From Briefing.com: 5:24 pm Weekly Wrap
The previous weekly wrap concluded with "the fundamentals haven't tanked as much as the market." This, week, the market came to realize that, and found its footing.
The week opened with a continuation of the poor sentiment from prior weeks. The S&P opened sharply lower on Monday morning and even though it came off its worst levels, still closed with a loss of 5 points. There was no specific news to account for the decline. Anything remotely bearish could be ascribed as a factor, but it really was just poor sentiment. Underlying that was concern that the Fed would go too far in raising rates and that economic growth would slow significantly.
This thought process included some ridiculous talk that a decline in commodity prices was bearish for stocks because it reflected weak global demand. But the daily fluctuations in commodity prices are driven much more by speculative positions than daily changes in underlying demand from China.
The market was extremely volatile on Tuesday. The S&P was up more than 10 points in the morning but gave way to a late sell-off to end down another 5 points. There was again no real news that moved the market. Sentiment was the overriding factor, and that sentiment was mostly about fear. That even included highly suspect worries about the impact of avian flu.
Wednesday was another very volatile day with one exception - the S&P closed with a 2 point gain. A more positive tone was supported by a surprising increase in April new home sales. This helped ease fears about the economic outlook.
Thursday the market rocketed higher. The S&P gained 14 points. Press reports ascribed it in part to an upward revision to first quarter real GDP to 5.3% from an originally reported 4.8% and an unchanged price deflator. Again, however, it was not so much the actual data as that fears were being squeezed out of the market on numbers that were largely in line with expectations.
That was the case on Friday as well. The April core personal consumption deflator (PCE) was up 0.2%. That was in line with expectations. It pushed the year-over-year increase in this closely watched inflation measure to 2.1%, up from 2.0% in March. That is above the Fed's forecasted range of 1 3/4% to 2% for all of 2006. There was nothing particularly bullish about the data. It also later became widely known that the increase was actually 0.249%. A slight fluctuation in one component and it would have been a 0.3% gain.
No matter. The market was comforted by the as-expected 0.2%, and the S&P gained another 6 points on Friday.
For the week, the fundamentals were little changed. The economic data was mixed. April durable goods orders on Wednesday were weaker than expected while new home sales were stronger than expected. Thursday brought the GDP data noted above and an as-expected dip in existing home sales. The core PCE deflator data was released on Friday.
There were very few earnings reports, and none of broad impact. The yield on the 10-year note dipped to 5.05% from 5.12%. Oil rose to $71 a barrel from $69 a barrel. And, despite all the talk about implications for Fed policy of every bit of news, fed funds rate futures barely moved. They still incorporate expectations of one more quarter-point rate hike this year. All in all, the news was mixed at best.
Yet, the market tone went from decidedly bearish at the start of the week to neutral or even a bit upbeat by the end of the week. This was due to the fact that the worst fears were taken out of the market. The economy isn't about to hit a wall, and earnings growth will be at least decent through year-end. Inflation may be firming a bit, but not tremendously. The Fed may have to raise rates again, but probably just one more time.
The fear that the Fed may go too far, drive the economy into the ground, and completely ruin the stock market outlook, has eased considerably.
Index Started Week Ended Week Change % Change YTD
DJIA 11144.06 11278.61 134.55 1.2 % 5.2 %
Nasdaq 2193.88 2210.37 16.49 0.8 % 0.2 %
S&P 500 1267.03 1280.16 13.13 1.0 % 2.6 %
Russell 2000 722.54 729.55 7.01 1.0 % 8.4 %
09:29 am Credence: Am Tech/JSA Research downgrades Buy to Hold. Firm lowers rating as they believe its long-term growth strategy is uncertain given current setbacks. CMOS grew slower in revs and bookings versus its competitive peers and it appears its SoC business is losing share. Firm believes the larger setback is a customer's cancellation of the flash tester program, which is subsequently leading CMOS to shut down its memory tester business. Firm is reducing their CY07 EPS from $0.38 to $0.22. Although the stock is at a 52-week low and valuation seems inexpensive, CMOS has fallen behind and is trying to regroup with an uncertain growth future. Firm sees no positive stock catalysts on the horizon.
3:33PM Market View: Turnaround Week (TECHX) : After two weeks of hefty selling the market has staged a solid recovery over the last three sessions. The S&P 500 fell more than 6% off its May high to Wednesday's intraday low but support near the 50% retracement of the Oct 2005/May 2006 rally, the 2006 intraday low from Jan and the Aug/Sep 2005 peaks at 1247/1245 provide a solid floor for the bounce. To a great extent leadership during the rebound has come from the sectors that paced way up and down in May (commodity/energy) but it has broadened a bit today (Steel +2.8%, Coal +2.2%, Airline +2.1%, Paper +2.1%, Broker/Dealer +2%, Biotech +1.7%, Mining +1.5%, Casino +1.4%.
1:56PM Market View: Steel -STQ- continues steady climb resistance in view (TECHX) : Following a mixed start to the day the STQ (368.46 +2.8%) has marched steadily higher over the last three plus hours. This brings the rebound off this week's double bottom to approximately 11.8% and the STQ to within reach of its 50/20 exp at 370/371.50 (April low/breakdown point at 373). Obviously bull momentum has control but given the extent of the run and the proximity to resistance would be watching for signs of at least a short term pause. Top performers include: STLD +3.7% (at 59.06, 50 sma 59.20, 20 ema 59.68), AKS +3.8% (session high 14.06, April low/breakdown point 14.20, 50 sma 14.41), OS +4.3% (at 45.83, 20 ema 45.95, 50 ema 46.73), X +3.1%, IPS +2.1%, CRS +2.3%, NUE +3%.
12:38PM Motorola confirms it receives $410 mln payment following completion of Telsim Sale (MOT) 21.27 +0.22 : Co confirms that Vodafone has completed its acquisition of Turkish cellular phone operator, Telsim Mobil Telekomunikasyon. Following completion of the transaction, Motorola received a cash payment of $410 mln pursuant to an agreement previously reached to settle Motorola's financial and legal claims against Telsim and certain other parties. The co issued the following statement: "We congratulate the Turkish Savings and Deposit Insurance Fund and Vodafone on the successful tender and transfer of Telsim. We appreciate TMSF's diligent efforts throughout this process to ensure a successful outcome for all parties." (see our 9:15 comment)
12:19PM Advanced Energy: Thomas M. Rohrs elected to Advanced Energy Board of Directors (AEIS) 14.19 +0.69 : Co announced that Thomas M. Rohrs was elected by the stockholders as a new director on May 24, 2006. Mr. Rohrs is currently chairman and chief executive officer of Electroglas, Inc., a supplier of wafer probing technologies to the semiconductor industry, a position he has held since April 7, 2006.
10:18 am Merck (MRK)
34.65 +0.26: Merck & Co. announced on Friday that the U.S. Food and Drug Administration has approved its new vaccine Zostavax for the prevention of herpes zoster, also known as shingles, in people 60 years of age or older. Although the approval is welcome news for the beleaguered drug maker, which also hopes to receive FDA approval for Gardasil, its vaccine against human papillomavirus, ongoing litigation with respect to its withdrawn painkiller Vioxx remains a persistent distraction for management, and a significant overhang on the stock.
Shingles, which is typically marked by a painful, blistering rash, is caused by the reactivation of the virus that causes chickenpox, the company said. The disease can occur without warning at anytime and can lead to severe complications, including long-term nerve pain which can last for months or even years. There are an estimated 1 million new cases of shingles each year, with roughly 40% to 50% affecting people over the age of 60.
"Zostavax is the first and only medical option approved for the prevention of shingles," said William Schaffner, M.D., professor of preventative medicine, Vanderbilt University School of Medicine. "Approval of a vaccine against shingles represents a major public health advance for people 60 and older," he added.
Merck estimates its market for the single-dose vaccine at about 50 million people age 60 and older in America and 100 million in Europe. The company said a single dose will cost $152.50.
--Richard Jahnke, Briefing.com
10:11 am Google Inc. (GOOG)
382.92 -0.07: Only hours after eBay Inc. (EBAY) Thursday said it would form an add-revenue-share deal with Yahoo! Inc. (YHOO), Google Inc. (GOOG) said it will bundle some of its software on Dell Inc.'s (DELL) PCs, providing the online search engine leader with a weapon against rival Microsoft Corp. (MSFT).
Shares in both companies saw gains immediately after the announcement, reflecting investor thoughts that the deal could be a precursor for even more valuable exchanges between the two technology giants.
Financial terms of Google's deal with Dell weren't disclosed, but it's believed that the amount of the deal isn't large enough to significantly impact either of the companies' finances. When talk of negotiations between the two companies surfaced about four months ago, Google reportedly was considering paying Dell up to $1 billion to load its software over a three-year period.
Competition in the tech space continues to heat up and cause companies who are otherwise rivals to band together. The agreement with eBay afforded Yahoo a way to narrow Google's lead in the generation of advertising sales.
--Christine Marie Nielsen, Briefing.com
09:24 am Las Vegas Sands (LVS)
63.67: The Singapore government on Friday said it awarded Las Vegas Sands Corp. a license to develop and operate the country's first casino-resort, which is expected to cost more than $3 billion. The government chose Las Vegas Sands from four other leading casino operators, including the team of MGM Mirage (MGM) and CapitaLand Ltd., the largest developer in Southeast Asia, and the team of Harrah's Entertainment (HET) and Singapore's Keppel Land Ltd.
The Marina Bay Sands project would be Singapore's first casino-resort. After the government lifted its ban on gambling last year to help boost tourism and economic growth, many international casino operators have been eager to invest in the rapidly growing region, including Las Vegas Sands, which also owns the The Venetian Resort Hotel Casino and The Sands Expo in Las Vegas and The Sands Macau Casino in the Chinese enclave of Macau.
With respect to the government's decision, Las Vegas Sands said it looks forward to ramping up its development plans to deliver on its commitment to opening the Marina Bay Sands in 2009. The company will have a 30-year concession to operate the casino in a complex which includes a 2,500 room hotel, as well as space for conventions and exhibitions, retail space, fine dining restaurants, and an array of entertainment offerings - making it the world's costliest casino, exceeding Wynn Resorts' (WYNN) $2.7 billion Wynn Las Vegas.
Based on the announcement, shares of the company are trading sharply higher in pre-market activity. Buoyed by continued strong growth in the gaming industry, which remains a bright spot within the Consumer Discretionary sector, the stock is up approximately 61% since the beginning of the year. At the current level, shares are trading at 50.5x trailing twelve month earnings, a premium to 24.3x for MGM and 21.2x for HET, given its comparative growth profile.
--Richard Jahnke, Briefing.com
09:15 am Mittal Steel Co. (MT)
32.31: Shares in Mittal Steel Company NV were headed higher Friday following news from second-largest steelmaker Arcelor SA that it had reached a deal giving it a controlling stake in Russia's largest steelmaker Severstal and $1.59 billion in cash in exchange for 32% of Arcelor.
Luxembourg-based Arcelor made the move to help fend off a hostile bid from rival Mittal, which has been bidding for Arcelor since early 2006. Its latest offer was a bid of $32.9 billion and would have reduced the Mittal's family stake in the combined company to 45%.
Arcelor's 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. It has also said it would ask its shareholders to back the repurchase of up to 150 million of its shares as part of a strategy against Mittal's hostile offer.
Both companies saw declines in first-quarter profits. Mittal saw profits of $743 million, or $1.06 a share, down from the year-ago total of $1.15 billion, or $1.78 a share. Arcelor reported a profit of $968 million for the January through March quarter, down nearly 20% from 934 million a year earlier as steel prices fell and oil costs rose. Financial results for the period have been converted from euros.
Media reports say Mittal has characterized Arcelor's deal with Severstal as a "second-class combination." Mittal executives said Arcelor's board seemed to be manipulating shareholders to their own ends. Shares in Arcelor fell about 3% in a knee-jerk reaction to the deal.
--Christine Marie Nielsen, Briefing.com
08:50 am Chico's FAS Inc. (CHS)
29.98: Specialty-clothing retailer Chico's FAS Inc. matched expectations with its financials Thursday, but issued lower guidance, noting that the company expects to make investments in newer brands that may hurt its operating margins in the remainder of the year. Shares of Chico's have lost almost a third of their value so far in 2006 as growth in the company has slowed.
The Fort Myers, Fla.-based company reported first-quarter earnings of $0.29 per share, in line with a Reuters Estimates consensus of $0.29. Revenues rose 94% year over year to $392 million versus consensus of $399.6 million.
Meanwhile, the company, which has a market cap of $5.46 billion, said it sees 2007 earnings per share of $1.20 to $1.24 from $1.23 to $1.26 versus $1.23 consensus. The company reaffirmed mid-single digit same store sales increases for the Chico's brand for the balance of the year.
The company also said it plans to increase its square footage by 30% this year, with another 25% gain planned for fiscal 2007.
--Christine Marie Nielsen, Briefing.com
10:15 am Borland: Banc of America Sec upgrades Neutral to Buy. Firm ups rating saying that following a 23% year-to-date pullback they believe co has risk/reward profile and valuation have become compelling, as much of the execution risk appears baked in at current levels. They believe the potential downside from here seems limited and 1Q results surpassed our expectations, patience will be required as we expect choppy N/T results as Borland attempts to divest its IDE business and complete the integration of Segue. Firm says they see 3 primary risks to their call: a delay in the IDE sale, an ongoing sales reorg. in EMEA and A/P, and the pace of cash burn remains uncertain for 2Q and 3Q. Finally, generating mid-single digit growth in the ALM biz by 4Q06 will also be a key.
10:00 am Sirius Satellite: Stifel Nicolaus reiterates Buy. Target $7.5 to $6. Firm lowers price tgt noting SIRI reiterated guidance this week after XMSR lowered guidance due to slowing retail additions. They believe SIRI had a high degree of visibility into how its subs were coming in as of May 23rd, so they would guess May is shaping up on track. They have already reported that the April NPD data suggested gross additions are tracking up ~53% y/y. But the firm says long-term guidance is at risk if SIRI also faces slowing gross retail adds. They think one problem with XM was that the Street has underestimated how much a slowdown in gross adds translates into an even worse slowdown in net adds. The firm says this occurs because of the higher sub base - the same churn rate results in a higher absolute number of subs churning. It may be too early to conclude that gross retail sales will slow for SIRI, particularly if new wearable products excite consumers, a legitimate possibility, in their view. However, given tough Howard Stern comps starting in 4Q and recent weakness at XM (cockroach theory), they believe it's logical to recognize the risk now.
09:58 am XM Satellite: Stifel Nicolaus reiterates Buy. Target $25 to $20. Firm cuts price tgt as they believe that guidance may still be aggressive. Firm believes possible reasons behind lower retail guidance are: a slowdown in marketing/subsidy spending; tough y/y comps; some saturation among those who want XM and are willing to go through the trouble to install it; Howard Stern hype may have dislocated 2Q06 sector growth into 4Q05/1Q06; and gas prices may be impacting growth as satellite radio may also be seen as a commuting cost. In firms view, one positive is EBITDA and EPS are higher as XM is sacrificing growth for near-term profitability.
09:57 am Smith & Wesson: Cowen & Co initiates Outperform. Firm initiates with an outperform saying the #1 handgun producer Smith & Wesson is a turnaround with new mgmt leveraging a strong brand to gain share in its fragmented market. The firm notes it's achieved 20%+ sales growth so far in FY06 from revamped marketing, new products, new customers, & productivity gains. They look for EPS to lift from FY06's 19c to 30c in FY07 and 40 in FY08 on 17-20% sales growth from new product ramp & new customer penetration; and cash flow conversion should lift to 80-100%. The firm says there's further expansion potential in long guns & defense/security areas, including M&A. They think SWB looks attractive at a 17x C07 P/E given healthy FY07-08 momentum.
09:49 am CONSOL Energy: RBC Capital Mkts initiates Outperform. Target $118. Firm initiates with an outperform as it initiates sector coverage of the US Coal Producers with an Outperform. Long-term they believe the prospects for coal look good and will be driven by growth in the world economy and the need for domestic energy independence. They note that most coal stocks had "gone parabolic" after strong 1Q06 earnings but they view that price move as fundamentally justified. They say the recent pullback in the sector, from its highs, creates a nice entry point into the group. As mentioned at 8:08 & 8:10, the firm initiated CNX and BTU with Outperforms, firm also initiated ACI with a Sector Perform.
09:48 am Embarq: RBC Capital Mkts initiates Sector Perform. Target $43. Firm initiates with sector perform and $43 tgt saying investment positives include solid broadband growth trends and the potential of multi product bundles (broadband, video via resale of Echostar's service, and future wireless resale offering) to partially offset access line losses. The firm says investment concerns include growing competition from cable telephony, overhang from Sprint (S) shareholders, lack of a wireless operation vs. certain other I.L.E.Cs, and lack of significant near-term prospects for M&A-driven growth.
09:47 am 24/7 Media: RBC Capital Mkts initiates Sector Perform. Target $10. Firm initiates with a sector perform and $10 tgt saying that through co's search and media divisions, the co benefits from increasing complexity and efficiency of online marketing. TFSM is one of the only small-cap ad services companies with significant exposure to both the Japanese and UK/European markets. Yet, the story comes with risks, including sub-industry margins, and the potential for competitive encroachment by Google and others. Firm believes the risk/reward is balanced at current levels. |
