ECONOMY WATCH
MARKET MOVERS
1. SECTOR-RELATED NEWS
OILFIELD SERVICES -- HALLIBURTON RISES IN THE THICK OF CONTROVERSY
INVESTMENT BANKING -- CHINA FUELING HOT IPO MARKET
MEDIA -- SHAREHOLDERS FORCE CHANGES AT DISNEY
2. BULL MARKET PREMIUM SERVICES CORNER
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MARKET INDICES FROM AROUND THE WORLD
FRIDAY, MARCH 5, 2004
INDEX CLOSE CHG DAY% WTD% MTD% YTD%
UNITED STATES
DOW JONES 10596 8 0.1 0.1 0 1
THE S&P 500 1157 2 0.2 1.0 1 4
THE NASDAQ 2048 -7 -0.4 0.9 1 2
THE NASDAQ 100 37 0 -0.4 0.2 0 0
THE S&P 400 113 1 0.5 2.4 2 7
TREASURY BONDS
10 YEAR 3.83, down 20 basis points -15bp -15bp -43bp
30 YEAR 4.75, down 14 basis points -11bp -11bp -32bp
EUROPE
UK FT-SE 100 4547 -12 -0.3 1.2 1 2
FRANCE CAC 40 3761 -16 -0.4 1.0 1 6
GERMANY DAX 4126 -8 -0.2 2.7 3 4
ASIA
JAPAN NIKKEI 225 11537 136 1.2 4.5 4 8
HONG KONG HANG SENG 13455 3 0.0 -3.3 -3 7
AMERICAS
BRAZIL BOVESPA 22873 480 2.1 5.1 5 3
CANADA TSE 300 8745 72 0.8 0.6 1 8
MEXICO BOLSA 10195 -1 0.0 2.0 11 16
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(All prices are as of the close of trading on Friday, and all changes in
price are for the week.)
COMMENTARY: FEAR OF INTEREST RATE INCREASES DOMINATE MARKETS
This week, investors made a valiant attempt at pulling the major indices
out of the tight range they've been locked into since the start of
February. Part of it looked like the rollover of the calendar from
February to March was a psychological cue, a sign that, hey, things are
different now. On Monday, the Dow Jones climbed 94 points, the S&P 500
11, and the Nasdaq 28. Investor optimism was strengthened by solid
manufacturing data, which came in lower than expected, but still strong.
(See Economy Watch for details.) They also took the data in the weird way
that they have been doing for a while. They saw weaker-than-expected
manufacturing activity as a sign that the Federal Reserve won't have to
raise interest rates in the first half of the year.
Interestingly, it was this sort of phobia about rising rates that helped
keep the indices in the black FOR THE WEEK:
THE DOW JONES INDUSTRIAL AVERAGE rose 12 points, or 0.1%, to 10,596.
THE S&P 500 climbed 12 points, or 1.0%, to 1,157.
AND THE NASDAQ gained 28 points, or 1.4%, to 2,048.
Let us explain. On Tuesday, the indices gave back nearly all the gains
they chalked up the day before. The reason? Decent economic data
suggested the possibility that the Jobs Report on Friday could come in
stronger than expected. That raised fears about -- guess what? -- an
interest rate hike. We have made the case that the U.S. economy can
handle an interest rate hike this half, and while we have pointed out that
right now a CUT is just as likely, that hasn't changed the overall
perception out there that a rate increase is bad for equities.
After Tuesday, the markets barely moved, as investors grew anxious about
what the Friday report would say. Wednesday THE WALT DISNEY COMPANY (DIS,
$26.48, down 0.05) shareholder meeting dominated news, but again the
indices hardly budged. On Thursday, only the Nasdaq moved much, gaining
22 points, or 1.1%.
Then on Friday, the Jobs Report came in, missing estimates by a country
mile. Economists expected the economy to produce 125,000 new jobs.
Instead we got a measly 20,000. (See Economy Watch #1 for more.) This
was disappointing. But after initially sending the markets lower,
investors came back strong. The underlying fear of interest rate hikes
provoked a surprising reaction. They bought stocks. They would rather
see the economy move along slowly, if that will keep rates low, than see
strong job growth. That's incredible because at this juncture job growth
is absolutely essential for the economy to continue improving on sound
footing. It's not all politicking and campaign propaganda. The labor
market is still hurting. And with interest rates at these historic
levels, what's a half point one way or another going to matter?
We were disappointed by the numbers. We had wanted to see more strength
in the labor market. The economy is growing at a steady rate, and yet
jobs are not coming back. (And it's not because of outsourcing!) The
economy is undergoing fundamental change. One big question is can the
economy continue to grow if jobs don't show up soon? What will happen to
consumer spending if unemployment stays at 5.6%?
In many ways, this is uncharted territory. Now, more than ever, you need
to have confidence that your investments will withstand the changes that
await.
ECONOMY WATCH
1. REPORT SHOWS FAR FEWER JOBS CREATED THAN EXPECTED
Employers added only 20,000 new workers in February, far below the 125,000
economists were predicting. This could be a bigger miss than it looks
like. The "whisper numbers" were calling for up to 200,000, but
"official" estimates were understated because of the embarrassing miss in
December. At that time, economists were looking for 150,000 new jobs;
they came in at 16,000!
So clearly you can see economists are to blame for the lack of job growth.
Kidding of course. We all like to poke fun at the economists. But let's
remember to focus on what's really happening.
First, let's look at the REAL numbers. Today the government revised new
jobs in December from 16,000 to 8,000. New jobs in January were revised
down from 112,000 to 97,000. Not good.
These numbers are backward looking. In other words, they tell us what
happened in the past. Our main concern about these numbers is how they
affect the decision-making in Corporate America. Yesterday we reported on
the optimism that corporate CEOs have for the economy. They expect
business to improve and to increase hiring over the next six months. For
the most part, they will base their decisions on the here and now, on how
order flow and demand is looking at a given time. But they also base
decisions, at least in part, on the outlook for the future. And they
derive those outlooks from backward-looking information such as this.
But the numbers aren't as relevant as they might seem. Remember, Initial
Jobless Claims were running high all through February, mainly because of
weather-related layoffs. In other words, the increased rate of
joblessness was expected to be temporary. There's not always a direct
correlation between joblessness and job creation, but in this case it is
strong. That's because if companies are laying construction workers due
to bad weather, then they aren't hiring either. The reports from Home
Builders for February told the story that the demand for new construction
was there (builders even went out and got their permits) but they couldn't
build due to the weather. So construction was on hold, and workers were
laid off. The number of construction workers alone waiting out the
weather accounts for a majority of jobless claims, and in part accounts
for the lack of jobs created.
There are also the indications that many people are going to work under
the radar. So many people have become disgruntled with the corporate
working world, with all the accounting scandals, executives stealing from
the companies and the shareholders, and the mass layoffs. They're quite
simply fed up and aren't going back to work there. While many people have
dropped out of the workforce completely, there are many people who have
gone to work for small businesses or started their own.
When you look at what's underneath these numbers, the Jobs Report is not
as negative for the labor markets or the economy as it might at first
look. We're not saying it was a good report. Clearly it wasn't; only
that it wasn't as bad either.
2. JOBLESS CLAIMS MEET EXPECTATIONS
Initial Jobless Claims fell 7,000 to 345,000 last week ended February
28th, in line with analyst estimates. There were 352,000 claims in the
prior week ending February 21st. The number of people receiving
unemployment benefits remained steady at 3.1 million.
3. ISM INDEX SHOWS CONTINUED EXPANSION
The February reading of The Institute of Supply Management's (ISM) Index
of Manufacturing Activity fell to 61.4 from a revised 63.6 in January.
Economists were expecting a reading of 62.1, but the miss wasn't anything
to worry about too much.
Why? First, any reading above 50 indicates expansion. Second, the
reading in January was a 20-year high. Finally, the index has been above
60 for three straight months. In the past 20 years, it has only been
above 60 nine times in total.
This was the most closely watched economic report of the day and
investors looked beyond the fact that it missed estimates. They liked
the details of the report, and the signs that the breadth of the
recovery was widening.
Another important component of the survey is the Employment Index, which
jumped to 56.3 from 52.9 in January. That's the highest level since 1987!
Wow. That's surprising considering all we've heard is how manufacturing
jobs are going overseas. Obviously, the changes in the sector are not as
dire as we've been told.
Economists are hopeful that the jump in the index will translate into
another increase in payroll numbers in February. We are, too. Job growth
hasn't materialized like we need it to. While our long-term holdings are
going to weather any ongoing sluggishness in the job market, we want to
see strong growth in this area, for new jobs will be a powerful driver of
profit gains and stock appreciation.
4. PERSONAL INCOME UP; SPENDING DOWN
Personal income rose a slight 0.2% in January compared to a year earlier.
That's the slowest rate of growth in five months and well below the 0.6%
increase analysts had been expecting. Disposable income, or income after
taxes, increased 0.8% due to lower taxes.
Consumption, meanwhile, increased 0.4% for the same period. Spending on
durable goods fell 3.3%, while on non-durables spending rose 1.5%.
Personal savings increased to 1.8% from 1.4% in December. The numbers
correlate with other indications that the labor market improved only
slightly in January. However, note that jobless claims reports showed
that poor weather increased temporary joblessness during the period. That
certainly could have skewed the income numbers to the downside.
5. LAYOFFS UP IN JANUARY, BUT SLIDE LOWER OVERALL
According to a prominent survey, January layoffs jumped 25% to 120,000
compared to December. On the bright side, however, layoffs were down 10%
from the year-ago period.
January typically has high employee turnover, as companies plan their
business needs for the year. Overall, there are signs of improvement in
the job market. For one, unemployment claims have been under 400,000 for
the past 18 weeks. Economists agree that unemployment claims need to be
lower than 400,000 for job expansion to occur. Second, the growth in the
employment component of the ISM Index is consistent with about the
creation of 250,000 new non-farm jobs per month. Without doubt, all eyes
are looking toward Friday's employment numbers. No matter whether they
come in good or bad, they will bring some volatility to the markets.
6. ISM NON-MANUFACTURING REPORT
The Institute of Supply Management's (ISM) Non-Manufacturing Index fell to
60.8 in February from 65.7 in January. The key to this index is that
anything above 50 indicates growth. Looked at this way, February's
reading was good, but just not as good as the one in January. Economists
were expecting 63.0, however, so there was a bit of disappointment with
the number as well. The strongest components of the index were Business
Activity and New Orders. The weakest component was Employment, which came
in at 52.7, indicating slight growth in non-manufacturing jobs.
MARKET MOVERS
I. RETAILERS REPORT STRONG FEBRUARY SAME-STORE SALES
February was a surprisingly strong month for Retailers. In fact, the
overall rise of 6.7% is the highest on record since Thomson First Call
began tracking them in 2000. Retailers benefited from tax rebates and
favorable comparisons from the year-earlier periods. The numbers are
positive, and they provide good insight into the country's true economic
conditions. We consider them far more reliable than the many consumer
sentiment surveys.
Here's a breakdown of same-store sales for February compared to a year
earlier:
Wal-Mart (WMT) 6.2%
Target (TGT) 7.5%
Sears Roebuck (S) 1.1%
J.C. Penney (JCP) 12.1%
Federated Department Stores (FD) 9.0%
TJX (TJX) 10.0%
Gap (GPA) 12.0%
May Department Stores (MAY) 3.3%
Dillard's (DDY) 2.0%
Limited Brands (LTD) 5.0%
Saks (SKS) 14.7%
Neiman Marcus (NMGA) 24.4%
Hot Topic (HOTT) 7.6%
American Eagle Outfitters (AEOS) 15.0%
II. CEO SURVEY RESULTS ARE OPTIMISTIC
Nearly 90% of CEOs polled in a recent survey expect sales to increase over
the next six months. By comparison, 10% thought there would be no change
and only 1% thought sales would go down. That's very encouraging. What's
more, 45% intend to boost capital spending in that period. That's not a
number where a majority percentage is relevant. Any boost in capital
spending is good news as long as it is greater than the percentage cutting
back. Only 7% plan to cut back, while 50% will keep spending the same.
So there's still a lot of wait and see attitude out there, but the outlook
is better than in December, when 35% of CEOs said they expected to
increase spending.
In regards to jobs, 35% plan to increase hiring over the next six months,
up from 25% in December and only 12% in October. 45% intend to hold
employment steady and 20% plan to cut jobs. Of course, this says nothing
about the magnitude of the hiring and firing. For example, we could see
100 companies each hire 50 people, while 10 companies could cut 1,000
each. This is possible because companies make layoffs in waves, letting
go of large numbers of employees at the same time, while they tend to hire
as needed over time.
Overall, the numbers are encouraging and much improved from the last
survey. They are also very relevant, as CEOs know better than anyone what
the future holds. They see orders coming in, and can get a feel for how
business is looking from the inside. So we are pleased to see these
numbers. We didn't, however, expect to see this outlook reflected in
Friday's Jobs Report, as the government reports tend to be more backward
looking.
III. ANALYSTS QUESTION ORACLE'S OBSESSION WITH PEOPLESOFT
We avoid writing about the ORACLE (ORCL, $12.71, down 0.16) / PEOPLESOFT
(PSFT, $20.30, down 1.28) hostile takeover circus because we're tired of
hearing about the largely inconsequential day-to-day maneuverings
surrounding it. We're sure you are, too. But it is worth pointing out
that more and more, people are questioning Oracle's obsession with the
deal. Specifically, analysts are wondering why Oracle CEO Larry Ellison
won't just give up and move on, especially now that antitrust challenges
from the government stand in his way. The chances of success are falling
every day, while the costs of prolonging the bid are rising.
Even if the deal goes through, it's bound to be a sour marriage. The
folks at PeopleSoft aren't happy with this deal at all. What's more, it's
not going to be an easy union from a technological perspective.
PeopleSoft owns millions of lines of computer code. People have the
impression that Information Technology is something that is easily
transitioned from one techie to the next. That's not the case. Oracle
will have to rely on PeopleSoft developers to transition that knowledge.
That means that if Oracle gets PeopleSoft, it will have to take over
millions of lines of code from disgruntled employees who know that the
faster they transition their responsibilities, the sooner they're out of a
job. Fat chance of that transition going smoothly. |
