From Briefing.com - 4:34PM Weekly Wrap: The focus of the holiday-shortened week was interest rates, both short and long term.
The S&P and Nasdaq both ended the week with fractional declines. This seems fairly surprising at first glance, because the economic releases reflected slower economic growth and oil prices rose from $51.85 last week to $55.03 this week. The reason the market was resilient was favorable developments on the interest rates outlook.
Most significantly, on Wednesday, Dallas Federal Reserve President Fischer said that the Fed is in the "eighth inning" of the current round of tightening. He doesn't speak for the entire Fed, of course, but that implies that maybe the Fed won't raise that target for the fed funds rate much higher from the current 3%.
The bond market rallied significantly on those comments. The yield on the 10-year note at the end of last week was 4.07%. This week it ended at 3.97%.
The economic data this week supported arguments that economic growth is slowing. The best news came on Tuesday, as consumer confidence for May was reported to have picked up. That was perhaps due to recent job growth and an easing in gas prices.
On Wednesday, auto and truck sales for May were reported to have slowed from the April pace. The May ISM manufacturing survey was reported at just 51.4, down from 53.3 in April. Any reading over 50 is intended to signal growth, but this doesn't suggest much growth.
On Thursday, May factor orders were reported up 0.9%, but the trend in orders the past few months has been soft and a gain of 1.2% had been expected. Also that day, new claims for unemployment unexpectedly jumped 25,000 to 350,000 for the week ended May 28.
The biggest news came on Friday. May nonfarm payrolls were reported up just 78,000. An increase of 175,000 had been expected. Not too much should be read into a single month of data. After all, this follows a big 274,000 gain in April, and the average gain so far in 2005 is 184,000. Nevertheless, the May numbers do reflect slower payroll growth.
The economic data on balance reflect economic growth, but at a slower pace than in recent months. That didn't disturb the stock market. Slower economic growth was generally accepted as probable, but now it comes with the benefit of perhaps an improved interest rates outlook. If short-term rates don't go much higher, and long-term rates stay near present levels, current stock valuations look all that much better.
There were no earnings releases of note this past week. There are none of broad significance scheduled for next week. It is a slow period for earnings. But Intel does have a mid-quarter update Thursday after the close that could be very important. Technology stocks have enjoyed a good run lately and provided some leadership to the broad market. Any whiff of bad news from Intel would hurt the sector.
The market has come back solidly the past six weeks. It has come off its lows from the six-month trading range. Trading volume has been moderate, however, and there isn't that much enthusiasm for a possible summer rally. Interest rates won't come down much further. Oil prices might not either. Slower economic growth means slower profit growth. There are plenty of worries to offset the support from overall good valuations on the market.
The stock market may be looking at some slow summer months in which a trading range mentality persists.
Index Started Week Ended Week Change %Change YTD
DJIA 10542.55 10460.97 -81.58 -0.8 % -3.0 %
Nasdaq 2075.73 2071.43 -4.30 -0.2 % -4.8 %
S&P 500 1198.78 1196.02 -2.76 -0.2 % -1.3 %
Russell 2000 616.90 620.30 3.40 0.6 % -4.8 %
6:08PM Swing Trader: OI, PRU, GENZ : -Technical- Market Breadth was mixed after Friday's job report as Decliners outpaced Advancers about 1.47 to 1 while New Highs exceeded New Lows almost 5.5 to 1. Heathlcare - Insurance (HMO +1.2%) was today's leader while Biotech (BTK -2.14%) and Technology (XLK -1.1%) were laggards. The action of the SPY on a Daily chart remains within its current up-channel off the May 18 bullish gap above 118.00...(continued)
3:08PM Treasury Market Ends Interesting Week Lower: : The market tossed and turned throughout the session, initially blasting higher on a huge miss in payrolls, which printed a mere 78K against expectations of 150K -- 180K. The market jumped and 10-yr yields blew through the 3.85% level. The market had been on a fishing expedition all week, looking to bring in mortgage-backed players, who have been in throughout the last few weeks (but nothing like the concentration or to the extent seen in Mar 2004 and June 2003) as well as positioning in the more sophisticated options markets. The rally also sucked in a batch of late and technical longs (too late), and as a results got pinched on the way down. Technical indicators and profit-taking took the market lower after a significant push higher in price, lower in yield, following the 78K payrolls reading. The sell-off today begs the question, is 3.81% the floor on the 10-year and is 4.150% the floor on the 30-year? Or, will the bullish trend continue next week pushing yields even lower? More simply, was today the reversal or just some profit-taking? The next two weeks will certainly have the answer with 2 Greenspan events next week and a data-packed economic calendar from Jun 14-17. The economic calendar next week offers very little with wholesale inventories, import-export prices, initial claims, and trade balance the only potential market moving pieces of the weekly economic puzzle. The market will also need to contest with new 5-year notes and reopened 10-years. The data and supply hitting next week doesn't hold a candle to the two Greenspan appearances scheduled. Greenspan will be speaking via satellite to China Banking panel Monday at 21ET and will be testifying before the Joint Economic Committee on Thursday at 13ET. The 10-yrs are currently -17/32nds yielding 3.968%.
8:05AM LTX Corp misses by a penny, ex items; guides Q4 above consensus (LTXX) 5.11 :Reports Q3 (Apr) loss of $0.28 per share, excluding non-recurring items, $0.01 worse than the Reuters Estimates consensus of ($0.27); revenues fell 63.7% year/year to $25.5 mln vs the $26.8 mln consensus. Co issues upside guidance for Q4, sees loss of $0.09-0.12 vs. loss of $0.20 consensus; sees Q4 revs of $37.5-39.5 vs. $31.52 mln consensus.
7:53AM Tech Focus :Intel (INTC) expected to introduce dual-core 65-nanometer Yonah notebook chip next year... Cree (CREE) to close Sunnyvale chip plant, lay off 80 workers... Microsoft (MSFT) discovers attempt by hackers to steal user information from its South Korean MSN Web site... EMC (EMC)worldwide standalone storage revs rise 12.2% to $808 mln vs. 6.7% growth to $3.7 bln for overall market, according to market research firm IDC... Dell (DELL) to launch premium brand of PCs targeted for high-end homes... Apple (AAPL) agrees to settle class action suits over iPod battery life, co offers extended warranties, $50 store credits; also, iTunes launches affiliate site program in the U.K... PartyGaming, co which runs online poker games, is set to debt on the London Stock Exchange later this month for an estimated 5bln (about $9.09 bln).
12:21PM Take-Two Interactive Software (TTWO) 27.01 +0.64: Fueled by the launch of Midnight Club 3: DUB Edition and Major League Baseball 2K5, videogame maker Take-Two Interactive reported Q2 earnings above analyst expectations. The company reported a narrower loss of ($0.12) on $222.1 million in revenue versus the consensus estimate of ($0.13) on $208.2 million in revenue. Net loss contracted by 44% year over year from ($0.22), while revenues increased 44% for the same period, from $153.4 million to $222.1 million. The current quarter results were largely attributed to the release of new game titles for PlayStation 2 and Xbox, as well as to the continued strength in demand for Grand Theft Auto: San Andreas, which has generated over $250 million since its introduction in October 2004.
In spite of current quarter results, mixed guidance was issued for Q3 and FY05. The company anticipates a Q3 loss of ($0.05) on revenues of $205-215 million versus consensus earnings expectations of $0.07 on revenues of $235.9 million. In addition, earnings forecasts for the year were reiterated to be in the range of $1.40-1.47 on $1.30-1.35 billion in revenue, in-line with consensus estimates. The company associated the sour outlook for the succeeding quarter to the delayed rollout of the highly anticipated Grand Theft Auto: Liberty City Stories for the new Sony PSP to the fourth quarter.
For the past year, the videogame industry has been inundated with the transition of next-generation game consoles. As Microsoft, Nintendo, and Sony prepare to introduce new technology platforms, leading software developers, such as Take-Two, Electronic Arts (ERTS), and Activision (00C0), are poised to capitalize on the anticipated market growth, which is expected to exceed 9% annually through 2008. Take-Two, with a market cap of $1.90 billion, possesses the necessary resources and ability to produce a steady stream of successful titles, and is not dependent on a short list of games to generate revenues. As attrition threatens smaller firms with thin resources, larger developers, such as Take-Two, with better capitalization will be better positioned to accommodate the increasing costs of creating new games.
The development of successful game titles will remain the primary driver for growth in the videogame industry as new technologies from leading hardware manufacturers promulgate. Amid increasing competitive pressures, Take-Two has gained considerable repute for its prowess in developing innovative titles. Through successful franchises, such as Grand Theft Auto and Midnight Run, and fresh product releases, the company remains well positioned to continue to captivate audiences and create value.
Current valuation levels for Take-Two continue to be enticing as the company responds to changing technologies and new growth opportunities. With a trailing P/E of 21.0x, relative to 33.4x and 23.8x for industry leaders Electronic Arts and Activision respectively, Take-Two possesses inherent value, and warrants investment consideration. --Richard Jahnke, Briefing.com
12:01PM JPMorgan Chase & Co. 35.64 -0.10: Large financial companies have ntelegraphed the challenging operating environment they are experiencing in the second quarter due to higher rates, a flatter yield curve, lower trading volumes, and wider credit spreads. This week, for the third time this quarter JPMorgan, the third largest bank by assets behind Back of America (BAC) and Citigroup (C), tempered the market's expectations.
In an 8K filing on June 1st, the investment bank said trading results for Q2 FY05 as of the end of May are the worst it has experienced in some time. Absent any drastic changes in June, it expects trading results for the quarter to come in lower than the $842 mln (fixed income and equities combined) it reported in Q3 FY04. JPM cited worse than expected proprietary and market-making trading activity across all of its credit, equities, and rates businesses, noting Europe has been generally its weakest market. Its client-driven trading, however, has remained generally strong to date.
The Street responded with little surprise, but nonetheless substantially lowered its expectations for the second quarter and the full year. Smith Barney took its Q2 figure down $0.70 to $0.65, CSFB cut its estimate by ninety-cents to $0.58, while Lehman reduced earnings by forty cents to $0.70. The consensus for the second quarter ending in June has dropped 6% this week to $0.68 with a range of $0.52-$0.82. Full year consensus estimates were pared from $3.05 to $2.99.
JPMorgan enjoyed robust trading volumes in the first quarter, generating $2.2 bln, but the momentum was short-lived. At a sell-side conference this week, CEO Jamie Dimon said, Absent any improvement in June, we expect our trading results to be worse in the second quarter than they were in the third quarter of last year, which was a terrible quarter. Even though there is typically a seasonal decline in the double-digits from Q1 to Q2 for the money center banks, this type of drop-off to the $800 mln range is well beyond these levels.
Jaime Dimon certainly has his hands full integrating Bank One with JPMorgan to emerge as a regional and investment bank offering additional speciality services, including credit cards, asset management, custody, and transaction services. It is certainly not alone in the difficulties its faced this quarter. Just this week several analysts have slashed earnings expectations for the Brokers due to a challenging trading environment. However, analysts estimate that JPM has been more negatively impacted than its peers due to its proprietary-trading model.
JPM's stock chart is telling, as shares have held relatively stable despite the revision. Clearly the market is viewing Q2 weakness as transitory and does not see it representing a secular slowdown. The only absolute here is that eventually the markets (bond and equities) will stabilize and allow banks to readjust. It should be noted, however, that share stability may be more a function of JPM's defensive stature as a Dow component, coupled with the well documented second quarter troubles. In terms of valuation, the stock trades at 1.20x price-to-book, below its historical average of 1.7x.
Disclosure: An immediate family member owns JPMorgan's stock.----Kimberly DuBord, Briefing.com
9:05AM Page One - Now Stocks Prefer Slower Growth : The stock market apparently likes the idea of slower economic growth - so long as there is still growth.
May nonfarm payrolls rose 78,000. This was below the expected 175,000 increase and a much smaller increase than the April 274,000 gain. The average gain the past two months is thus 176,000 and the average monthly gain this year is 184,000.
One month of data never makes a trend, but it is reasonable to take the smaller May increase at face value as a reflection of slower economic growth overall. Retail data and business orders data also reflect such a trend. Apparently, the stock market is comfortable with that.
Stock futures actually bounced up a bit on the news. The idea is that slower economic growth is beneficial because it signals that the Fed is reaching the end of its tightening cycle. It also implies that inflationary pressures will ease. The 10-year bond yield has dropped to 3.81% on the payroll news. Low bond yields are another benefit of slower economic growth.
That interpretation of the data may be a bit pollyannish. Slower economic growth will also produce slower profit growth. But at least the market has gotten beyond the idea that slow economic growth means no economic growth. The payroll data are consistent with expectations of 3% real GDP growth. That is sufficient to produce decent profit growth over the long term.
Oil is hovering around $54 a barrel. There is little corporate news.
The S&P is up 5 points for the week so far. This could be the fifth weekly increase over the past six weeks. Dick Green, Briefing.com
9:13AM Engineered Support (EASI) Thomas Weisel upgrades Peer Perform to OUTPERFORM. Thomas Weisel upgrades EASI following Q2 report and yesterday's share price decline due to weak guidance for FY05. Firm thinks the negatives are known and priced in, the FY06 rev plan is coming together nicely and valuation is attractive. They believe that the April qtr shortfall is an isolated problem that will be resolved by the end of the year. Firm also notes their confidence is boosted by mgmt's otherwise blemish-free execution track record.
9:13AM Gentex (GNTX) Banc of America Sec downgrades Buy to NEUTRAL. Firm says the stock now looks to be discounting a roughly 13% free cash flow growth rate through 2010, which would put global contented mirror penetration at a reasonable 25% (vs. 14% today). Also, they see near term sales and margins being soft due to weak GM and Ford retail sales/production.
9:12AM Allergan (AGN) JP Morgan upgrades Neutral to OVERWEIGHT. JP Morgan upgrades AGN citing the following: 1) over-hyped negative impact to Botox from Reloxin; 2) possible filler deal in the near-term to compete with Restylane; 3) possible biotech VEGF deal to put in Oculex back-of-the eye delivery platform; 4) final approval for Alphagan Z in the next few weeks; 5) high likelihood of Combigan approval in mid-2006; and 6) better Tazoral clarity with the FDA and approval in 2007.
9:11AM Engelhard (EC) Deutsche Securities downgrades Buy to HOLD. Target $34 to $32. With an expected late 2005 pickup in auto catalysts now unlikely to occur until late 2006 (due to GM and Ford cutting production in 2H05 in order to work off high inventories), and an accelerating negative mix shift away from SUVs toward smaller cars (1-2/vehicle), firm thinks the co's earnings are unlikely accelerate until 3Q06.
9:11AM Kinetic Concepts (KCI) Stanford Research initiates BUY. Target $85. Firm says that demographics and increasing wound care issues related to diabetes and other diseases suggests to them a potential for long-term growth by KCI that rivals that of any medical technology co. Also, firm says continued de-leveraging of the balance sheet (now 80% debt) should also create value for equity investors.
9:11AM Monster Worldwide (MNST) Ryan, Beck & Co upgrades Mkt Perform to OUTPERFORM. Target $30 to $34. Firm believes MNST is poised for more than a 25% increase over the next 12 months. They say recent data points, including this morning's Monster Employment Index, point toward steady job growth throughout 2005 and indicate that any "soft patch" in the economy/employment markets was temporary. They also believe that operating margins at MNST will rise dramatically from the 13.4% level reported in the March '05 quarter, and will end the year at over 19%.
9:10AM Marchex (MCHX) Kaufman Bros initiates BUY. Target $19. Firm believes the search marketing industry is seeing strong secular growth, and believes it will grow at a CAGR of 20% from $3.9 bln in 2004 to $9.6 bln by 2009. They say this growth will be primarily driven by advertising dollars moving online from offline media. Firm believes the acquisition of Name Development has improved strategic positioning, and they believe that the co's technology focus will enable it to extract high margins and operating leverage resulting in strong free cash flow growth.
9:09AM Cintas (CTAS) FTN Midwest downgrades Buy to NEUTRAL. FTN Midwest downgrades CTAS, as industry fundamentals are not improving at the level they had anticipated. Firm says their checks over the past 18 months have indicated mixed results for the fundamentals of the industry, and they are not witnessing an acceleration in the overall fundamentals and do not believe they will significantly improve over the next 12 months.
9:09AM Plains All Amer (PAA) Smith Barney Citigroup upgrades Hold to BUY. Firm believes a few partnerships have the ability to increase value to unit holders on a long-term basis, and expected lower long-term interest rates should support higher valuations. |
