IN THIS ISSUE
MARKET INDICES
COMMENTARY: SOLID JOBS REPORT CAPS A GOOD WEEK
ECONOMY WATCH
MARKET MOVERS
1. SECTOR-RELATED NEWS
INDICES -- TWO BULL MARKET REPORT STOCKS JOIN THE DOW
PENSION FUNDS -- GOVERNMENT GAMES WON'T SOLVE PENSION PROBLEMS
INTERNET -- GOOGLE EMAIL TAKES SHOT AT MSN & YAHOO
2. BULL MARKET PREMIUM SERVICES CORNER
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MARKET INDICES FROM AROUND THE WORLD
FRIDAY, APRIL 2, 2004
INDEX CLOSE CHG DAY% WTD% MTD% YTD%
UNITED STATES
DOW JONES 10471 97 0.9 1.1 1 0
THE S&P 500 1142 10 0.9 1.4 1 3
THE NASDAQ 2057 42 2.1 3.2 3 3
THE NASDAQ 100 37 1 2.6 3.5 4 2
THE S&P 400 112 0 0.3 1.5 1 6
TREASURY BONDS
10 YEAR 4.14, up 24 basis points +30bp +30bp -12bp
30 YEAR 4.97, up 15 basis points +20bp +20bp -10bp
EUROPE
UK FT-SE 100 4466 55 1.2 1.8 2 0
FRANCE CAC 40 3740 70 1.9 3.2 3 5
GERMANY DAX 4008 83 2.1 3.9 4 1
ASIA
JAPAN NIKKEI 225 11816 133 1.1 0.9 1 11
HONG KONG HANG SENG 12732 56 0.4 0.4 0 1
AMERICAS
BRAZIL BOVESPA 22949 302 1.3 3.6 4 3
CANADA TSE 300 8799 147 1.7 2.5 2 7
MEXICO BOLSA 10714 102 1.0 1.9 2 22
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(All prices are as of the close of trading on Friday, and all changes in
price are for the week.)
COMMENTARY: SOLID JOBS REPORT CAPS A GOOD WEEK
For the first time in a long while, we saw a week full of good news. Some
changes to the Dow, a drop in oil prices, steady manufacturing growth, and
the best Jobs Report in months was plenty to light a fire under the market
and push the major indices to their best weekly gains since October.
For the WEEK:
THE DOW JONES INDUSTRIAL AVERAGE gained 258 points, or 2.5%, to close at
10,471.
THE S&P 500 climbed 34 points, or 3.1%, to 1,142.
THE NASDAQ jumped 97 points, or 4.9%, to 2,057.
Oil prices closed $1.34 lower this week, even though OPEC went ahead with
previously announced production cuts. What's up with that? Well, the cut
was priced into oil for weeks, and the market sold on confirmation of the
announcement. But while oil prices dropped a bit, and gasoline prices
followed, don't count on them sinking much further. Supplies are still
tight and demand around the world isn't letting up. Increased
manufacturing activity, meanwhile, is going to push demand higher in the
coming months, as heavy industry uses a lot of oil and natural gas. Watch
for prices to stay high, and inflation fears to creep ever higher on the
Fed's radar screen.
Now, looking at all those new jobs in March, the most created in the U.S.
since April 2000, there is no denying that this is good news. What's
great is that the market focused on the data, not on what will follow.
It's about time, for all too often, once the highly anticipated reports or
data come out, the market immediately starts looking for the next report.
The fact is, the market interpreted the Jobs Report just right, realizing
that it means stronger consumer spending, corporate profits, tax revenue,
and GDP growth.
There are a few things to note, however. First, in a normal economic
recovery, 310,000 jobs is a normal level of job creation; it's not a home
run. Be aware of this don't assume that job growth is skyrocketing.
Second, in a short time, you will hear prognosticators wonder aloud if
this level of job creation can continue. That is, (surprise!) the market
IS going to start looking forward to the next Jobs Report. Don't worry.
We expect it is going to come in strong. When you consider the revisions,
which show that job growth has been strong for three straight months,
there's no reason why it won't continue. In fact, we wouldn't be
surprised to see hiring strengthen over the coming months.
Finally, if you begin to have doubts about future job creation and the
overall health of the economy, take heart: Earnings season is going to
pick next week, with the Dow components kicking things off with a report
from ALCOA (AA, $35.90, up 1.26). We expect to see solid results from a
wide range of industries -- and particularly from the stocks in our Model
Portfolios. There's going to be plenty of positive news in the coming
weeks. If it's not enough to lift the market higher, it will certainly
lift particular stocks. Make sure you're well-positioned to profit.
ECONOMY WATCH
1. MISSING JOBS FOUND
The Labor Department announced in the much-awaited Jobs Report that the
U.S. economy added 310,000 new jobs in March, blowing by expectations for
120,000. It included revisions of January and February jobs figures,
pushing total new jobs in those months to 200,000, up from 130,000. This
is great news, and it came at a great time.
Early in the year, investors were super-sensitive to anything that might
indicate an interest rate hike sooner rather than later. Had news like
this come out in January, the equity markets would have tanked. The
thinking then was that the economy wasn't ready for a rate increase. Now,
after seeing strong earnings from Corporate America and positive economic
data across the board, concern has shifted to inflation. The stock market
move higher on Friday signaled that we are now, or will be soon, prepared
to handle a rate hike when it comes.
Late last year, we said hiring would come in January, as employers started
out the year with new budgets and positive outlooks. We were dead on
right. But it took a little longer for the data to show up. There's a
long incubation period in corporate hiring. The whole process takes
several months from the time an employer decides they want to hire. Then
those numbers have to get into the government reports. Well, they're
showing up now, and we expect the upward trend to continue. Aside from
strong business results driving hiring, the numbers will do a lot for
optimism, and that can help push business spending higher, as well.
2. MARCH CONSUMER CONFIDENCE FLAT
The Conference Board's Consumer Confidence Index came in flat for March at
88.3 compared to 88.5 in February. The survey of 5,000 households
indicated that while consumers thought business conditions were more
favorable, they remained pessimistic about the labor market. That in turn
weighed on the Expectations Index, which dipped slightly to 91.0 from a
previous reading of 91.9.
This is not a prescient indicator by any means. The dip is no doubt
connected to the fact that all month consumers have been seeing headlines
about slow job growth. If Friday's jobs data comes in stronger than
expected, consumer confidence will likely move up. In other words, the
reading is in part backward looking. That can be important, however, as
sentiment (inspired by whatever factors) can influence both consumer and
corporate spending decisions. The good news is that this report doesn't
appear overly pessimistic. Instead, people are on the fence and ready to
be swayed either way by the information that is to come. Hopefully,
they'll pay attention to the good things happening in the economy -- like
productivity and profit growth -- and not focus entirely on the
disappointing aspects, like job growth.
3. FUEL COSTS NOT HINDERING SHOPPING TRIPS
Despite rising gas prices and weakened consumer confidence, spending at
chain stores has remained strong. For the week ended March 20th, chain
store sales rose 7.1% YoY, and 0.2% compared to the prior week. This just
goes to show that the proof IS in the pudding. While sentiment is down,
consumers have done nothing to alter their shopping behavior. Talk is one
thing, but action is what counts, and the positives to be taken from these
numbers outweigh the negatives from the flat consumer confidence reading.
4. FACTORY ORDERS POST FOURTH RISE IN SIX MONTHS
Factory orders rose a slight 0.3% in February, less than the 1.5% that had
been expected. While the factory orders didn't meet expectations, there
were positives in the numbers. Durable goods led with a 2.5% increase
compared to a 2.0% decline for nondurable goods. Breaking that down
further, consumer durables rose 4.7%, while consumer nondurables declined
2.2%. The market didn't like the slowdown in output, but in the whole
scheme of things remember that output did rise, showing that the economy
is slowly and steadily improving.
The same can be said of the Chicago PMI reading, which showed
manufacturing activity in the region slowing. Yes, the index came in at
57.6, below expectations for 61.6. But any reading over 50 shows
expansion, and including the most recent data, the index has shown growth
in manufacturing for 11 straight months.
5. ISM INDEX SHOWS MANUFACTURING ACTIVITY HIGHER
The Institute for Supply Management Index rose to 62.5 in March from 61.4
in February. The index was expected to decline to 59.5. When the index
is above 50 it indicates expansion in manufacturing. The index has stayed
above 50 since May, and above 60 since September. The employment
component also moved higher to 57.0 from 56.3. All of this is good news:
The economy is clipping right along.
MARKET MOVERS
I. SUN SETTLES, AND PARTNERS WITH MICROSOFT
Troubled IT company SUN MICROSYSTEMS (SUNW, $5.06, up 0.95) settled
antitrust and patent disputes against MICROSOFT (MSFT, $25.85, up 0.82,
3%) for $1.6 billion. Sun shot up 21% on the news, in part because the
settlement is a huge cash infusion, amounting, for instance, to more than
half of the $2.9 billion in revenue the company generated in the fiscal
quarter ended December 28th. Additionally, Microsoft agreed to make an
upfront royalty payment of $350 million for the use of Sun's technology.
Sun will make payments to Microsoft when it integrates Microsoft
technology into its server products. The settlement amounts to a product
innovation partnership between the two companies. That's interesting,
considering they've been enemies for so long. But the Linux operating
system, which has been winning server software market share from both
companies, brought them together.
The market also reacted favorably to news that Sun would cut 3,300
employees from its staff of 36,000. And the market chose to overlook a
warning from the company that for fiscal 3Q ended March 28th it expects to
lose 24 cents, twice what the Street anticipated. Sun is getting
desperate, as its server hardware and proprietary operating system is
slowly becoming irrelevant and obsolete. More than any other company, it
has been hurt by the encroachment of the open-source Linux OS.
II. INDIA'S ECONOMY GREW MORE THAN 10% IN 4Q
In 4Q, India's $560 billion economy grew 10.4% compared to 8.4% in 3Q.
The increase was largely attributed to a 17% increase in farming revenues.
Agriculture, which accounts for 25% of the country's GDP, benefited as
the heaviest monsoon season in a decade led to bumper crops. But the
economy is also being fueled by privatization initiatives that have seen
the government sell large stakes in several state companies. Also giving
the economy a boost were foreign investors, who pumped $7 billion into the
Indian stock markets last year. The services sector grew 9%. Though the
report didn't say specifically, the high rate of growth in the services
sector is likely in large part due to the many jobs other countries have
outsourced to India in the past several years. It's an increasing trend,
so expect the growth rate for the services sector to hit even higher
numbers going forward.
III. RUSSIAN MINING COMPANY BUYS INTO AMERICAN COMPANY
Russian Mining company Norilsk paid $1.2 billion in cash for a 20% stake
in GOLD FIELDS (GFI, $13.13, up 0.69), which is held by ANGLO AMERICAN
(AAUK, $25.27, up 1.77). Anglo American said it would pick up $480
million on the deal, which it plans to use to finance gold mining efforts
and to pay down debt in South Africa. Gold Fields is the #4 Gold Miner in
the world. It's interesting to see such a large purchase from a Russian
company, and illustrative of how high gold prices are helping producers
worldwide.
IV. $1 BILLION DEAL TO CREATE #3 CHEMICAL COMPANY
LYONDELL CHEMICAL (LYO, $15.67, up 0.05) agreed to acquire MILLENNIUM
CHEMICALS (MCH, $15.69, up 3.14, 25%) for $1 billion in stock. The deal,
which is expected to close in 3Q, will create the third largest chemical
company behind #2 DUPONT (DD, $44, up 2) and #1 DOW CHEMICAL (DOW, $41, up
2). The combined companies will keep the Lyondell Chemical name. The
industry is rebounding after a five-year slump, as Chipmakers,
Construction firms, and Auto companies increase production and therefore
step up demand for chemicals used in the manufacture of their products.
V. BUSH ON BROADBAND
On the campaign trail, President Bush spoke in New Mexico at length about
broadband, proposing a goal for universal availability by 2007 to keep the
country competitive and innovative. Bush said, "It's important that we
stay on the cutting edge of technological change, and one way to do so is
to have a bold plan for broadband." Lawmakers have been debating how to
roll out such expansive access.
A government sponsored push would be a boon to broadband providers,
including Cable company COMCAST (CMCSA, $29.09, down 0.15) and Telecom SBC
COMMUNICATIONS (SBC, $24.87, up 0.95). Taking a broader view, a
commitment to broadband is key to America's competitiveness, as technology
and innovation will ensure new, well-paying jobs in the years to come. On
this front, the U.S. has a lot to do. There are now more than 20 million
broadband users, which is less than 20% of all homes. By contrast, in
South Korea, a government initiative helped roll out broadband to 70% of
all homes, creating one of the most widespread and advanced internet
networks on the globe. We welcome any government action that will prompt
growth in innovation, and hope that any promises on this front live well
past election day.
VI. BIG PLAYERS MAKE BIG PROMISES IN BROADBAND
Telecom and internet companies are scrambling feverishly to be first to
market with new broadband related services. At a cellular industry trade
show, AT&T (T, $19.60, down 0.15), VERIZON COMMUNICATIONS (VZ, $37.24, up
1.22), and Samsung all separately announced plans to roll out wireless
broadband services in some cities by late this year.
Samsung said it would deploy a new wireless broadband technology, but
would not disclose the wireless phone company it had partnered with. The
new service will be 5-10x faster than dialup internet service. That would
add an interesting new choice for broadband access, though it is not
likely to bump off any of the existing services for quite some time.
Why? First, look at the cell phone. After many years, it has only
recently become an alternative to a land phone for a small minority of
people. Second, slower wireless data connections through cellular
networks have been around for a number of years and usage charges have
remained high. There would need to be a large number of subscribers and
heavy competition between services before prices would drop significantly
and attract many users. Finally, for many people it won't be a sufficient
alternative to cable and DSL broadband because of the popularity of
wireless networks in the home. Nowadays many households have multiple
computers hooked to a wireless home network. These wouldn't work well
with new wireless broadband services.
The technology does, however, bring up a couple of interesting
possibilities. First, it could enable wireless Voice over Internet
Protocol (VoIP), which means that subscribers could make long distance
calls from a mobile device at significantly reduced rates. That would
have huge potential in the corporate world, and particularly amongst
companies with legions of roaming salespeople. Second, it could bring
always-on high-speed internet to many people who can't get cable or DSL
connections. There are many people in rural areas who have access to a
cellular network but not cable or DSL. That could make life tough for
ECHOSTAR COMMUNICATIONS (DISH, $32.99, down 0.69) and THE NEWS CORPORATION
(NWS, $36.68, up 2.02), both of which provide broadband via satellite.
Note, however, that this is an unproven technology, and like many of the
promises in the Tech and Telecom sectors, these could take years to
fulfill. We don't like the companies involved here, and news of these new
products, while exciting, doesn't change our take. There's a lot of
investment involved, and at this point little indication that the risk is
worth it for you.
VII. PEPSI PUTTING UP STRONG NUMBERS
PEPSICO (PEP, $54, up 3) expects first-quarter results to come in at 46
cents a share, 2 cents above estimates, as snack and beverage sales were
strong across the board. For the year, the company expects to earn $2.30,
at the high end of estimates, and up from $2.05 in 2003. The company also
raised its annual dividend 45%, to 92 cents, and said it would spend up to
$7 billion on share repurchases over the next three years. Wow. We
wouldn't buy the stock here -- too rich for our blood, with a PE of 26,
but we could see it trading at $60 in a few months, with all these
positive things going on at the company.
VIII. BEST BUY BESTS ESTIMATES
QUARTER F4Q03 F4Q04 %CHG.
REVENUE $7.0B $8.4B +20
NET INCOME $310M $470M +52
EPS $0.96 $1.42 +48
Fiscal fourth quarter ended 02/28/04
Reported 03/31/04
Fiscal 4Q earnings at Consumer Electronics Retailer BEST BUY (BBY, $54, up
6, 12%) rose sharply QoQ, driven by holiday demand for computers, CDs,
flat-panel TVs, and home office goods. The company beat analyst (and its
own) expectations for earnings of $1.39 a share. For the fiscal year, the
company earned $705 million, or $2.15, on revenue of $25 billion compared
to 2002 earnings of $100 million, 30 cents, on revenue of $21 billion.
The company expects first-quarter earnings to come in at up to 35 cents,
and same-store sales to increase 8%. For fiscal 2005, the company said it
expects to make $2.85, ahead of analyst expectations of $2.79. Clearly
electronic sales are on the rebound. The company also said it is
investing heavily on improving customer service and staff expertise to
protect itself against the competition from mass discounters like WAL-MART
(WMT, $59, down 1). That's going to be a tough fight, especially because
Wal-Mart is moving into the flat-panel TV market in a big way. In this
battle, we'll take Wal-Mart.
IX. CIRCUIT CITY STRUGGLES TO KEEP UP
QUARTER F4Q03 F4Q04 %CHG.
REVENUE $3.2B $3.2B unch.
NET INCOME $70M $90M +29
EPS $0.34 $0.44 +26
Fiscal fourth quarter ended 02/29/04
Reported 03/31/04
CIRCUIT CITY (CC, $11.19, up 0.51, 5%) posted flat revenues for the fiscal
quarter, and saw them sag 2% to $9.8 billion for full fiscal year 2004.
Though the company improved 4Q earnings, beating estimates by 10 cents, it
was not satisfied with full-year results. For the year, the company moved
to a loss of $90 million, or 43 cents, compared to a profit of $70
million, or 35 cents, a year ago. The loss came in part because of issues
related to significant store format changes. In 2004, the company closed,
relocated, and reconfigured many of its stores. It plans to open 60-70
Superstores in 2005, as its smaller stores have had trouble competing with
Best Buy and discount retailers. It expects better results in fiscal
2005, but this is a company clearly not keeping up with the competition.
It is trying, however; it is buying INTERTAN (ITN, $13.98, up 1.68, 14%),
the operator of Radio Shack stores in Canada, for $285 million.
X. MONSANTO HAS MOMENTUM
QUARTER F2Q03 F2Q04 %CHG.
REVENUE $1.3B $1.5B +15
NET INCOME $100M $155M +55
EPS $0.38 $0.57 +50
Fiscal second quarter ended 02/28/04
Reported 03/31/04
Seed company MONSANTO (MON, $36.50, up 2.07) increased 2Q04 sales 15% on
strength in sales of corn seed and traits -- royalties on genetically
modified seed biotechnology traits. The company completed sales of seeds
for the approaching North American planting season, and expects to earn
$1.45 for the current fiscal year ending August 31st. The company said it
has established a clear path to achieve a 10% annual growth rate in EPS
for fiscal 2005 and 2006.
Good investing next week!
Todd Shaver
Editor in Chief
Editor@BullMarket.com
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