isn't exactly at bargain basement levels either. The Price-to-Sales ratio for the S&P 500, for instance, stands at 1.21x.
In light of YHOO's premium valuation in a market that is value-oriented, and its sizable advance in the past few sessions, it is a stock we would be reluctant to chase as we suspect it will fall prone to profit taking, not to mention the whims of short sellers looking to ring some of the excesses out of its share price. Initial support falls at 12.30 with subsequent support at 11.30. The latter marks the upper end of the gap created in the wake of a Q3 earnings report that was good, but not so good to warrant the type of move seen in the past two days.-- Patrick J. O'Hare, Briefing.com
12:44PM Sentiment Shift : The market had other favorable developments to focus on today, but the fact that it maintained its bullish bias after the much weaker than expected Univ. of Michigan Consumer Sentiment report suggests investors are sold on the idea that the market is, well, oversold.
For the second day in a row now, the market has rallied in the face of disconcerting news about consumer trends which, just a short time ago, would have thrown it into a tailspin. So, what does the reaction mean?
We think it says a good deal about the market's position, which is to say it is oversold. Why else would the market, which has been rattled by thoughts of a weakening consumer, rally in the face of a weak consumer sentiment report? At the same time, why would IBM surge nearly 10% on news that a brokerage firm thinks it will meet lowered earnings estimates, or for that matter, why would Intel be up at all in the wake of news two firms were cutting EPS estimates and that a District Court ruled its Itanium microprocessors infringed two patents owned by a competitor?
Understandably, there are bound to be a number of short sellers licking their chops at the sight of today's action. It is fair to say, though, that their impact may not be felt for a while yet. Rallies in the face of gloomy news often raise the interest level of sidelined investors who have been waiting for some indication that there is a decent opportunity to make some money on the long side of a trade. Undoubtedly, a number of those investors have thoughts of the sizable rally off the July lows fresh in their minds.
Of course, how can they forget the subsequent sell-off? While rallies of this nature are good to see, it is premature to think this is the start of a sustained uptrend. That's not to say the indices won't succeed in achieving sizable percentage moves off the recent lows. In fact, they already have and more gains are likely as we progress through earnings season and we hear the normal litany of companies report earnings ahead of expectations.
Investors, though, must still be careful not to get too caught up in the move. Its foundation is questionable as the catalysts for the shift in sentiment aren't all that inspiring in their own right. Accordingly, one can only conclude at this juncture that it is a rally from oversold conditions that has been exacerbated by short-covering activity. If your timing is good, some decent money can be made, but without any convincing fundamental catalyst driving the action, the recent action has the smell of yet another rally within the bear market.-- Patrick J. O'Hare, Briefing.com
9:02AM Stocks to Watch : Two days ago the whole market took a hit when Morgan Stanley lowered their 2003 earnings estimate for General Electric (GE 22.60). This morning, GE reported earnings at the classic "a penny above expectations" with revenue up a sold 11% from the year-ago quarter and above the consensus forecast. They also re-affirmed full year 2002 earnings guidance of $1.65 per share (current consensus is $1.64 per share). Good news.
This is a microcosm of the earnings season cycle. First come the warnings, earnings cuts, and general fears. Then comes the re-assuring report.
Today then, not only might GE get a lift, but the GE report is a factor helping to boost S&P futures ahead of the open. Unfortunately, there isn't much else on the wires this morning to provide a further boost to the market. Earnings reports will not start in earnest until next week. None are scheduled for after the close today.
In another flashback story, both UBS Warburg and Salomon Smith Barney are lowering earnings estimates for Intel (INTC). On October 3, Dan Niles of Lehman Brothers said that earnings estimates for INTC had to come down $0.05 to $0.08 from the consensus of $0.77 per share for 2003. Today, UBS Warburg lowered their forecast from $0.80 to $0.74 and Salomon from $0.79 to $0.70. INTC took its hit back then, and is indicated to open up. But Niles was probably right, and even more earnings cuts are likely to follow. That won't help the stock even though other cuts now will be seen as following the pack.
Can't overlook the fact that Lehman Brothers upgraded IBM this morning from "Equal-weight" to "Overweight", saying, believe it or not, that any 2003 earnings estimate cuts will be modest. In other words, they feel that the stock is priced for even worse news, so when brokers cut estimates by just a little, the stock should go up. And it might just happen. Earnings estimates have come down so much for IBM lately that the stock could bounce on their earnings report Wednesday, October 16 even if they guide 2003 numbers down a bit. IBM looks to open about 2 points higher.
On the economic front, PPI (producer prices) came in with a small 0.1% increase for September. No inflation fears there as the year/year gain in the index is -1.9%. Also, retail sales for September posted a large 1.2% decline, but that was right in line with expectations as it was well known that chain store sales were weak. No impact from these data on stocks today.
Finally, there is a story on page C1 of this morning's Wall Street Journal that is worth a look. The article says a survey conducted by CSFB of 360 companies indicates significant underfunding of pension funds at many firms. This is serious. Unless the funds get better returns on investments in future years, these companies will be forced to make greater contributions to the funds. That hurts earnings. More on this in a "The Big Picture" Story Stock later day. -- Dick Green, Briefing.com
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