THE BULL MARKET WEEKLY ADVISOR, January 11, 2004
Volume 74, #2W
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IN THIS ISSUE
MARKET INDICES
COMMENTARY: TECH STANDS OUT, JOBS YET TO BE FOUND
ECONOMY WATCH
MARKET MOVERS
1. SECTOR-RELATED NEWS
TECHNOLOGY -- TECH COMPANIES CONCERNED ABOUT JOBS INTERVENTION
MUTUAL FUNDS -- MUTUAL FUND GAINS REFLECT STRONG MARKETS
EXCHANGES -- AFRAID OF A LITTLE COMPETITION?
2. BULL MARKET PREMIUM SERVICES CORNER
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MARKET INDICES FROM AROUND THE WORLD
FRIDAY, JANUARY 9, 2004
INDEX CLOSE CHG DAY% WTD% MTD% YTD%
UNITED STATES
DOW JONES 10459 -134 -1.3 0.5 0 0
THE S&P 500 1122 -10 -0.9 1.2 1 1
THE NASDAQ 2087 -13 -0.6 4.0 4 4
THE NASDAQ 100 38 0 -0.7 3.8 3 3
THE S&P 400 107 0 -0.1 1.0 1 1
TREASURY BONDS
10 YEAR 4.09, down 16 basis points -29bp -17bp -17bp
30 YEAR 4.97, down 11 basis points -21bp -10bp +10bp
EUROPE
UK FT-SE 100 4466 -28 -0.6 -1.0 0 0
FRANCE CAC 40 3575 -18 -0.5 -0.6 0 0
GERMANY DAX 4016 -29 -0.7 -0.1 1 1
ASIA
JAPAN NIKKEI 225 10965 127 1.2 2.7 3 3
HONG KONG HANG SENG 13386 182 1.4 4.6 6 6
AMERICAS
BRAZIL BOVESPA 23917 200 0.8 6.6 8 8
CANADA TSE 300 8352 -34 -0.4 0.7 2 2
MEXICO BOLSA 9103 -67 -0.7 3.2 3 3
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(Please note that all prices are as of the close of trading on Friday, and
all changes in price are from the previous Friday.)
COMMENTARY: TECH STANDS OUT, JOBS YET TO BE FOUND
The Tech sector brought strong rays of sunshine to the markets this past
week, but weak job data and disappointing earnings from ALCOA (AA, $37,
down 1) dampened investor enthusiasm.
For the WEEK:
THE DOW JONES closed up 49 points, or 0.5%, at 10,459.
THE S&P 500 added 14 points, finishing the week up 1.3%, at 1,122.
AND THE NASDAQ added an impressive 80 points, or 4.0%, to 2,087.
SIEBEL (SEBL, $15.39, up 1.40) charged up the Tech sector early with a
boost in its 4Q guidance. The Semiconductor Industry Association added to
the cheer with news that November Flash and DRAM sales rose 11% and 4%,
respectively.
NOKIA (NOK, $20.66, up 3.53) kept Techs moving big time with its own
positive earnings news. The company expects to earn 30-31 cents on $11
billion in revenue in 4Q, blowing away previous estimates of 26 cents.
Wall Street, meanwhile, demonstrated its continued influence on Tech
buyers. They've either forgotten that the very same Wall Street firms
pumped up Tech stocks in the late 90s, or they believe Wall Street has
reformed. Either way, upgrades on INTEL (INTC, $34, up 2) and
HEWLETT-PACKARD (HPQ, $24.16, up 1.00) worked their magic, sending both
stocks up sharply. Analysts expect both firms to do well in the first
half of 2004. Intel is clearly the better half of this couple, but it's
overpriced.
While much of the good news driving Techs last week was focused on the
near-term, such as 4Q results and 1H04, the interest in this sector has to
be on the future. That is, investors have to be counting on significant
earnings growth to continue, if not accelerate, through 2004. There's no
other way to justify the PE's these stocks are carrying.
Interestingly, that future-centric outlook spelled trouble for SBC
COMMUNICATIONS (SBC, $26, down 1), AT&T (T, $21.06, down 0.92). Many
investors now consider these two dinosaurs. Like much of the Telecom
sector they're suffering from an identity crisis. Each day customers see
their telephone services as less and less valuable. Staying relevant will
require billions more in technological upgrades and marketing. Last week
analysts downgraded both to Sell. We expect the worst of their punishment
is yet to come.
Speaking of punishment, Alcoa seemed to get off easy after earnings
disappointed Wall Street. Analysts argued that the company's actual
earnings were 27 cents a share, versus the 39 cents reported by the
aluminum producer. The number was below the consensus 34 cents.
The negative views on Alcoa came out Friday, and if that's all the news
that we had on Friday then we would've seen a pretty awesome week.
Unfortunately, there was more.
The worst came from the job market. Economists had expected that 130,000
new jobs were created in December. Seems they've been listening to the
Treasury Secretary too much. He pledged that the economy would be
producing hundreds of thousands of jobs a month by now. The facts have
proven him and economists wrong. Non-Farm Payrolls grew by just 1,000
jobs in December.
The bad news continued to roll on Friday. FORD (F, $16.56, up 0.48)
deflated the Auto industry with forecasts that 2004 earnings will fall
short of estimates. The stock sunk 3% Friday.
ROYAL DUTCH (RD $49, down 4) stated that it had overestimated its oil and
gas reserves. The company "just realized" that roughly 20% of its proven
reserves belong in a lesser category. Investors reacted accordingly to
this bogus excuse.
The SEC, meanwhile, announced possible action against IBM (IBM, $91, down
1) for colluding in an accounting scandal with DOLLAR GENERAL (DG, $21.45,
up 0.65). Both closed down from their intra-week highs.
The earnings landscape for corporate America continues to look mottled.
We see inspiring growth in some sectors and real disappointments in
others. The big problem, of course, is that if job growth doesn't come to
life soon, then ALL earnings could start to take a hit.
As you monitor your portfolio, stay cautious. Remember, the economists
who've called for 4-5% GDP growth this year are the same ones who said
130,000 more Americans would be working today.
ECONOMY WATCH
1. CONSTRUCTION SPENDING HITS RECORD HIGH
Without a doubt, low mortgage rates have spurred a surge in building and
buying over the past few years. And Monday's Construction Spending number
is further proof of exactly that. For November, Construction Spending
jumped 1.2%, far above the 0.9% expected by analysts. The seasonally
adjusted annual rate of spending came in at $935 billion versus $925
billion in the prior month. With Construction Spending continuing to
build momentum, real estate will be a significant contributor to 4Q GDP.
With the 30-Year Mortgage Rate under 5.50% it's no surprise that
Residential Construction led the report, gaining 1.2%. Residential
Construction is now a whopping 8.3% ahead of this time last year. Though
there is some fear on Wall Street that rising mortgage rates could cause
real estate markets to slow over the next year, Monday's news shows that
consumers are still out there taking advantage of low rates, and buying
all they can.
2. FACTORY ORDERS FELL IN NOVEMBER
November Factory Orders declined 1.4%, almost in line with the expected
drop of 1.5%. The decline was attributed to waning business spending as
the holidays concluded. However, the broader picture of economic
expansion remains positive. As demand grows orders will increase.
Tuesday's decline in Factory Orders is a minor setback in the overall
trend of economic recovery.
3. SERVICES INDUSTRY MISSES THE MARK; JOBS STILL GROWING
The Institute of Supply Management's Index of Non-Manufacturing Business
Activity (Services Index) came in at 59, falling short of the expected 60.
Though the index didn't stay above 60, any reading above 50 indicates
manufacturing expansion. This was the ninth straight month above 50 for
the index. Employment numbers were steady.
New Orders grew to 61 from 60, while the Price Index rose from 58 to 60.
Though Tuesday's report missed analyst estimates slightly, it's positive
overall for the recovery.
4. JOBLESS CLAIMS LOWEST IN 35 MONTHS
Though Initial Claims edged up 14,000 to 353,000 in the latest week, the
four-week average for jobless claims is now at 350,000, the lowest number
in 35 weeks.
Looking back, in 1992, the last time the job markets were this weak, once
the average for Initial Claims fell below 350,000, labor markets were set
in motion for full recovery of 150,000 new jobs added each month! At that
rate, it won't be until 2005 that new employment additions top 200,000.
But given that the worst is over, we can wait.
Is this exciting? You bet! Even more exhilarating, Continuing Claims
declined under the 3.3 million mark for the third consecutive week,
indicating that many previously unemployed Americans are now finding jobs.
5. U.S. DOLLAR STILL ON THE DECLINE; NON-FARM PAYROLLS DISAPPOINT
The U.S. dollar continued its path south Friday after the Labor Department
said that Non-Farm Payrolls added a meager 1,000 jobs in December. The
meek job number was far short of the expected 130,000 news jobs that were
expected by Wall Street. However, the unemployment rate fell from 5.9% to
5.7%. Despite the falling unemployment rate, Friday's report was
extremely disappointing, and is now prompting investors to think the Fed
will leave rates alone for a while still.
The recovery is underway, but labor markets could still take considerable
time to regain footing. The problem is that even with the blistering
economic expansion of late (as witnessed in 3Q GDP of 8.2%), many
companies have moved jobs overseas.
In addition to the dollar's decline, there is now some concern by the
European Central Bank about the rising euro. The elevated currency is
hurting euro zone exports, and could be a roadblock to global economic
recovery, though analysts feel that increasing global demand should offset
the rising exchange rate for European countries.
MARKET MOVERS
I. INTEREST RATES IN NO RUSH TO MOVE ANY TIME SOON
The Fed Funds Rate currently stands at 1.0%, a 45-year low. The next FOMC
meeting is on January 27-28, and Fed officials have said they intend to
leave rates unchanged. But, the meeting could provide some insight into
the plans for the March meeting. Though many believe that there will be
no change in rates in March either, there is some speculation that the Fed
will begin raising rates in June. However, it's an election year and
raising rates, which could slow the economic recovery, would be a bad
political move.
At the heart of the issue, inflation remains tame at 1.1%, while the
unemployment rate stands at 5.9%. The unemployment rate is expected to
fall to 5.5% by the end of 2005, though the wild card is where will the
inflation rate be? Right now inflation isn't a threat; however, if it
does begin to pick up, the Fed will have to act quickly to squelch it.
II. ELI LILLY GUIDES LOWER FOR 2004
Drugmaker ELI LILLY (LLY, $68, down 3) stated that it expects 2004
earnings to come in at $2.80-2.85 a share, compared to estimates of $2.92.
However, the company expects 2004 earnings to rise 9-10%, from expected
2003 earnings of $2.58.
The company does have some bright spots though, including a new
anti-depression drug that is to be launched this summer. The company also
sees additional growth from its new drugs for osteoporosis and attention
deficit disorder. However, marketing, administrative, and research &
development costs are expected to rise in the double digits, which were
part of the reason for Monday's lower earnings guidance.
III. CREDIT CARD DELINQUENCIES AT ALL TIME HIGH
Most homeowners have already refinanced their homes. And job markets are
recovering slowly. So consumers have turned to their plastic for
financial support. As a result, credit card delinquencies were at an all
time high of 4.09% in 3Q, slightly above the rate recorded in 2Q, which
shows that many consumers are in trouble, despite the economic recovery.
Since the start of 2001, the U.S. economy has shed over 2 million jobs.
Though recent employment reports indicate labor recovery, for many
Americans the jobs aren't coming back quickly enough. Part of the problem
is that while the economy is recovering, many corporations are moving jobs
overseas, where labor is substantially cheaper. No matter how you slice
it, the current economic recovery has yet to help many of the unemployed.
And many have had to settle for jobs paying much less than they had been
accustomed to. The good news is that the unemployment rate is expected to
fall to 5.5% by the end of 2004, which will help many pay down their
credit card balances.
IV. SUN MICROSYSTEMS RAISED ON CURRENCY BOOST
Remember the analyst from Merrill Lynch who sent a letter to SUN
MICROSYSTEMS (SUNW, $5.31, up 0.61), calling on the company to cut jobs
and rethink their entire strategy? Well that same analyst just raised his
4Q revenue target for the company. Wall Street sure is wishy-washy.
The firm sees the computer giant increasing revenues, as companies upgrade
older hardware. Moreover, favorable currency exchange rate will bolster
revenue. For 4Q, the company is expected to report $2.9 billion in
revenue, versus the previous estimate of $2.7 billion. Though the firm is
anticipating a 3-cent loss for the quarter, it's a penny better than
previous estimates.
V. MICROSOFT UNVEILS NEW DIGITAL MOVIE PLAYER
MICROSOFT (MSFT, $28, up 1) is introducing the latest and greatest in
digital media players. What is it? The Portable Media Center (PMC).
It's similar to the iPod by APPLE (AAPL, $23.00, up 1.72) in that it
downloads digital content from the Internet. The device is expected to
compete with the iPod, but analysts are wondering how effective it'll be.
There are several problems facing the PMC. First, even with a 20 gigabyte
hard drive, it can only hold about three full-length feature films.
Second, movies take a long time to download. And third, the PMC is
expected to sell in the $700-900 range, which is quite pricey. Microsoft
is definitely gambling on the PMC, as it could be a while before for the
technology catches on with consumers. However, as the technology improves
over the next few years, the company will be positioned on the forefront
of the exciting digital movie player market.
VI. THE GREAT CHINA BANK BAILOUT
China will be transferring of $45 billion from its foreign exchange
reserves to two of the four largest government-owned banks. The
transaction is the third largest bailout of the banking system in the last
six years. The problem is that even with China's booming economy, the
banks are mismanaged and have serious problems with bad loans.
Despite criticism, the bailout isn't a "get out of jail free card" for the
troubled banks. The $45 billion only covers about half of the defunct
loans. And remember the U.S. Savings and Loan crisis? The Federal
government put in $125 billion, and an extra $30 billion in supplemental
deposit insurance premiums. Thus, China's bailout isn't all that big in
relation to what the U.S. has done to correct its banking system in the
past, though, it's highly probable that the government will give the banks
more money in the future.
VII. VERIZON SPENDING BIG BUCKS TO EXPAND
VERIZON (VZ, $36, up 1) will spend $3 billion over the next two years to
expand its Wireless Telecommunications Service nationwide. The service is
high-speed wireless Internet access, and is currently offered in San Diego
and Washington. However, by the end of 2006, the company anticipates that
the service will be offered in almost every major U.S. city. The service
is intended for those on the move, who constantly need Internet access.
Though the price tag is a little high -- $79.99 -- the company expects
that the service will be in high demand.
It'll be interesting to see how this pans out. This is not the first
attempt at wireless Internet, as there are several other smaller carriers
doing the same thing. However, even with close proximity to a signal
tower, the services are hardly ever reliable enough for consistent
high-speed access. If Verizon can solve the technology problems that have
hurt wireless access in the past, then the company will have a winner on
its hands. However, given that there are already other wireless services
available throughout the nation that cost less, we would prefer to watch
this story unfold from the sidelines.
VIII. GENERAL MOTORS SHOOTS ITSELF IN THE FOOT, AGAIN
We've been thinking that the U.S. Automotive industry could be on the cusp
of recovery, as signs of improvement have surfaced over the last few
weeks. However, now we are re-thinking the subject. GENERAL MOTORS (GM,
$54, unch.) is once again offering 0% financing and cash rebates up to
$3,500 on most of the company's 2004 models.
Amazing. In the last few months, the economy has slowly begun to show
signs of life, and at the same time, interest rates for loans have begun
to edge up. This is great opportunity for Automakers to begin charging a
little interest for the loans they issue. However, GM is now giving money
away for free again, expecting massive volume to bolster earnings. Now
that GM is offering 0% financing, many other companies will likely follow
suit, in what will become another pricing and discounting war. We were
pleased to see the end of 0% financing and massive rebates, but obviously
this chapter is not over.
IX. OIL HITS FRESH HIGHS; NOT A GOOD SIGN FOR THE ECONOMY
Crude Oil topped $34 a barrel Friday, partially fueled by fears that cold
weather in the U.S. will deplete inventories. Crude inventories are now
at their lowest level since 1975, which is deemed by many on Wall Street
as a "critical problem".
The problem is that historically any time oil has been over $30 a barrel
for an extended period, a recession has followed. High oil prices
directly take money out of consumers' pockets at the pump and increase
expenses for many businesses. Airlines pay higher jet fuel costs, which
are in turn passed on to passengers. And many manufacturing components
like plastics are made from oil. Thus, the bulk of consumer goods rise in
price, as oil stays at elevated levels. For the time being OPEC has no
plans to increase supply so crude should stay high throughout the winter.
X. HEWLETT-PACKARD TO RESELL IPODS
Apple Computer will manufacture a version that will be HEWLETT-PACKARD
(HPQ, $24.16, up 1.00) branded. It seems like a strange arrangement, but
it makes sense. Apple is new to the personal electronics business, and HP
already has an extensive distribution network in place via its
calculators, handheld computers, digital cameras, and more. The iPod is
leading the market for digital music players. So the deal makes sense for
HP as well.
HP also said it's developing a "digital hub", which is intended to be the
central processing point of home networking systems that will interconnect
various entertainment and computing components in the home.
Good investing next week!
Todd Shaver
Editor in Chief
Editor@BullMarket.com
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1. SECTOR-RELATED NEWS
TECHNOLOGY
TECH COMPANIES CONCERNED ABOUT JOBS INTERVENTION
The largest U.S. Tech companies have been moving so many jobs overseas
that they're now acting to head off possible intervention from the
government. Lawmakers are asking for an economic study on the
implications of this shift in jobs to other countries. The companies cite
that the job moves are necessary for future profits. It's their position
that government efforts to protect jobs through trade restrictions would
backfire and lead to retaliation -- and a trade war with other countries.
Tech companies are also asking the government to increase tax credits on
R&D, science, and education; which they say is necessary for the U.S. to
compete with employees overseas.
TODD'S TAKE: We're not going to delve into the moral issues on this
subject. Our interest in presenting it to you is from the perspective
that the flow of jobs overseas is a trend that is advancing rapidly. The
recession forced companies to look for ways to cut costs, and they found
it. As you know, many job cuts where IT servicing contracts have moved to
India.
There are still plenty of employment opportunities in Computing Services
here in the U.S., where jobs aren't easily transitioned to another
country. But there is no stopping this growing trend, and what interests
us is how this is playing out in the markets.
In moving IT jobs overseas, counterparts, liaisons, and HQs need to find
ways to communicate effectively, and reduce inefficiencies of getting work
done remotely. That means big spending in a variety of communication
technologies, and technologies that reduce expenses in such things as long
distance. These technologies include VoIP, teleconferencing management,
video conferencing solutions, and software for mirroring systems.
THE BOTTOM LINE: We are in the process of researching companies that are
suitable for The BullMarket.com portfolios. Many companies tend to have
valuations too high for our taste. We want to find the best values with
the highest potential for outstanding growth in this fledgling industry,
so we'll be covering some specific recommendations in the near future.
********************
MUTUAL FUNDS
MUTUAL FUND GAINS REFLECT STRONG MARKETS
Mutual Funds took in $1.6 billion in the last week of the year, and $1.3
billion Christmas week, marking eight straight weeks of positive inflows
according to AMG Data Services. Separately, numbers compiled by Lipper on
mutual fund performance for 2003, showed some amazing results. The
average Equity mutual fund gained 35%, the most since 1967. Technology
and Precious Metals funds were the biggest gainers, moving up more than
50% on average. It was the second highest gain ever for Technology, with
a 33% gain for Value funds, the highest ever. Small-Cap funds were up
more than 40%. And Emerging Markets funds made big gains, with Latin
American funds up more than 50% and China funds up 63%.
While the bond markets were generally weak, Junk Bond funds performed
well. And Real Estate funds gained more than 35%, even as housing markets
were on shaky ground.
TODD'S TAKE: The mutual fund companies were sitting on high cash
percentages during the recession, and at the first signs that the economic
recovery would have legs, the funds put the cash to work. Managers sought
out value and high returns. As more money went in, momentum took over,
and prices went up. As the returns for 2003 are being tallied, individual
investors are once again handing money over to the funds. Investors
aren't ignoring the scandals, but they figure the fund companies have
learned their lesson, at least for the time being.
THE BOTTOM LINE: We like to watch trends in mutual fund money flow
closely. It provides a great deal of information about the markets,
investor sentiment, and the economy. When money flows into the markets,
they generally head higher, and that's what we're seeing lately.
********************
EXCHANGES
AFRAID OF A LITTLE COMPETITION?
For many years the Nasdaq has tried with little success to get companies
to defect from the NYSE. It has now switched tactics, and is trying to
convince companies trading on the NYSE to dual list on both exchanges.
Hewlett-Packard wants to be the first company to do so.
TODD'S TAKE: Our first thought is how this might impact investors if many
companies decide to dual list. The answer is that for the most part,
there would be little change to what people pay for a stock.
Decimalization of share prices has taken bid/ask spreads down to pennies
on liquid stocks.
For some stocks dual listing could actually mean more liquidity. Many
active traders tend to stick to Nasdaq traded securities because of the
advanced electronic trading platforms and pricing information they have at
their disposal. Active trading in shares of popular companies that are
currently only trading on the NYSE, would no doubt increase.
On the other hand, if a firm with low volume and little interest from
traders decides to dual list, they would be splitting the volume over two
exchanges. That would lead to wider bid/ask spreads, and higher costs for
the investor.
That is at least in the early stages. Because over time, it's likely that
such a shift would drive infrastructure changes leading to both exchanges
competing for the same order flow. That is how it currently works for
stocks trading on the Nasdaq that also trade via Electronic Communications
Networks (ECNs). Think of the Instinet, Island and Archipelago exchanges.
These are actually distinct exchanges to which traders can route order
flow on Nasdaq listed stocks. But they all compete electronically to fill
orders. There are about a dozen of these electronic exchanges.
THE BOTTOM LINE: When the first companies commence dual listing on both
the Nasdaq and the NYSE, there won't be the type of electronic competition
that there currently is between the Nasdaq and the ECNs. But that is why
this is such big news. Because it'll force the NYSE to innovate, and that
has the floor traders concerned. It could also mean the last gasp for a
bastion of tradition laced with a feeling of nostalgia for many, something
the Big Board has been clinging tightly to since the Nasdaq came to be.
We'll be sad when the inevitable finally occurs. But we also can't help
noting the irony of an organization that exists to maintain a competitive
marketplace, and yet has vigorously fought off competition at every turn. |
