From Briefing.com: 5:14PM Market Wrap : Stocks tumbled for a second straight day as realization that interest rates are still going higher, perhaps much higher than what has been priced into the market so far, prompted broad-based consolidation which closed all three major averages down at least 1.0%. The absence of any notable leadership, as all ten economic sectors finished in negative territory, and above average volume to the downside lending even more conviction behind another dismal performance, kept buyers sidelined heading into the weekend.
4:32 pm Weekly Wrap
The stock market had a very rough week. Reality finally hit home on the interest rate front.
The S&P 500 index was dead flat on Monday and Tuesday. The reason was simple. The market was awaiting the Fed's policy announcement on Wednesday. Another 1/4% hike in the fed funds rate to 5% was fully expected, and it happened. There were also high hopes that the Fed would give an indication that it would either pause at the next meeting and not raise rates then, or that it would indicate that the rate hikes were over. That didn't happen.
Instead, the Fed policy statement said "some further policy tightening may yet be needed" and that the "extent and timing" was uncertain. The statement also said, to no one's surprise, that the upcoming data would be critical in determining policy. After all, if the economy weakens significantly, the Fed probably won't raise rates again. If inflation picks up, the Fed will keep raising rates.
The problem was that the market was hoping to look past the top of the interest rate cycle while economic growth remained strong. Now, there are by no means any assurances that the Fed won't raise rates again. In fact, if economic growth continues to put pressures on resource utilization, more rates hikes are likely. The market is not likely to get the best of both worlds - strong economic and earnings growth and no more rate hikes.
The S&P vacillated on Wednesday after the announcement and closed down just 2 points.
Then the selling started. The S&P plunged 17 points on Thursday. This was at times ascribed to a continued sharp rise in commodity prices or to a weaker than expected April retail sales reports. But the commodity story is by no means new, and the retail data could have been spun as a reason why the Fed would be cautious. The real reason for the selling was the realization that interest rates are still going higher, perhaps much higher than was priced into the stock market.
The selling continued on Friday, and for the same reason. There was no news, and oil prices were actually down a bit. Yet the S&P dropped sharply again.
This week, it was all about the Fed.
Earnings season essentially closed out. Over 90% of the S&P 500 have now reported first quarter earnings and the reports tail off sharply in the weeks ahead. Oil is holding well above $70 a barrel. The 10-year note yield has backed up to 5.18% from 5.11% at the end of last week as it continues its steady march higher.
The focus in the weeks ahead will be on the incoming data. The market is caught in a bit of a vise. Strong economic data represents a risk in that it may lead to the Fed raising rates. Weak economic data undermines the market optimism about earnings growth. Furthermore, any uptick in inflation data could send tremors through the market. The stock market is not yet priced for further rates hikes which may well be coming. This reality set in last week, and some further consolidation may yet be needed.
Index Started Week Ended Week Change % Change YTD
DJIA 11577.74 11380.99 -196.75 -1.7 % 6.2 %
Nasdaq 2342.57 2243.78 -98.79 -4.2 % 1.7 %
S&P 500 1325.76 1291.24 -34.52 -2.6 % 3.4 %
Russell 2000 781.83 742.40 -39.43 -5.0 % 10.3 %
4:20 pm : Stocks tumbled for a second straight day as realization that interest rates are still going higher, perhaps much higher than what has been priced into the market so far, prompted broad-based consolidation which closed all three major averages down at least 1.0%. The absence of any notable leadership, as all ten economic sectors finished in negative territory, and above average volume to the downside lending even more conviction behind another dismal performance, kept buyers sidelined heading into the weekend.
Before the bell, investors found some comfort after the U.S. Trade Deficit unexpectedly narrowed for a second straight month in March to $62 bln. However, realizing that such a decline will leave an upward revision to Q1 GDP growth -- a red flag for inflation hawks -- and additional data that showed the largest jump in import prices since September, which will weigh heavily on the April Trade Deficit, continued to underpin a sense of nervousness throughout the Treasury market. As a result, stocks again took a bearish cue from rising interest rates and traded in sympathy with further deterioration in bonds which lifted the yield on the 10-yr note to another 4-year high (5.18%).
With no notable earnings reports on the docket and over 90% of the S&P 500 having already reported Q1 results, investors also turned their attention to further weakness in the dollar -- a concern that we're not buying into as a presumed bearish factor for the market. After all, a modestly weak dollar is actually good for U.S. equities since it increases demand for U.S. products and increases the value in dollars of overseas profits for U.S. companies. Nevertheless, the recent damage done on the commodity price front due in part to a weaker greenback making dollar-denominated assets like gold and oil more attractive, continued to act as an overhang even though crude prices fell 1.7% and gold lost 1.2%. In fact, modest consolidation throughout commodities merely prompted investors to lock in profits from this year's two best performing sectors. Energy and Materials plunged 2.9% and 2.1%, respectively. To wit, Alcoa (AA 34.79 -1.23) was the worst performing Dow component Friday with ExxonMobil (XOM 62.20 -1.26), ranking third on the price-weighted index with a 2.0% pullback, also contributed to the Dow snapping a five-week winning streak.
Speaking of Industrials, the sector has been the third best performer in 2006 and, as one might deduce from all of this year's leaders getting hit the hardest Friday, turned in the day's third worst performance. Caterpillar (CAT 77.81 -1.81), United Technologies (UTX 64.87 -0.95), and Honeywell (HON 42.91 -0.63) -- all recently at 52-week highs -- were also influential Dow components that weighed on blue chips throughout the session.
On a positive note, chip maker Analog Devices (ADI 36.03 +1.35) beat estimates by three cents and issued upside guidance, which plays into our Overweight rating on Technology; however, follow-through consolidation throughout the influential sector also took a toll on investors asking themselves if they should in fact "sell in May and go away." BTK -1.1% DJ30 -119.74 DJTA -2.1% DJUA -1.0% DOT -1.0% NASDAQ -28.92 NQ100 -1.3% R2K -2.0% SOX -0.8% SP400 -1.8% SP500 -14.68 XOI -2.2% NASDAQ Dec/Adv/Vol 2295/740/2.32 bln NYSE Dec/Adv/Vol 2583/663/1.85 bln
4:15PM Afternoon Wrap: Heavy selling, Nasdaq 100 under water for the year : The week started out on a solid note with all the averages (except Nasdaq 100/Comp) establishing minor new 52-wk highs. Over the last three days, however, the market has been hammered with the breakdown coming amid strong volume suggesting institutional selling (Nasdaq 2.332 bln, NYSE 1.848 bln). Friday's losses leave the Nasdaq 100 under water for the year (2005 close 1645.20), below its 200 day averages (1650) and back near the bottom of its year long trading range (1633). Commodity/energy, which provided leadership of late, helped pace the way lower Thur/Fri. The weakest sectors Friday included: Coal -5.1%, Steel -4.5%, Mining -4.3%, Oil Service -4%, Gold -4%, Natural Gas -3.1%, Commodities Index -2.9%, Railroad -2.8%, Paper -2.3%, Broker/Dealer -2.2%, Oil 2.2%. Little was in the plus column other than Healthcare +0.4% and Health Provider +0.13%.
1:42PM NASDAQ 100 Trust hovering just above support (QQQQ) 40.29 -0.45 : Highlighted the 6 month range floor in early trade at 40.19/40.16 (see 09:34, 09:55 updates) with the index hovering near this area for the last several hours (recent session low 40.19). While is has edged slightly off the low, will need to see gains back above 40.40 and the 40.56/40.63 area to begin to improve. The next areas of interest on the downside is in the 40.08/40.00 and 39.90.
10:35 am Mittal Steel (MT)
40.00 +0.75: The world's largest steel producer, Rotterdam-based Mittal Steel Co. Friday shook up European markets, not to mention the commodities world, when it announced it had obtained U.S. antitrust clearance for a bid to acquire its rival and second-largest steelmaker Arcelor SA. European authorities are due to report on the matter June 7.
Mittal has been bidding for Luxembourg-based Arcelor since early 2006, with its latest figure upwards of $27 billion. Should the purchase occur, it would be the largest such deal seen in the steel industry.
Arcelor has said it will ask its shareholders May 19 to back the repurchase of up to 150 million of its shares as part of a strategy against Mittal's hostile offer. However, Mittal executives have said Arcelor's proposed buyback program could be in violation of regulations in some jurisdictions. It wasn't clear which jurisdictions or regulations the company may have been referencing, however.
Arcelor's other defense maneuvers have included a transfer of Dofasco Inc., which the company purchased in March, to a trust based in the Netherlands in an effort to keep Mittal from selling it to German steelmaker ThyssenKrupp (TKAG) should a takeover occur.
Both companies said Friday that they had seen declines in first-quarter profits. Mittal said it saw profits of $743 mln, or $1.06 a share, down from the year-ago total of $1.15 bln, or $1.78 a share. Arcelor reported a profit of $968 mln for the January through March quarter, down nearly 20% from $934 mln a year earlier as steel prices fell and oil costs rose. Financial results for the period have been converted from euros.
--Christine Marie Nielsen, Briefing.com
10:15 am Taser International Inc. (TASR)
9.38 -0.76: Shares of Taser International Inc. plunged on Friday, falling nearly 10% in early trading, after the stun gun maker said it would delay filing its first quarter report with the Securities and Exchange Commission due to concerns about its methodology for calculating certain expenses. The stock, which foundered last year amid a host of legal issues and bad publicity over injuries from the use of its products, is up about 34% year to date.
In an SEC filing, Taser said its method for calculating indirect manufacturing expense applied to inventory was incorrect and also identified a clerical error in the calculation. As a result of the errors, the Scottsdale, Arizona-based company said adjustments were required to correct the cumulative impact both in the fiscal first quarter and relevant prior periods. The changes will have no impact on revenues for the periods, it noted.
Taser did not say when it expects to file its quarterly report.
Although market sentiment towards the beleaguered company has improved dramatically in recent months, with investors returning to the stock, we believe it is prudent for investors to lock in gains at this juncture as the company continues to recover from a challenging year, as well as recent accounting concerns.
--Richard Jahnke, Briefing.com
09:26 am Expedia Inc. (EXPE)
19.66: Expedia Inc. said Thursday that its first quarter profits slipped 51% as higher expenses offset modest revenue growth, sending shares sharply lower in pre-market activity. The travel services company, which was spun off from IAC/InteractiveCorp. (IAC) last year, earned $23.3 million, or $0.06 per share, down from $48 million, or $0.14 per share, in the year ago period. On an adjusted basis, earnings were $57 million, or $0.15 per share - six-cents below the Reuters Estimates consensus.
Revenue inched up 1.8% to $493.9 mln from $485 mln last year, the company said, while gross bookings increased 14% for the quarter. Analysts on average were looking for revenue of $544.37 mln, according to Reuters Estimates. The increase in total revenue was driven by higher merchant hotel and advertising revenues, partially offset by a decline in worldwide agency air revenue. Expedia's domestic revenue fell 4% year/year, but international revenue grew 24%. Meanwhile, domestic gross bookings increased 10% and international gross bookings increased 26%, or 34% excluding the impact of foreign currency translation.
Gross profit for the period was $375 mln, up 1% from a year earlier. However, gross margin was down 63 basis points to 75.8%, largely due to the inclusion of lower gross margin revenue from a recently acquired travel services destination company. Operating income, meanwhile, decreased by 35% to $89 million, driven by higher operating expenses, particularly higher selling and marketing and general and administrative expenses.
In a statement, Chairman and Senior Executive Barry Diller said, "While we anticipated negative growth in the first half of 2006, our performance this quarter was far below those expectations." "We increased costs in many sectors - necessarily we believe for our long term growth - but didn't generate the revenues to offset the increased expenses," he added.
Amid concerns of heightening competition, shares of Expedia have fallen approximately 18% since the beginning of the year. With increasing costs and continued industry pressures weighing on the company, as evidenced in the latest quarter, we would remain on the sidelines with respect to the current investment proposition.
--Richard Jahnke, Briefing.com
09:19 am Kohl's Corp (KSS)
56.85: Kohl's Corp. is allowing shareholders to end their week on a high note after announcing first-quarter earnings of $167.2 million, or $0.48 per share, $0.02 better than a Reuters Estimates consensus of $0.46. The store said the positive financials were due largely to a surge in same-store sales in April.
Total sales at the the Menomonee Falls, Wisconsin-based company jumped 16.1%, climbing to $3.18 bln from $2.74 bln a year ago. Sales at stores open longer than a year climbed 6.9% in the quarter, helped in large part by a 13.4% surge last month. Revenues were said to have risen 16.1% year over year to $3.18 bln, versus the consensus of $3.17 bln.
While Kohl's issued in-line guidance for the second quarter, with earnings per share of $0.61 to $0.64 versus $0.62 consensus, it raised its guidance for the fiscal year of 2007. The company said it saw earnings per share of $2.91 to $3.02, up from $2.74 to $2.87. That compared to consensus of $2.91.
The company, which has a market cap of about $19.64 bln, continues its impressive growth pattern. Kohl's opened 17 new stores in the quarter and Kohl's officials said they expect to open another 85 locations in the third and fourth quarters of the year. The company said it expects to open a total of 200 new outlets in 2006 and 2007 and as many as 500 stores over the next five years.
In March, Kohl's announced it entered into a strategic credit card alliance with JPMorgan Chase (JPM). Under the terms of the deal, the investment bank purchases Kohl's private label credit card accounts and the outstanding balances associated with the accounts for approximately $1.5 billion. Kohl's handles all customer service functions and received payments related to the profitability of the program.
Kohl's can convert its receivables connected to the deal into cash, and that enables Kohl's to repurchase stock, fund its store expansion, and use the funds for general corporate purposes. In conjunction with the deal, Kohl's board authorized a $2 billion share repurchase program that the company said Thursday is expected to be completed in approximately two to three years.
--Christine Marie Nielsen, Briefing.com
08:41 am Nvidia Corp (NVDA)
28.30: Shares in the world's number three computer-graphics chip maker, rose in extended trading following a solid quarterly result despite seasonal weakness. Net income grew 41% to $90.7 mln, or 23 cents per share on rising demand for chipsets. Excluding costs from stock-based compensation, per share profits of 29 cents bested expectations by a penny.
Revenues rose 16.8% over the prior year and 8% sequentially to $681.8 mln - a slight upside over estimates. The Santa Clara, California-based company reported seeing broad-based growth in graphic processor units (GPUs), handhelds, and consumer electronics. It looks to the adoption of Microsoft's (MSFT) Vista, high-definition video, and Sony's (SNE) Playstation 3 released in November, as key growth drivers. Gross margins widened by 220 basis points q/q to $42.4% due to an improved product mix. Of concern, operating expenses grew 15% sequentially and inventories rose 36%, which the company indicated was due to product ramps.
Nvidia forecasts sales will be unchanged for the second quarter, along with flat gross margins and higher operating expenses. EPS guidance of $0.29, excluding option expenses, is a penny ahead of consensus. At 23.6x forward earnings, the stock appears priced to perfection. Given its seasonality, we would be sitting on the sidelines throughout the summer looking for a better entry point ahead of the third quarter ramp into the holiday season.
--Kimberly DuBord, Briefing.com
09:40 am General Motors: KeyBanc Capital Mkts / McDonald upgrades Hold to Buy. Target $35. Firm ups rating and target based primarily on their belief that 1) the UAW-GM-DPH negotiations will be successfully completed with no material labor disruptions; 2) GM's earnings will improve materially in 2006 and 2007 driven primarily by the introduction of the co's new full-size SUVs and pickup trucks; and 3) cost savings initiatives. Additionally, the firm says they are more bullish on the longer-term outlook for GM as they believe 1) the 2007 contract negotiations with the UAW will likely result in a material reduction in structural costs; and 2) the changes underway to streamline the co's global product development process will yield material benefits in terms of lowering product costs, reducing product development times and improving product quality.
09:39 am ViaSat: CE Unterberg Towbin downgrades Buy to Market Perform. Firm downgrades based on the co's growth, which the firm thinks will remain robust. While firms believes upside is possible from commerical endeavors, they do not think it is sufficient to change estimates enough to change their recommendation. Firm says there are business units that could provide upside to the revenue estimates, but firm has already built in substantial growth for commercial broadband, information security and MIDS, the areas most likely to deliver upside.
09:38 am Newfield Expl: UBS reiterates Buy. Target $55 to $65. Firm is saying their takeaways from the analyst meeting were 1) mgmt's high conviction in success of play came through in the presentation. 2) recent wells being drilled in play are exceeding baseline assumptions & would rank in top 40% in Barnett shale; 3) potential upside to their N.A.V assumptions exists in several areas (e.g costs, infill, acreage prospectivity, multi zone completion).
09:35 am Acorda Therapeutics: Cowen & Co initiates Outperform. Firm is saying that they are optimistic that Fampridine's Phase III trial will be successful. As walking disability is a major unmet need in multiple sclerosis, firm's consultants expect Fampridine would enjoy meaningful use, and firm believes that it could have $175 - $200 mln peak potential. Firms says that while there is clinical development risk associated with Fampridine, Acorda is trading at a deep discount to its peer Phase III cos suggesting that Wall Street is giving it little credit for Fampridine's potential. Firm expect Acorda to outperform the market over the next 12-24 months as Fampridine successfully completes its Phase III program.
09:34 am Threshold Pharma: Lazard Captial downgrades Buy to Hold. Firm is noting that TH-070 Phase III trial placed on clinical hold due to apparent drug-related significant liver enzyme abnormalities. The firm says given that TH-070 is used by oncologists at significantly higher doses than the current BPH trials with no signs of liver toxicity, this adverse event was unexpected.They are removing TH-070 worldwide sales ests from their model. They expect safety concerns to outweigh possible positive efficacy results from the upcoming Phase II and Phase III trial results, reducing the likelihood of approval and market potential if approved.
09:33 am Basic Energy Services: RBC Capital Mkts reiterates Underperform . Target $36 to $45. Firm is saying BAS has not seen any change in customer behavior despite the pullback in natural gas prices. The firm says the market conditions remain "very" strong across all operating segments. |
