Portfolio Manager's Commentary on Investing and Trading in the U.S. Financial Markets
Sunday, August 15, 2004
Charts of the Week
Bottom Line: As the top chart illustrates, gasoline prices on an inflation-adjusted basis are at the upper end of the trading range they have been in since 1986. Gas prices would have to soar another 70% to reach levels seen during the late 70's/early 80's. As well, the survey illustrated in the bottom chart seems to point to an overstatement by the media and some companies of the effects of gas prices on consumers at current levels.
Weekly Outlook
There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports this week include Empire Manufacturing, Housing Market Index, Consumer Price Index, Housing Starts, Building Permits, Industrial Production, Capacity Utilization, Initial Jobless Claims, Leading Indicators and Philadelphia Fed. Consumer Price Index, Housing Starts, Leading Indicators and Philly Fed. all have market-moving potential.
Lowe's(LOW), Kmart Holding(KMRT), BJ's Wholesale(BJ), Deere & Co.(DE), Home Depot(HD), J.C. Penney(JCP), Staples(SPLS), Applied Materials(AMAT), Brocade(BRCD), Intuit(INTU), Medtronic(MDT), Nortel(NT), Barnes & Noble(BKS), Limited Brands(LTD), The Gap(GPS), Nordstrom(JWN) and Novell(NOVL) are some of the more important companies that release quarterly earnings this week. There are also several other events that have market-moving potential. The CS First Boston Small Cap IT Services Conference and SEMI Book-to-Bill Report could also impact trading this week.
Bottom Line: I expect U.S. stocks to finish the week modestly higher, led by an oversold bounce in technology shares. However, equities will likely weaken the following week on terrorism fears ahead of the Republican Convention. I expect measures of investor anxiety to spike higher again during this period. I continue to believe stocks will make an intermediate-term bottom during the next 6 weeks, setting the stage for an exceptional fourth quarter. Short Funds with substantial gains for the year will likely begin to cover to protect profits. The Hennessee Hedge Fund US Short-biased Index rose 10.2% in July, its best performance since the terror-induced market sell-off of September 2001. Moreover, the 4 week average of Specialist Short Sales to Total Short Sales is at the lowest levels since at least the 1960's. I expect fundamental demand to snap back in the fourth quarter as political uncertainty lifts, terrorism fears subside, energy prices fall and businesses increase spending on capital equipment to take advantage of tax incentives before they expire at year-end. Many companies should beat their recently lowered earnings forecasts.
Lowe's(LOW), Kmart Holding(KMRT), BJ's Wholesale(BJ), Deere & Co.(DE), Home Depot(HD), J.C. Penney(JCP), Staples(SPLS), Applied Materials(AMAT), Brocade(BRCD), Intuit(INTU), Medtronic(MDT), Nortel(NT), Barnes & Noble(BKS), Limited Brands(LTD), The Gap(GPS), Nordstrom(JWN) and Novell(NOVL) are some of the more important companies that release quarterly earnings this week. There are also several other events that have market-moving potential. The CS First Boston Small Cap IT Services Conference and SEMI Book-to-Bill Report could also impact trading this week.
Bottom Line: I expect U.S. stocks to finish the week modestly higher, led by an oversold bounce in technology shares. However, equities will likely weaken the following week on terrorism fears ahead of the Republican Convention. I expect measures of investor anxiety to spike higher again during this period. I continue to believe stocks will make an intermediate-term bottom during the next 6 weeks, setting the stage for an exceptional fourth quarter. Short Funds with substantial gains for the year will likely begin to cover to protect profits. The Hennessee Hedge Fund US Short-biased Index rose 10.2% in July, its best performance since the terror-induced market sell-off of September 2001. Moreover, the 4 week average of Specialist Short Sales to Total Short Sales is at the lowest levels since at least the 1960's. I expect fundamental demand to snap back in the fourth quarter as political uncertainty lifts, terrorism fears subside, energy prices fall and businesses increase spending on capital equipment to take advantage of tax incentives before they expire at year-end. Many companies should beat their recently lowered earnings forecasts.
Market Week in Review
S&P 500 1,064.80 +.08%
Click here for the Weekly Wrap by Briefing.com.
Bottom Line: Overall, last week's market action was mildly negative. A number of sectors advanced, notwithstanding another dismal performance by tech stocks. The fact that the market didn't fall in the face of hurricane Charley, potential political unrest in Venezuela, a worsening of Russia's OAO Yukos situation, rising energy prices, worse-than-expected outlooks from Cisco and Hewlett, the Fed's hawkish comments and the possibility of acts of terror at the Olympics is very impressive. Dell's bullish outlook, positive reports from Wal-Mart and Target, decelerating inflation readings and the Fed's positive comments with respect to future economic growth offset these negatives to an extent. However, it is definitely bad for the Bulls that measures of investor anxiety fell last week in the face of such uncertainty. As well, mutual fund outflows reached $1.25 billion for the week.
Click here for the Weekly Wrap by Briefing.com.
Bottom Line: Overall, last week's market action was mildly negative. A number of sectors advanced, notwithstanding another dismal performance by tech stocks. The fact that the market didn't fall in the face of hurricane Charley, potential political unrest in Venezuela, a worsening of Russia's OAO Yukos situation, rising energy prices, worse-than-expected outlooks from Cisco and Hewlett, the Fed's hawkish comments and the possibility of acts of terror at the Olympics is very impressive. Dell's bullish outlook, positive reports from Wal-Mart and Target, decelerating inflation readings and the Fed's positive comments with respect to future economic growth offset these negatives to an extent. However, it is definitely bad for the Bulls that measures of investor anxiety fell last week in the face of such uncertainty. As well, mutual fund outflows reached $1.25 billion for the week.
Saturday, August 14, 2004
Economic Week in Review
ECRI Weekly Leading Index 131.50 -.30%
Wholesale Inventories for June rose 1.1% versus estimates of a .6% increase and a rise of 1.4% in May. Consumer spending, that cooled by the most in almost three years during the month, helped give companies the chance to replenish inventories that had been drained to record lows earlier this year, Bloomberg reported. "We expect a general recovery in inventories relative to sales in the wholesale sector to provide solid support for GDP growth through the remainder of 2004," said Michael Englund, chief economist at Action Economics. Wholesalers had enough supply to last 1.15 months at the current sales pace, up from the record low of 1.12 months in April.
Preliminary 2Q Non-farm Productivity rose 2.9% versus estimates of a 2.0% rise and a 3.7% increase in 1Q. Preliminary 2Q Unit Labor Costs rose 1.9% versus estimates of a 2.0% increase and a .3% rise in 1Q. The gain in productivity suggests that companies have become efficient enough to hold down payrolls until the economy rebounds form a second-quarter lull, economists said. The second-quarter rise in productivity is in line with the average annual increase of 3% since 1996. By contrast, productivity rose an average 1.5% a year in the previous two decades, Bloomberg reported. The number "is still quite healthy, productivity is incredibly strong," Douglas Porter, senior economist at BMO Nesbitt Burns said. Labor costs, while increasing, are still at moderate levels, Bloomberg reported.
Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter-point to 1.5% and restated a pledge to lift borrowing costs at a "measured" pace to suppress inflation without choking off growth, Bloomberg said. "Output growth has moderated and the pace of improvement in labor market conditions has slowed recently, however the economy appears poised to resume a stronger pace of expansion going forward," the Fed's rate-setting Open Market Committee said. The year's second rate increase was overshadowed by the decision to keep the "measured" pace language, which some investors expected the Fed to abandon, Bloomberg said.
The Import Price Index for July rose .2% versus estimates of a .4% rise and a .1% fall in June. The recent acceleration in core prices "has probably just about run its course," Joshua Shapiro, chief U.S. economist at MFR Inc. said. Imports account for about 15% of all goods and services bought in the U.S., Bloomberg reported.
Advance Retail Sales for July rose .7% versus estimates of a 1.2% increase and an upwardly revised .5% decline in June. Retail Sales Less Autos for July rose .2% versus estimates of a .4% increase and an upwardly revised .3% rise in June. Retailers said same-store sales rose in July and Wal-Mart boosted its annual earnings forecast, Bloomberg reported. "The slowing that was apparent in earlier months likely overstated the weakness in consumer spending," said Richard DeKaser, chief economist at National City. Consumer spending is now forecast to rise at a 3.2% annual rate in the third quarter, based on the median estimate of 48 economists polled by Bloomberg.
Initial Jobless Claims fell to 333K last week versus estimates of 340K and 337K the prior week. Continuing Claims were 2896K versus estimates of 2895K and 2901K prior. The figures on jobless claims "suggest that the recent weakness in payroll employment should be transitory," Steven Wood, president of Insight Economics said. Moreover, the four-week moving average of continuing claims fell to 2.88M, the lowest since the week that ended June 2, 2001.
Business Inventories rose .9% versus estimates of a .6% rise and an increase of .7% in May. The inventory-sales ratio rose to 1.31 months, boosted by more autos on dealer lots. From March through May, the ratio was at a record low of 1.3 months, Bloomberg said. "Companies are continuing to rebuild their inventories but are doing so basically in line with growing sales," said Steven Wood, chief economist at Insight Economics. The increase in stockpiles will add more to economic growth in the second quarter than the government initially reported, economists said.
The Producer Price Index for July rose .1% versus estimates of a .3% rise and a decrease of .3% in June. PPI Ex Food & Energy for July rose .1% versus estimates of a .1% increase and a .2% rise in June. Prices rose less than forecast in July, restrained by cheaper cars and the biggest drop in the cost of food in more than two years, Bloomberg reported. Moreover, the cost of dairy products fell 6.2%, the biggest decline since April 1999, Bloomberg said. Smaller increases in core prices support the central bankers' view and may make it possible for them to continue to raise the target benchmark interest rate at a "measured" pace.
The Preliminary Univ. of Mich. Consumer Confidence reading for August came in at 94.0 versus estimates of 97.2 and a reading of 96.7 in July. The Current Conditions Index, based on perceptions of consumers' financial situation and whether it's a good time to make big purchases, rose to 108.4 in August from 105.2 last month, Market News said. Sentiment was likely negatively affected by the many reports of terror plots across the globe, rather than by weaker payroll numbers and rising oil prices. Stephen Gallagher, chief economist at Societe Generale in New York, said the index is influenced more by the unemployment rate, which fell, than by job creation, Bloomberg reported. Furthermore, the average all-grades price of a gallon of gasoline has fallen since reaching a record in late May, Bloomberg said.
Bottom Line: Overall, the economic data last week were mixed. Inventories are rising slightly, which could be a positive or negative depending on final demand in future months. However, the inventory rebuilding will help boost GDP growth this quarter. Payroll increases will likely remain underwhelming until demand reaccelerates in the fourth quarter and productivity drops. Unit labor costs, the largest component of inflation, remain at relatively subdued levels. In my opinion, the Fed made a mistake by leaving the "measured" language in their policy statement without qualifying it. While I agree with the Fed that the economy will reaccelerate, current weakness resulting from anti-business political rhetoric and terrorism fears, will likely restrain growth through the election in November. With interest rates plunging, most commodity prices dropping and recent inflation readings decelerating, I believe the Fed should wait at least until the November 10th meeting to hike rates further. However, at this point it appears a September rate increase is likely. Retail Sales for June were revised higher and July saw a rebound from June's temporarily depressed levels. The July reading for the Current Conditions component of Univ. of Mich. Consumer Sentiment Index bodes well for retail sales during the third quarter. The fall in the overall index was a direct result of the multiple terror warnings and reports during the month. Negative political rhetoric and the media's intense focus on higher oil prices and slower payroll growth also contributed to the decline. There were very few stories on the recent deceleration in inflation readings and the fall in the Unemployment Rate. The Unemployment Rate is now back to levels seen right before the 9/11 terrorist attacks. Finally, the CRB Index(a broad-based measure of commodity prices) is now down almost 6% from its highs set in March. Oil comprises less than 5% of inflation, yet every story related to inflation or commodities revolves around it being at all-time highs. Crude oil and gasoline would have to rise by 70% each to just reach the inflation-adjusted levels seen in the late 70's/early 80's. Rising energy prices and decelerating payroll growth are definitely not good for the economy, but the media's intense focus on everything negative is currently far more destructive to economic growth, in my opinion.
Wholesale Inventories for June rose 1.1% versus estimates of a .6% increase and a rise of 1.4% in May. Consumer spending, that cooled by the most in almost three years during the month, helped give companies the chance to replenish inventories that had been drained to record lows earlier this year, Bloomberg reported. "We expect a general recovery in inventories relative to sales in the wholesale sector to provide solid support for GDP growth through the remainder of 2004," said Michael Englund, chief economist at Action Economics. Wholesalers had enough supply to last 1.15 months at the current sales pace, up from the record low of 1.12 months in April.
Preliminary 2Q Non-farm Productivity rose 2.9% versus estimates of a 2.0% rise and a 3.7% increase in 1Q. Preliminary 2Q Unit Labor Costs rose 1.9% versus estimates of a 2.0% increase and a .3% rise in 1Q. The gain in productivity suggests that companies have become efficient enough to hold down payrolls until the economy rebounds form a second-quarter lull, economists said. The second-quarter rise in productivity is in line with the average annual increase of 3% since 1996. By contrast, productivity rose an average 1.5% a year in the previous two decades, Bloomberg reported. The number "is still quite healthy, productivity is incredibly strong," Douglas Porter, senior economist at BMO Nesbitt Burns said. Labor costs, while increasing, are still at moderate levels, Bloomberg reported.
Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter-point to 1.5% and restated a pledge to lift borrowing costs at a "measured" pace to suppress inflation without choking off growth, Bloomberg said. "Output growth has moderated and the pace of improvement in labor market conditions has slowed recently, however the economy appears poised to resume a stronger pace of expansion going forward," the Fed's rate-setting Open Market Committee said. The year's second rate increase was overshadowed by the decision to keep the "measured" pace language, which some investors expected the Fed to abandon, Bloomberg said.
The Import Price Index for July rose .2% versus estimates of a .4% rise and a .1% fall in June. The recent acceleration in core prices "has probably just about run its course," Joshua Shapiro, chief U.S. economist at MFR Inc. said. Imports account for about 15% of all goods and services bought in the U.S., Bloomberg reported.
Advance Retail Sales for July rose .7% versus estimates of a 1.2% increase and an upwardly revised .5% decline in June. Retail Sales Less Autos for July rose .2% versus estimates of a .4% increase and an upwardly revised .3% rise in June. Retailers said same-store sales rose in July and Wal-Mart boosted its annual earnings forecast, Bloomberg reported. "The slowing that was apparent in earlier months likely overstated the weakness in consumer spending," said Richard DeKaser, chief economist at National City. Consumer spending is now forecast to rise at a 3.2% annual rate in the third quarter, based on the median estimate of 48 economists polled by Bloomberg.
Initial Jobless Claims fell to 333K last week versus estimates of 340K and 337K the prior week. Continuing Claims were 2896K versus estimates of 2895K and 2901K prior. The figures on jobless claims "suggest that the recent weakness in payroll employment should be transitory," Steven Wood, president of Insight Economics said. Moreover, the four-week moving average of continuing claims fell to 2.88M, the lowest since the week that ended June 2, 2001.
Business Inventories rose .9% versus estimates of a .6% rise and an increase of .7% in May. The inventory-sales ratio rose to 1.31 months, boosted by more autos on dealer lots. From March through May, the ratio was at a record low of 1.3 months, Bloomberg said. "Companies are continuing to rebuild their inventories but are doing so basically in line with growing sales," said Steven Wood, chief economist at Insight Economics. The increase in stockpiles will add more to economic growth in the second quarter than the government initially reported, economists said.
The Producer Price Index for July rose .1% versus estimates of a .3% rise and a decrease of .3% in June. PPI Ex Food & Energy for July rose .1% versus estimates of a .1% increase and a .2% rise in June. Prices rose less than forecast in July, restrained by cheaper cars and the biggest drop in the cost of food in more than two years, Bloomberg reported. Moreover, the cost of dairy products fell 6.2%, the biggest decline since April 1999, Bloomberg said. Smaller increases in core prices support the central bankers' view and may make it possible for them to continue to raise the target benchmark interest rate at a "measured" pace.
The Preliminary Univ. of Mich. Consumer Confidence reading for August came in at 94.0 versus estimates of 97.2 and a reading of 96.7 in July. The Current Conditions Index, based on perceptions of consumers' financial situation and whether it's a good time to make big purchases, rose to 108.4 in August from 105.2 last month, Market News said. Sentiment was likely negatively affected by the many reports of terror plots across the globe, rather than by weaker payroll numbers and rising oil prices. Stephen Gallagher, chief economist at Societe Generale in New York, said the index is influenced more by the unemployment rate, which fell, than by job creation, Bloomberg reported. Furthermore, the average all-grades price of a gallon of gasoline has fallen since reaching a record in late May, Bloomberg said.
Bottom Line: Overall, the economic data last week were mixed. Inventories are rising slightly, which could be a positive or negative depending on final demand in future months. However, the inventory rebuilding will help boost GDP growth this quarter. Payroll increases will likely remain underwhelming until demand reaccelerates in the fourth quarter and productivity drops. Unit labor costs, the largest component of inflation, remain at relatively subdued levels. In my opinion, the Fed made a mistake by leaving the "measured" language in their policy statement without qualifying it. While I agree with the Fed that the economy will reaccelerate, current weakness resulting from anti-business political rhetoric and terrorism fears, will likely restrain growth through the election in November. With interest rates plunging, most commodity prices dropping and recent inflation readings decelerating, I believe the Fed should wait at least until the November 10th meeting to hike rates further. However, at this point it appears a September rate increase is likely. Retail Sales for June were revised higher and July saw a rebound from June's temporarily depressed levels. The July reading for the Current Conditions component of Univ. of Mich. Consumer Sentiment Index bodes well for retail sales during the third quarter. The fall in the overall index was a direct result of the multiple terror warnings and reports during the month. Negative political rhetoric and the media's intense focus on higher oil prices and slower payroll growth also contributed to the decline. There were very few stories on the recent deceleration in inflation readings and the fall in the Unemployment Rate. The Unemployment Rate is now back to levels seen right before the 9/11 terrorist attacks. Finally, the CRB Index(a broad-based measure of commodity prices) is now down almost 6% from its highs set in March. Oil comprises less than 5% of inflation, yet every story related to inflation or commodities revolves around it being at all-time highs. Crude oil and gasoline would have to rise by 70% each to just reach the inflation-adjusted levels seen in the late 70's/early 80's. Rising energy prices and decelerating payroll growth are definitely not good for the economy, but the media's intense focus on everything negative is currently far more destructive to economic growth, in my opinion.
Friday, August 13, 2004
Weekly Scoreboard*
Indices
S&P 500 1,064.80 +.08%
Dow 9,825.35 +.10%
NASDAQ 1,757.22 -1.11%
Russell 2000 517.39 -.44%
S&P Equity Long/Short Index 951.25 -.64%
Put/Call 1.05 -23.91%
NYSE Arms 1.20 -65.12%
Volatility(VIX) 17.98 -7.03%
AAII % Bulls 38.57 +24.46%
US Dollar 87.90 -.50%
CRB 269.19 +.26%
Futures Spot Prices
Gold 401.20 -.30%
Crude Oil 46.03 +5.89%
Unleaded Gasoline 134.68 +8.83%
Natural Gas 5.53 -1.28%
Base Metals 111.07 +2.27%
10-year US Treasury Yield 4.22% unch.
Average 30-year Mortgage Rate 5.85% -2.34%
Leading Sectors
HMO's +3.55%
Iron/Steel +3.07%
Telecom +1.39%
Lagging Sectors
Disk Drives -3.74%
Semis -5.23%
Networking -5.66%
*% Gain or loss for the week
S&P 500 1,064.80 +.08%
Dow 9,825.35 +.10%
NASDAQ 1,757.22 -1.11%
Russell 2000 517.39 -.44%
S&P Equity Long/Short Index 951.25 -.64%
Put/Call 1.05 -23.91%
NYSE Arms 1.20 -65.12%
Volatility(VIX) 17.98 -7.03%
AAII % Bulls 38.57 +24.46%
US Dollar 87.90 -.50%
CRB 269.19 +.26%
Futures Spot Prices
Gold 401.20 -.30%
Crude Oil 46.03 +5.89%
Unleaded Gasoline 134.68 +8.83%
Natural Gas 5.53 -1.28%
Base Metals 111.07 +2.27%
10-year US Treasury Yield 4.22% unch.
Average 30-year Mortgage Rate 5.85% -2.34%
Leading Sectors
HMO's +3.55%
Iron/Steel +3.07%
Telecom +1.39%
Lagging Sectors
Disk Drives -3.74%
Semis -5.23%
Networking -5.66%
*% Gain or loss for the week
Mid-day Update
S&P 500 1,063.56 +.03%
NASDAQ 1,755.73 +.18%
Leading Sectors
Energy +1.21%
Computer Boxmakers +1.18%
Commodity +.87%
Lagging Sectors
Biotech -.83%
Semis -.96%
Fashion -1.19%
Other
Crude Oil 46.0 +1.10%
Natural Gas 5.47 +.61%
Gold 401.30 +1.21%
Base Metals 111.07 +1.23%
U.S. Dollar 87.93 -.86%
10-Yr. T-note Yield 4.20% -1.54%
VIX 18.38 -3.51%
Put/Call 1.28 +23.08%
NYSE Arms 1.52 -45.32%
Market Movers
DELL +4.8% after meeting 2Q estimates, maintaining 3Q forecast and multiple upgrades.
DNA -5.3% after saying its Avastin colon-cancer drug may increase risk of heart attacks and strokes.
CNO -8.7% after announcing the departure of CEO William Shea.
SINA -9.5% after MDB Capital cut to Neutral and competitor SOHU trading halt.
ADI -4.8% after missing 3Q estimates and lowering 4Q outlook.
SCSC +9.9% after beating 4Q estimates and giving strong 1Q outlook.
RRGB +9.4% after beating 2Q estimates, raising 3Q/04 outlook and multiple upgrades.
DIGE +9.8% after yesterday's sharp decline on disappointing 4Q earnings.
KSS +4.5% after meeting 2Q estimates and maintaining guidance.
SCSS -10.3% after downgrade to Underweight at BB&T capital over concerns that mold forms in the company's mattresses.
Economic Data
Producer Price Index for July rose .1% versus estimates of a .3% increase and a .3% decline in June.
PPI Ex Food & Energy for July rose .1% versus estimates of a .1% rise and a .2% increase in June.
Trade Balance for June came in at -$55.8B versus estimates of -$47.0B and -$46.9B in May.
Preliminary Univ. of Mich. Consumer Confidence for August was 94.0 versus estimates of 97.2 and 96.7 in July.
Recommendations
CSCO raised to Overweight at Morgan Stanley. LXK raised to Overweight at Morgan Stanley. ROH raised to Overweight at JP Morgan. NILE raised to Outperform at JP Morgan. QLTY cut to Underweight at JP Morgan. BEAS raised to Buy at Merrill, target $8. Goldman Sachs reiterated Outperform on DELL and DNA. Citi SmithBarney reiterated Buy on MDT, target $61. Citi reiterated Buy on DELL, target $39. Citi reiterated Buy on SNMX, target $12. Citi reiterated Sell on WTW, target $31. Citi reiterated Buy on FD, target $58. Citi reiterated Buy on URBN, target $35. Citi reiterated Buy on BRCD, target $6.30. Citi reiterated Buy on WMT, target $65. Citi reiterated Buy on BEAS, target $11.50. Citi reiterated Buy on TGT, target $50.
Mid-day News
U.S. stocks are mixed mid-day as positive news from Dell is being offset by rising energy prices. Hudson's Bay Co., Canada's biggest department-store chain, is in talks to sell all or part of its operations to U.S. retailer Target, the Globe and Mail reported. Aetna is using medical experts for advice on subscribers' conditions as part of its plan to cut costs and improve finances, the Wall Street Journal reported. General Electric's NBC said it signed a three-year contract with DreamWorks Television to get an ownership interest in and the first right to air its shows, the LA Times reported. McKesson Corp. and Cardinal Health are interested in buying PSS World Medical, Business Week reported. U.S. producer prices rose less than forecast last month, restrained by cheaper cars and the biggest drop in the cost of food in more than two years, Bloomberg reported. Google said regulators may force it to buy back shares sold in its IPO because an interview in Playboy magazine may have violated U.S. securities law, Bloomberg said. U.S. consumer confidence fell for the first time in three months in August, restrained by news of higher oil prices and slower job creation, Bloomberg reported. More than half of Americans surveyed said they approve of the job President Bush is doing, up from a low of 46% in May, according to a new Gallup Poll. Crude oil futures rose to a record $49.99 a barrel in New York on speculation a recall vote in Venezuela will disrupt shipments from the fourth-largest supplier to the U.S., Bloomberg reported. As well, hurricane Charley and Tropical Storm Bonnie caused companies to cut daily crude-oil production in the Gulf of Mexico by 18% and natural-gas output by 7.4%, Bloomberg reported. Hurricane Charley headed for Florida's west coast today, forcing the state to call for the evacuation of almost 2 million people, Bloomberg said.
BOTTOM LINE: The Portfolio is slightly higher today on strength in my homebuilding and internet longs and weakness in my Chinese ADR shorts. I have not traded and the Portfolio is still 25% net long. The market is being restrained today by worries over terrorism at the Olympics, potential disruptions to oil shipments in Venezuela and the disruption to oil production in the Gulf from Hurricane Charley. Inflation readings continue to decelerate and interest rates continue to fall, yet the mainstream press barely reports these positive developments and chooses to focus the overwhelming majority of their reports on high oil prices. Oil comprises less than 5% of inflation. I am not trying to minimize its importance. I just don't believe that one commodity that is trading 41% below its inflation-adjusted highs of almost 25 years ago deserves to receive this much attention. Moreover, consumers are now spending less than 2% of their discretionary income on gas versus 6% during the late 70's. Relatively few companies, outside of the airline industry, are being hurt significantly by high oil prices at this point. The deceleration in retail sales is more a function of less tax-cut stimulus, bad weather, less home re-financings and the huge spike in home sales during the first quarter rather than high gas prices. Again, I am not trying to say that high energy prices aren't worthy of reporting or they are not a negative, just that they don't deserve the amount of attention they are getting at this point.
NASDAQ 1,755.73 +.18%
Leading Sectors
Energy +1.21%
Computer Boxmakers +1.18%
Commodity +.87%
Lagging Sectors
Biotech -.83%
Semis -.96%
Fashion -1.19%
Other
Crude Oil 46.0 +1.10%
Natural Gas 5.47 +.61%
Gold 401.30 +1.21%
Base Metals 111.07 +1.23%
U.S. Dollar 87.93 -.86%
10-Yr. T-note Yield 4.20% -1.54%
VIX 18.38 -3.51%
Put/Call 1.28 +23.08%
NYSE Arms 1.52 -45.32%
Market Movers
DELL +4.8% after meeting 2Q estimates, maintaining 3Q forecast and multiple upgrades.
DNA -5.3% after saying its Avastin colon-cancer drug may increase risk of heart attacks and strokes.
CNO -8.7% after announcing the departure of CEO William Shea.
SINA -9.5% after MDB Capital cut to Neutral and competitor SOHU trading halt.
ADI -4.8% after missing 3Q estimates and lowering 4Q outlook.
SCSC +9.9% after beating 4Q estimates and giving strong 1Q outlook.
RRGB +9.4% after beating 2Q estimates, raising 3Q/04 outlook and multiple upgrades.
DIGE +9.8% after yesterday's sharp decline on disappointing 4Q earnings.
KSS +4.5% after meeting 2Q estimates and maintaining guidance.
SCSS -10.3% after downgrade to Underweight at BB&T capital over concerns that mold forms in the company's mattresses.
Economic Data
Producer Price Index for July rose .1% versus estimates of a .3% increase and a .3% decline in June.
PPI Ex Food & Energy for July rose .1% versus estimates of a .1% rise and a .2% increase in June.
Trade Balance for June came in at -$55.8B versus estimates of -$47.0B and -$46.9B in May.
Preliminary Univ. of Mich. Consumer Confidence for August was 94.0 versus estimates of 97.2 and 96.7 in July.
Recommendations
CSCO raised to Overweight at Morgan Stanley. LXK raised to Overweight at Morgan Stanley. ROH raised to Overweight at JP Morgan. NILE raised to Outperform at JP Morgan. QLTY cut to Underweight at JP Morgan. BEAS raised to Buy at Merrill, target $8. Goldman Sachs reiterated Outperform on DELL and DNA. Citi SmithBarney reiterated Buy on MDT, target $61. Citi reiterated Buy on DELL, target $39. Citi reiterated Buy on SNMX, target $12. Citi reiterated Sell on WTW, target $31. Citi reiterated Buy on FD, target $58. Citi reiterated Buy on URBN, target $35. Citi reiterated Buy on BRCD, target $6.30. Citi reiterated Buy on WMT, target $65. Citi reiterated Buy on BEAS, target $11.50. Citi reiterated Buy on TGT, target $50.
Mid-day News
U.S. stocks are mixed mid-day as positive news from Dell is being offset by rising energy prices. Hudson's Bay Co., Canada's biggest department-store chain, is in talks to sell all or part of its operations to U.S. retailer Target, the Globe and Mail reported. Aetna is using medical experts for advice on subscribers' conditions as part of its plan to cut costs and improve finances, the Wall Street Journal reported. General Electric's NBC said it signed a three-year contract with DreamWorks Television to get an ownership interest in and the first right to air its shows, the LA Times reported. McKesson Corp. and Cardinal Health are interested in buying PSS World Medical, Business Week reported. U.S. producer prices rose less than forecast last month, restrained by cheaper cars and the biggest drop in the cost of food in more than two years, Bloomberg reported. Google said regulators may force it to buy back shares sold in its IPO because an interview in Playboy magazine may have violated U.S. securities law, Bloomberg said. U.S. consumer confidence fell for the first time in three months in August, restrained by news of higher oil prices and slower job creation, Bloomberg reported. More than half of Americans surveyed said they approve of the job President Bush is doing, up from a low of 46% in May, according to a new Gallup Poll. Crude oil futures rose to a record $49.99 a barrel in New York on speculation a recall vote in Venezuela will disrupt shipments from the fourth-largest supplier to the U.S., Bloomberg reported. As well, hurricane Charley and Tropical Storm Bonnie caused companies to cut daily crude-oil production in the Gulf of Mexico by 18% and natural-gas output by 7.4%, Bloomberg reported. Hurricane Charley headed for Florida's west coast today, forcing the state to call for the evacuation of almost 2 million people, Bloomberg said.
BOTTOM LINE: The Portfolio is slightly higher today on strength in my homebuilding and internet longs and weakness in my Chinese ADR shorts. I have not traded and the Portfolio is still 25% net long. The market is being restrained today by worries over terrorism at the Olympics, potential disruptions to oil shipments in Venezuela and the disruption to oil production in the Gulf from Hurricane Charley. Inflation readings continue to decelerate and interest rates continue to fall, yet the mainstream press barely reports these positive developments and chooses to focus the overwhelming majority of their reports on high oil prices. Oil comprises less than 5% of inflation. I am not trying to minimize its importance. I just don't believe that one commodity that is trading 41% below its inflation-adjusted highs of almost 25 years ago deserves to receive this much attention. Moreover, consumers are now spending less than 2% of their discretionary income on gas versus 6% during the late 70's. Relatively few companies, outside of the airline industry, are being hurt significantly by high oil prices at this point. The deceleration in retail sales is more a function of less tax-cut stimulus, bad weather, less home re-financings and the huge spike in home sales during the first quarter rather than high gas prices. Again, I am not trying to say that high energy prices aren't worthy of reporting or they are not a negative, just that they don't deserve the amount of attention they are getting at this point.
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