From Briefing.com: 6:17 pm Weekly Wrap
The stock market had a pretty good week...until Friday. That day, the market become shocked, shocked, to learn that the yield on the 10-year note was rising. Friday wiped out the gains from the rest of the week.
It was a slow week for news. That left the recent modestly bullish underlying tone intact during the early part of the week. On Monday, the S&P gained 3 points. On Tuesday, it gained 8 points. On Wednesday, it gained 6 points. Throughout that period there was little specific news to account for the upward drift. It was a continuation of the trend of prior weeks, with support from chart considerations and "internals" factors such as the number of new 52-week highs.
On Thursday, some actual bad news hit. March same stores sales for retail chains were soft. Wal-Mart posted a disappointing 1.3% gain over a weak March of last year. Most other major chains also posted soft numbers. Many retailers blamed a late Easter that pushed retail sales into April, but the excuse was widely viewed as only moderately plausible. That day, the S&P lost 3 points.
The real selling hit on Friday. The March employment data that morning was initially greeted with enthusiasm. Payrolls were up a slightly stronger-than-expected 211,000. Hourly earnings were up a less-than-expected 0.2%. The S&P opened 5 points higher on the seemingly strong economic data and low inflationary implications of modest wage gains.
Yet, the bond market quickly turned south on the belief that a drop in the unemployment rate and strong payroll gains means a tightening in labor market conditions. This reflects high resource utilization (of labor) that the Fed noted as a concern in the most recent FOMC statement. Suddenly, the data was seen as creating a risk that the Fed might raise rates more than just one time.
The 10-year note yield surged to 4.96% by the end of the day. This was a major factor behind the 14 point plunge in the S&P on Friday.
This was a case of underlying fears rising up as much as a rational reaction to data. The 10-year note yield had risen from 4.67% to 4.85% the week before and there was little stock market reaction. The yield had inched higher to 4.89% through Thursday of this week and was barely noticed.
But as the yield rose towards 5%, the latent stock market concerns about rising interest rates suddenly burst through. The previous modestly bullish sentiment gave way quickly.
This sets a less optimistic tone for the market as earnings season begins on Monday. Earnings reports are not heavy next week, but will soon be the focus. Guidance for the second quarter will be more important than usual, given the risk that earnings growth will slow if the Fed keeps raising interest rates.
Another potential factor for the market is commodity price trends. The price of a barrel of oil rose to $67.39 this week, up from $66.63 last week and $64 the week before. It pushed near $70 at times, and a move above $70 could add to concerns that consumer spending might slow in the months ahead. Gold and other commodity prices have also been rising, but have generally been viewed as a curiosity. Now, they are looked on as possible reflections of inflation pressures.
The action on Friday presents a risk that the recent resilience in the market and the underlying upbeat tone will give way to a more somber outlook.
Index Started Week Ended Week Change %Change YTD
DJIA 11109.32 11120.04 10.72 0.1 % 3.8 %
Nasdaq 2339.79 2339.02 -0.77 0.0 % 6.1 %
S&P 500 1294.83 1295.50 0.67 0.1 % 3.8 %
Russell 2000 765.14 756.13 -9.01 -1.2 %12.3 %
4:20 pm : Not surprisingly, Friday's equity trade was dictated by the March employment report. More specifically, it was the Treasury market's reaction to it that set the stage for stocks.
Equity investors responded well to the data. On the surface, particularly in terms of the hourly earnings and non-farm payrolls figures, the data appeared better than expected and reflective of strong economic growth amid contained inflationary pressures. As we had stressed, the hourly earnings component was of particular significance. Given the mounting concerns over rising resource utilization and wage-based inflation, that (and also the unemployment rate) was in focus. The slightly smaller than expected 0.2% rise in the hourly earnings series was a welcomed one, and it helped spark some early buying.
Taking the revisions to February's figures into account, however, that conclusion was somewhat diminished. Considering those revisions, non-farm payrolls were only a bit above the expected level, and the net increase in hourly earnings matched expectations for March. Thus, the data were essentially consistent with expectations. In and of itself, the report featured nothing to undermine the stock market's recently bullish tone. A lack of negative surprise caused the stock market to breathe a sigh of relief. That was stifled, though.
The Treasury market had a very divergent reaction to the data, and it took the stock market down with it. For Treasury traders, the in-line data essentially provided no evidence that the Fed will be inclined to soon end its monetary tightening cycle. While inflationary concerns were not exacerbated today, they were not allayed, either. Aggravating conditions was speculation that the Bank of Japan may raise interest rates earlier than previously thought. The yield on the benchmark 10-year note had been pushing, and it several times touched, 4.90% all week. Today, it tore through that level and flirted with 5.00%. The especially inflation-sensitive back end of the curve fared worst; the 30-year (-28/32) was yielding 5.05% at the close of equity trade. As we continue to note, Treasuries remain in the stock market's spotlight. The conditions within it continue to serve as a bearish backdrop for stocks, and they remain a significant challenge to a spirited, sustainable advance in the stock market.
Today, selling was broad-based and spared few areas of the market. Rate-sensitive sectors took a lot of heat. The influential Financial sector levied a 1.0% loss, and Utilities dropped more than 1.5%. Each of the other economic sectors declined substantially.
The bond market was the primary reason behind the stock market's fall, but there was another factor that played a considerable role. Commodities have commanded a lot of attention over the past week. Several metals have hit or approached historic highs, and many of them faced profit-taking today. Gold was a particular case. It hit a 25-year high of $600 per troy ounce yesterday, and declined alongside several other metals today. The dollar's strength, borne out of expectations for more rate hikes, may have been a catalyst for the consolidation. The Materials sector, on a related note, experienced some profit-locking. On the energy side of the commodity aisle, prices across the complex gave back some ground today. Outside of fostering a weighty 1.7% loss in the Energy sector, the energy price declines had little effect upon trade.
Today's corporate front provided investors with little distraction from the state of the Treasury market. There were earnings reports from Research in Motion (RIMM 79.74 -4.64) and Constellation Brands (STZ 23.99 -1.47), same-store sales results from Starbucks (SBUX 37.81 +0.36), and a management change and Ford (F 7.60 -0.05). The news took a backseat to the jobs data and bond yields, and even more so as the corporate focus has shifted to the first quarter earnings season that commences Monday.DJ30 -96.46 NASDAQ -22.15 SP500 -13.54 NASDAQ Dec/Adv/Vol 2085/952/2.02 bln NYSE Dec/Adv/Vol 2664/608/1.53 bln
12:10PM 50 Day-Alert -- Semiconductors Hldrs Trust (SMH) 36.96 -0.73 : The SMH has tested and is vacillating near support at its 50 day ema at 36.91 (session low 36.91). Initial support below here is in the 36.81/36.74 zone.
9:02AM Microsemi's revenue estimates appear conservative - Amtech (MSCC) 27.84 : Amtech notes that a closer look at the co's end markets suggests that 17% top-line growth for fiscal 2006 (ending September) appears conservative. They believe defense & aerospace (40% of sales) and notebooks & LCD TVs (20% of sales) have the greatest potential to upside their ests and that medical (20% of sales) and mobile connectivity (10% of sales) have the greatest potential to miss their estimates. They also note that their 17% rev growth est is significantly better than current forecasts for semiconductor industry growth ranging from 5-10%. They are reiterating their BUY rating with a $37 target price, which is 25X their fiscal 2007 EPS est of $1.47.
11:57 am Ford (F)
7.66 +0.01: Among the many initiatives in Ford Motor Company's "Way Forward" restructuring plan, a reduction of its officer ranks by 12% is right near the top of a long list of key tenets aimed at trying to turn around the struggling auto maker. Last night, the difficult decisions that come with downsizing top management that has been in place for so long may have gotten a bit easier following the announced retirement of Jim Padilla, Ford's president and chief operating officer who has worked at Ford since he was 19 years old. Effective July 1st, William Clay Ford, Henry Ford's great-grandson who has been CEO since 2002, will assume Padilla's duties. As an aside, Ford told reporters on Wednesday that bankruptcy is "not an option."
It remains to be seen if the team Padilla helped assemble to get Ford back on track will make a smooth transition into the new roles that await them for the job of achieving North American automotive profitability no later than 2008. Last year, Ford posted a $1.6 bln loss in North America as it struggled to overcome continued market share losses to Japanese and Korean rivals in the U.S. and succumbed to high health care costs -- a huge reason why Ford will cut up to 30,000 jobs over the next six years.
Separately, Ford said Thursday it is expanding 0% financing to buyers nationwide on the hybrid versions of its Escape and Mercury Mariner SUVs. The incentive on the gasoline-electric SUVs was offered last month in California and Washington, D.C., but was expanded effective Monday and runs through July 5. Last month, Ford offered as much as $1,000 in discounts on its Escape Hybrid, whose sales have picked up since January but still leave the Kansas City facility that makes them running at 65% capacity. While Ford's efforts to help consumers more affordably own cars that cut gasoline consumption and greenhouse gas emissions are noble, doing so at the expense of not collecting interest on higher-priced vehicles will make its chances of becoming profitable that much more challenging.
Even though Ford claims it will introduce at least seven more hybrid models, most of which are priced about $3,500 above the traditional versions, and that it has the capacity to build 250,000 such vehicles by the end of the decade, rival Toyota (TM) will produce more hybrids this year alone than Ford will combined over the next four years. Mary Anne Wright, Ford's former head of hybrid programs and proponent of clean vehicles as a "lifelong passion," is another Ford loyalist whose resignation last October sparked concerns about the future of Ford. At this point, the prospects for Ford remain uncertain enough that we continue to find its stock unappealing from an investment standpoint.
-- Brian Duhn, Briefing.com
10:30 am Extreme Networks (EXTR)
4.70 -0.39: After the close on Thursday, Extreme Networks lowered its financial outlook for the fiscal third quarter due to weaker than expected sales in the United States and Japan. Shares of the Santa Clara, California-based company, in turn, plunged at the market open, losing more than 12%.
For the third quarter ended April 2, 2006, Extreme Networks expects to post earnings of breakeven per share to $0.02 per share, excluding stock-based compensation expense. Analysts on average were looking for earnings of $0.05 per share, according to Reuters Estimates.
On the top line, Extreme Networks said lower revenue in the U.S. and Japan offset revenue growth in its European markets. Accordingly, the company now expects revenue for the quarter to be between $84 and $85 million, well below its prior guidance of $90 to $95 million. That compares with the consensus estimate of $92.8 million.
The tempered outlook, which largely stems from longstanding operational problems in the U.S. and slow progress in Japan, seemingly opens the door for competitors such as Foundry Networks (FDRY) and Cisco Systems (CSCO), a recommended holding in our Active Portfolio, to further expand their market share.
--Richard Jahnke, Briefing.com
09:13 am AutoNation (AN)
22.09: Less than two weeks ago, AutoNation issued downside guidance for the first quarter, saying it expected EPS to come in between $0.32 and $0.35, including $0.01 in stock option expensing; the Reuters Estimates consensus was $0.37. While stable growth to a slight increase in revenue was anticipated, higher floor plan interest expenses were expected to adversely impact its bottom line by about $0.02 per share.
Last night, however, America's largest automotive retailer updated its Q1 outlook, increasing earnings from continuing operations to a range of $0.36 to $0.38 per share. Management attributed the upward revision to a stronger than expected performance primarily in its premium luxury business in March and added that they now expect its previously announced equity tender offer and debt tender offer and consent solicitation to be accretive to future earnings in the range of $0.13 to $0.15 per share on a full-year basis. Previously, the company's estimated range was $0.08 to $0.10 per share on a full-year basis but has since improved due to a better mix of financing sources between bank financing and senior notes, as well as lower interest-rate spreads than previously anticipated.
On March 7th, AN shares were up as much as 8% intraday after the company said it plans to offer up to $900 mln of senior unsecured notes. Its intention is to use the proceeds to purchase 50 mln shares of its common stock at $23 a share pursuant to a common stock tender offer and up to $323.5 mln of aggregate principal amount of its 9% senior notes due 2008 pursuant to a debt tender offer and consent solicitation. While investors applauded the move, Fitch Ratings did not, downgrading AutoNation's debt to junk.
-- Brian Duhn, Briefing.com
09:05 am Constellation Brands (STZ)
25.46: Constellation Brands on Thursday reported a 22% increase in fourth quarter profits, as higher sales in beers and spirits helped offset lower wine sales. Specifically, the company, which imports such beers as Corona and Tsingtao, posted net income of $55.7 million, or $0.24 per share, up from $45.2 million, or $0.20 per share, a year earlier. Excluding one-time items, earnings were $86.9 million, or $0.36 per share, a penny below analysts' forecast, according to Reuters Estimates.
Net sales for the quarter totaled $1.05 billion, up 1% from the year ago period. The top line results included a three percentage point headwind, along with approximately $8.5 million in sales from the acquisition of Robert Mondavi brands, and $7.7 million of sales for Ruffino brands. Excluding acquisitions, net sales decreased 1%. Sales of beers and spirits during the period climbed 16% to $280.9 million, as imported beer sales increased 20% and spirits sales grew 4%. Meanwhile, fourth quarter wine sales slipped 3% to $767.0 million. Branded wine sales fell 1% to $538.8 million, hurt by a 16% decline in net sales in Europe. In the United States, sales of branded wines rose 3% due to the addition of Robert Mondavi brands in December 2004 and Ruffino brands in February 2005.
Separately, Constellation said earlier this week that it will acquire Canadian winemaker Vincor International (VN.TO), whose brands include Inniskillin and Jackson-Triggs, for approximately US$1.31 billion. The deal further demonstrates widespread consolidation in the industry and highlights Constellation's growing portfolio of brands.
Looking to the fiscal first quarter, Constellation expects to earn between $0.30 and $0.33 per share, ex-items, in line with the consensus estimate of $0.33 per share. For the full year, the company forecast earnings in the range of $1.70 to $1.78 per share, ex-items, on revenue of approximately $6.05 to $6.16 billion. Analysts on average are expecting earnings of $1.77 per share and revenue of $5.05 billion. Based on analysts' estimate, shares are trading at 14.4x forward earnings. Consolidation within the global beverage market will likely remain a key driver for the industry in the current year and should bolster Constellation's already strong portfolio of brands and help create long-term value.
--Richard Jahnke, Briefing.com
07:55 am Starbucks (SBUX)
38.50: Shares in Starbucks are percolating in pre-market action after the Seattle-based company reported another strong quarter of same-store sales. Following on the footsteps of an 8% gain in February, March comps grew 10% compared to the Briefing.com Benchmark consensus of 8.1%. Starbucks stated the upside reflects the ongoing popularity of its seasonal espresso and core beverage offerings. The shift of the Easter holiday to later April and a successful Annual Brewing Event drove traffic during the month. Further, Starbucks converted 67 stores in Hawaii and Puerto Rico to company-owned status.
The result topped off the company's own forecasts of 3-7% growth. Nonetheless, the company stands by the same forecast for the reminder of the year, stating a 10% rise is not sustainable. The recent launch of its new warm breakfast sandwich lines could be a modest comps driver ahead. Total net revenues grew 24% during the five weeks ended April 2nd to $743 mln, according to the company. The trend clearly remains in Starbucks' favor, which underscores our positive position on the company as a long-term, defensive, fundamental growth story. Starbucks has retained an impressive growth rate, while domestic and international operating margins expand. Its long-term outlook is as mouth-watering as its Caffe Verona, particularly within the international markets.
--Kimberly DuBord, Briefing.com
07:12 am Research In Motion (RIMM)
80.80: There is little doubt that the air has been let out of Research In Motion's tires after the threat of a service shutdown of its Blackberry sliced into fourth quarter results. The Canadian-based company has been dodging suggestions that growth for its email-centric device is slowing, but the facts are starting to bear fruit. This was the eighth consecutive quarter that revenue declined sequentially and the seventh quarter subscriber net adds slowed.
There is no doubt the patent litigation suit between NTP and RIMM, which was settled last month for $615 mln, has hurt sales, but the possibility of the potential service stoppage may have caused its core enterprise customers to start looking elsewhere for alternative solutions. Nokia (NOK) and Motorola (MOT) are coming on strong with competitive devices. MOT's "Q" phone, deemed the RAZRberry, offers similar functionality with a full QWERTY keyboard and thumb wheel despite its small size. On Thursday, the Census Bureau awarded Microsoft (MSFT) an order for 500,000 smartphones.
After the close, RIMM reported that Q4 revenue growth of 0.1% to $561 mln and $0.65 in per share profits. The EPS line came right on target with estimates, while revenues were marginally higher. RIMM added 625,000 net subscribers versus the Street's expectations of 625.8 mln. In March RIMM guided earnings to a range of 64-66 cents per share. Following the latest release, shares have taken a substantial hit after the company issued modest guidance below consensus estimates. For the first quarter, it sees earnings of $0.62-0.67 per share versus the consensus estimate of $0.76 on revenues of $580-610 mln, well below expectations of $620.3 mln. Management guided net subscriber additions to 675k, indicating they are seeing a recovery in additions.
The patent litigation was the underlying factor for the disappointing quarter which extends into Q1, but we would argue that there are other factors at work suggesting growth rates will continue to slow. The outlook remains clouded at this point and it does warrant caution. We suggest investors looking for a name in the hardware space focus on Motorola due to its product momentum, earnings growth and discounted valuation.
--Kimberly DuBord, Briefing.com
09:26 am Research In Motion: Bear Stearns downgrades Peer Perform to Underperform . Firm downgrades following Q4 results and guidance. Firm is now assuming total subscriber addition of 3.13 mln (up 26% y/y but lowered from their prior assumption of 4.02 mln). They are forecasting handset sales of 5.06 mln units (up 25% y/y but lowered from their prior 5.29 mln unit estimate). They expect software/services revenues to comprise 29% in FY07 (lowered from their prior 30% forecast). Reflecting slowing growth rates and lowered estimates, they are lowering their calendar 2006 year-end fair value to $66-$72 from $79-$86 by applying a lower multiple of 21x-23x (lowered from 22x-24x P/E multiple).
09:25 am IntercontinentalExchange: Morgan Stanley downgrades Overweight to Equal-weight. Target $75 to $63. Downgrade reflects the change in the competitive landscape from a CME/Nymex partnership. While they continue to believe in the ICE's solid position in the energy derivatives market, the CME/Nymex partnership may limit further upside in the stock price from continued market share gains in the WTI, the optionality from new Nymex "look-alike" products, and strategic value in a consolidating industry. Moreover, they say weaker-than-expected OTC volumes results in a $0.10 reduction to their 2006 and 2007 EPS estimates.
09:23 am Palm: Nollenberger Capital initiates Buy. Target $35. Firm is based on their belief that Palm is positioned to gain significant market share within the e-mail-capable cell phone market. They expect that this may result in cell phone vendors taking unit volumes from PC manufacturers like Dell (DELL) and Hewlett-Packard (HPQ). They project that mobile phones and, in particular, smartphones will see strong growth over the next few years as the number of wireless subscribers increases and device functionality expands.
09:22 am Abercrombie: Banc of America Sec reiterates Neutral. Target $63 to $60. Firm is saying ANF posted a flat comp for March, well below consensus of +3.6%, and their estimate of +5%. The firm says they were a bit surprised the stock was not down, although there was a lot of chatter about ANF posting a flat comp. They say it appears that investors want to own the stock because they believe it is cheap, but they are focused on decelerating comps, high inventory levels, and more difficult denim comparisons going forward.
09:21 am Coca-Cola FEMSA: UBS downgrades Buy to Neutral. Target $37.55 to $40. Firm is saying the downward trend in ray material prices should continue in 2006, which should drive additional gains in profitability. The firm says though that the mexican peso has stopped strengthening and they see evidence of mounting pressure on salaries and sugar prices. Finally they say the likely removal of Mexico's tax on fructose C.S.Ds is neutral for KOF.
09:21 am Iomai: UBS initiates Neutral. Target $6.5. Firm is saying that with the potential for the flu vaccine market to double from its current $1 bln size and the growing concern regarding pandemic, they believe this is one of the most opportune times to be developing adjuvent delivery systems. However the firm says the competititve environment cannot be ignored, and the co may simply fil a niche in these markets.
09:20 am Pepsi Bottling: UBS reiterates Buy. Target $35 to $38. Firm is saying that according the latest I.R.I data PEP's non carb brands continue to post impressive growth particularly in R.T.D tea, water, and energy drinks. Morover, they say PEP has a strong pipeline of new prodcuts this year, including the high margin SoBe life water.
09:19 am GlobalSantaFe: Calyon Securities reiterates Buy. Target $67 to $86. Firm also increases their 2007 earnings estimate to reflect new contract data disclosed in last night's fleet status report.
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