Wednesday, March 24, 2004

Wednesday Close

S&P 500 1,091.33 -.24%
NASDAQ 1,909.48 +.40%


Leading Sectors
Gaming +3.28%
Semis +2.33%
Software +.53%

Lagging Sectors
Energy -2.11%
Iron/Steel -2.46%
Oil Service -3.05%

Other
Crude Oil 36.82 .51%
Natural Gas 5.42 -.22%
Gold 415.50 -.46%
Base Metals 111.80 +.84%
U.S. Dollar 88.97 +.04%
10-Yr. Long-Bond Yield 3.71% +.50%
VIX 19.81 -4.16%
Put/Call .89 +32.84%
NYSE Arms 1.24 +1.64%

After-hours Movers
THC +5.54% after it said it agreed to pay the government $30.75M to settle 2 investigations into its billing practices.
LSCC +3.33 after better-than-expected 4Q and restating previous 3 quarters downward.
MERX -8.34% after beating 3Q estimates and lowering 4Q guidance.
MU -4.55% after missing sales estimates for 2Q.

Recommendations
Goldman Sachs reiterates Outperform on MDT, PFE, TRW and MSFT.

After-hours News
U.S. stocks finished mixed on Wednesday as strength in gaming and semiconductors was offset by weakness in commodity-related sectors. Continued fears of terrorism hurt economically sensitive groups after French officials discovered a bomb underneath the tracks of a train headed from Paris to Basel. Investors fear that already weak European economies could weaken further, damaging the U.S. economy. After the close, the Financial Times said Microsoft faces further suits over Windows XP. Bush administration officials said they are working to get Saudi Arabia to disrupt funding for terror groups and they are cooperating much more than a year ago. Israeli forces stopped a 14-year old Palestinian boy that was paid $22 to carry an 18 pound bomb and detonate it at a roadblock. The boy said he was tempted by the promise of his dispatchers that he would meet 70 virgins once he entered heaven and that he wanted to be a hero, reported Ha'aretz.

BOTTOM LINE: The Portfolio ended down slightly on the day as the market deteriorated substantially in the afternoon. I sold a few of my commodity-related longs, bringing market exposure for the Portfolio back down to 25%. I will closely monitor the tech sector's reaction to a relatively disappointing quarter from Micron. A break below 456 on the Morgan Stanley High-tech index will lead me to exit some of my longs and a break above 467 will lead me to increase my exposure in tech. Semis led the market correction and it is good to see them stabilizing and showing outperformance. However, tomorrow will be the real test. I am expecting a significant countertrend rally to begin early next week, but it could begin at any time due to the oversold short-term position of the major U.S. indices.

Mid-day Update

S&P 500 1,094.33 +.02%
NASDAQ 1,916.79 +.78%


Leading Sectors
Gaming +2.94%
Semis +2.86%
Software +.97%

Lagging Sectors
I-Banks -1.03%
Oil Service -1.58%
Iron/Steel -2.08%

Other
Crude Oil 37.15 -.80%
Natural Gas 5.44 -1.63%
Gold 417.40 -.62%
Base Metals 111.80 +.84%
U.S. Dollar 88.78 +1.14%
10-Yr. Long-Bond Yield 3.71% +.56%
VIX 19.84 -4.21%
Put/Call .85 +26.87%
NYSE Arms 1.01 -17.21%

Market Movers
NOVL +13.1% after announcing joint agreement with HPQ and multiple upgrades.
SNTO +17.6% after announcing that C. Lloyd Mahaffey joined board.
ENDP +13.6% after the drug-maker won U.S. approval for a generic version of the OxyContin painkiller.
CTB +7.8% after saying it may sell its auto-parts unit to focus on expanding its main business in emerging markets such as China.
PCSA -13.3% after announcing resignation of CFO.
GS -2.18% after negative Heard on the Street column in Wall Street Journal.
Gaming stocks up across the board on positive comments from Deutsche Bank.

Economic Data
Durable Goods Orders for February +2.5% vs. expectations of +1.5%.
Durable Goods Less Transportation for February -.3% vs. expectations of +1.0%.
New Home Sales for February 1163K vs. expectations of 1100K.

Recommendations
TheStreet.com says companies are using coal bed methane to boost natural gas production. Companies that are focusing on this method are APC, BR, DVN, ECA, EVG, KWK and MHR. Cramer of TheStreet.com is saying that the high Put/Call ratio, Investors Intelligence drop in bulls, the oversold oscillator reading and low valuations in many stocks should provide the catalyst for at least a short-term bottom. TMB, TSU, EAGL and HOT raised to Overweight at JP Morgan. BBBY and BBY raised to Outperform at CSFB. TWX raised to Sector Outperform by CIBC. SLB, BNI and NSC raised to Overweight at Morgan Stanley. CSX and UNP cut to Underweight at Morgan Stanley. SPLS raised to Overweight at Prudential. RSAS rated Buy at Citi Smith Barney. NRP raised to Buy at Citi. Citi says to use recent weakness in MAR, HLT and FHR to Buy. Citi says to Buy MSFT, target $34. Citi reiterates 1M on GTK. Citi reiterates 1H on GS, raised target to $127. Goldman Sachs says recreational boat season stronger than expected, reiterates Outperform on BC. GS reiterating Outperform on MSFT.

Mid-day News
U.S. stocks are mostly higher in the afternoon as strength in gaming and semiconductor companies more than offset terrorism fears in Europe. Many U.S. companies and politicians are criticized for exporting jobs outside the U.S., while the fact that foreign companies are creating jobs here almost goes unnoticed, the Wall Street Journal reported. France's embassy in Djibouti said today it received a letter from an Islamic extremist threatening French interests due to its ban on religious clothing in public schools, Agence France-Presse reported. An unexploded bomb with several detonators was found today in France on the rail line linking Paris and the Swiss city of Basel, AFP reported. The U.S. economy is strengthening as business investment picks up and that will force the Fed to raise rates at some point, said Fed Bank of Atlanta President Jack Guynn. U.S. durable goods orders rose a larger-than-expected 2.5% in February on strength in computers, vehicles and aircraft. New Home Sales were the third-fastest on record, reported Bloomberg. Crude oil fell after an Energy Dept. report showed inventories rose to their highest level in 4 months.

BOTTOM LINE: The Portfolio is up today as one of my longs is up substantially and my shorts are unchanged. I added a few beaten up tech long positions this morning, raising market exposure to 50% net long. It is too early to tell if the countertrend rally has begun, but outperformance by semis is a positive development. A move up through 467 on the Morgan Stanley High-tech Index will likely lead me to add another 25% long exposure.

Wednesday Watch

Earnings Announcements
Company/Estimate
LSCC/-.01
MERX/.09
MU/-.07
PERY/1.11

Splits
ASFI 2-for-1
COCO 2-for-1

Economic Data
Durable Goods Orders for February estimated up 1.5% vs. -2.3% prior month.
Durable Goods Less Transportation for February estimated up 1.0% vs. 1.2% prior month.
New Home Sales estimated at 1100K for February vs. 1106K prior month.

Recommendations
Goldman Sachs reiterated Underperform on RKY. TheStreet.com is saying OVTI is about to have a lot of large competition. TSC also says that this still looks a pullback in a primary uptrend.

Late-Night News
Asian stocks are mostly higher on an upgrade of Japan's debt rating and several major stock buyback announcements by leading Taiwanese companies. Richard Branson's Virgin USA low-cost carrier plans to purchase as many as 55 planes and may partner with US Airways as it seeks to take advantage of demand for low cost flights in the U.S. OPEC will discuss a proposal to delay production cuts at a meeting next week, OPEC news agency said. Taiwan Semi announced a 300 million share buyback on its 13% decline since the disputed election. Nokia(NOK) may tell shareholders at an annual general meeting Thursday that demand for handsets is rising, leading to better-than-expected 1Q earnings. Japan's debt outlook was raised by S&P, the first of the rating companies to become more optimistic after 3 years of downgrades.

Late-Night Trading
Asian Indices -.25% to +.75%.
S&P 500 indicated -.05%.
NASDAQ indicated +.11%.

BOTTOM LINE: I expect the U.S. markets to remain weak to flat tomorrow on continuing worries over geopolitical matters, technical deterioration and high commodity prices. The Portfolio is 25% net long and I will look to add market exposure on any signs of a significant countertrend rally.

Tuesday, March 23, 2004

Tuesday Close

S&P 500 1,093.95 -.13%
NASDAQ 1,901.80 -.42%


Leading Sectors
Iron/Steel +.80%
HMO's +.78%
Airlines +.72%

Lagging Sectors
Telecom -1.02%
Disk Drives -1.03%
Oil Service -1.40%

Other
Crude Oil 37.51 +.16%
Natural Gas 5.53 unch.
Gold 419.90 -.02%
Base Metals 110.87 -1.28%
U.S. Dollar 87.85 +.07%
10-Yr. Long-Bond Yield 3.69% -.61%
VIX 20.67 -4.22%
Put/Call .67 -30.21%
NYSE Arms 1.22 -63.58%

After-hours Movers
RHAT +9.12% after largest developer of Linux software met 4Q estimates and raised 1Q guidance.
NOVL +5.71% as number 2 developer of Linux software benefited from strong RHAT report.

Recommendations
Goldman Sachs reiterated Outperform on AMGN. GS reiterates its view that steel stocks will continue to see earnings driven outperformance. TheStreet.com has a negative column on AWE, saying it is losing subscribers. TheStreet.com has a positive column on gaming stocks, saying estimates are rising as the stocks correct.

After-hours News
U.S. stocks ended slightly lower Tuesday on another disappointing session for the bulls. Equities were higher until the final 30 minutes, dropping on reports that Israeli gunboats opened fired off the shoreline of Gaza City. After the close, Tyson Foods said it won't have to pay $1.28B in damages to thousands of ranchers, according to a ruling by a U.S. judge. Morgan Stanley led companies that sold $7.5B of new notes and bonds today, more than double the daily average this year, as frequent borrowers such as finance companies took advantage of low borrowing costs. Israeli planes hit a squad preparing to fire rockets from Lebanon into Israel, military officials reported.

BOTTOM LINE: The Portfolio was up slightly on the day, as I took profits in a few winning longs and added a new overbought short, bringing market exposure back down to 25% net long. I shorted ANF in the afternoon and will use a tight stop-loss of $33 as the market is very oversold short-term. The action in the final 30 minutes was disheartening for the bulls, as the days gains completely evaporated on some inconsequential news items. I expect a bit more weakness before a real countertrend rally begins on quarter-end mark-ups. Furthermore, I expect weakness to resurface in early April. However, the beginning of earnings season later in the month should provide the catalyst for a resumption of the bull market that began last year.

Mid-day Update

S&P 500 1,098.41 +.27%
NASDAQ 1,912.83 +.15%


Leading Sectors
Iron/Steel +1.29%
Airlines +1.0%
Papers +.50%

Lagging Sectors
Biotech -1.10%
Telecom -1.50%
Oil Service -1.64%

Other
Crude Oil 37.35 +.81%
Natural Gas 5.49 -1.01%
Gold 420.20 +.67%
Base Metals 110.87 -1.28%
U.S. Dollar 87.71 -.11%
10-Yr. Long-Bond Yield 3.71% -.05%
VIX 21.02 -2.60%
Put/Call .68 -29.17%
NYSE Arms 1.29 -61.49%

Market Movers
PLMO +27.6% after significantly beating 3Q estimates and raising 4Q guidance.
ELN +7.7% after saying it will ask European regulators to approve its Antegren multiple sclerosis treatment this year.
SBNY +24.5% on strong demand for IPO.
SKIL +12.2% after better-than-expected 4Q estimates.
AKAM -9.2% after announcing COO will leave company.

Economic Data
None of note.

Recommendations
Goldman Sachs says that key takeaways from CTIA wireless show are 1)2G infrastructure market likely stronger than expected in 04 2)3G ramp continues to look steady in 04 3)3G ramp continues steady in 04. Overall, vendor sentiment remains in-line with recent positive demand comments, favorite is ERICY. GS reiterated Outperform on ACS, PETC and ATYT. GS says EU fine of $610M on MSFT is equivalent to 2 weeks of its cash flow, reiterated Outperform. GS positive on CSCO and NT ahead of their Voice on the Net conference next week. Citi Smith Barney raised RA to Buy 1M. Citi reiterated Buy on CCL, $53 target. Citi says NT oversold and is negotiating with FLEX to divest almost all it remaining optical, wireless and enterprise manufacturing operations. PFGC raised to Overweight at Morgan Stanley, target $41. PFE raised to Buy at Oppenheimer, target $39. SWY cut to Underweight at Lehman. TheStreet.com is positive on BRL.

Mid-day News
U.S. stocks are moving higher mid-day on a bounce from oversold levels and positive earnings news from Goldman Sachs. Jones Apparel Group began a hostile tender offer of about $297M for Maxwell Shoe, Bloomberg reported. The euro fell against the dollar after a European Central Bank report showed investors withdrew more than twice as much money from the euro region in January than in December. Advanced Micro(AMD) expects demand to rise in the second half of the year as companies buy new computers to replace those purchased in 1999. U.S. companies that have resisted making stock options an expense will have to do so starting next year under a rule the Financial Accounting Standards Board will issue this month.

BOTTOM LINE: The Portfolio is up slightly on the day as a few of my tech longs are up and my oil service shorts are down. I added a few new longs this morning on weakness in select securities. The Portfolio is now 50% net long. I will closely monitor the late-afternoon action for any signs that a significant bounce has begun as the major U.S. indices are oversold short-term.

Tuesday Watch

Earnings Announcements
Company/Estimate
FDO/.46
GS/1.66
RHAT/.03

Splits
NIHD 3-for-1

Economic Data
None of note.

Recommendations
CBA raised to Overweight at Morgan Stanley. Goldman Sachs reiterated Underperform on EDS. GS reiterated Outperform on YUM.

Late-Night News
Asian stocks are mixed as strength in Hong Kong, South Korea and India is overshadowed by another significant decline in Taiwan. A statement purportedly from the al-Qaeda terrorist network called for retaliation against the U.S. after Israeli forces killed Hamas leader Sheikh Ahmed Yassin, Agence France-Presse reported. Comcast will leave its bid to buy Disney on the table for no longer than three to six months, the New York Times reported. The U.S. is prepared to consider granting India the status of a non-NATO ally, New Delhi Television reported. General Motors is paying parts suppliers higher prices to cover rising steel costs, while at the same time suing two suppliers that threatened to stop deliveries, the WSJ reported. Anheuser-Busch is under pressure to spend more money on advertising its Bud Light brand because of growing competition from other beers, the WSJ reported. China protested a U.S. resolution prepared for a UN commission that criticizes the Chinese government for "backsliding" on human rights.

Late-Night Trading
Asian Indices -.50% to +1.0% on avg. with Taiwan's TWSE Index declining another 3.0%.
S&P 500 indicated +.27%.
NASDAQ indicated +.47%.

BOTTOM LINE: Asian stocks opened mostly lower and have rallied throughout the day. It is likely that U.S. stocks will attempt to rally in the morning off their oversold short-term condition. I will analyze the strength of the rally in the morning to decide whether or not to add some exposure on any weakness into the afternoon. However, if the indices open lower, I will likely add 25% long exposure in the morning. The Portfolio is 25% net long.