Earnings of Note
Company/Estimate
CHP/.08
CPB/.31
DY/.23
MDT/.46
NOVL/.03
Splits
SONC 3-for-2
Economic Data
None of note.
Weekend Recommendations
Forbes on Fox had guests that were positive on GE, AA and mixed on BBBY, TIF, VRTSE and HOV. Bulls and Bears had guests that were positive on GRMN, KKD, ADP and mixed on NEM, SLR, PNRA, NSM, MSO, TWX, INTC and DNA. Cashin' In had guests that were positive on LDG and mixed on ZNT, TOL and NOVL. Louis Rukeyser's Wall Street had guests that were positive on FCX, GPC, FLR, HAR, RL, BIIB, JPM, ABT, RDA, CCH, SNN and CAT. Wall St. Week w/Fortune had guests that were positive on C, MER, ATVI, ERTS, ZIXI and negative on TTWO, LF, NLS and SFP. Barron's had positive columns on BZH, CMCSA, ATK, ABMD and a negative column on SYMC. Goldman Sachs reiterated Outperform on ACN, EBAY. Business Week has a positive article on JNPR.
Weekend News
New York City has spent about $100 million to reinforce security at its reservoirs elsewhere in New York state to prevent terrorists from poisoning drinking water, the New York Post reported. Ford Motor Co.'s Escape, a sport-utility vehicle that gets about 23 miles to the gallon, and similar rivals are being snapped up as gas prices rise, the New York Times reported. International inspectors have found evidence that North Korea sold Libya two tons of weapons-grade uranium in 2001, the NY Times said. HSBC may bid for New York Community Bancorp, the Independent newspaper reported. Saudi Arabia is ready to increase oil production by more than 15% if needed to help lower prices, Oil Minister Ali al-Naimi said. Amec has agreed to help Korea National Oil Co. develop oil projects in Iraq, the Observer reported. U.S. military commanders said Iraqi militants loyal to al-Sadr seem to have abandoned their effort to control Karbala, the New York Times reported. Lloyds TSB Group Plc, the UK's no.5 bank, is in talks with IBM over a $1.8 billion technology contract, the Mail on Sunday said. Spending on Internet advertising reached $7.3 billion in 2003, a 21% increase, the San Francisco Chronicle reported. Halliburton's CEO said his company has never overcharged the U.S. Army for work in Iraq, the NY Times reported. Pakistan's President and India's new Prime Minister discussed peace moves between the countries and pledged to continue the process, Agence France-Presse reported. Starwood Hotels & Resorts Worldwide Chairman Sternlicht said he is "seeing group bookings making a significant comeback" and that the U.S. economy is "definitely getting legs under it," Bloomberg reported. Hewlett-Packard will offer its first mobile phone that combines the functions of a hand-held computer during the second half of this year, the Commercial Times reported. Vodafone may raise its dividend 20% this week, Bloomberg reported. Wells Fargo may buy Strong Capital Management, which settle lawsuits last week over allegations of engaging in improper mutual fund trading, Bloomberg reported.
Late-Night Trading
Asian indices are mostly higher, -.25% to +2.0% on average.
S&P 500 indicated +.38%.
NASDAQ indicated +.39%.
BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on strength in Asia and falling oil prices. I have had some huge winners in the last couple of weeks and may rotate out of a few of these tomorrow. The Portfolio is 125% net long.
Monday, May 24, 2004
Sunday, May 23, 2004
Weekly Outlook
There are a number of important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Consumer Confidence, Existing Home Sales, Durable Goods Orders, New Home sales, Preliminary GDP, Initial Jobless Claims, Personal Income, Personal Spending, PCE Deflator, Univ. of Mich. Consumer Confidence and the Chicago Purchasing Manager report. Consumer Confidence readings, Durable Goods Orders, PCE Deflator and the Chicago Purchasing Manager report all have market-moving potential.
Novell(NOVL), Medtronic(MDT), Computer Associates(CA), Williams-Sonoma(WSM), Sports Authority(TSA), Toll Brothers(TOL), Vodafone(VOD), Krispy Kreme(KKD), Autozone(AZ), Costco(COST) and Vivendi Universal(V) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The CSFB Semiconductor & Equipment Conference, UBS Software and Services Conference and the CSFB Small-cap Conference could all impact trading this week.
Bottom Line: I expect U.S. stocks to rise modestly throughout the week as oil and interest rates decline. As well, continued positive news on the earnings front and from several conferences should push stocks higher. While the major indices were mostly flat last week, breadth improved as many stocks posted significant gains. Recent Put/Call and Arms Index readings are also consistent with a rise this week. I expect basic materials stocks will continue their outperformance, while energy-related stocks should remain laggards. I took a long position in NKTR on Friday afternoon and I am using a $17 stop-loss on the position. The Portfolio is 125% net long heading into the week.
Novell(NOVL), Medtronic(MDT), Computer Associates(CA), Williams-Sonoma(WSM), Sports Authority(TSA), Toll Brothers(TOL), Vodafone(VOD), Krispy Kreme(KKD), Autozone(AZ), Costco(COST) and Vivendi Universal(V) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The CSFB Semiconductor & Equipment Conference, UBS Software and Services Conference and the CSFB Small-cap Conference could all impact trading this week.
Bottom Line: I expect U.S. stocks to rise modestly throughout the week as oil and interest rates decline. As well, continued positive news on the earnings front and from several conferences should push stocks higher. While the major indices were mostly flat last week, breadth improved as many stocks posted significant gains. Recent Put/Call and Arms Index readings are also consistent with a rise this week. I expect basic materials stocks will continue their outperformance, while energy-related stocks should remain laggards. I took a long position in NKTR on Friday afternoon and I am using a $17 stop-loss on the position. The Portfolio is 125% net long heading into the week.
Chart of the Week
Bottom Line: The Index of Leading Economic Indicators, released last week, rose .1% in April. However, the March number was revised to show a .8% increase, the largest since May of 2003, right before US economic growth exploded upwards. Moreover, the Index rose 4.9% year-over-year in April, the largest 12-month gain since March 1984. "It's hard to see a second-half slowdown here. The increase in the Index of Leading Indicators during the past year is consistent with GDP growth of about 6.75%," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Market Week in Review
S&P 500 1,093.56 -.19%
U.S. stocks were mixed last week as more violence in Iraq and high oil prices once again dominated headlines, drowning out continuing strength in the economy and better-than-expected corporate reports. Stocks rose from their lows on Monday morning after the President of the Iraqi governing council was assassinated. As well, a continued rise in energy prices and political instability in India and Taiwan could not take stocks meaningfully lower early in the week. However, as the week progressed, strong corporate earnings, several mergers, constructive comments from OPEC and stabilizing interest rates could not push stocks higher.
There were a number of very positive stories during the week. Applied Materials, Hewlett Packard, Home Depot, Lowe's, Synopsys, Nordstrom and STMicroelectronics all reported strong quarterly earnings. In merger news, Cardinal Health paid an 18% premium for Alaris Medical, Tellabs paid a 13% premium for Advanced Fiber and Marsh & McLennan agreed to purchase Kroll for a 32% premium. Delta Air had its biggest weekly advance in 14 months after a Lehman analyst said shares may double if the company reaches an agreement with its pilots. Shares of Internet jewelry retailer Blue Nile rose 31% following its IPO. Finally, shares in Millennium Pharmaceuticals rose after the company said its Velcade medicine helped people with a blood cancer called multiple myeloma live longer.
Bottom Line: Overall, last week was characterized by trend-less choppy trading. However, if positioned properly, profits were attainable. Basic material, airline, gaming, retail, foreign and some tech stocks registered good gains. Energy-related stocks fell as crude oil had its worst weekly performance in 7 weeks in anticipation of an OPEC production increase. Again, I believe investor psychology is being affected by the mainstream media's obsession with negativity. Very little attention was paid last week to the many strong earnings and economic reports, mergers, falling oil prices and positive biotechnology news. Instead, negative stories on Iraq and inflation made headlines once again. The CPI, a measure of consumer inflation, is projected to rise 2.2% this year, below its 84-year average of 3.0%. Oil accounts for less than 5% of inflation. Even if oil stayed unexpectedly high at $40/bbl., it would only shave .3% off of U.S. GDP growth each of the next two years. Oil, currently $39.93/bbl., has barely risen over the last 23 years. It would have to rise to $78/bbl. to reach the inflation-adjusted levels it hit during the height of the Iran hostage crisis during the early 80's. Oil-related stocks are breaking down in anticipation of lower prices in the near future. Mild inflation is historically good for stocks, yet 90% of the financial stories last week seemed to revolve around inflation worries. There are many positive stories relating to the current state of the U.S. economy that are not being told or are spun in a negative light in the media's quest for negativity. With the S&P's 04 P/E at 16.95 and falling almost daily and economic growth the best in two decades, fundamentals should win out over the longer-term. However, it is still possible that investor psychology is so greatly damaged from the constant barrage of negative stories that it results in a self-fulfilling prophecy of slower economic growth.
U.S. stocks were mixed last week as more violence in Iraq and high oil prices once again dominated headlines, drowning out continuing strength in the economy and better-than-expected corporate reports. Stocks rose from their lows on Monday morning after the President of the Iraqi governing council was assassinated. As well, a continued rise in energy prices and political instability in India and Taiwan could not take stocks meaningfully lower early in the week. However, as the week progressed, strong corporate earnings, several mergers, constructive comments from OPEC and stabilizing interest rates could not push stocks higher.
There were a number of very positive stories during the week. Applied Materials, Hewlett Packard, Home Depot, Lowe's, Synopsys, Nordstrom and STMicroelectronics all reported strong quarterly earnings. In merger news, Cardinal Health paid an 18% premium for Alaris Medical, Tellabs paid a 13% premium for Advanced Fiber and Marsh & McLennan agreed to purchase Kroll for a 32% premium. Delta Air had its biggest weekly advance in 14 months after a Lehman analyst said shares may double if the company reaches an agreement with its pilots. Shares of Internet jewelry retailer Blue Nile rose 31% following its IPO. Finally, shares in Millennium Pharmaceuticals rose after the company said its Velcade medicine helped people with a blood cancer called multiple myeloma live longer.
Bottom Line: Overall, last week was characterized by trend-less choppy trading. However, if positioned properly, profits were attainable. Basic material, airline, gaming, retail, foreign and some tech stocks registered good gains. Energy-related stocks fell as crude oil had its worst weekly performance in 7 weeks in anticipation of an OPEC production increase. Again, I believe investor psychology is being affected by the mainstream media's obsession with negativity. Very little attention was paid last week to the many strong earnings and economic reports, mergers, falling oil prices and positive biotechnology news. Instead, negative stories on Iraq and inflation made headlines once again. The CPI, a measure of consumer inflation, is projected to rise 2.2% this year, below its 84-year average of 3.0%. Oil accounts for less than 5% of inflation. Even if oil stayed unexpectedly high at $40/bbl., it would only shave .3% off of U.S. GDP growth each of the next two years. Oil, currently $39.93/bbl., has barely risen over the last 23 years. It would have to rise to $78/bbl. to reach the inflation-adjusted levels it hit during the height of the Iran hostage crisis during the early 80's. Oil-related stocks are breaking down in anticipation of lower prices in the near future. Mild inflation is historically good for stocks, yet 90% of the financial stories last week seemed to revolve around inflation worries. There are many positive stories relating to the current state of the U.S. economy that are not being told or are spun in a negative light in the media's quest for negativity. With the S&P's 04 P/E at 16.95 and falling almost daily and economic growth the best in two decades, fundamentals should win out over the longer-term. However, it is still possible that investor psychology is so greatly damaged from the constant barrage of negative stories that it results in a self-fulfilling prophecy of slower economic growth.
Saturday, May 22, 2004
Economic Week in Review
ECRI Weekly Leading Index 133.80 -1.33%
Empire Manufacturing for May came in at 30.21 versus an estimate of 34.0 and 34.03 in April. This was the 13th consecutive monthly increase as more companies added workers to meet increased demand and shipments rose to a record. The index of prices paid rose to 17.5 from 13.1 the prior month. "U.S. industrial production is picking up and economic slack is being absorbed at a steady pace," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Prices received rose faster than prices paid for the first time in a while," implying that companies are starting to re-gain pricing power, said Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein.
Japan's economy grew at a much greater-than-expected 5.6% annual pace in the first three months of the year, expanding for an eighth straight quarter, as an export-led recovery spread to consumer spending, Bloomberg reported. Rising demand for Japanese cellular phones, digital cameras and other electronic equipment has fueled capital spending. Consumer spending, the strongest in years, accounted for more than a third of the expansion, Bloomberg reported.
U.S. Housing Starts in April were 1969K versus expectations of 1985K and 2011K in March. Building Permits for April were 1999K versus estimates of 1960K and 1975K in March. Increased job growth and other signs of economic expansion are keeping housing demand strong, even as mortgage rates rise, Bloomberg reported. "The housing economy is incredibly strong," said Joel Rassman, Chief Financial Officer of Toll Brothers.
President Bush nominated Alan Greenspan to a fifth term as chairman of the Federal Reserve, saying the central banker has done a "superb job" in guiding the U.S. economy to the fastest growth in two decades. Greenspan said he was "honored" by the nomination and would serve if confirmed again by the U.S. Senate.
Initial Jobless Claims last week rose to 345k versus a 328K estimate and 333K the prior week. Continuing Claims were 2943K versus expectations of 2956K and 2966K prior. The four-week moving average for continuing claims fell to the lowest level since 2001, Bloomberg reported. "When you look at some of the jobs data, when you look at some of the indexes around industrial production and confidence levels among businesses, I think all those things point up," Ron Sargent, CEO of Staples Inc. said.
Leading Indicators for April rose .1% versus estimates of a .2% rise and a revised .8% rise in March. The March increase was the strongest since May of 03, right before GDP growth exploded upwards to the fastest pace in two decades, Bloomberg said. "It's hard to see a second-half slowdown here," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The increase in the index of leading indicators during the past year is "consistent with GDP growth of 6.75%." "The outlook for the economy is strong. It's almost absurd to be arguing anything else," said Tim Rogers, chief economist at Briefing.com.
Philadelphia Fed. for May was 23.8 versus estimates of 30.5 and 32.5 in April. The index, which reached a 10-yr high in January, has been in positive territory since June 2003, signaling continued economic expansion in the region. U.S. factories boosted production and added more workers to their payrolls than at any time in almost 4 years. Rising demand has kept inventories lean and will probably encourage manufacturers to keep employment growing and assembly lines humming, Bloomberg reported.
The Fed's pledge to raise interest rates at a "measured" pace is "not an unconditional commitment," Fed Governor Ben Bernanke said. "The pace of tightening will of necessity respond to evolving economic conditions." The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose at a 1.4% annual rate in March, up from 1.2% in February. Bernanke also said he still expects economic developments to be consistent "with a gradual adjustment of policy," with core inflation "likely to remain in the zone of price stability during the remainder of 2004 and into 2005."
China plans to raise interest rates for the first time in nine years unless steps taken so far to cool an investment boom produce a more pronounced slowdown in the economy, Vice Minister of Finance Lou Jiwei said. "The measures that have been taken have shown some effectiveness but the overheating problem hasn't been fully solved," Lou said. China's foreign trade is expected to grow at a slower pace this year as higher raw material prices curb exports and a government clampdown on investment slows imports, the country's commerce ministry said.
Bottom Line: There are several key takeaways for the week. First, U.S. factories are continuing to increase production to meet rising demand. Profits are soaring as companies regain pricing power, allowing them to hire more workers. Japan, the world's second largest economy, is contributing meaningfully to world growth for the first time in close to 15 years. The Japanese consumer which has not participated in past recoveries is finally gaining confidence. This very positive development is almost completely ignored by the financial media. Pent-up demand for housing remains robust. As more Americans gain employment demand will remain relatively strong, notwithstanding higher interest rates. Job growth should stay at high levels as executive confidence is high, corporate profits are soaring, inventories are low and demand remains strong. The revised March Leading Indicators number points to another spurt in economic growth in the near future. At a minimum, U.S. economic growth should stabilize at current high levels throughout the remainder of the year. Statements by multiple Fed members last week were very important. They said that they expect to raise rates at a moderate pace in the near future, however they WILL NOT allow inflation to become a problem. This should quell fears that the Fed was falling behind the curve with respect to inflation. Finally, China seems committed to slowing growth to a more sustainable level. While a hard-landing for the Chinese economy is still possible, the much more likely outcome is a soft-landing which would be very positive for the long-term economic health of the region and the world. I continue to expect a 50 basis point increase at the June 29-30 Fed meeting. However, a continuing rise in energy prices or a significant fall in stock prices could result in a 25 basis point increase or a delay in any rate hike. It is also very possible that the Fed decides to make an inter-meeting move of 25 basis points before the June meeting and another 25 at the meeting. This scenario is likely in the case of a significant fall in oil prices or much higher-than-expected inflation readings.
Empire Manufacturing for May came in at 30.21 versus an estimate of 34.0 and 34.03 in April. This was the 13th consecutive monthly increase as more companies added workers to meet increased demand and shipments rose to a record. The index of prices paid rose to 17.5 from 13.1 the prior month. "U.S. industrial production is picking up and economic slack is being absorbed at a steady pace," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Prices received rose faster than prices paid for the first time in a while," implying that companies are starting to re-gain pricing power, said Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein.
Japan's economy grew at a much greater-than-expected 5.6% annual pace in the first three months of the year, expanding for an eighth straight quarter, as an export-led recovery spread to consumer spending, Bloomberg reported. Rising demand for Japanese cellular phones, digital cameras and other electronic equipment has fueled capital spending. Consumer spending, the strongest in years, accounted for more than a third of the expansion, Bloomberg reported.
U.S. Housing Starts in April were 1969K versus expectations of 1985K and 2011K in March. Building Permits for April were 1999K versus estimates of 1960K and 1975K in March. Increased job growth and other signs of economic expansion are keeping housing demand strong, even as mortgage rates rise, Bloomberg reported. "The housing economy is incredibly strong," said Joel Rassman, Chief Financial Officer of Toll Brothers.
President Bush nominated Alan Greenspan to a fifth term as chairman of the Federal Reserve, saying the central banker has done a "superb job" in guiding the U.S. economy to the fastest growth in two decades. Greenspan said he was "honored" by the nomination and would serve if confirmed again by the U.S. Senate.
Initial Jobless Claims last week rose to 345k versus a 328K estimate and 333K the prior week. Continuing Claims were 2943K versus expectations of 2956K and 2966K prior. The four-week moving average for continuing claims fell to the lowest level since 2001, Bloomberg reported. "When you look at some of the jobs data, when you look at some of the indexes around industrial production and confidence levels among businesses, I think all those things point up," Ron Sargent, CEO of Staples Inc. said.
Leading Indicators for April rose .1% versus estimates of a .2% rise and a revised .8% rise in March. The March increase was the strongest since May of 03, right before GDP growth exploded upwards to the fastest pace in two decades, Bloomberg said. "It's hard to see a second-half slowdown here," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The increase in the index of leading indicators during the past year is "consistent with GDP growth of 6.75%." "The outlook for the economy is strong. It's almost absurd to be arguing anything else," said Tim Rogers, chief economist at Briefing.com.
Philadelphia Fed. for May was 23.8 versus estimates of 30.5 and 32.5 in April. The index, which reached a 10-yr high in January, has been in positive territory since June 2003, signaling continued economic expansion in the region. U.S. factories boosted production and added more workers to their payrolls than at any time in almost 4 years. Rising demand has kept inventories lean and will probably encourage manufacturers to keep employment growing and assembly lines humming, Bloomberg reported.
The Fed's pledge to raise interest rates at a "measured" pace is "not an unconditional commitment," Fed Governor Ben Bernanke said. "The pace of tightening will of necessity respond to evolving economic conditions." The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose at a 1.4% annual rate in March, up from 1.2% in February. Bernanke also said he still expects economic developments to be consistent "with a gradual adjustment of policy," with core inflation "likely to remain in the zone of price stability during the remainder of 2004 and into 2005."
China plans to raise interest rates for the first time in nine years unless steps taken so far to cool an investment boom produce a more pronounced slowdown in the economy, Vice Minister of Finance Lou Jiwei said. "The measures that have been taken have shown some effectiveness but the overheating problem hasn't been fully solved," Lou said. China's foreign trade is expected to grow at a slower pace this year as higher raw material prices curb exports and a government clampdown on investment slows imports, the country's commerce ministry said.
Bottom Line: There are several key takeaways for the week. First, U.S. factories are continuing to increase production to meet rising demand. Profits are soaring as companies regain pricing power, allowing them to hire more workers. Japan, the world's second largest economy, is contributing meaningfully to world growth for the first time in close to 15 years. The Japanese consumer which has not participated in past recoveries is finally gaining confidence. This very positive development is almost completely ignored by the financial media. Pent-up demand for housing remains robust. As more Americans gain employment demand will remain relatively strong, notwithstanding higher interest rates. Job growth should stay at high levels as executive confidence is high, corporate profits are soaring, inventories are low and demand remains strong. The revised March Leading Indicators number points to another spurt in economic growth in the near future. At a minimum, U.S. economic growth should stabilize at current high levels throughout the remainder of the year. Statements by multiple Fed members last week were very important. They said that they expect to raise rates at a moderate pace in the near future, however they WILL NOT allow inflation to become a problem. This should quell fears that the Fed was falling behind the curve with respect to inflation. Finally, China seems committed to slowing growth to a more sustainable level. While a hard-landing for the Chinese economy is still possible, the much more likely outcome is a soft-landing which would be very positive for the long-term economic health of the region and the world. I continue to expect a 50 basis point increase at the June 29-30 Fed meeting. However, a continuing rise in energy prices or a significant fall in stock prices could result in a 25 basis point increase or a delay in any rate hike. It is also very possible that the Fed decides to make an inter-meeting move of 25 basis points before the June meeting and another 25 at the meeting. This scenario is likely in the case of a significant fall in oil prices or much higher-than-expected inflation readings.
Friday, May 21, 2004
Weekly Scoreboard
Indices
S&P 500 1,093.56 -.19%
Dow 9,966.74 -.46%
NASDAQ 1,912.09 +.41%
Russell 2000 545.81 +.38%
Total Market 258.08 -.11%
Volatility(VIX) 18.49 +.11%
AAII % Bulls 36.67 +11.49%
US Dollar 90.49 -1.23%
CRB 269.78 +.22%
Futures Spot Prices
Gold 384.90 +2.04%
Crude Oil 39.93 -3.32%
Natural Gas 6.35 -.81%
Base Metals 104.99 +2.91%
10-year US Treasury Yield 4.76% -.25%
Average 30-year Mortgage Rate 6.30% -.63%
Leading Sectors
Airlines +7.34%
Iron/Steel +5.62%
Gaming +1.90%
Lagging Sectors
Biotech -2.12%
Oil Service -2.68%
Energy -2.72%
*% Gain or loss for the week
S&P 500 1,093.56 -.19%
Dow 9,966.74 -.46%
NASDAQ 1,912.09 +.41%
Russell 2000 545.81 +.38%
Total Market 258.08 -.11%
Volatility(VIX) 18.49 +.11%
AAII % Bulls 36.67 +11.49%
US Dollar 90.49 -1.23%
CRB 269.78 +.22%
Futures Spot Prices
Gold 384.90 +2.04%
Crude Oil 39.93 -3.32%
Natural Gas 6.35 -.81%
Base Metals 104.99 +2.91%
10-year US Treasury Yield 4.76% -.25%
Average 30-year Mortgage Rate 6.30% -.63%
Leading Sectors
Airlines +7.34%
Iron/Steel +5.62%
Gaming +1.90%
Lagging Sectors
Biotech -2.12%
Oil Service -2.68%
Energy -2.72%
*% Gain or loss for the week
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