Robust data inspires Wall Street's bulls
By Julie Rannazzisi
Tuesday May 14, 3:14 pm Eastern Time
NEW YORK (CBS.MW) -- Data pointing to a still-robust consumer backed up hopes that the economy will continue to strengthen and raised Wall Street's spirits Tuesday, hurling shares sharply higher.
Better-than-expected earnings news from retailing giant Wal-Mart and an upgrade of chip colossus Intel added intensity to the buying spree, dealing the top averages their second straight session of considerable upside.
Retail sales shot up 1.2 percent in April, breezing past expectations for a 0.7 percent increase. The core, which excludes the volatile auto component, added 1 percent vs. the 0.5 percent anticipated by economists polled by CBS.MarketWatch.com. and check economic calendar and forecasts.
The market was awash in green, with most sectors participating in the upside. Gold and oil service stocks were the exception, as they tend to advance when the rest of the market is heading south.
The most heated buying took place in the tech sector, with investors gobbling up chip, Internet and software issues. The broader market found the best sponsorship in the brokerage, biotech, retail and airline sectors.
The Dow Jones Industrial Average (CBOT: ^DJI - news) soared 171 points, or 1.7 percent, to 10,280, fueled by brisk buying in shares of Wal-Mart, Intel, Microsoft, Home Depot and Caterpillar. Taking a dip into the minus column were Johnson & Johnson, Philip Morris, McDonald's, Coca-Cola and Procter & Gamble.
The Nasdaq Composite (NasdaqSC: ^IXIC - news) flew 65 points, or 3.9 percent, to 1,717 and the Nasdaq 100 Index (NasdaqSC: ^NDX - news) raced up 62 points, or 5.1 percent, to 1,304.
Though investors were giddy Tuesday, professional money managers were sour on techs according to Merrill Lynch's latest global fund manager survey.
The brokerage found that 29 percent of the 293 fund managers polled for the May survey said they planned to underweight tech stocks in the future, up from just 9 percent in April. The fund managers are keeping a close eye on tech valuations and balance sheets in addition to earnings growth, according to Merrill's chief global investment strategist David Bowers.
And 26 percent of the fund managers surveyed planned to overweight the financial sector, up from only 4 percent in the prior month.
The Standard & Poor's 500 Index (CBOE: ^SPX - news) jumped 2 percent while the Russell 2000 Index (CBOE: ^RUT - news) of small-capitalization stocks rose 2.2 percent.
Morgan Stanley's Steve Galbraith said his chief concerns on stocks remain valuation and equity risk premiums. Still, he feels investors have become too defensive in their portfolios, with excessive holdings in areas like consumer staples and those healthcare companies that have been making their numbers.
"We think the best risk-reward is in pro-cyclical areas like basic materials, industrials, consumer discretionary and some media. The next big call is likely to be TMT (tech/media/telecom). Telco, for example, has reached a 19-year low in terms of market cap. It appears that we've about reached the point where investors are throwing in the towel on these stocks," Galbraith told clients in a research note.
Volume totaled 1.11 billion on the NYSE and at 1.91 billion on the Nasdaq Stock Market. Market breadth was markedly positive, with advancers squashing decliners by 22 to 10 on the NYSE and by 24 to 11 on the Nasdaq.
Separately, Standard & Poor's said it was changing they way it evaluates corporate earnings to take into account things like options, restructuring costs, pension fund contributions and goodwill. The move aims at more accurately reflecting companies' costs of doing business.
Inside the retail sales
The unexpectedly bullish reading in the April retail numbers was partly because the government figures were adjusted for the early Easter while private-sector data were not.
"The Commerce Dept.'s seasonal adjustment process took some of the strength in March and put it in April, when Easter usually occurs. That is the only explanation we can come up with that reconciles the Commerce numbers with what the nation' major retailers are reporting, which is that sales were remarkably strong in March and fairly soft in April. If we are right, the financial markets' reaction may be a bit of an overreaction," conceded Mark Vitner of Wachovia Securities.
But another economist claimed the report was unequivocally strong.
"Households are continuing to spend money at an awesome pace. You can make any adjustment you want [but] this report was strong,' remarked Joel Naroff, chief economist at Naroff Economic Advisors.
"How much longer can firms continue to reduce inventories? Shelves were emptied during the first quarter even after the massive reduction posted in the fourth quarter of last year. With household spending holding up, orders for goods will have to improve even more. This means that the manufacturing sector should be in for a period of expanding production," he concluded.
But one economist points out that the issue of sustainability on the spending front remains an unresolved one.
"In my view, consumers have been unbelievable in the way they have continued to spend despite the growth of overall debt burdens. [But] we should realize that the word 'unbelievable' is not a synonym for the word 'sustainable' -- which happens to be the real buzzword for monetary policymakers at the moment," commented Anthony Chan, chief economist at Banc One Investment Advisors.
"While this report provides very encouraging news for economic growth in the second quarter, it still doesn't fully resolve the sustainability issue that can only be confirmed when overall growth in the economy becomes more broad-based and includes things such as capital spending," he concluded.
Intel rallies on upgrade; PC makers also swell
Intel shares rallied 5.1 percent after Robertson Stephens raised its view on the Dow stock (NasdaqNM: INTC - news) to a "buy" rating from a "market perform." The firm believes Intel will avoid cutting chip prices in its fiscal third quarter. That would mark the first three-month period in over five years of steady prices for Intel.
A number of tech bellwethers are opening their quarterly books this week. Among them: chip equipment maker Applied Materials and PC makers Dell Computer and Hewlett-Packard.
Commenting on Dell (NasdaqNM: DELL - news) , SG Cowen said it's holding on to a somewhat cautious view of demand drivers for the balance of the year and feels that Dell shares are "relatively richly priced." Cowen maintains that H-P shares (NYSE: HPQ - news) are more undervalued but acknowledged that the company faces more execution issues. H-P tacked on 2 percent and Dell rose 5.2 percent. See Hardware Stocks.
Meanwhile, WorldCom shares (NasdaqNM: WCOM - news) continued to bleed, sliding another 6.3 percent on record volume. Standard & Poor's said late Monday that it was removing the carrier from the S&P 500 Index due to a lack of representation. Apollo Group (NasdaqNM: APOL - news) is set to replace the troubled telecom company, with its shares up 2.3 percent as index fund managers buy up the stock to realign their portfolios. While WorldCom took a nosedive, other telecom firms did some muscle-flexing: Dow stock SBC Communications rose 2.7 percent while Qwest added 5.8 percent and Sprint 2.3 percent. SBC (NYSE: SBC - news) announced it would slice 5,000 jobs in the second quarter due to the soggy economy and a "burdensome" regulatory environment.
A near 11-percent spike in shares of Amazon.com propelled the Internet sector following sunny comments from US Bancorp Piper Jaffray. The firm said it believes Amazon had a very strong April and is on track for another solid quarter, which should provide more positive momentum despite a relatively rich valuation. And Yahoo (NasdaqNM: YHOO - news) rallied 8.8 percent, with US Bancorp noting that "steady growth" is the key trend at the Net portal, with "slight upside a possibility."
Storage stocks mirrored the sharp gains in the rest of the hardware sector, with Brocade Communications (NasdaqNM: BRCD - news) especially ebullient, racing up 10 percent following news its SilkWorm 12000 core fabric network switch will be used by IBM (NYSE: IBM - news) .
Wal-Mart jumps after earnings
Wal-Mart's rally bulled up the retail sector, sending the group's main gauge 1.3 percent higher. The company (NYSE: WMT - news) checked in with first-quarter earnings-per-share of 37 cents vs. the 36 cents that had been expected by Thomson Financial/First Call.
Wal-Mart shares gained 4.3 percent and fellow Dow component Home Depot tacked on 3.8 percent. Morgan Stanley said just before Wal-Mart's earnings release that the recent pullback in the retailer's stock represented a "buying opportunity" given the company's "exceptional inventory management" and "accelerating comparable-store sales."
In the meantime, UBS Warburg upped its view on Sears (NYSE: S - news) to a "buy" from a "hold" to reflect its "enthusiasm" for the retailer's announced acquisition of Lands' End (NYSE: LE - news) on Monday. The brokerage also lifted its 12-month price target on Sears to $60 from $55 and upped its 5-year earnings growth rate forecast. Sears climbed 4.2 percent.
OfficeMax shares (NYSE: OMX - news) flew 17.3 percent after breezing past Wall Street's expectations by posting a profit from operations in the first quarter vs. an expected loss.
Brokerage issues (AMEX: ^XBD - news) lifted nicely, with Merrill Lynch up 1.4 percent, Bear Stearns up 2.1 percent and Lehman Brothers up 2.2 percent. Merrill's (NYSE: MER - news) top executive said that the company was working "diligently" to reach a settlement with the New York attorney general, though he provided no timeline as to when a resolution would be reached. Check the article.
Biotech stocks were among the best performers in the broad market, with leader Amgen (NasdaqNM: AMGN - news) up 7.1 percent after Merrill Lynch initiated coverage of the firm with a mid- and long-term "buy" rating. And Human Genome Sciences (NasdaqNM: HGSI - news) tacked on 6.1 percent after receiving FDA approval to begin clinical trials for a new anti-caner drug.
A rare red spot in the market was found among oil service stocks, with the sector's main barometer (Philadelphia: ^OSX - news) off 0.9 percent. Bear Stearns lowered its rating on both Halliburton (NYSE: HAL - news) and Schlumberger (NYSE: SLB - news) to a "neutral" from an "attractive" rating, sending shares down 2.7 percent and 2.8 percent, respectively.
In the media space, shares of News Corp. (NYSE: NWS - news) spiked 6 percent higher while shares of spinoff Fox Entertainment Group (NYSE: FOX - news) rallied over 7 percent. News Corp. surpassed Wall Street's projections in its fiscal third quarter.
Agricultural equipment maker Deere & Co. (NYSE: DE - news) ran up 7.8 percent after posting a second-quarter profit that cruised past the Wall Street consensus estimate thanks to successful cost-cutting initiatives and brisk foreign sales.
Read Movers & Shakers for the latest individual stock action.
Treasurys slide after solid data
Government issues got slammed following the release of the robust retail sales numbers, perhaps the week's most market-moving event. Yields on long-dated issues shot up to their highest level in 6 weeks.
Fed tightening expectations were immediately ratcheted up after being consistently sliced over the past six weeks.
The July fed funds contract now implies an overnight rate of 1.82 percent vs. 1.795 percent at the close Monday. That means traders are assigning an almost 30-percent chance of a 25-basis-point nudge up in rates at the June FOMC meeting vs. a less than 20 percent chance on Monday.
Going forward, the October fed funds contract is implying an overnight rate of 2.14 percent, which means one 25-basis-point rate increase is fully priced in and a close to 60 percent chance of a second 1/4 point hike is anticipated by the end of September. Three FOMC meetings will take place by then. On Monday, only a 40-percent probability was given to a second rate hike by the end of the third quarter.
The 10-year Treasury note declined 1/2 to yield (CBOE: ^TNX - news) 5.295 percent while the 30-year government bond slumped 28/32 to yield (CBOE: ^TYX - news) 5.755 percent.
In the foreign exchange sector, the dollar perked up even more following the release of the bullish data: the greenback was up 0.6 percent to 128.56 yen while the euro declined 1.1 percent to 90.22 cents. |
