From Briefing.com: 4:45 pm Weekly Wrap
The fundamentals were almost entirely bearish this week. It is no surprise that all the major indices were lower. In fact, it is a bit surprising that the sell-off was not more severe.
Oil prices were up sharply, the Fed Chairman as much as said that rate cuts are unlikely any time soon, the economic data were mixed at best, and a key inflation measure was higher than expected. There wasn't any significant corporate news to offset the bearish macro-economic issues.
The Fed Chairman's testimony before the Joint Economic Committee of Congress on Wednesday ranked as the most important event of the week. Fed Chairman Bernanke said that inflation remains the predominant concern. He made that absolutely clear.
He did not express significant concern about economic growth, and while recognizing the risk from the housing sector, he also suggested that the impact from the problems in the subprime mortgage market would be contained.
Bernanke's testimony implied that it will take a while for the current level of interest rates to bring inflation down. That means market hopes for a rate cut by the end of the summer are overly optimistic. The S&P lost 11 points on the day of his testimony.
The economic data this week brought mixed news. New home sales for February were down 3.9% despite expectations of a bounce from a sharp drop in January. Consumer confidence in March posted the first drop in five months. February durable goods new orders were up a smaller than expected 2.5% after a 9.3% plunge in January. The housing and manufacturing sectors remain drags on the economy.
More positively, initial claims for unemployment remained at low levels, reflecting a strong labor market. Fourth quarter real GDP growth was revised modestly higher to a 2.5% annual rate from 2.2%. The March Chicago PMI index jumped sharply higher to a strong 61.7 from 47.9 in February, raising hopes of a manufacturing rebound. And February personal consumption expenditures rose a stronger than expected 0.6%, showing that consumer spending remains strong.
The most important economic release, however, was the clearly bearish 0.3% increase in the February core personal consumption expenditure (PCE) price deflator.
This is the Fed's favorite inflation measure. The gain was larger than an expected 0.2%, and follows a 0.1% increase in December and a 0.2% gain in January. It raised the year-over-year increase to 2.4% from 2.2% in January. The Fed's forecast calls for this to get below 2.0% in 2008. It is going in the wrong direction.
This is just one month of data and it shouldn't be over-emphasized. If the core PCE continues at even a 0.2% rate in upcoming months, however, it will keep the Fed in an aggressive inflation fighting mood. Higher inflation is always bad for the financial markets.
Adding to inflation concerns is the fact that oil prices rose to about $66 a barrel this week from $62 last week and $57 the week before. The Iran situation was a factor, but there are concerns that oil prices will remain higher regardless of how that plays out.
The macro economic news therefore amounts to rising inflationary pressures, a tough stance from the Fed, and continued sluggish economic indicators. There isn't a lot of good news. The market could have sold off more following the solid gains last week.
The biggest corporate news this week was that Dell is delaying its 10-K report due to an ongoing investigation into its accounting, but that news didn't hit the stock market very hard since it is a company-specific issue.
The first quarter ended with the S&P nearly flat for the year. It was an up and down quarter with excessive optimism followed by excessive fears. The market has filtered through it all and has assessed that stable interest rates and significantly slower earnings growth warrant little net change.
The market is likely to remain extremely sensitive to economic releases, but an increased focus to corporate news will develop as first quarter earnings reports in mid-April approach.
Index Started Week Ended Week Change % Change YTD
DJIA 12481.01 12354.35 -126.66 -1.0 % -0.9 %
Nasdaq 2456.18 2421.64 -34.54 -1.4 % 0.3 %
S&P 500 1436.11 1420.86 -15.25 -1.1 % 0.2 %
Russell 2000 808.05 800.71 -7.34 -0.9 % 1.7 %
4:20 pm : The market had its share of trading triggers on Friday, the bulk of which were bearish in Briefing.com's estimation.
Granted there was encouraging news from an economic growth standpoint, as personal income and spending were both reported to be up 0.6% in February, versus expectations for a 0.3% increase for each, while the Chicago Purchasing Manager's Index printed with a 61.7 reading versus the 49.5 consensus estimate. A number above 50 reflects growth.
Those items, in fact, proved to be early buying catalysts. However, they weren't enough to sustain a strong bullish bias as there were some overriding factors that effectively canceled them out.
The biggest factor in that respect was the core-PCE component of the Personal Income and Spending report, which is the Fed's favorite inflation gauge. It was up 0.3% (consensus +0.2%) which pushed the annual rate up to 2.4% from 2.2% in January. The Fed's target range for core-PCE is 1.0% to 2.0%.
To be sure, the combination of stronger than expected growth and higher than expected inflation not only squashed the idea that a Fed rate cut will happen soon, it also raised the potential that the Fed might raise rates again.
Despite that negative implication and an admission from Dell (DELL 23.21, -0.18) that it found accounting errors and evidence of misconduct, stocks managed to hold their ground fairly well before a late-morning report that the Commerce Department approved duties on Chinese paper imports knocked them back in noticeable fashion.
At their lows for the session, which were established just before noon eastern time, the Dow, Nasdaq and S&P were down approximately 105, 15 and 14 points, respectively.
The impetus for the broad-based sell-off was the supposition that the Commerce Department's action reflected a protectionist agenda. Whether one agrees with that view or not, protectionism never plays out well on Wall Street given its detrimental effect on overall earnings prospects.
Compounding the market's concerns mid-day were worries about the tension in the Persian Gulf between Iran and Western powers. Those concerns pushed oil prices as high as $66.78 on an intra-day basis before they rolled over on a burgeoning hope that there will be a peaceful resolution over the weekend with respect to Iran's capture of 15 British sailors.
The pullback in oil prices helped drive an afternoon recovery effort that saw each of the major indices make their way back into positive territory before ending the day mixed and little changed.
On a related note, the latter characterization sums up the first quarter for the major indices. While the Dow declined 0.87%, the Nasdaq and S&P 500 managed to eke out gains of 0.26% and 0.18%, respectively, for the first three months of the year.DJ30 +5.60 NASDAQ +3.76 SP500 -1.67 NASDAQ Dec/Adv/Vol 1477/1558/1.88 bln NYSE Dec/Adv/Vol 1540/1720/1.27 bln
10:51AM Atmel says purpose of special meeting called by Mr. Perlegos is to remove those directors who terminated him and to reinstate himself as CEO. (ATML) 5.06 +0.09 : Co commented on the preliminary proxy materials filed with the S.E.C by George Perlegos, Atmel's former Chairman and CEO who was terminated for cause, regarding the special meeting of stockholders on May 18, 2007. The sole purpose of the special meeting called by Mr. Perlegos is to remove those directors who terminated him and to reinstate himself as CEO. "Atmel's Board and new management team have initiated a number of significant strategic and operational improvements,... Through these actions, estimated to save between $70-$80 mln this year alone, we have started to refocus the co on its core microcontroller products and technical strengths, and on improving growth and profitability. We are continuing to identify other areas of opportunity to create a stronger future for Atmel and our stockholders." The co noted that George Perlegos controlled Atmel for more than 20 years and that in each of the last five years under his direction (2001 to 2005), the co incurred net losses, which exceeded $1.2 bln in the aggregate.
6:52AM Atmel: George Perlegos files preliminary proxy statement to replace five Atmel Directors at special meeting (ATML) 4.97 : George Perlegos, the largest individual shareholder of Atmel Corporation (ATML), announces the filing of the preliminary proxy statement with the S.E.C in connection with his planned solicitation of proxies at a Special Meeting of Shareholders scheduled for May 18, 2007 for Atmel shareholders of record as of April 5, 2007. Mr. Perlegos is seeking support from fellow Atmel shareholders to elect five highly qualified and independent nominees to replace five members of Atmel's current Board of Directors... The preliminary proxy statement outlines a plan to drive shareholder value at Atmel, including divesting non-core assets to refocus the co on its core strengths in microcontrollers, hiring an experienced new President and CEO, and initiating a $500 mln-$1 bln share repurchase program. Mr. Perlegos is seeking the removal of the following current directors of Atmel: Pierre Fougere, Dr. Chaiho Kim, Steven Laub, David Sugishita and T. Peter Thomas. These Atmel directors own less than 0.01% of Atmel's outstanding shares in the aggregate, based on public filings.
07:38 am Dell (DELL)
After Thursdays close, Dell (DELL) announced it will delay the filing of its 10-K for the fiscal year 2007 beyond its originally prescribed April 3rd release date. But that wasnt the worst of the news released by the struggling PC giant. Dell admitted its internal audit committee found a number of accounting errors and evidence of misconduct during its month-long review of its financial statements, adding to its financial woes.
Dell's admission, which also included "deficiencies in the financial control environment" sent shares tumbling in the after-hours by 2.4% to $22.83.
The news adds further uncertainty to shares, and therefore will likely weigh heavily on the stock until the investigation is resolved. It's unclear whether the accounting fixes the company has instituted will alter reported financials. Dell indicated that it's moving closer to the conclusion of its investigation, and thus it could be releasing delinquent filings over the next few weeks.
Over the past few months, there has been a major management shakeup with the departure of the CEO and CFO and the return of Michael Dell back to the chief executive seat. The company's second, third and fourth quarter financial results all remain preliminary and have yet to be filed with the SEC.
While this is a hefty blow to the company, Dell will no doubt recover. The worst that could happen at this point is for the investigation to reach a criminal level, which most industry watchers don't believe will occur. Earlier this month, we argued that the waters remained hostile for those bottom fishers looking at Dell as a turnaround story. That being said, the stock becomes quite interesting down in the $21-$20 range.
--Kimberly DuBord, Briefing.com |
