Stocks Dodge Friendly Fire
URL:http://www.smartmoney.com/bn/index.cfm?story=20021115084528
By Igor Greenwald
November 15, 2002
WALL STREET refused to lose on Friday, buying just enough stocks to offset a sudden surge in producer prices, analyst downgrades of two blue-chip leaders and a vague new terror warning.
After trailing throughout the morning, the Dow recovered to gain 37 points to 8579, while the Nasdaq slipped a fraction at 1411. The S&P 500 rose 5 to 909.
That wrapped up another profitable week that saw the Dow add 42 points, roughly 0.5%, while the S&P 500 tacked on 15 points, or 1.7%. The real action was over at the Nasdaq, its namesake index rising 51 points for a weekly boost of nearly 4%.
Computer-hardware suppliers and airlines lost lift on Friday. Insurers fared best as the lame-duck Congress readied legislation guaranteeing government payments of up to $100 billion for claims stemming from future terrorist strikes. The measure has already passed the House and appeared headed for approval in the Senate sometime next week.
The market gradually shrugged off a surprising leap in wholesale prices. The producer price index spiked 1.1% in October, boosted by a decrease in auto incentives as manufacturers rolled out new models. The core rate excluding volatile food and energy prices rose 0.5%, its biggest increase since September 1999, at the height of the last economic boom.
Investors who've been gauging the risks of Japan-style deflation may yet latch on to a new worry, since rising inflation could discourage the Federal Reserve from further cutting interest rates should the economy continue to struggle. For now, though, traders were willing to view the data as an aberration caused by price hikes on autos and gasoline.
Corporate headlines favored skeptics. Top PC maker Dell Computer (DELL) merely met estimates and affirmed expectations after hitting a new one-year high on hopes that it would provide a bonus in its earnings report.
Merrill Lynch urged clients to sell Intel (INTC) shares, while J.P. Morgan turned on General Electric (GE) ahead of "very messy" fourth-quarter accounting.
Meanwhile, the FBI warned anybody who'd listen that al Qaeda may be planning "spectacular attacks that meet several criteria: high symbolic value, mass casualties, severe damage to the U.S. economy and maximum psychological trauma."
The agency offered few specifics, beyond speculation that terrorists could opt for tried-and-true methods such as truck or boat bombs aimed at particularly vulnerable targets "within the aviation, petroleum and nuclear sectors as well as significant national landmarks." Authorities are worried that the recent tape of threats likely recorded by Osama bin Laden will prod his followers here and abroad into action.
The market responded with prudence, not fear. Stocks' surge Thursday on news that retail sales are holding up much better than consumer confidence persuaded some investors that the short-term trend is higher still. Stronger equity markets, in turn, are now starting to lift shoppers' mood, as the Michigan survey of consumer sentiment jumped to a reading of 85 from October's nine-year low of 80.6.
Bonds didn't offer an enticing alternative to stocks. The yield on the 10-year Treasury note slipped to 4.02% from 4.04% Thursday, far above its 3.83% level on Wednesday. The two-year note's yield was little changed at 1.84%, up from Wednesday's 1.70%. Treasurys failed to make much headway despite an unexpectedly sharp 0.8% decline in October's industrial production.
Dell shares dipped 4% even though the company posted a 31% rise in profits, on sales that swelled 22% in a year's time. Dell noted that its unit shipments were up 28% year-over-year, versus a meager 2% rise for its competitors.
But there's a limit to market-share gains in the absence of a fundamental upturn in demand. "While we saw a few encouraging signs in the third quarter, it is still too soon to call a rebound in overall IT spending," said Dell Chief Financial Officer Jim Schneider. "The demand environment has not changed. It remains stable in the U.S., with some other regions still experiencing softness."
Meanwhile, Wall Street is getting increasingly skittish about General Electric ahead of the conglomerate's analyst meeting next week. J.P. Morgan's downgrade comes from the same analyst who hurt GE's weakening stock a week ago by raising questions about the high debt level at the GE Capital financial subsidiary. Lehman Brothers has also warned that GE may have to rein in expectations, as well as inject fresh money into its struggling Employers Reinsurance unit. GE's stock fell 3%.
Intel shares also retreated 3% in the wake of Merrill's downgrade to Sell from Neutral, attributed by the brokerage to "a rethink over long-term valuations in the global chip-making sector." Like Dell's stock, Intel shares have rallied strongly over the last month, rising 42% since the top chip maker's costly sales warning in mid-October. "Using reasonable growth rates and discount assumptions, it's hard to make most of our stocks look cheap," wrote Merrill semiconductor analyst Joe Osha.
The brokerage was kinder to graphics chip maker Nvidia (NVDA), boosting its shares to a Buy from Neutral. That was good for a 7% pop.
Retailers were another bright spot, Gap (GPS) shares gaining 7% after an earnings report that reversed the year-ago loss and beat the recently rising consensus forecast by a penny a share. The retailer is in the midst of a turnaround emphasizing a return to basic fashions after a disastrous spell on the cutting edge. But it remained cautious on the upcoming holiday season, having already warned that the recent West Coast dockworkers' lockout will trim profits.
Fast-growing department-store chain Kohl's (KSS) also beat expectations with profits that rose 33% in a year's time. It opened 75 stores in that span, a 20% increase. December's same-store sales are expected to be up 5% or more year-over-year. The company has recorded annual earnings growth of 30% in each of the last 11 quarters, though its latest forecast puts that streak in jeopardy. The stock traded up 5%.
Investors also got a real sugar high from jelly maker J.M. Smucker (SJM), which made its recent acquisitions of the Jif peanut butter and Crisco cooking oil brands pay off with better sales and an improved profit outlook. The stock sweetened 14%.
In contrast, Dell competitor Gateway (GTW) slumped 15% after revealing for the first time a two-year old Securities and Exchange Commission probe tied to a past earnings restatement. That might not have been such a big deal if Dell weren't eating Gateway's lunch.
Meanwhile, another bullish strategist got put out to pasture when Lehman laid off its chief market handicapper Jeffrey Applegate as part of a cut eliminating some 500 jobs, roughly 4% of the total. Applegate went out recommending an 80% exposure to stocks, one of the highest ratios on Wall Street. Late last month, Credit Suisse First Boston axed its own optimistic market guru, Tom Galvin. Merrill's sanguine chief economist Richard Steinberg lost his job last week. |
