From Briefing.com: The market traded lower in noticeable fashion on Monday and the weak dollar was to blame... or so it will be written by any number of journalists. Now, it's fine to blame the weak dollar for the losses, but only if the blame is kept in proper context, which is this: the weak dollar, vis-a-vis the yen specifically, simply provided an excuse to take some money off the table.
The story that should be told, as it was in a Briefing.com Story Stock, is that the weak dollar will help boost the U.S. economy as it improves the competitive position of U.S. companies both here and abroad. Also, there should be some mention that the major indices did just fine last week when - surprise - the yen was strengthening versus the dollar.
On Monday, though, the market was alleged to have been caught up in the notion that calls for freer-floating exchange rates at the G-7 meeting over the weekend will crimp foreign purchases of Treasury securities and force Treasury yields higher, undercutting the appeal of equities. While that may be true in its own right, it's a stretch to think participants were so caught up in that consideration that it changed their entire outlook for equities, which has been resolutely positive since March. It didn't, so don't believe the hype. What it did was give participants an excuse to take profits from an over-extended market.
Fittingly, the profit taking was concentrated in the technology sector, which was hit by added stories highlighting lofty valuations. For all of the hullabaloo surrounding the dollar, volume totals at the NYSE (1.25 bln) and the Nasdaq (1.73 bln) were a long way from suggesting any palpable sense of concern about the standing of the greenback.-- Patrick J. O'Hare, Briefing.com
6:00PM Monday After-Hours price levels vs. 4pm ET: The lackluster tone of the equity session is getting carried over into the after-hours session. As such, the S&P 500 futures are trading 0.3 points above the fair value of 1021, while the Nasdaq futures are trading 3.5 points below the fair value of 1369.
Among today's earnings reporters is the specialty retailer of automotive parts and accessories, AutoZone (AZO 89.10 -0.63), which reported its Q4 (Aug) earnings. Specifically, the company reported sales of $1.83 bln, which was slightly below the Reuters Research consensus of $1.89 bln and up 5.5%, excluding sales from the extra week included in the prior year. Gross profit margin for Q4 improved by 190 basis points (bps), while operating expenses as a percentage of sales declined by 86 bps, which resulted in an operating profit margin increase of 276 bps, to 19.7%. Excluding restructuring charges, but including the EITF 02-16 "Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor", AZO reported earnings of $2.24 per share, which compared favorably to the Reuters Research consensus of $1.95.
Several companies are providing guidance. First, Eli Lilly (LLY 59.40 +0.15), a major drug company, confirmed its Q3 (Sept) and FY03 guidance ahead of tomorrow's presentation at the Merrill Lynch Global Pharmaceutical Conference in London. Specifically, LLY reaffirmed its forecast of $0.65-0.67 for Q3 (consensus $0.66) and $2.55-2.60 for FY03 (consensus $2.57). This guidance was originally announced on July 24 and was reaffirmed on September 5. Look for more information on the guidance and its implications on the Briefing.com's Story Stocks page tomorrow.
Also issuing guidance was the food processing company, Tyson Foods (00C 13.37 -0.13), which announced that it expects Q4 (Sept) GAAP EPS to be in the range of $0.35-0.40 and FY04 EPS in a range of $0.90-1.20. According to Reuters Research, analysts on average were expecting the company to report EPS of $0.25 in Q4 and $1.05 in FY04. TSN attributed its improved expectations to the beef segment having an outstanding quarter, driven by strong domestic and international demand for U.S. beef against a reduced supply environment resulting primarily from the ban on Canadian beef imports for most of the quarter. The company added that its value added business continues to benefit from improved domestic and international market conditions in its chicken segment, and its pork segment continues to perform well in a tough environment.
For more detail on these, and other after hours developments, be sure to visit Briefing.com's In Play, Earnings Calendar and Guidance pages. -- Victoria Glikin, Briefing.com
Close Dow -109.41 at 9535.41, S&P -13.51 at 9535.41, Nasdaq -31.23 at 1874.47: Troubling headlines about the dollar and the other major currencies threw cold water on the stock market's latest leg higher as traders booked profits across the board... The G-7's decision to adopt a flexible exchange rates policy spooked the world markets, and suggested that Japan will scale back the practice of selling its currency to protect exporters... As a result, the yen skyrocketed to a two year high against the dollar, and sent the Nikkei tumbling 4.2% for its largest point fall in two years...
The greenback's resulting slump had a similar effect on the US equity market, although the latter does not imply the same effects on business... In fact, a weaker dollar boosts international demand, and translates into higher profits... Nonetheless, investors used the negative headline as an excuse to sell into the market's recent strength - as the major indices finished Friday near 52-week highs... Such an advance in a short amount of time has kept valuation concerns omnipresent, and contributed to today's reaction to (what was) not necessarily a negative development for the market...
Momentum groups such as technology, homebuilding, biotech, cyclicals, and financial paced the pullback, and incited retreats in just about every other industry group... Only the gold issues managed a gain of greater than 1% due, in part, to the $5.40 increase in the price of gold to $388.30/oz... The precious metal's appeal was augmented in the face of the dollar's drop versus the euro and yen... Elsewhere, the treasury market also gave way to noticeable selling pressure, owing to both concerns that foreign investors will flee bonds, and bullish economic comments from Fed Governors Bernanke and Guynn...NYSE Adv/Dec 869/2385, Nasdaq Adv/Dec 1090/2102
11:22AM Ratings Briefing - MOT : After the close last Friday, a press release from Motorola (MOT 12.24 +1.15) indicated that CEO Chris Galvin informed the Board of Directors of his decision to retire. It was apparent in the press release, though, that the announcement of his retirement was really a diplomatic way of saying that the Board of Directors forced him to leave. To that end, Galvin said, ... the Board and I do not share the same view of the company's pace, strategy and progress at this stage of the turnaround. Accordingly, it is time for me to pass the baton to new leadership. It is unknown when a new leader will be named, but Galvin will continue to serve as CEO until a replacement is found.
We don't know Mr. Galvin, but if he has an ego, it has surely been dealt a blow by Wall Street as the news of his retirement has elicited a host of upgrades and a surge in Motorola's stock price. The latest count has the number of upgrades at eight and they span big firms and small firms alike. The underlying message is that Galvin's leadership didn't inspire a whole lot of confidence in the investment community.
Motorola recently confirmed the Q3 guidance it provided in its July 15 earnings press release, but nonetheless, there was some speculation in research notes today that Galvin's sudden retirement could portend a disappointing pronouncement with respect to the company's Q4 and FY04 prospects. Even if that is the case, there should be less fallout because the market is apt to appreciate the point that the company will soon be under new leadership. In other words, what happens through year-end is likely to be attributed to a shortcoming that had its roots on Galvin's watch.
McDonald's (MCD) is a recent example of how a leadership change, following a prolonged period of underperformance, has a tendency to invite renewed buying interest. There can be no guarantees that Motorola's stock will do as well as McDonald's has under new leadership, but it is off to a good start with today's showing. Although Motorola's appeal as a long-term holding will be made apparent on the new CEO's watch, the buzz surrounding Galvin's departure should serve investors well over the near- to intermediate-term as institutional investors will be sensing that positive change is afoot at the company.
Frankly, it is an opportune time to become CEO at Motorola because the expectations bar is low. Any problems over the near-term will be linked to Galvin, whereas, any incremental improvement will be taken as a sign that the company is regaining momentum under new leadership. Moreover, the new CEO will be stepping in as economic activity is accelerating, so the odds of there being incremental improvement in demand for Motorola products are in that person's favor.-- Patrick J. O'Hare, Briefing.com
11:14AM The Big Picture - More on the Dollar: Last week, the dollar lost 3% against the yen. No one noticed. The S&P 500 rose rose 1.7% and the Nasdaq 2.7%. Today, the dollar is down 1.5% against the yen and that is cited as a reason for the early losses in the stock market.
Long-term, there is a correlation between the dollar and stock prices. That makes a lot of sense. When the US economy gets stronger, the dollar gets stronger. So does the stock market. That does not mean that there is causation, particularly in the short run.
That is, a weaker dollar does not mean that the stock market will get weaker. In fact, it doesn't mean the US economy will get weaker either. A weaker dollar boosts the US economy. A weaker dollar means that US exports costs less overseas. That increases demand. A weaker dollar means that imports cost more in the US. That improves the competitive position of US companies both here and abroad.
Furthermore, a weaker dollar increases the dollar value of profits achieved in yen, or other currencies. A weaker dollar has a broad, positive impact on the US economy. That, incidentally, is why developing countries tend to devalue their currencies. It boosts their economies. It also increases the inflation rate, but that is not a problem for the US at this time.
The dollar move is perhaps more significant today, because it reflects the G-7 meeting this weekend, and there may be longer term implications. However, the dollar is not about to magically drop 50%, or even 15%, just because governments may intervene less in the currency markets than before.
The value of the dollar is greatly impacted by capital flows. If overseas investors lose confidence in the US economy, the dollar might go down. That is part of the correlation mentioned above. At this time, however, the US economy is accelerating. Real GDP will grow at a 5% or more annual rate in the third quarter, and another strong quarter is on tap for the end of this year. The stock market is up, and is hardly a reason for overseas investors to lose confidence.
There are bears that want to look at every drop in the dollar as some sort of mystical signal that the US economy is actually weak, and that the gains in the stock market are based on false hopes rather than a solid foundation of rising profits. Today, they can trumpet that case. Back in May, the same thing was happening, and a weak dollar against the euro was cited as a reason for a lower stock open six straight days. But the market ended up five of those days, and the rally barely paused after that to notice the daily fluctuations in the dollar. The dollar is a bit weaker now than it was in May, while the stock market is up sharply.
The yen is stronger today because the outlook for the Japanese economy is improving. But the stronger yen was rightly seen as bad for Japanese stocks, and the Nikkei was down 4.2%. The stronger yen has little real significance to US companies, and whatever impact there is will be positive. In our opinion, the market is simply using the dollar as an excuse to sell a short-term overextended market. The weaker dollar today is not a legitimate fundamental reason for the stock market to be down. -- Dick Green, Briefing.com
9:19AM The Technical Take : The three major market averages ended expiration Friday on a slightly negative note but continued their winning ways for the week as a whole. Both the S&P 500 and the Nasdaq Comp have risen five out of the six weeks with the Dow up six out of the last seven. Clearly an impressive advance but the small cap Russell 2000 has actually topped this performance as it has run its weekly winning streak to six in a row.
From a sector perspective the action has been solid. As we have often mentioned, the sector indices are an area that can provide early clues to an underlying loss of momentum even if it isn't reflected in the market indices. We had cited some concerned a little over a week ago as pressure in the banking sector became evident with the index (BKX) hovering just above it multi-month range floor. However, last week saw the bank index (and broker/dealer --XBD) topping the list of sector winners along with biotech (BTK) and utility (UTY). Underperforming sectors were of less interest as a potential market indicator with oil/oil service and healthcare topping the losers list.
Nasdaq Composite: A quick gander at an hourly chart of this index shows the importance of the 20 period exp mov avg that we have extolled many times in this update. Note that once the index began to stabilize on Sep 11/12, it closely followed the upward path that developed in this moving average. Based on the pre-market indicators today, the index is poised for a break of the 20 period exp mov avg at 1895 (also Friday's low and Sep 17 high) in opening action. Short term supports thereafter are at 1888 (Sep 08 high), 1880/1877 (congestion/38% retrace of latest run) and the 1870/1866 area (50 period simple mov avg, congest, 50% retrace). It will takes a sustained breach of these levels to inflict any damage of significance to the near term bull bias, so the market has some wiggle room here to pause and refresh. On the upside we have the first resistance at 1895 after the anticipated early slide followed by 1905/1907 and Friday's early high of 1913. |
