S&P 500 1,144.11 -.69%
U.S. stocks declined last week, led by technology shares amid concerns about valuations, a rising dollar and rising interest rates. Without so much as a 5% correction in over a year, U.S. stocks will likely decline or consolidate in the short-term. As well, the NASDAQ is up 90% over the last 15 months, its 4th best cyclical showing ever and is due for a correction. Small-cap growth stocks bore the brunt of the selling as investors became more risk adverse on inflation fears.
Merger and acquisition activity continues to accelerate in 04. Cingular's $41B takeover of AT&T wireless and National City's buy of Provident Financial for $2.1B highlighted the week in M&A.
On the earnings front, bell-weather U.S. market leaders Deere & Co., Broadcom and Applied Materials all significantly beat expectations. Analysts boosted 04 estimates for all 3 substantially, lowering their valuation on 04 estimates. Wal-Mart, the world's largest retailer, also reported good 4th quarter profits up 8.5% and raised 1st quarter guidance. Intuit and Hewlett Packard met expectations, but were conservative in their guidance, leading to their shares' decline.
BOTTOM LINE: I think the market's decline last week was mainly a result of profit-taking after an exceptional run. Investor concerns over inflation seem pre-mature considering interest rates barely moved last week, hovering near 46-yr. lows. The rise in the dollar was not significant considering the size of its decline over the last year. Energy prices, while a concern longer term, will likely fall or move sideways into the spring, as weather improves. Corporate profitability growth is near historic highs, resulting in rapidly falling valuations for U.S. stocks. For these reasons, I view the current consolidation/correction as only temporary.
Saturday, February 21, 2004
Economic Week in Review
ECRI Weekly Leading Index 132.90+.99%
The holiday-shortened week began on Tues. with the Empire Manufacturing, Industrial Production and Capacity Utilization reports. The Empire Manufacturing report rose in February to a record 41.1 vs. expectations of 37.0. The report showed 52.5% of the company's surveyed said business improved from January, while 10.5% saw deterioration. The survey's hiring index for the next 6 months jumped to 36.2, the highest since the report began in 01. U.S. industrial production rose .8% in January, meeting expectations, while capacity utilization increased to 76.2 vs. expectations of 76.4. Record-low inventories relative to sales have prompted factories to speed up assembly lines to meet demand.
Housing starts retreated from their highest level in 20 years to a 1.9M-unit annual rate last month vs. expectations of 2M, on record cold temperatures in many parts of the country. The average temperature in the Northeast was almost 8 degrees colder than normal. As well, building permits declined to 1.9M vs. expectations of 1.91M.
The number of Americans filing initial unemployment claims fell last week to 344K, better than expectations of 355K and close to a 3-yr. low. The number of people continuing to collect jobless benefits rose to 3.19M vs. expectations of 3.11M. The index of leading U.S. economic indicators rose .5% in January meeting expectations. Jose Rasco, a senior economist at Merrill Lynch, said the rise could be attributed to the rise in the avg. work week, consumer sentiment, soaring stocks and falling jobless claims. The Philly Fed Index fell to 31.4 this month vs. expectations of 35.0. However, this was the first time since 1984 that the index came in above 30 for 3 consecutive months and the survey's measure of the length of the work week was the highest since record-keeping began in 1968.
The Consumer Price Index climbed .5% in January vs. expectations of a .3% rise. Ex food and energy, the index climbed .2% vs. expectations of .1%. The energy component of the index increased 4.7%, the most since the Iraq war began, on cold weather and increased demand from the U.S. and China. However, the core CPI only gained 1.1% for all of 03, the smallest annual rise in inflation in 43 years.
Federal Reserve Governors were unusually vocal last week. Their statements all seemed to focus on a few main themes. On the positive side, they said a substantial increase in hiring is on the horizon, tax cuts and interest rates at 46-yr. lows are boosting GDP growth significantly, they can remain "patient" with respect to raising rates and that overseas outsourcing has been going on for a long time and that it is good for the U.S. in the long-run. On the negative side, they said that U.S. workers were under-educated, persistently high energy prices were becoming a major concern and that inflation may become a problem in the future.
BOTTOM LINE: The avg. work week is increasing, productivity is declining and GDP growth is accelerating which should result in an accelerated rate of hiring. Tax cuts of $37B more than last year at this time are about to hit U.S. consumers' pockets. Interest rates are at 46-yr. lows and show no sign of moving up significantly. A recent survey of Global Economic Confidence by the Intl. Chamber of Commerce is at a 10-yr. high and their Overall Global Economic Climate index is at its best level since 1984. These findings were based on the responses of 1,114 "economic experts" in 92 countries. Fed Fund Futures are predicting the Fed to stay on hold until October. Finally, foreign governments and investors added 23% to their net holdings of U.S. securities in 03 even with a declining U.S. dollar, interest rates at historic lows and rising deficits. These are all reasons to be very positive for the direction of the U.S. economy in 04.
The holiday-shortened week began on Tues. with the Empire Manufacturing, Industrial Production and Capacity Utilization reports. The Empire Manufacturing report rose in February to a record 41.1 vs. expectations of 37.0. The report showed 52.5% of the company's surveyed said business improved from January, while 10.5% saw deterioration. The survey's hiring index for the next 6 months jumped to 36.2, the highest since the report began in 01. U.S. industrial production rose .8% in January, meeting expectations, while capacity utilization increased to 76.2 vs. expectations of 76.4. Record-low inventories relative to sales have prompted factories to speed up assembly lines to meet demand.
Housing starts retreated from their highest level in 20 years to a 1.9M-unit annual rate last month vs. expectations of 2M, on record cold temperatures in many parts of the country. The average temperature in the Northeast was almost 8 degrees colder than normal. As well, building permits declined to 1.9M vs. expectations of 1.91M.
The number of Americans filing initial unemployment claims fell last week to 344K, better than expectations of 355K and close to a 3-yr. low. The number of people continuing to collect jobless benefits rose to 3.19M vs. expectations of 3.11M. The index of leading U.S. economic indicators rose .5% in January meeting expectations. Jose Rasco, a senior economist at Merrill Lynch, said the rise could be attributed to the rise in the avg. work week, consumer sentiment, soaring stocks and falling jobless claims. The Philly Fed Index fell to 31.4 this month vs. expectations of 35.0. However, this was the first time since 1984 that the index came in above 30 for 3 consecutive months and the survey's measure of the length of the work week was the highest since record-keeping began in 1968.
The Consumer Price Index climbed .5% in January vs. expectations of a .3% rise. Ex food and energy, the index climbed .2% vs. expectations of .1%. The energy component of the index increased 4.7%, the most since the Iraq war began, on cold weather and increased demand from the U.S. and China. However, the core CPI only gained 1.1% for all of 03, the smallest annual rise in inflation in 43 years.
Federal Reserve Governors were unusually vocal last week. Their statements all seemed to focus on a few main themes. On the positive side, they said a substantial increase in hiring is on the horizon, tax cuts and interest rates at 46-yr. lows are boosting GDP growth significantly, they can remain "patient" with respect to raising rates and that overseas outsourcing has been going on for a long time and that it is good for the U.S. in the long-run. On the negative side, they said that U.S. workers were under-educated, persistently high energy prices were becoming a major concern and that inflation may become a problem in the future.
BOTTOM LINE: The avg. work week is increasing, productivity is declining and GDP growth is accelerating which should result in an accelerated rate of hiring. Tax cuts of $37B more than last year at this time are about to hit U.S. consumers' pockets. Interest rates are at 46-yr. lows and show no sign of moving up significantly. A recent survey of Global Economic Confidence by the Intl. Chamber of Commerce is at a 10-yr. high and their Overall Global Economic Climate index is at its best level since 1984. These findings were based on the responses of 1,114 "economic experts" in 92 countries. Fed Fund Futures are predicting the Fed to stay on hold until October. Finally, foreign governments and investors added 23% to their net holdings of U.S. securities in 03 even with a declining U.S. dollar, interest rates at historic lows and rising deficits. These are all reasons to be very positive for the direction of the U.S. economy in 04.
Weekly Scoreboard*
Indices
S&P 500 1,144.11 -.69%
Dow 10,619.03 -.70%
NASDAQ 2,037.93 -1.72%
Russell 2000 579.89 -2.17%
Wilshire 5000 11,143.58 -.85%
Volatility(VIX) 16.04 +4.77%
AAII Bullish % 56.45 +.62%
US Dollar 87.24 +2.37%
CRB 264.25 -.28%
Futures Spot Prices
Gold 398.00 -3.84%
Crude Oil 34.26 +2.58%
Natural Gas 5.19 -4.8%
Base Metals 112.02 +2.25%
10-year US Treasury Yield 4.09% +1.24%
Average 30-year Mortgage Rate 5.58% -1.41%
Leading Sectors
Fashion +2.53%
Papers +1.89%
HMO's +1.51%
Lagging Sectors
Telecom -2.74%
Disk Drives -3.23%
Networking -3.8%
*% Gain or loss for the week
S&P 500 1,144.11 -.69%
Dow 10,619.03 -.70%
NASDAQ 2,037.93 -1.72%
Russell 2000 579.89 -2.17%
Wilshire 5000 11,143.58 -.85%
Volatility(VIX) 16.04 +4.77%
AAII Bullish % 56.45 +.62%
US Dollar 87.24 +2.37%
CRB 264.25 -.28%
Futures Spot Prices
Gold 398.00 -3.84%
Crude Oil 34.26 +2.58%
Natural Gas 5.19 -4.8%
Base Metals 112.02 +2.25%
10-year US Treasury Yield 4.09% +1.24%
Average 30-year Mortgage Rate 5.58% -1.41%
Leading Sectors
Fashion +2.53%
Papers +1.89%
HMO's +1.51%
Lagging Sectors
Telecom -2.74%
Disk Drives -3.23%
Networking -3.8%
*% Gain or loss for the week
Friday, February 20, 2004
Friday Close
S&P 500 1,144.11-.26%
NASDAQ 2,037.93-.39%
Leading Sectors
Food+.17%
Tobacco+.11%
Oil Service+.05%
Lagging Sectors
Homebuilders-1.66%
Iron/Steel-2.00%
Networking-2.01%
Other
Crude Oil 34.26-1.10%
Natural Gas 5.19-.80%
Gold 398.00-3.00%
Base Metals 112.02-.8%
U.S. Dollar 87.15+1.5%
10-Yr. Long-Bond Yield 4.09%+1.53%
VIX 16.04+1.52%
Put/Call .86+28.4%
NYSE Arms 1.49+53.6%
After-hours Movers
None of Note
After-hours News
The U.S. markets ended down modestly after a late-day surge on positive comments from members of the Federal Reserve. This surge came on the heels of an intense mid-day sell-off on inflation fears. Later in the afternoon, Alan Greenspan said outsourcing hasn't hurt the U.S. economy and he sees employment rising "more quickly" before long. He also said protectionism won't save jobs and that demand is declining for low-skilled labor. The Fed's Bernanke said high energy costs will eventually hurt GDP growth if they persist and that hiring will strengthen this year on substantial U.S. growth and low inflation. Texas became the 4th state to report a case of bird flu this month. CNBC says the current unemployment rate of 5.6% is lower than the avg. unemployment rate for any 10-yr. period during the last three decades. CNBC also said that the NASDAQ is up 95% in the last 15 months, the 4th best cyclical move on record. Rumors are flying that Ralph Nadar will make an announcement soon that he plans to run for President.
BOTTOM LINE: I covered a few profitable shorts during the late afternoon rally, taking the Portfolio's market exposure back to market neutral. The volatility caused by option expiration likely masked underlying weakness that will resurface sometime next week. My short-term indicators continue to give a sell signal for the NASDAQ and are close to giving a sell for the S&P 500, as well. Thus, I will keep the Portfolio's market exposure close to market neutral, as I expect a continuation of the recent weakness in the short-term.
NASDAQ 2,037.93-.39%
Leading Sectors
Food+.17%
Tobacco+.11%
Oil Service+.05%
Lagging Sectors
Homebuilders-1.66%
Iron/Steel-2.00%
Networking-2.01%
Other
Crude Oil 34.26-1.10%
Natural Gas 5.19-.80%
Gold 398.00-3.00%
Base Metals 112.02-.8%
U.S. Dollar 87.15+1.5%
10-Yr. Long-Bond Yield 4.09%+1.53%
VIX 16.04+1.52%
Put/Call .86+28.4%
NYSE Arms 1.49+53.6%
After-hours Movers
None of Note
After-hours News
The U.S. markets ended down modestly after a late-day surge on positive comments from members of the Federal Reserve. This surge came on the heels of an intense mid-day sell-off on inflation fears. Later in the afternoon, Alan Greenspan said outsourcing hasn't hurt the U.S. economy and he sees employment rising "more quickly" before long. He also said protectionism won't save jobs and that demand is declining for low-skilled labor. The Fed's Bernanke said high energy costs will eventually hurt GDP growth if they persist and that hiring will strengthen this year on substantial U.S. growth and low inflation. Texas became the 4th state to report a case of bird flu this month. CNBC says the current unemployment rate of 5.6% is lower than the avg. unemployment rate for any 10-yr. period during the last three decades. CNBC also said that the NASDAQ is up 95% in the last 15 months, the 4th best cyclical move on record. Rumors are flying that Ralph Nadar will make an announcement soon that he plans to run for President.
BOTTOM LINE: I covered a few profitable shorts during the late afternoon rally, taking the Portfolio's market exposure back to market neutral. The volatility caused by option expiration likely masked underlying weakness that will resurface sometime next week. My short-term indicators continue to give a sell signal for the NASDAQ and are close to giving a sell for the S&P 500, as well. Thus, I will keep the Portfolio's market exposure close to market neutral, as I expect a continuation of the recent weakness in the short-term.
Mid-day Update
S&P 500 1,142.25-.44%
NASDAQ 2,028.62-.85%
Leading Sectors
Tobacco+.14%
Food+.01%
Energy-.09%
Lagging Sectors
Disk Drives-1.92%
Iron/Steel-2.7%
Networking-2.85%
Other
Crude Oil 35.47-1.47%
Natural Gas 5.18-1.05%
Gold 399.50-2.63%
Base Metals 111.94-.87%
U.S. Dollar 87.11+1.47%
10-Yr. Long-Bond Yield 4.09%+1.38%
VIX 16.31+3.23%
Put/Call 1.0+49.2%
NYSE Arms 1.72+77.3%
Market Movers
BEAS+4.5% on better-than-expected 4Q and multiple upgrades.
TASR+6.9% on positive reception from investor conference.
BCSI+16.5% on very strong 3Q report, significantly above expectations.
CEGE+12.1% on optimism over lung cancer vaccine.
VAPH+25% on 3-for-1 split announcement.
KVHI-10.8% on 4Q report below expectations.
UVN-4.8% on weak 1Q guidance.
Recommendations
Morgan Stanley says demand for semis in Asia is stronger than seasonal in 1Q, capital spending plans are conservative. MS also says JWN had best 4Q margin performance in 10 years. MS raising price target on UTX to $110 from $100. 9 of 14 insurance companies that MS follows beat 4Q expectations by a significant margin. Goldman Sachs believes the U.S. Treasury yield curve will flatten in 04, benefiting ALL, AIG, C, MWD and STT. This would hurt FTN, NCC, JP, NFB and FNM. GS would buy HPQ at current levels. GS positive on newspaper stocks in 04. GS also like JWN, saying it is in the early stages of a dramatic systems-enhanced turnaround. Finally, GS raised WMT to "Outperform" from "In-line." Smith Barney says to switch from Copper to Aluminum stocks. Likes AA and AL. SB also likes CCI on significantly better-than-expected earnings. SB also positive on WMT, saying it will benefit from improved apparel offerings and tax cut spending. TheStreet.com is negative on RMBS, saying INTC will use a new standard for memory that relies on a technology different than that offered by RMBS. MU was cut to "Neutral" at CSFB. BEAS raised to "Buy 2" at UBS.
Economic Data
Consumer Price Index rose .5% vs. .2% last month.
CPI Ex Food and Energy rose .2% vs. .1% last month.
Mid-day News
U.S. stocks fell as comments from Hewlett Packard about computer-industry growth, higher-than-expected inflation readings, options expiration and plain profit-taking weighed on shares. AMG Data reporting Equity funds had net cash inflows of $3.6B for the week ended February 18. TXN announced 21M share buyback. Morgan Stanley says that 87.5% of the S&P 500 either met or beat earnings expectations in 4Q, only 12.5% disappointed. Earnings growth was 27.8% on avg. 78% of information tech companies surprised on the up-side with 54.3% average earnings growth. Japan raised its terror alert to the highest level. The Fed's Poole said slowing rates of productivity growth combined with strong economic growth should lead to "substantial gains" in payroll employment growth in 04. President Bush named FDA commissioner Mark McClellan to lead Medicare, as it rolls out expanded prescription drug coverage for seniors.
BOTTOM LINE: The market was looking for a reason to decline today and the CPI report was the catalyst. This report resulted in an increase in the U.S. dollar, interest rates and worries that the Fed was getting behind the curve on inflation. With base metal and energy prices soaring on US/Chinese demand, the Fed may have to raise rates sooner rather than later. I added a few more shorts on the open and the Portfolio is now 20% net short. The put/call and trin readings are at levels that suggest we are getting close to a short-term bottom. I may take some profits in a few of my better shorts on the close. If the U.S. dollar continues to rally next week, we may get the first 5%+ correction in the S&P in over a year, as a rising dollar hurts U.S. multi-nationals.
NASDAQ 2,028.62-.85%
Leading Sectors
Tobacco+.14%
Food+.01%
Energy-.09%
Lagging Sectors
Disk Drives-1.92%
Iron/Steel-2.7%
Networking-2.85%
Other
Crude Oil 35.47-1.47%
Natural Gas 5.18-1.05%
Gold 399.50-2.63%
Base Metals 111.94-.87%
U.S. Dollar 87.11+1.47%
10-Yr. Long-Bond Yield 4.09%+1.38%
VIX 16.31+3.23%
Put/Call 1.0+49.2%
NYSE Arms 1.72+77.3%
Market Movers
BEAS+4.5% on better-than-expected 4Q and multiple upgrades.
TASR+6.9% on positive reception from investor conference.
BCSI+16.5% on very strong 3Q report, significantly above expectations.
CEGE+12.1% on optimism over lung cancer vaccine.
VAPH+25% on 3-for-1 split announcement.
KVHI-10.8% on 4Q report below expectations.
UVN-4.8% on weak 1Q guidance.
Recommendations
Morgan Stanley says demand for semis in Asia is stronger than seasonal in 1Q, capital spending plans are conservative. MS also says JWN had best 4Q margin performance in 10 years. MS raising price target on UTX to $110 from $100. 9 of 14 insurance companies that MS follows beat 4Q expectations by a significant margin. Goldman Sachs believes the U.S. Treasury yield curve will flatten in 04, benefiting ALL, AIG, C, MWD and STT. This would hurt FTN, NCC, JP, NFB and FNM. GS would buy HPQ at current levels. GS positive on newspaper stocks in 04. GS also like JWN, saying it is in the early stages of a dramatic systems-enhanced turnaround. Finally, GS raised WMT to "Outperform" from "In-line." Smith Barney says to switch from Copper to Aluminum stocks. Likes AA and AL. SB also likes CCI on significantly better-than-expected earnings. SB also positive on WMT, saying it will benefit from improved apparel offerings and tax cut spending. TheStreet.com is negative on RMBS, saying INTC will use a new standard for memory that relies on a technology different than that offered by RMBS. MU was cut to "Neutral" at CSFB. BEAS raised to "Buy 2" at UBS.
Economic Data
Consumer Price Index rose .5% vs. .2% last month.
CPI Ex Food and Energy rose .2% vs. .1% last month.
Mid-day News
U.S. stocks fell as comments from Hewlett Packard about computer-industry growth, higher-than-expected inflation readings, options expiration and plain profit-taking weighed on shares. AMG Data reporting Equity funds had net cash inflows of $3.6B for the week ended February 18. TXN announced 21M share buyback. Morgan Stanley says that 87.5% of the S&P 500 either met or beat earnings expectations in 4Q, only 12.5% disappointed. Earnings growth was 27.8% on avg. 78% of information tech companies surprised on the up-side with 54.3% average earnings growth. Japan raised its terror alert to the highest level. The Fed's Poole said slowing rates of productivity growth combined with strong economic growth should lead to "substantial gains" in payroll employment growth in 04. President Bush named FDA commissioner Mark McClellan to lead Medicare, as it rolls out expanded prescription drug coverage for seniors.
BOTTOM LINE: The market was looking for a reason to decline today and the CPI report was the catalyst. This report resulted in an increase in the U.S. dollar, interest rates and worries that the Fed was getting behind the curve on inflation. With base metal and energy prices soaring on US/Chinese demand, the Fed may have to raise rates sooner rather than later. I added a few more shorts on the open and the Portfolio is now 20% net short. The put/call and trin readings are at levels that suggest we are getting close to a short-term bottom. I may take some profits in a few of my better shorts on the close. If the U.S. dollar continues to rally next week, we may get the first 5%+ correction in the S&P in over a year, as a rising dollar hurts U.S. multi-nationals.
Friday Watch
Earnings Announcements
Company/Estimate
DOX/.24
HSII/.07
LSCC/-.01
STAR/.23
OS/-.25
Splits
None of Note
Economic Data
Consumer Price Index estimated up .3% in Jan. vs. a .2% rise in Dec.
CPI Ex Food and Energy estimated up .1% in Jan. vs. a .1% rise in Dec.
Late-night News
Tivo's(TIVO) shares will climb as it attracts more subscribers, Business Week reported in its "Inside Wall Street" column. The column also said Net2Phone Inc.'s(NTOP) shares may reach $11 in a year. Bird Flu killed a cat for first time, Thailand's Nation reports. The book-to-bill ratio for North American chip-tool makers was 1.18 in January, lower than the 1.23 reported in December. TheStreet.com, reporting from the Enercom Oil Service Conference, said the CEO of Patterson-UTI(PTEN) stated that declining natural gas production rates and increasing demand will translate into "a lot more drilling" this year. As well, the CEO of Unit Corp.(UNT) said for natural gas production just to remain stable, the number of drilling rigs in North Amer. will have to reach 1,100 from 950 currently. TheStreet.com also reported that Nabors(NBR), Precision Drilling(PDS) and Grey Wolf(GW) will also benefit directly. Indirect beneficiaries include GRP, SII, BHI, SLB and HAL.
Late-Night Trading
Asian markets are down, ranging from -.25% to -1.25%.
S&P 500 indicated -.08%.
NASDAQ indicated -.07%.
BOTTOM LINE: Asian markets are weaker across the board with tech leading the way down. With option expiration tomorrow, volatility should remain through early next week. I plan to add a few shorts into any rally tomorrow, taking my net market exposure to 20% net short. The Portfolio is currently market neutral.
Company/Estimate
DOX/.24
HSII/.07
LSCC/-.01
STAR/.23
OS/-.25
Splits
None of Note
Economic Data
Consumer Price Index estimated up .3% in Jan. vs. a .2% rise in Dec.
CPI Ex Food and Energy estimated up .1% in Jan. vs. a .1% rise in Dec.
Late-night News
Tivo's(TIVO) shares will climb as it attracts more subscribers, Business Week reported in its "Inside Wall Street" column. The column also said Net2Phone Inc.'s(NTOP) shares may reach $11 in a year. Bird Flu killed a cat for first time, Thailand's Nation reports. The book-to-bill ratio for North American chip-tool makers was 1.18 in January, lower than the 1.23 reported in December. TheStreet.com, reporting from the Enercom Oil Service Conference, said the CEO of Patterson-UTI(PTEN) stated that declining natural gas production rates and increasing demand will translate into "a lot more drilling" this year. As well, the CEO of Unit Corp.(UNT) said for natural gas production just to remain stable, the number of drilling rigs in North Amer. will have to reach 1,100 from 950 currently. TheStreet.com also reported that Nabors(NBR), Precision Drilling(PDS) and Grey Wolf(GW) will also benefit directly. Indirect beneficiaries include GRP, SII, BHI, SLB and HAL.
Late-Night Trading
Asian markets are down, ranging from -.25% to -1.25%.
S&P 500 indicated -.08%.
NASDAQ indicated -.07%.
BOTTOM LINE: Asian markets are weaker across the board with tech leading the way down. With option expiration tomorrow, volatility should remain through early next week. I plan to add a few shorts into any rally tomorrow, taking my net market exposure to 20% net short. The Portfolio is currently market neutral.
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