From Briefing.com: 5:19 pm Weekly Wrap
The stock market was slightly lower this past week. Technology and small cap stocks suffered the worst, but the S&P 500 index lost only 0.4%. That wasn't a bad performance given the big gains last week.
The market opened the week with a sizable 10 point gain on the S&P 500 index on Monday. It was a half day of trading ahead of the Tuesday holiday and volume was light. There was little news and the gains were due to a carryover of the more positive tone that developed the prior week. There was also talk of buying by funds on the first day of the quarter.
Wednesday the market reopened and decided to give back the Monday gains. The S&P 500 index dropped 9 points on what was again a light news day. The selling was largely a reaction to the recent rally, but there was also the troubling news about the North Korean missile tests. Oil closed above $75 a barrel.
Thursday the see-saw pattern continued as the S&P bounced back 3 points. The news was mostly bearish, suggesting that the gains reflected a technical bounce as the market continued to settle in after the Fed policy statement from the week before. June same store sales data from retailers was weak. Wal-Mart posted a meager 1.2% gain as discount chains produced the worst results. Some specialty chains had decent results, but overall, the impression was of slower growth in the consumer sector. The ISM services index dipped for June, supporting the view of a general slowdown in the economy.
Friday the market took a dive. The S&P dropped 9 points and erased all of the gains for the week. The big news was that June payrolls were up only 121,000. That originally gave a boost to stocks on the idea that slower payroll growth gives the Fed less of a reason to raise rates again. There had been talk of a surge in payrolls of as much as 300,000, which might reflect economic growth of such a magnitude that the Fed would have to keep raising rates.
The market did open higher on the news, but quickly reversed ground. Part of the reason was a large 0.5% increase in hourly earnings in the payroll data. Wage gains have been picking up and the year-over-year increase is now up to 3.9%. This is viewed as adding to inflationary pressures. The talk thus turned to higher inflation and slower economic growth - not exactly a prescription for good stock gains.
In fact, a key theme this week was that economic growth is clearly slowing. June auto sales were weak. May construction spending dipped. The June ISM manufacturing index fell to just 53.8 (a reading above 50 reflects growth) from 54.4 in May. The retail chain store data and ISM services index noted above were also both soft. Thus, although virtually all economic series still reflect growth, there is widespread slowing. Housing, manufacturing, consumer spending, and employment all are growing at slower rates.
Slower growth brings mixed blessings. It may lead the Fed to soon end the rate hikes, but it also leads to slower earnings growth. The mixed implications are a reason the market has been in a trading range for almost six months now. The S&P 500 index is little changed from where it was one-half year ago.
The focus now shifts from the macro issues such as Fed policy and economic data to the micro issue of individual corporate earnings. Monday afternoon, Alcoa kicks off the second quarter earnings season with their report. The reports get very heavy the following week.
It is expected that second quarter operating earnings for the S&P 500 in aggregate will post a very respectable 10% increase over the same quarter in 2005. The market will be particularly sensitive to warnings for second half earnings, however. On Friday, 3M warned and the stock was slammed. It is very possible that many companies express a cautious outlook given the clear indications that economic growth is slowing.
The Fed may very well be on their way to accomplishing a "soft landing." That would entail slower economic growth in the second half of the year that leads to lower inflation rates, but no recession. The current trends in the economy suggest the Fed may be very near the end of their rate hike cycle as they await the lagged impact in terms of lower inflation. But the market will remain nervous over the possibility that the Fed has already gone too far and that the economy will slow too much. Those concerns could be reflected in reactions to earnings guidance in the upcoming reports.
The broader trading range may continue until there is more clarity on the outlook for Fed policy and third and fourth quarter earnings.
Index Started Week Ended Week Change % Change YTD
DJIA 11150.22 11090.67 -59.55 -0.5 % 3.5 %
Nasdaq 2172.09 2130.06 -42.03 -1.9 % -3.4 %
S&P 500 1270.20 1265.48 -4.72 -0.4 % 1.4 %
Russell 2000 724.67 709.30 -15.37 -2.1 % 5.4 %
4:49PM Market Internals (MKTIN) : The Dow decreased 1.20% closing at 11091, the Nasdaq was down 1.16% to finish at 2130, and the S&P was down 0.67% to finish at 1265. Leading sectors included: auto manu +1.5%, agricultural products +1.4%, health care facl +1.2%, independent power producers and energy traders +1.2 %, drug retail +0.85%. Lagging sectors included: coal and consumable fuel -4.9%, human resources and employment srvc --3.1%, casinos and gaming -2.5%, oil and gas drillers -2.5%, building products --2.5%. Today's movement came from mixed volume (NYSE 1787, vs. closing avg of 1734; Nasdaq 1427, vs. 2077), with lower advance/decline ratios (NYSE 1246/2005; Nasdaq 852/2181, and with mixed new high/new low ratios (NYSE 79/77, Nasdaq 51/104).
4:20 pm : The major averages closed sharply lower Friday as a mixed jobs report, downside guidance from two bellwethers and the absence of notable sector leadership kept buyers on the sidelines going into the weekend.
As if ADP Employer Services saying Wednesday that June nonfarm payrolls (according to their estimates) were very strong didn't create enough confusion about job growth, a mixed employment report from the Labor Dept. merely exacerbated uncertainty with regard to Fed policy. On the one hand, June nonfarm payrolls rising only 121,000 -- a level of growth consistent with the "soft landing" the Fed is trying to achieve, eased concerns of policy makers going too far with their tightening efforts. To wit, Treasuries took notice sending yields to session lows; the 10-yr yield closed at 5.12%. However, even though the market was initially relieved that the rumors of a June payroll surge did not materialize, a larger than expected 0.5% jump in hourly earnings -- an inflationary factor that could influence the Fed since it equates to year-over-year growth of 3.9%, the biggest gain in five years -- lent some rationale for another rate hike in August.
With earnings season officially beginning Monday and investors beginning to switch their focus to corporate profits, warnings from two industry bellwethers also weighed on sentiment, questioning the likelihood of a 12th straight quarter of a double-digit operating earnings growth for the SnP 500. The Industrials sector was hit the hardest after 3M Co. (MMM 74.10 -7.29) issued downside second-quarter earnings guidance due to lower than expected sales volumes for optical systems used in flat panel displays. Aside from Technology also falling victim to a warning after Advanced Micro Devices (AMD 23.56 -0.27) said second-quarter sales will be below expectations, 3M's warning also weighed on Corning (GLW 22.15 -1.09), the largest maker of glass for LCDs, preventing tech from surrendering its status as this year's worst performing sector.
Not even crude oil prices falling 1.4% from record highs was enough to get investors excited, even amid expectations that gas prices could surpass $3.00 a gallon nationally next week. While lower oil prices may bode well for consumers, especially with the summer driving season in full swing, a 1.3% decline in Energy questioned the sector's continued ability to support double-digit earnings growth for the broader market. BTK -0.58% DJ30 -134.63 DJTA -0.86% DJUA +0.68% DOT -0.88% NASDAQ -25.03 NQ100 -1.15% R2K -1.57% SOX -1.52% SP400 -0.93% SP500 -8.60 XOI -0.48% NASDAQ Dec/Adv/Vol 2181/852/1.79 bln NYSE Dec/Adv/Vol 2005/1246/1.43 bln
3:33PM Conference/Events Calendar for the week of July 10-14 : Conference/Events Calendar for the week of July 10-14 include: Monday: Credit Suisse Group Hedge Fund Manager Roundtable; CVS June Sales Release; NVLS at SEMICON West 2006... Tuesday: ASYT Analyst Meeting; LRCX to Hold Analyst and Investor Meeting; TSCM TheStreet.com and Avondale Partner's Investor Day; KLAC, MKSI at SEMICON West 2006; LNC Conf Call; PLAB, WFR at JP Morgan SEMICON West Mini Conf; PNRA,COSI, GES, IFF at CIBC World Markets Annual Consumer Growth Conf; SUNW New x64 Enterprise Systems Launch... Wednesday: ASMI Analyst Meeting; BFF Investor Luncheon Meeting; KLIC Analyst Event; ANN, TPX, DRI, TLB at CIBC World Markets Annual Consumer Growth Conf; BRKS, KEI, RTEC at SEMICON West 2006; ENTG Analyst Meeting at Semicon West; PRZ Luncheon Presentation... Thursday: ACOR 2006 Analyst Meeting; BFF Investor Luncheon Meeting; SEMICON West 2006... Friday: SEMICON West 2006.
10:18 am Starbucks (SBUX)
35.78 -2.10: Shares of Starbucks Corp. traded sharply lower on Friday, after the world's largest specialty coffee retailer reported June same store sales rose 6%, short of analysts' lofty expectations. While the result was at the upper end of the company's stated long term goal of 3% to 7% growth, analysts were expecting a 7% gain in June comps.
The Seattle-based coffee chain reported net revenues of $751 million for the five-week period ended July 2, up 22% from $618 million a year earlier. Sales were primarily driven by the Starbucks' seasonal handcrafted blended beverages, as well as its expanded lunch locations and enhanced bakery offerings, the company said.
Based on the results for the month of June, the company's shares slipped nearly 6% in early market trading. The stock has traded in a range of $23.01 to $39.88 over the past twelve months and is up about 19% since the beginning of the year. Although June same store sales fell short of analysts' expectations, Starbucks, which has grown revenue at an average of 23.8% and net income an average of 36.2% over the past five years, remains one of our favored names in the Consumer Discretionary sector, given its continued success in new products and substantial growth opportunities domestically and internationally.
--Richard Jahnke, Briefing.com
09:12 am LaBranche & Co. (LAB)
12.44: LaBranche & Co., one of the largest specialist trading firms on the NYSE, said Thursday it expects to post a loss in the second quarter, primarily due to lower trading revenue in its specialist and market-making business. Included in the estimate is an operating loss of approximately $5 million, or $0.08 per share, and a non-cash of $17 million decline in the value of the company's restricted shares in the NYSE Group Inc. (NYX), the company said.
According to Reuters Estimates, analysts on average were expecting the company to post earnings of $0.08 per share, excluding non-recurring items.
LaBranche said the operating loss was a result of adverse market conditions in May and June. Principal trading revenue in the quarter totaled approximately $20 million, down from $47 million in the same period last year, the company said.
The company's earnings warning reflects the barren results seen during much of the past two years, as the role of the specialist continues to diminish as traditional exchanges, such as the NYSE, have lost ground to faster, cheaper, and more transparent electronic systems. With the specialist business in a state of transition, as trading moves to electronic platforms, LaBranche continues to be pressured by lower trade and share volumes. As such, we remain hesitant on the near-term prospects for the company and would not be committing money to the stock at this time.
--Richard Jahnke, Briefing.com
09:03 am Verizon Communications Inc. (VZ)
33.02: Shares in Verizon Communications Inc. could get a boost today as the company has filed documents with the Securities and Exchange Commission to enable the spinning off of its domestic print and Internet yellow pages directories.
The company, which has a market cap of $96.33 billion, said it has not made a final decision on whether a spin-off will occur, but has said it continues to expect to complete a disposition of its directories publishing operations - which could include the spin-off, a sale or other transaction - by the end of 2006.
A spin-off, which could be valued at as much as $13 billion, is appealing to Verizon because it could be done tax-free. Verizon management has said it expects to recommend to its board of directors that the company maintain its annual dividend at its current level of $1.62 per share immediately following a proposed spin-off.
The filing was made by a recently formed wholly owned subsidiary named Verizon Directories Disposition Corporation. The registration statement provides details about a proposed spin-off, which would create a new, publicly traded company with management independent from Verizon. The new company would be headquartered in Dallas and would have approximately 7,100 employees.
Verizon, which is trying to transform itself into an Internet-based communications business from a traditional phone company, said last December it was reviewing the directories business.
Briefing.com feels that the future belongs to converged telecom products, and has argued this for around two years. As a percentage of total revenue, converged telecom products are still somewhat insignificant at Verizon (and elsewhere), but the growth is solid and encouraging.
The theme of Verizon for the past year - and probably the coming year - has been the "buildout." The company is investing on a large scale in the nationwide fiber-optic service, which will give it the first fully integrated "converged" network capable of carrying digital telephone video, data, and internet access on a single wholly-owned infrastructure.
Verizon is not only investing heavily in this future, it is also clearly making strong progress in that direction. And at about 13x trailing 12-month earnings, the stock is currently trading at a discount to its main competitors.
--Christine Marie Nielsen, Briefing.com
08:17 am Advanced Micro Devices (AMD)
23.83: Advanced Micro Devices reduced its second quarter revenue guidance below consensus, sending shares lower in pre-market trading. The chip maker warned revenues would decline by 9% in the quarter due to weakness in sales of chips used in mobile and desktop PCs.
The Sunnyvale, California-based company did indicate that chip sales used in servers and workstations were strong. AMD has been successful in eroding market share from the world's leading chipmaker, Intel (INTC). Intel hasn't taken the market invasion laying down, as it has fought back by lowering prices to stem share losses. Today's warning indicates that its strategy is working as the price war and seasonality cut into AMD's top line. Reducing prices has enabled Intel to clear out older inventories before its newest chips head to the marketplace this year.
For AMD, it now expects second quarter revenues of $1.22 bln, up 52% from a year ago, but again down 9% from Q1. Its previous guidance indicated Q2 sales would be equal to or slightly below the prior quarter. Analysts were expecting sales of $1.31 bln. AMD noted record Opteron processor sales, while weakness mainly came from entry-level and mainstream mobile and desktop processors.
After closing at $23.83 on Thursday, AMD shares are trading down over 4% to $23.71. AMD's stock price, however, already reflects the market's concerns over the pricing wars and the PC cycle. The overall tech sector has been bereft of buyers since May over concerns on rising inventories and second half demand trends. We currently rate the sector at Market Weight on palpable concerns that the Fed has gone too far in its tightening effort.
--Kimberly DuBord, Briefing.com
09:40 am Business Objects: RBC Capital Mkts downgrades Outperform to Sector Perform. Target $43 to $29. Firm lowers rating and price tgt noting BOBJ preannounced Q2/06, below their and consensus estimates, on weak large deal execution, as well as poor European/Asia-Pac performance.
09:31 am Anheuser-Busch: Banc of America Sec reiterates Neutral. Target $47 to $44. Firm raises price tgt saying the good start to the year for the beer industry and reasonable pricing environment suggests modest upside for BUD and TAP. They expect these stocks to perform well into results. (the previous comment has been deleted)
09:29 am Credence: Global Crown Capital upgrades Neutral to Overweight. Target $6. Firm ups rating saying they expect CMOS to deliver an upside to the current consensus expectations in the next two quarters due to the strength in its core business -- mixed-signal and analog IC testers -- and improvements in sales of its Sapphire-based product lines.
09:26 am Advanced Micro: Prudential reiterates Overweight. Target $45 to $40. Firm cuts price tgt noting AMD lowered its June sales forecast to $1.215 bln vs. prior est. for sales to be flat to down slightly. The firm says although a shortfall was expected, they believe the magnitude was worse than investors had been anticipating. They also says various factors lead tje, to believe that the worse may not yet be behind for AMD. Specifically, they believe that 1) a continued deterioration in AMD channel inventory, 2) difficult comps heading into Q3, which will revert back to a normal 13-week qtr, 3) margin impact from late qtr. price cuts, which will be felt almost entirely in Q3, 4) strong likelihood of share loss to Intel (INTC) in 2H06, and 5) an elevated cost structure heading into '07, will result in further downward adjustments to AMD's consensus forecast.
09:25 am Valassis: Prudential reiterates Underweight . Target $32 to $18. Firm cuts price tgt saying execution risk remains a big factor as they think it will be hard for Valassis to integrate both companies while driving the top-line. The firm says by levering up the balance sheet, Valassis is putting itself in a riskier position with regard to the competitive pricing environment with News America.
09:24 am JC Penney: UBS reiterates Buy. Target $78 to $81. Firm ups price tgt saying 70% of q2 sales are in, so even if July is flat, comps for the qtr should be p around 5%. They estimate this can drive roughly 90 bps of leverage on buying/fixed expenses. The firm says with some additional expense reduction, they est JCP can earn $0.75 in Q2. The firm notes this is ahead of mgmt's $0.65, but they note mgmt has a history of conservative guidance.
09:21 am FOCUS Enhancements: Roth Capital initiates Buy. Target $2. Firm initiates saying the co is poised to reinvent itself in the Ultra Wide Band market. The firm says demand for Portable Media Players could fuel strong growth for FCSE's semiconductor products. The firm says their channel checks indicate that several portable media manufacturers are ramping up production for a strong year end selling season. They believe FCSE could beat Q2:06 Street Consensus on better gross margins and guide for revenues above Consensus.
09:18 am Zhone Technologies: Needham & Co initiates Hold. Firm re-initiates saying although the co has assembled a quality portfolio of access products through a series of acquisitions and the management team is very solid, the firm believes that the stock's current depressed valuation reflects investor uncertainty over sequentially-improving results through 2006. |
