From Briefing.com: 6:23PM Swing Trader: Ugly Charts...A Sign of Fear? : -- Technical -- The markets opened lower on Tuesday morning, but managed to quickly fill that gap and stage a rally towards Monday's highs. By noon time, sellers returned in full-force across the board. Market Breadth was negative as Decliners outpaced Advancers about 2.5 to 1 and as New Lows continue to exceed New Highs. Hospital- related names (HCA, TRI, LPNT, HMA, UHS) were the strongest group today while Steel was the weakest. Stocks related to commodities were also hit hard, especially among Oil, Paper, Chemicals, and Basic Materials...(Continued)
Close Dow -79.95 at 10405.70, S&P -8.92 at 1165.36, Nasdaq -18.64 at 1973.88: The market opened slightly lower ahead of consumer confidence data but closed sharply lower amid worries related to even more influential economic data... While March consumer confidence fell to 102.4 (consensus 103.0), the decline was widely anticipated as gasoline prices have continued to climb... More notably, was the fact that a slew of more significant economic releases - with particular interest being placed on Thursday's Personal Income and Spending figures and Friday's non-farm payrolls data - were forthcoming...
Such uncertainty underpinned a sense of nervousness among market participants, amid ongoing inflation fears and higher oil prices, as all 10 economic sectors closed in negative territory... Even though crude oil futures only inched up 0.3%, to close at $54.23/bbl (+$0.18), the modest move higher was enough of an inflationary deterrent to erase modest intraday gains and keep buyers on the sidelines for good... Upbeat guidance from HCA Inc (HCA 51.95 +3.08) and Monsanto (MON 60.94 +0.84), coupled with steady oil prices early on and strength in Treasurys, prompted modest intraday buying interest...
And news that Hewlett-Packard (HPQ 21.78 +1.99) selected current NCR Corp (NCR 31.40 -6.50) chief executive Mark Hurd as its new CEO and that former American International Group (AIG 58.20 +1.18) CEO Maurice "Hank" Greenberg will step down as chairman, provided a boost to blue chips... But gains were short-lived as investors' reluctance to own equities ahead of upcoming data mounted and a bearish bias remained firmly intact... Treasurys, however, held onto early gains amid a decline in consumer confidence and weakness in Asian markets after disappointing government reports in Japan raised concerns about an economic slowdown...
The flight to quality lifted bonds to their best levels of the day, as the 10-year note finished up 13 ticks to yield 4.58%... Losses in excess of 1.0% were felt in Materials, Energy, Utility and Industrials while Consumer Discretionary and Consumer Staples were also influential economic sectors to the downside...
However, the upbeat news from AIG, HPQ and HCA helped minimize losses in Financial (-0.4%), Information Technology (-0.6%) and Health Care (-0.3%), respectively, while news that MCI Inc. (MCIP 23.78 +0.84) accepted a sweetened $7.6 bln offer from Verizon Communications (VZ 34.86 +0.14) also prevented further deterioration in Telecom Services (-0.5%)... Meanwhile, the dollar was mixed following consumer confidence data, as the greenback weakened against the euro (1.2921) but traded higher against the yen (107.52)...DJTA -1.8, DJUA -1.4, DOT -0.9, Nasdaq 100 -0.6, Russell 2000 -1.8, SOX -1.3, S&P Midcap 400 -1.1, XOI -0.9, NYSE Adv/Dec 1001/2295, Nasdaq Adv/Dec 793/2305
3:03PM Treasuries Quietly Ride Higher, Await Upcoming Events : Treasuries closed near session highs with the 10-year yield closing the session below 4.60%. Trade was tame and orderly as the market anticipates data later in the week. The spread between the 2- and 10-year yield has moved into the narrow end of its recent trading range. The curve flattened 2.3 basis points to 74.5 on the session. The dollar gave back some gains versus the euro and yen today but remains strong versus Asian regionals. ABN AMRO believes USD is holding strong versus Asia for three reasons: weaker Asian equities, concerns about the Sumatra earthquake and weak data from Korea and Japan. The firm is betting that the spot USD-JPY corrects to at least 104.55 in the next two weeks. The economic calendar tomorrow will be offering up Q4 GDP-final (4.0% est) and the chain deflator (2.1% est). The market is likely to remain range bound prior to the PCE deflator Thurs and payroll data on Fri. ABN AMRO believes the core measure of the PCE deflator will be pivotal for the markets now that the Feb PPI and CPI data both confirm that the Jan spike in inflation was not simply a temporary development. Adding, persistence is one of the key factors implying that the risks surrounding our benign inflation outlook are mounting. Also on the agenda tomorrow, NY Fed President Geithner will be giving a speech on monetary policy and central banking at a seminar commemorating the 40th anniversary of Brazil's central bank. Fed Gov Bernanke will speak on implementing monetary policy at 12ET (Q&A expected). In addition to the economic data and Fed-speak, the Treasury will auction $24B in 2-year notes at 13ET. The market will be closely monitoring the indirect bidder participation figure, which for the 2-year is certainly in a down trend. The 10-years are +13/32nds yielding 4.587%.
9:08AM Gapping Down : REDE -23% (guides; CFO resigns, appoints new CFO; WR Hamrecht downgrades), APOL -2.8% (reports FebQ; disappointing rev guidance), AGIX -9.5% (started with a Sell at IRG; tgt $6), SMDI -14% (lowers Q1 guidance), TAYD -5.6% (profit taking after 45% move yesterday), LEXR -2.7% (extends yesterday's 17% drop), BOBJ -2% (Microsoft pending business intelligence announcement could dampen BI software stocks -- Goldman), ELBO -1.7% (profit taking after 10.5% move yesterday), BIIB -1.6%, ANTP -1.4%.
8:53AM Gapping Up : HCA +9.5% (guides higher; upgrades from Fulcrum and OpCo), NVEC +8.5% (to receive patent), LANV +26% (reports JanQ), BITS +11% (signs license agreement with Connexion by Boeing), MCX +6.2%, STSI +6%, ELTK +5.6% (extends recent momentum), PACT +9.5% (reaffirms financial guidance), TSRA +2.9%, LPNT +2.8% (shareholders approve merger with PRV), .... Under $3: ARTX +22% (wins Army contract), MCEL +21% (delivers system to Defense Dept).
11:07AM Verizon Communications (00) $35.05 +0.33 (+0.9%) Verizon stock will probably never look back on today's level, if the MCI (MCIP) acquisition gets government approval and closes later this year. The decision by MCI to accept the renewed Verizon bid comes as no surprise to us, as we have been emphatically stating that MCI will decide for Verizon's bid over Qwest's (Q) for more than a month now. Even the new Verizon bid of $23.50, which raises the cash paid at closing and offers a collar to protect against a decline in VZ stock, is technically "lower" than Qwest's bid of $26.00 per share. But Qwest's bid is only worth $26 if you have faith in the currency of Q stock.
MCI might have accepted a Qwest bid over a Verizon bid if Qwest had offered an all-cash deal. Even then, however, we think that the cash level of the bid would have had to been higher than an equivalent Verizon bid, even an all-stock Verizon bid.
As we detailed in the March 23 Ahead of the Curve column, "Verizon Will Acquire MCI," the problem with the Qwest bid is that more than half of the "value" was based on Qwest stock. Since the real value of stock is not the current price, but the price at which it can be sold, the MCI board clearly feels that the future value of VZ stock will be much higher than the future value of Q stock. We strongly agree with that view. Furthermore, we think that view can reasonably be supported in court, which is probably inevitable.
The reason that Verizon wants MCI is also the reason that MCI directors have greater faith in VZ stock than in Q stock. With the MCI acquisition, Verizon gains two strategic pieces it does not currently have. First, the MCI internet backbone infrastructure will give Verizon 100% ownership from top-to-bottom of a large telecom network. Although Verizon owns its own telecommunications network for local voice and data services, and some of its long distance voice calls, for the most part it does not own packet-switched networking on a national basis. Gaining this from MCI gives Verizon entry into the enterprise market for leased networking capacity.
The second strategic piece that Verizon gets with the MCI deal is the existing customer base in this very market. Although MCI still has a large, but rapidly declining, long distance client base, those customers are not strategic, particularly the retail customers. The valuable client base is the large corporate enterprise. Those customers purchase high bandwidth data networking capacity, often at the lowest protocol level. This isn't basic "internet access" capability, although that is also sold by MCI, but high capacity, proprietary networking services. A geographically dispersed large enterprise leases networking capacity from MCI and uses it to connect all of their various offices on a single, secure, and known network. Those customers sign long term contracts and would find it difficult to shift to another vendor easily.
That customer base is the real jewel for Verizon. Not only is the business model good (in contrast to the consumer long distance model), but the opportunity to begin providing additional telecom products to the enterprise customer is enormous. We believe the future of telecom lies with the development of a "single-source" telecom suite, where a single vendor productizes all of the various analog and digital telecom services into a single package. The development of that type of product will occur first for enterprises, like the MCI enterprise client, and then evolve towards the consumer market. With the MCI acquisition, Verizon will have a tremendous headstart over all other competitors for the next era of telecom. (Today's Ahead of the Curve column, to be published later this afternoon, will have more on the Verizon/MCI acquisition and what it means for the future of the telecommunications industry.) - Robert V. Green
11:06AM Online Advertising and Yahoo! (YHOO) 32.65 +0.40: With the calendar quarter drawing to a close, this is as good a time as any to revisit a very popular theme of last quarter. Online ad spending was higher, and that really only helped a couple of stocks. Yahoo! and Google, and the brokers of the advertisements, were the ones that were helped out by this idea. Everyone else wasn't so fortunate.
The question permeated throughout the first quarter as every chance an Internet or Media analyst had to ask management about how online ad rates were trending, they took it. It is, after all a key idea for investors (as opposed to short term traders) who want to get a sense of whether this was an anomaly or the likely seasonal pattern that the Internet will carry forward.
Since most online advertising is paid for through auction format, its not as simple as looking at a standard rate card to see where most prices are going. This forces much deeper analysis and due diligence, something that few investors really want to do. One way to look at it, although not quite as accurate as looking at where all the auctions have been, is to look at the marketing expense lines for the other dot coms, who, for the most part, spend a majority of their ad budgets with other online companies.
One general conclusion that could be made when looking at these numbers was that marketing spend was growing faster than sales. That is a bad sign to most investors. Amazon, for instance, saw marketing expense grow 44% year-over-year while sales increased 31%. Priceline saw an even more dramatic shift with online advertising growing by more than 100% while revenues grew a paltry 8% on a year-over-year basis. This wasn't the case in all instances, as eLoan grew revenue at a 36% rate compared to a 24% increase in marketing expense.
Guidance for the next quarter included the idea of higher expenses. Monster WorldWide (MNST) noted that "expense levels in the first quarter are expected to increase due to seasonally higher marketing and promotion expenses in North America." The CEO for Drugstore.com stated a similar notion when he said "we need to invest in our brand marketing and technology." And even as eBay noted that they were seeing "bubble-like" search pricing, they noted they still plan on keeping marketing expenses around 20% of revenue.
The obvious conclusion here is that marketing expenses are increasing, and often they are increasing faster than sales. This will adversely affect the profitability of Internet companies, which is one reason why the sector has been weakening throughout the quarter. Looking ahead to the releases over the next month, keen investors will pay close attention to where marketing expenses are headed as they are a key part of any online business.
9:58AM Circuit City (CC) 15.75, +0.30: Volatility has been the name of the game in Circuit City's shares. The stock reached a peak back in November and then dropped 30% over the next two months following disappointing same-store sales and earnings results that prompted multiple downgrades from the Street. Shares began to finally stabilize in Jan, only to skyrocket on Feb 15th when the company received a $2.35 bln cash offer from its fifth largest shareholder, Highfields Capital Management. CC's Board unanimously agreed to reject the offer saying it was "not for sale" and that the buyout was not in the best interest of its shareholders. The bid prompted the company to increase its buyback authorization by $400 mln to total capacity of $455.7 mln.
So, what do we have to look forward to when the company reports Q4 results on Wednesday? Well, investors are being asked today to be a little more patient, as Circuit City has indicated it will delay its Q4 and year-end report so that it can complete the review of its current lease accounting practices. The company expects to post its results within 7 to 14 days.
Excluding adjustments related to the review, Circuit City has indicated that it expects to report earnings for the fiscal year in the range of $0.33-0.35 per share, after $0.15 per share costs associated with previously announced closings of select stores, regional offices, and a distribution center. Separately, the company had preannounced that sales rose 5.3% to $3.47 bln (consensus $3.35 bln), up from $3.30 bln last year. Comps were down 1.8%. This indicates a marked improvement in Jan and Feb, following a disappointing Dec when comps were down 5.8% vs. expectations for a 0.6% drop. For the full year, total sales rose 6.3% to $10.47 bln (consensus $10.24 bln), with comps up only 0.7%.
Although in the red, earnings have beaten expectations over the last three quarters. For Q4, there has not been any earnings guidance from the company, therefore the Street's estimates are wide ranging. The Reuters Estimate consensus is $0.56 indicating a 22% year/year growth rate from $0.46. One issue the market will focus on is the level of promotional activity during the first two months of the year, possibly impacting margins at core CC stores. Ideally the company will provide greater details of its restructuring plan, possibly involving a new store prototype.
The Highfields offer lingers in the sense that shares are trading less on fundamentals, even after management formerly rejected the offer. Some analysts portend the offer may have been used to put pressure on management to restructure and turnaround its business, in addition to increasing shareholder value, or possibly forcing a leadership change. The pressure has definitely been ramped up. Following the offer, Circuit City announced several senior management changes, as well as 19 store closings. CC also hired several key individuals throughout the organization, including Ron Cuthbertson as VP of supply chain and inventory management. Cuthbertson formerly worked in a similar capacity at rival Best Buy (BBY).
Investors should take heed, as the speculation is likely to continue for the near-term, increasing volatility in shares. Shares are currently trading at 35.8x forward earnings, which seems quite rich considering the challenges ahead and the potential for a slowdown in consumer spending as interest rates continue to rise. ----Kimberly DuBord, Briefing.com
9:04AM Page One - Underlying Concerns : There is very little news of note, yet the futures indicate a lower open that would more than reverse yesterday's gains. The data due later this week continue to hang over the market.
There are no earnings reports of note and no economic releases. Oil prices are down slightly. There aren't even any earnings warnings of significance. There is nothing specific to account for the fact that futures indicate a significantly lower open.
Inflation concerns continue to hold the market back. The inflation indicator in the February personal income data due on Thursday (the core PCE) and the average hourly earnings number in the March employment data due on Friday are viewed with apprehension. If either is seen as reflecting increased inflationary pressures, the stock market could take a hit. Those concerns are creating a cautious underlying tone.
The stock market needs a catalyst to improve the tone. Upcoming first quarter earnings reports could provide that catalyst. Expectations are for operating earnings for the S&P 500 to rise 8%. Earnings regularly come in with better gains than expected, and the increase is likely to again be double digit. The market often rallies through earnings season, which this quarter will be heaviest the final three weeks of April. That isn't to say that a big rally is coming, but the earnings reports will bring a reminder that not all the news is bad.
There are times when investors need to be patient. This is one of those times.Dick Green, Briefing.com
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