Monday, July 31, 2006

Standout Stocks

Here are some stocks making strong moves on above-average volume today:
  • HUM - breaks above 50-day on earnings
  • CLB - hits new highs, after last week's gap higher
  • AKAM - also moves to new highs following last week's move
  • CHK - rallying on strong natty gas prices
  • BEAV - extends last week's gap higher (earnings)
  • AG - gaps 15% lower on weak guidance
  • ITRI - spikes lower on convertible note offering
  • AVP - gaps 11% lower on disappointing earnings
  • GPN - reverses lower following Friday's gap up
  • EEFT - continued weakness from last week's earnings

long CHK

Morning News Roundup

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: NGA +6.7%, EMAG +5.6%, ASMI +5.5%, CTCM +4.1%, HUM +3.8%, UAUA +1.3%... Other news: FLSH +11% (to be acquired by SNDK; up in sympathy: SIMO +7%), POZN +15% (to submit response to FDA approvable letter for Trexima in Q4), PD +5.5% (Grupo Mexico considering a bid for the co - Globe and Mail; also Pru upgrade), COH +4.8% (mentioned positively in Barron's), RMBS +4.4% (BWS Financial upgrade), CPO +3.3% (corn prices rise as heat wave threatens crops), EP +3.2% (mentioned positively in Barron's), HSOA +2.7%, LBIX +2.7% (extends recent momentum), AAPL +2.2% (BofA upgrade), PWAV +2.1% (reports tonight after the close), CHK +2.1%, WMT +1.8% (July sales guidance), PFE +1.7% (names new CEO), SIRI +1.5% (announces that its service will be offered on Mitsubishi cars), SNY +1.4% (states reject Plavix deal)... Under $3: CYTR +22% (completes Phase 1 HIV trial), VLTS +11%.
  • Gapping Down
    Gapping down on disappointing earnings/guidance: SCT -38% (warns of a loss, suspends dividend, CEO resigns, to explore strategic alternatives), AG -9.7%, ABN -3.2%, MTU -3.2%, UAUA -1.9%, ENMC -1.8%, GVHR -1.7%... Other News: ITRI -6.6% (to offer convertible notes), SRZ -5.1% (to restate earnings), AVCI -4.2% (profit taking after recent move higher), CEPH -2.8% (hearing related to state's decision to reject BMY's Plavix settlement agreement), PALM -1.9%, RTP -1.8% (mentioned as a potential bidder of PD - Globe and Mail), AAUK -1.5%, BHP -1.4%, AMZN -1.2%, REP -1.1% (invests in expanding capacity in Portugal).
  • BONDX Poole says data shows slowing growth, see 50% chance on Aug Fed hike
    Says inflation is "tilted" upward (Bloomberg)
  • AAPL Apple Computer: Upgrade details (65.59 ) -Update-
    BofA upgraded AAPL to Buy from Neutral and raises their tgt to $79 from $68 saying that channel checks show higher end demand for MacBooks than their previous checks. Firm is encouraged that Street expectations have moved lower for iPods, which was part of the reason for their downgrade in Dec 05. Firm sees the same product introduction schedule as they have mentioned previously - a new Nano late in the Sept Q and modestly upgraded Video in Q4, in time for a holiday demand. Further EPS upside potential from iPod of $0.08-0.12. Also, firm is not including the impact of an AAPL phone, which could be $0.03-0.05 in F07.
  • WMT Wal-Mart sees July same-store sales up 2.4% - Reuters (44.46 )
    Reuters reports Wal-Mart (WMT) on Saturday estimated that July sales rose 2.4% at its U.S. stores open at least a year, toward the high end of its forecast.
  • SNDK SanDisk to acquire M Systems Flash Disk; co to become wholly owned subsidiary of SanDisk (47.14 )
    Co and M Systems Flash Disk Pioneers (FLSH 31.79) enter into definitive agreements for SanDisk to acquire M Systems in an all stock transaction. In the transaction, each M Systems ordinary share will be converted into 0.76368 of a share of SanDisk common stock, representing a 26% premium over the average closing price of M Systems' shares for the last thirty trading days.

long AAPL

Back In The Saddle

Hope you had a good weekend. As for me, while I rarely get sick I caught something nasty this weekend and spent most of it in bed with a fever. Not a fun way to spend your time off.

Anyway, the market is opening on a slightly weak note. This shouldn't be surprising given last week's strong rally. The market greeted the soft GDP report with a cheer on Friday, but this week we have the key core CPE deflator report on inflation. So we'll see if the market has the same benign outlook for inflation.

The bond market doesn't seem too worried about inflation. The 10-year yield is still just below 5.0%. Natural gas is screaming higher over capacity concerns, and this is helping those stocks levered to natty gas.

Semis are also bucking the early weakness. SNDK is acquiring FLSH in the flash memory space. Also, AAPL is up nicely on an upgrade from BofA.

I'll be back with a roundup of the morning news.

long AAPL

Saturday, July 29, 2006

Weekly Recap

The stock market rallied sharply this week. It was due to a developing sense that the fundamentals are improving. There was not a lot of specific news to account for the gains.
On Monday, the S&P surged 21 points. There was some good news, but it was hardly of the nature that would normally spark a large rally. HCA announced that it would go private in a $33 billion deal. AMD announced it would acquire ATI technologies for $5.4 billion. These announcements continued the trend of a high level of acquisitions.

Merck, BellSouth, and Schering-Plough had good earnings reports. There was even an analyst upgrade on Dell, which had taken a beating the week before after warning of lower than expected second quarter profits. That's all good, but it's hardly the basis of a 1.7% rally in the S&P.

The positive tone continued on Tuesday. Stocks opened lower following the big Monday move on the expectation that the see-saw pattern of recent weeks would continue. But the market rallied strongly in the afternoon and the S&P managed an 8 point gain.

This was a very good performance considering that the news was mixed. UPS had a poor earnings report and warned, and 3M reported profits below expectations. Altria, AT&T, and Texas Instruments had produced good reports, but that wasn't enough to offset the bad news - at least in the morning. The afternoon rally was spurred by an analyst upgrade to UPS. The news was still negative in net for the stock, but the market rallied nonetheless.

Wednesday the market was flat and Thursday there was a bit of profit-taking as the S&P 500 lost 5 points. The earnings reports continued to lean bullish. There were so many reports it is impossible to list even the major ones, but the biggest were perhaps that General Motors had a surprisingly good report, ExxonMobil and other oil companies reported strong numbers, and a number of manufacturing firms such as Cummins and Ingersoll-Rand posted strong numbers. Amazon represented a notable miss.

The second quarter earnings are now headed for a 13% to 14% increase in operating earnings for the S&P 500 in aggregate with about two-thirds of the companies having reported. That is obviously a very strong gain. And guidance has been good enough to keep third quarter estimates at 12% to 15%. The earnings numbers may not have prompted the rally this week, but they certainly provided support.

The economic data was light this week, but the GDP number on Friday sparked another upward move. The S&P jumped 15 more points as a modest increase of 2.5% in second quarter real GDP growth was posted. The breakdown of the data suggested the Fed is getting the soft landing they desire. There is no indication of a sharp slowdown in the economy.

The slower growth led the market to conclude that the Fed probably won't raise rates at the August 8 meeting. That boosted stocks on Friday. The probability of a rate hike in August, as measured by the fed funds futures market, dropped to about 35% on Friday from 45% on Thursday.

The S&P thus ended the week with a very strong 3% gain even though there was not much economic data, and earnings reports weren't good but not surprising. Nevertheless, there is a growing belief that the Fed might not raise rates further, that economic growth will slow only modestly, and that earnings growth will continue in the second half of the year. That is a good formula for the stock market to post gains through year-end.

There are certainly concerns. Oil ended the week at $73 and it could jump at any time on geopolitical events or a disruptive hurricane. Inflation might inch higher and prompt the Fed to raise rates further. Yet, overall, the underlying market tone is improving as the worst fears are fading.


Friday, July 28, 2006

Holding Up Into The Weekend

The market is holding up well, even if volume is running light.

Financials have taken off, due to the "Fed is done" trade. With the action on the 10-year yield, the market is also saying that inflation expectations have peaked. This has the potential to release some more positive sentiment, if the economy can achieve a soft landing.

Small-caps are leadingthe action, gaining +2%. Big-cap tech is up an equal amount. Among industry groups, semis are also having a good day, up nearly +3%. And brokers are strong too.

If the Fed is done, even the lowdown and beaten up homebuilders could catch a nice bounce. Though I am not wading in there yet.

Technically speaking, the SPX is in the best shape, even as it nears resistance around 1280. I will expand on this over the weekend.

Slower Growth Cheered By The Street

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: GNSS +21% (also upgrades from Roth and Stanford), AMMD +11%, ONNN +9.5%, GPN +6.3%, SPSX +6.2%, MHK +6.3%, VSEA +5.2% (also Needham and BofA upgrades), FORM +4.1% (also BofA upgrade), PLAY +3.7%, DRIV +3.4%, SRCL +3.2%, LWSN +2.7% (also Deutsche upgrade), APC +1.5%... Other News: ISIS +6.6% (clinical study on a treatment for Lou Gehrig's disease prolongs life in rats), RMBS +5% (accepts $133.6 mln in damages from Hynix), EMIS +3.1% (profiled in BWeek Inside Wall St section), MDG +3%, LBIX +2.5% (extends recent momentum), CRME +2.5% (same), BBY +1.9% (Raymond James upgrade), HAL +1.2%... Mining stocks are trading higher one weaker than expected GDP: AAUK +2.9%, RTP +2.3%, N +1.5%, NEM +1%... Under $3: PXPL +22% (hearing newsletter mention).
  • Gapping Down
    Gapping down on disappointing earnings/guidance: RACK -33% (also Piper downgrade), SWIR -30% (also downgrades from Piper and Morgan Joseph), FORD -28%, VLCM -20% (also Wachovia downgrade), USPI -17%, MEE -16% (also Credit Suisse downgrade), MFE -15%, SPRT -14% (also Miller Johnson downgrade), CKCM -14%, ANDE -9.5%, SOHU -8.4%, MRCY -5.5%, DTE -3.8%, FII -3.3%, CVX -2.9%... Other News: GTOP -31% (Phase III MyVax data; also RBC downgrade), LNCR -7% (BofA downgrade), SINA -5%, SMSI -3.7% (extends yesterday's 12% drop), ISRG -2% (extends yesterday's 11% drop), BIDU -2% (extends yesterday's 21% drop), BMY -1.8% (JP Morgan downgrade), SHPGY -1.5%, RTRSY -1.3%, LSI -1.4%, UARM -1.3%... Under $3: CNXT -4.7% (reports JunQ; also Credit Suisse downgrade).
  • Morning News Summary
    WSJ: Congress may let hedge funds manage more pension money... Chico's FAS (CHS) falls out of fashion with investors. Reuters: Sony (SNE) Q2 games division losses may exceed Q1... FBI raids office of Bristol-Myers (BMY) chief executive... AP: Judge OKs $90 mln 'click fraud' settlement.
  • CHS Chico's FAS falls out of fashion with investors - WSJ (21.90 )
    The Wall Street Journal reports Chico's FAS (CHS) has been so successful that there may not be many new customers left to attract. The reversal in Chico's fortune revolves around the question of whether the co can sustain its success as the expansion of its original brand slows while they develop three other brands it has created or acquired in the past three years. The retailer attributes these problems to a few discrete issues. It says it is fixing bad color choices and improving its selection of cold-weather clothing for its northern U.S. stores. It is expanding some Chico's and White House/Black Market stores, with more space for cash registers and dressing rooms to shorten lines. For the first time in years, the number of new sign-ups to Chico's loyalty program is slowing, spelling trouble for future sales growth, as most of its sales come from these regular shoppers. Finally, Piper analyst Neely Tamminga believes that Chico's concept may be hitting a saturation point and shares could command a lower P/E.
  • GOOG Judge OKs $90 mln 'click fraud' settlement - AP (382.40 )
    AP reports An Arkansas judge Thursday approved a $90 mln settlement between Google (GOOG) and advertisers who claimed Google improperly billed them for ''clicks'' that didn't lead to genuine customers seeking their products. Miller County Circuit Judge Joe Griffin called the settlement ''fair, reasonable and adequate'' and downplayed claims it hurt small advertisers. More than 70 objections were filed, with smaller companies saying they didn't have the resources to prove ''click fraud'' losses. By settling claims made in the plaintiffs' class-action lawsuit, Google will give advertising credits that are the equivalent of a $3.80 refund on every $1,000 spent in its advertising network during the past 4 1/2 years.
  • RACK Rackable Systems: Another strong quarter with conservative guidance as usual - Thomas Weisel (34.91 )
    Thomas Weisel says RACK had another great quarter, with revs of $88.6 mln and pro forma EPS of $0.28. Firm said RACK reported solid gross margin of 23.7% (excluding options), 69bp higher than their est of 23.0%. Previous gross margin guidance was 22-24%, and the co reiterated that guidance for future quarters with a caveat that higher Intel mix in 2H could be a drag on gross margin. Cautious guidance for next quarter and full year guidance, as always-but note shift back to INTC Woodcrest causing some purchase delays near term. Firm is raising their ests to the higher end of co guidance. Sources of investor and Thomas Weisel's concern are: 1) Fear of broken growth story-but firm believes strong re-acceleration is likely in 4Q and beyond as new salespeople ramp. 2) Fear of margin erosion-but they believe high leverage is likely with a rev acceleration, thus, a return to the 12-15% OM range from the 10% is expected in 3Q06.

Market Comments: The markets are rallying, both the stock and bond markets. Q2 GDP came in at +2.5%, below expectations of +3.0%. So the economy has slowed, and that is pushing bond yields lower. The 10-year broke below 5.0% this morning. And remember that the fed funds rate is 5.25%. So the odds of another rate hike are falling again.

The fact that the Fed is almost certainly done is also helping push stocks higher, in addition to rumors that a cease-fire in Israel might be in the works.

These two factors are masking the damage inflected on many individual stocks that reported less than stellar earnings and saw plunges in their stock prices. I am long RACK, but fully hedged my position with puts before earnings. The stock is down so much (-35%) that I actually made money overall.

As for the market, I don't want to sound like a broken record about strong opens, but we saw what happened yesterday. So color me skeptical.

long GOOG; net long RACK

Thursday, July 27, 2006

Markets Put In Negative Reversal

The markets were rallying early in the day, but then sold off into the closing hours. Now you know why I say that I prefer it when the market opens weak.

Both major indexes put in negative reversals today, with the COMP actually putting in an outside day. As for the SPX, it is still above its 50-day, so we will have to watch for potential support.

Volume rose a bit today, which qualifies as a distribution day. And we never did get a true follow through day to the rally on 7/18. So this latest rally attempt really needs to prove itself.

In all the years I have been trading, I think this has to be the most volatile earnings season I can remember. Especially for companies who report so-so earnings and give cautious guidance. Stocks for those companies have been totally trashed. Did you see UPS, AMZN, NVT, AET, PLXS, KNDL? And I can name two dozen more.

It has been brutal, but I suspect that as earnings season winds down, smart investors will pick through the rubble and find those stocks that don't deserve to be down as much as they are. It seems everyone is a technician these days, and as soon as a stock breaks a little, the herd runs for the hills. What ever happened to buy low, sell high?

Home Sales Still Weakening

(this post was delayed due to Blogger technical issues)

Morning News of Note:

  • Gapping Up
    Gapping up on strong earnings/guidance: AKAM +20% (also multiple upgrades), SIMG +20% (also Stanford upgrade), BOBJ +14% (also Credit Suisse and First Albany upgrades), GSIC +12% (also upgrades from Bear Stearns and Morgan Stanley), WLV +36%, WFR +10.4%, RAIL +10%, TSCM +8%, QLTI +8%, SYMC +7.2%, BVN +6%, LIFC +5.9%, LVLT +5.8%, TMS +5.4%, ITRI +4.6%, TLAB +4.6%, CYMI +3.6% (also BofA upgrade), DCX +3.5%, BSX +2.6%, CMCSA +2.2%, BP +2.2%, ROK +2.2% (also AG Edwards and FBR upgrades), PTRY +2.1%, NETL +1.9%... Other News: IMAX +6.6% (Sony joins in bidding for co - Globe and Mail), BTRX +5.7%, IPAS +5%, RSD.A +3%, GLW +2.1% (bounces after 14.5% drop yesterday), CHK +2.1% (JP Morgan upgrade), SAP +2% (in sympathy with BOBJ), CONR +2% (prices offering), BRCM +2%... Under $3: NYER +7.7% (reports sales).
  • Gapping Down
    Gapping down on disappointing earnings/guidance: PLUG -21%, NVT -19%, PLXS -19%, AET -15% (also Bear Stearns downgrade), BBI -13%, BIDU -13%, PMTI -13%, ISRG -10%, AMKR -9.5% (also to review stock option practices), SMSI -8%, XMSR -7.3%, KLIC -7%, PENN -6.4%, ARRS -5.5%, DOW -5.5%, KOMG -5%, AZN -4.8%, TKP -4.7%, PRST -4.6%, TLAB -4.6%, HET -4.5%, CELG -3.8%, HZO -2.7%, ALA -2.7%, NEM -1.5%, RCL -1.3%... Other News: SNY -4.1% (Plavix deal under criminal probe, also BMY -3%), UNH -3.6%, NBIX -2.9% (lays off sales force)... Under $3: DRRA -24% (reports Q2).
  • GOOG Google lags Yahoo, Baidu in Chinese search - InfoWorld (385.50 )
    InfoWorld reports GOOG may dominate the mkt for search-engine advertising in the U.S. and other countries, but the co lagged far behind its main rivals in China during the first quarter of 2006, said mkt analyst Analysys Intl. In terms of rev, GOOG ranked third among search engines in China with a 13.2% share of the mkt. (BIDU) ranked first with 43.9% of the mkt, Analysys said in a report. Yahoo China (YHOO), which is operated by, had the second-largest share of the mkt, with a 21.1% share.'s (SOHU) search engine came in fourth, with 9.2% of the mkt.
  • WFR MEMC Elec: Delivers solid 2Q06 results - UBS (28.89 )
    UBS notes that WFR reports 2Q06 sales of $371 mln and proforma EPS of $0.45, beating both ests. Firm says co reported the 2Q06 semiconductor wafer pricing was up "mid" single digits q/q and will be up at similiar levels next quarter. Firm is raising ests on improving fundamentals. Firm notes that WFR guided 3Q06 tp $389 mln, which is higher than the pre-call consensus of $386 mln and now expects Y06 revs of EPS to be $1.5 bln and $1.80-$2.00 repectively. Firms new ests are $1.90 with Y07 EPS of $2.47 (consensus $1.71 and $2.13 respectively).
  • Cramer's 'Mad Money' Recap -
    On Wendesday's edition, Jim mentioned that ActiveIdentity (ACTI) could be bought by Symantec (SYMC). He also believes Tibco (TIBX) and BEA Systems (BEAS) could be absorbed by buyers since there is a gap in middleware, according to Citigroup. In fact, he notes Hewlett (HPQ), SAP (SAP) or Oracle (ORCL) as buyers of one or both.

    Market Comments: The market has gotten off to a good start, and so far has been able to hang on to those gains. There are plenty of stocks gapping down on earnings reports, as I have mentioned repeatedly.

    Bond yields are lower again (5.03%). New Home Sales fell 3%, and also came in below expectations, showing a further softening in the housing market. I think this makes it more likely that the Fed will not raise rates in August, unless they want to risk a hard landing in the housing market.

    Natural gas inventories showed a slight decline in the most recent data, versus expectations of a build in inventories. This is helping the natural gas stocks in the energy group.

    long GOOG, net lon g WFR

Wednesday, July 26, 2006

After Hours Update

Today's action was bullish, even if the indexes didnt' close positive for a 3rd day. The markets were down earlier in the day, but recouped those losses by rallying into the close. This is a change in character from previous rallies that were completely retraced in the next couple of sessions.

Bond yields moved lower again today, with the 10-year closing at 5.04%. The Fed's Beige Book pointed to a further slowing of growth, and mentioned residential real estate specifically. The talk on the trading floors in the bond pits isn't that the Fed is going to "pause", but that they are actually going to be finished raising rates.

After hours, the earnings minefield continues:
  • Navteq (NVT) missed by 3 cents and said "faced a number of challenges"; reaction = down $4
  • (BIDU) beat EPS by 4 cents and raised Q3 guidance; stock reaction = down $13
  • Akamai (AKAM) beats by 2 cents, raises guidance; reaction = up $4.50
  • Intuitive Surgical (ISRG) beats by 15 cents; reaction = down $10
  • MEMC Elec. (WFR) beats by 3 cents, raises FY guidance; reaction = up $3
  • Symantec (SYMC) beats by 6 cents, raises guidance nicely; reaction = up $1
  • Zimmer (ZMH) beats EPS by a penny, guides Q3 in-line; reaction = down $2
  • Itron (ITRI) beats by 8 cents, raises guidance slightly; reaction = up $2

net long WFR; short AKAM, NVT

Natty Gas Moving Up

Natural gas is getting a nice bounce today, and that is helping the stocks in that group. I have felt that natural gas has been trading at too steep of a discount relative to crude oil, and that the spread should narrow.

Regardless, one stock I like is Chesapeake Energy (CHK), which is well run and levered to natural gas. The stock is spiking higher today on ok volume, but it is now above its 200-day average.

Moreover, it looks like it has now completed its correction that began back in May. I am looking for this stock to continue to climb into the mid-30s. And although I don't wish for any hurricanes, if we do get one (or more) that would likely serve to drive the stock even higher.

long CHK

Not Sweating A Down Open

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: GM +4.5% (up in sympathy: F +2.4%), MNST +4.3%, YCC +7.8%, BEAV +7.3%, SGTL +19%, PMTC +9%, NHWK +8.2%, WIRE +7.6%, IDTI +4.7%, AJG +4.7%, QLGC +3.6% (also FBR upgrade), SPIL +3.2%, MEA +3%, SUNW +2.9% (also Bear Stearns upgrade), ATI +2%... Other News: CPWR +7.6% (Piper believes CPWR benefits from HPQ's purchase of MERQ.PK), WFR +5.9% (finalizes solar deal with Suntech), MT +3.2% (Arcelor holders accept bid), CRME +2.9% (extends recent momentum), BOBJ +2.6%, BBBY +2% (JP Morgan upgrade), HCA +1.5% (Blackstone considering bid for co - WSJ), OLAB +19% (developments in Partner Success Holdings merger, light vol 2,400 shares)... Under $3: GNTA +9% (receives Special Protocol Assessment from FDA).
  • Gapping Down
    Gapping down on disappointing earnings/guidance: SIRF -19%, AMZN -15% (also downgrades from Piper and Wachovia), SOLD -13% (also Piper downgrade), CHH -15% (also downgrades from Bear Stearns and Susquehanna), CYMI -14%, PLT -12% (also Kaufman downgrade), PNRA -10%, GYI -9.4% (also downgrades from Credit Suisse and Kaufman Bros), PFCB -8.5%, GLW -7.2%, LLTC -6.8%, UARM -6.7%, CRS -6.4%, BYD -6.3%, RFMD -6.2%, NSC -5.9%, ESLR -5.8%, HES -5.3% (also Deutsche downgrade), TASR -5.1%, XLNX -4.7%, FDRY -4.7%, BWLD -4%, LSS -3.9%, CX -3.7%, GSK -2.2%, BA -1.7%... Other News: NTRI -2.8% (extends yesterday's 20% decline, could also be no analysts defended the stock with an upgrade), AMLN -1.5% (Wachovia downgrade), SBUX -1.1%.
  • WFMI Whole Foods: checks indicate that both industry growth and Whole Foods' comps remain strong- RBC (56.26 -0.38) -Update-
    RBC says part of this under-performance is a function of the market systematically selling off high multiple retailers. However, they believe a portion of the weakness can also be attributed to investor concerns that comps will slow just as Whole Foods is accelerating its square footage growth and working to reduce prices in an effort to rid itself of the "Whole Paycheck" stigma. The firm says their checks indicate that both industry growth and Whole Foods' comps remain strong, but likely moderated somewhat due to tougher comparisons. They think Whole Foods will report comps of about 11% (vs. 11.9% last quarter), and believe earnings will meet or modestly exceed consensus of $0.34. The firm thinks these results should satisfy investors at current levels. The firm says Whole Foods' Q3 earnings release would still be a negative event if mgmt were to provide disappointing initial guidance for fiscal 2007. They say that fears that mgmt will "guide below the Street" should prove overblown.
  • WFR MEMC Elec and Suntech Finalize Solar Wafer Supply Contract (29.73 )
    Co announced today that MEMC and Suntech Power Holdings (STP) have executed the binding definitive agreement for the supply of solar grade silicon wafers. The companies had previously announced the signing of a non-binding letter of intent for this transaction on July 6, 2006. Under the terms of the definitive agreement, MEMC will supply solar wafers to Suntech over a 10-year period, with pre-determined pricing, on a take or pay basis beginning in the first quarter of 2007. Sales of the wafers over the 10-year period would generate between $5 billion and $6 billion in revenue for MEMC. As part of the definitive agreement and in order for MEMC to meet Suntech's supply requirements, Suntech will advance funds to MEMC in the form of an interest-free loan or security deposit which will be used by MEMC for expansion of MEMC's manufacturing capacity. In addition, MEMC has received a warrant to purchase an approximately 4.9% equity stake in Suntech.
  • Cramer's 'Mad Money' Recap -
    On Tuesday's edition, Jim tells viewers to buy (CSX) and sell Wrigley (WWY). He notes CSX is now more than 60% non-cyclical and sees it as a secular growth story. The lack of new rail networks, the fact that "roads in the country have become very, very bad" and high gasoline costs means that trucking won't be able to comete with rail haulage. He labels Wrigley a poorly managed co facing some severe competition. He expects an upgrade Wednesday morning, which could provide viewers with a suitable selling opportunity. It's also squeezed by Cadbury Schweppes (CSG) in the gum market. He also said to avoid comparables ConAgra Food (CAG) and Sara Lee (SLE).

Market Comments: I am not worried that the market has opened lower this morning. I prefer a market that opens soft and then builds strength into the close. That is what we saw yesterday, and is bullish action.

What is not bullish is the market's reaction to some of these earnings reports. Unless a company totally blows out the numbers, it seems that the stock gaps lower. I could rattle off plenty of tickers, but if you look above at the "gapping down" list you will get the jist. I bought some puts yesterday on AMZN and CRS, just as a speculation on their earnings reactions. Sometimes these work out well.

But for investors holding a portfolio of stocks, this earnings season feels like a minefield. You just have to take the good with the bad. We have raised cash in our portfolios recently, which should allow us to take advantage of some of the dislocations in stocks that have created good buying opportunities.

Energy stocks are up again this morning on bullish inventory data. The oil services stocks that were sold off so hard have reported very good earnings, and most of them are bouncing back.

net long WFR, WFMI

Tuesday, July 25, 2006

Solid Back-to-Back Gains

Today was a nice day for the market. Unlike past one-day rallies, the market was able to shake off mid-day weakness and rally into the close. Volume also rose today, making for a solid accumulation day.

Small and mid-caps led the rally. Energy and materials stocks were strong, but the leading sector was biotechs (BTK), which is a good sign that growth stocks may be on the mend.

Unfortunately, the price gains weren't enough to qualify as a follow-thru day. Too bad. Yesterday the price gains would have qualified, but the volume was too light. Today, the volume was there but not the price action. That doesn't mean this rally has to falter. It's just something we like to see to give us more conviction about the new uptrend.

That said, the technical action on the SPX was good. A look at the chart above shows how the SPX definitively recaptured its overhead 200-day average. With the index now above both of its key moving averages, it should be able to use them for support on future pullbacks.

This is the process of a change in trend. Former resistance gets converted and then becomes future support.

Earnings reports continue to be treacherous for stocks. Even some in-line reports resulted in the stocks gapping lower. In some cases, these are overreactions, but they can still hurt you if you are involved. Better to let the dust settle, and then sift through the rubble for bargains. Remember, one man's trash is another man's treasure.

Medical Device Stocks Getting A Bounce

It seems like large-cap growth stocks have started to rebound a little lately, albeit from depressed levels. JNJ is doing better, AMGN has broken above its recent downtrend, and today MDT looks like it is breaking out.

MDT has gotten very cheap. This company has consistent, high quality earnings, but no one is willing to pay any sort of premium for those earnings lately. Today, the stock is spiking above its overhead 50-day on above-average volume. This could be the spark the stock needed to embark on a new uptrend.

I see that the whole medical device group of stocks are up today, but MDT is the one that stands out to me.


Hanging RACK Out To Dry

Shares of Rackable Systems (RACK) have been knocked more than $5 off their intraday high today. The stock looked like it was staging a successful breakout until rumors started swirling about a Gartner report that showed RACK server shipments below expectations.

I checked around, and came away with comments that Gartner put out preliminary market share estimates, showing RACK declined sequentially. But RACK does not give this information to Gartner, and said they went through the same thing last quarter.

RACK is in its blackout period. For them to break their normal silence to comment on these rumors implies how much they disagree with the figures.

RACK reports earnings after the close on Thursday, and I'm sure we will get some clarity on the conference call.

net long RACK

Market Poised To Break Downtrend

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: SNDK +14% (also Baird upgrade), DXPE +10%, ARMHY +8%, DADE +6%, ACL +5%, OXPS +4.6%, BJS +4.6%, NBR +4.4%, CNCT +3.4%, ALTR +2.9%, AMLN +2.8%, TXN +2.7%, X +2.6%, HOLX +1.6%... Other News: RYAN +40% (to be acquired by Old Country Buffet), WGRD +13% (to be acquired), ENZN +10.4% (FDA approval for Oncaspar), CRME +6.6% (extends yesterday's 36% move), MYOG +6.2% (FDA delays approval of competing ENCY drug), ACGY +4.8% (light volume 1,300 shares), SHPGY +4.2% (announced FDA approval late yesterday for Elaprase), AVCI +4% (its largest customer AT&T reported strong results), MU +3.8%, NVDA +2% (extends yesterday's 10% move), PEIX +1.9%, GSK +1.9%, RMBS +1.7%, LTXX +1.5%... Under $3: OSCI +22% (to buy US rights to Reliant's cardio drug Antara; also JMP Sec upgrade, $3.50 tgt), PAE +27% (boutique firm announces $3.60 tgt), QEE +13%.
  • Gapping Down
    Gapping down on disappointing earnings/guidance: ZRAN -24% (also downgrades from CIBC and OpCo), NFLX -20%, RNOW -15%, NTRI -12%, ORCT -12%, AV -11%, LCAV -10%, UPS -9.4% (also Merrill downgrades to Sell; down in sympathy: FDX -3.3%), STN -6.1% (down in sympathy: BYD -3.3%, LVS -1%), STMP -6%, JBLU -4.8%, ATHR -2.5%, MMM -1.9%, BNI -1.5%, LVLT -1.4%... Other News: ENCY -44% (FDA withholds final approval on Thelin), ALTU -37% (two drug trials delayed), ATML -5.4% (delays Q2 report), MOVI -4.4% (in sympathy with NFLX), ERICY -1.7%, SYMC -1.5% (Merrill downgrade), SGP -1.5% (Avelox clinical data)... Under $3: CPST -9.4% (CEO resigns), PRAN -9% (profit taking after 65% move yesterday), CMOS -3.5% (to be removed from S&P MidCap 400).
  • X U.S. Steel beats by $0.69, ex items (59.86 )
    Reports Q2 (Jun) earnings of $3.10 per share, excluding non-recurring items, $0.69 better than the Reuters Estimates consensus of $2.41; revenues rose 14.7% year/year to $4.11 bln vs the $3.93 bln consensus. Co notes: "We expect continued strong operating results for our three reportable segments in the third quarter of 2006. Healthy steel consumption levels are expected during the quarter along with further increases in flat-rolled prices in the U.S. and in Europe."
  • GOOG Google: Google sites rev has more costs than previously understood - UBS (390.90 )
    UBS believes that rev booked as Google sites rev is incrementally lower "quality" than previously thought, and think Google sites rev has more costs than previously understood. They now understand that there is TAC associated with some of this rev, it does not represent only "organic" growth, and is susceptible to competitive pressures. Also, generally assumed TAC rate calculations do not take into account TAC associated with Google sites rev.
  • NTRI Nutrisystem CEO appears on CNBC, discusses COO's departure, Q3 results (67.80 ) NTRI CEO appears on CNBC, wont comment on what happened with stock price. Focusing growth on mail market. Thinks that 1/3 or more of their business in next 12-18 months could come from men. Says business isn't based around controversial weight loss. Co is absolutely not for sale, have not been approached. Energy prices have not affected the co. Says there is no connection between COO's departure and anything going on in the co, but will not cause the co to "stutter step"
  • OXPS OptionsXpress beats by a penny (22.65 )
    Reports Q2 (Jun) earnings of $0.29 per share, $0.01 better than the Reuters Estimates consensus of $0.28; revenues rose 65.4% year/year to $47.3 mln vs the $46.6 mln consensus. "This year, the typical summer slowdown, which didn't materialize until late May, combined with choppy market conditions resulting in a significant drop in June DARTs. We believe this decline in customer activity has likely stabilized and remain confident that the retail investor will come back as the market environment improves..."
  • BJS BJ Services beats by $0.09, beats on revs; guides Q4 EPS above consensus (31.06 )
    Reports Q3 (Jun) earnings of $0.67 per share, $0.09 better than the Reuters Estimates consensus of $0.58; revenues rose 36.7% year/year to $1.12 bln vs the $1.05 bln consensus. Co issues upside guidance for Q4, sees EPS of $0.73-0.75 vs. $0.68 consensus.

Market Comments: The market had a very solid day yesterday. Volume didn't rise enough to make it a follow-through day, but the price action was solid nonetheless. The SPX closed above its 50-day, and is now poised to overtake its 200-day as well.

This would mark a change in trend that has been in place since the selloff began in May. Earnings reports have been solid, and overall S&P 500 earnings have continued to be revised higher, with this quarter's profits looking like they will grow 13%+.

The 10-year yield is flat this morning at 5.04%, and oil is up slightly. Boone Pickens spoke this morning, and said that oil could reach $100 within a year. But he has been predicting higher oil for a while, so this isn't much of a surprise. Strong earnings reports from companies in the oil patch is pushing the whole group higher this morning.

SNDK reported a much stronger than expected quarter, which is helping push the semis higher also. And the biotech (BTK) group looks like it might break its recent downtrend also.


Monday, July 24, 2006

Market Adding To Its Gains

The market has built on its early gains, and still trading near its highs for the day. The SPX has broken above its 50-day average, a bullish sign. It's next resistance level is its overhead 200-day near 1265.

Breadth is very solid, with upside volume swamping downside. If we can stay at these levels, or rally more into the close, we could get additional short-covering as a boost.

Sec. of State Rice made a surprise visit to Lebanon, which traders are hoping may lead to an early cease-fire.

Bearish sentiment is still running at extreme levels. Last week, the AAII survey showed more bears that any time since the crash in 1987 and the Gulf War in 1990. That's a lot of bears. The spread was also negative for the 10th consecutive week.

The 10-day put/call ratios are als back toward the high end of their recent ranges, which means that a lot of bearish bets have been re-loaded. The number of people betting on a rally probably has declined in the last couple of weeks, which from a contrarian perspective could make it all the more likely.

If today's volume can pick up, we could even get an accumulation day out of it.

Monday Morning Musings

Morning News of Note:

  • Gapping Up
    Gapping up on strong earnings/guidance: PETS +9.3%, SLAB +8.5%, UAUA +6% (guidance only), SGP +5.1%, MRK +2%, TIE +1.9%... Other News: CRME +34% (announces positive Phase 2 clinical data), NG +30% (ABX to make $14.50 bid to acquire NG), ATYT +18% (to be acquired by AMD; up in sympathy: NVDA +6.1%), NSIT +9% (bounces after 11% drop on Friday), LBIX +6.3%, ERS +5.6%, IOTN +5.1% (signs R&D agreement with Army), NCOG +5% (to be acquired), HCA +4.2% (to merge with private equity consortium), BIDU +4.1% (HPQ computers to pre-load Baidu search service), XMSR +4% (hires new C.O.O.), ELN +3.8% (co announces that Tysabri had returned to the US and European mkts), AZN +3.2% (gets FDA approval for its inhaler - WSJ), DELL +3% (Citigroup upgrade), MOT +2.5% (accelerates stock buyback), CHRT +2.2% (Citigroup upgrade), CSR +2.2% (JP Morgan upgrade), AAUK +2.1%, BP +2%, NOK +1.5% (N73 begins shipping), RMBS +1.3% (recovers a bit after 32% decline last week), CAT +1.3% (to build plant in China), YHOO +1%... Under $3: RDCM +11% (reports Q2).
  • Gapping Down
    AMD -3.7% (to acquire ATYT), BCGI -13% (profit taking after 109% move on Friday on settlement of lawsuit), COT -10% (light volume 2,000 shares), BDCO -4.4% (light volume 1,200 shares), SAPE -3.7% (negative comments from Goldman), HAL -1.8% (extends last week's slide after announcing delay of KBR IPO; also Merrill, Calyon downgrades), BOBJ -1.4% (extends recent weakness), NVS -1% (cancer drug carries heart risk - WSJ), X -1% (Bear Stearns downgrade), Mining/gold stocks are weak on possible MidEast cease-fire: NXG -2.7%, GLD -1.6%, GG -1.5%, BGO -1.4%.
  • WFR MEMC Elec: 2Q06 preview; semiconductor wafer prices likely to remain solid through 2H06 (27.21 ) -Update-
    UBS says that WFR directed 200mm wafers originally planned for Japanese customers to other customers who were willing to pay higher prices. Firm also found spot price of WFR's polysilicon remain
  • AMD AMD to acquire ATI Technologies (18.26 )
    Co and ATI (ATYT 16.56) announce plans to join forces in a transaction valued at approx $5.4 bln. Under the terms of the transaction, AMD will acquire all of the outstanding common shares of ATI for a combination of $4.2 bln in cash and 57 mln shares of AMD common stock, based on the number of shares of ATI common stock outstanding on July 21, 2006.

Market Comments: The market is opening on a strong note, following some strong earnings reports (MRK, BLS) and renewed M&A activity (AMD, HCA).

Of course, you know how skeptical I am of strong opens, so we will just have to wait and see how the market weathers the inevitable midday swoon.

Bond yields are down slightly (5.03%), as are oil, gold, and most commodities. The dollar is up slightly.

Most sectors are trading higher so far. This week will be another busy week of earnings reports. I will do my best to keep you up to speed. Hope you're well rested.

long WFR

Friday, July 21, 2006

Weekly Recap

The stock market was schizophrenic this week. It loved the Fed, it hated the Fed. It loved the earnings reports, it hated the earnings reports. Not surprisingly, the indices ended mixed for the week. Ultimately though, the fundamentals improved.

The market opened the week with a mixed day on Monday. The S&P lost 2 points, but the Nasdaq and Dow were up. The market was looking forward to the PPI and CPI data later in the week and the flood of earnings reports that would start after the close on Monday. Good earnings news before the open from Citigroup and Harley-Davidson had little broad impact.

Tuesday was another day of a holding pattern. The S&P regained the 2 points it had lost the day before. The June core PPI came in at a comfortable 0.2%. That was in line with expectations and did not cause concern. Earnings reports were generally good. Coca-Cola, Johnson & Johnson, and United Technologies in particular posted good numbers.

Wednesday the market busted loosed. Before the open, the June core CPI was reported to have jumped 0.3% for the fourth straight month. The year-over-year increase rose to 2.6%. The data raised inflation concerns and the S&P futures dropped sharply. The conclusion was that the Fed would probably have to raise rates again in August to counter building inflationary pressures. Fed funds futures priced in a high probability of a rate hike.

Then Bernanke testified before Congress at 10:00 ET. His testimony turned that logic on its head. Bernanke said that the core personal consumption (PCE) deflator, which does not include the rental equivalency measure for housing costs, was a better measure of inflation than the core CPI. It has been up 0.2% each of the past two months and the year-over-year gain is only at 1.9%.

Furthermore, Bernanke indicated that the Fed expects core inflation to ease in 2007. That implies the Fed might be willing to wait for the impact of the previous rate hikes to take effect, and not feel the need to raise rates right now. Fed funds futures plunged as expectations of an August rate hike dropped sharply.

Bernanke clearly indicated a more dovish stance towards policy and the 23 point surge in the S&P 500 index that day was justified on that basis.

Earnings reports also helped, as IBM, JP Morgan, Bank of America, and UnitedHealth Group posted good numbers. Yahoo, however, gave a soft outlook and the stock was hit.

Thursday, the market shifted personality again. The release of the June FOMC minutes did not reflect as dovish a stance as Bernanke had done the day before. The market became concerned that the Fed might indeed raise rates in August. It is not clear why the market would place so much emphasis on minutes that are now many weeks old when the Fed Chairman had spoken on policy the day before. Nevertheless, the market was near flat at mid-day but sold off after the release of the minutes to end with an 11 point loss on the S&P 500 index.

Also hurting the Nasdaq that day was a disappointing report and outlook from Intel. Apple and Motorola had excellent reports, but Intel's numbers were more influential.

Friday the S&P 500 lost another 9 points. A major factor was a warning from Dell that second quarter profits would be lower than expected. There was probably also some risk-event selling ahead of the weekend given the continuing conflict in the Middle East. As to the Fed outlook, fed funds futures ended the day with a 45% chance of a rate hike at the August meeting built into the price structure.

Earnings overall this week were good. The best numbers came from Dow firms such as Coca-Cola, Citigroup, Caterpillar, Honeywell, IBM, JP Morgan Chase, Johnson & Johnson, and United Technologies. Even Pfizer posted good numbers. As a result, the Dow had a strong week and advanced 1.2%.

There was far greater concern in the tech sector. Intel, Dell, and Yahoo gave cautious to poor outlooks. These key companies overrode the impact from good earnings from some companies such as Apple and Google. The broader technology picture is of concern, while some companies remain in growth mode. The Nasdaq took it on the chin again this week.

Overall, however, the market enters the latter stage of earnings season on a sounder footing. There is no reason to doubt the veracity of Bernanke's testimony. He clearly represented a less hawkish stance than the market had assumed at the start of the week. Earnings are coming in better than expected (as usual) and warnings are far less prevalent than feared. Economic growth is clearly slowing, so many companies will have trouble posting good earnings numbers the second half of the year. That should not be surprising.

The near-term outlook remains mixed, and perhaps even dicey for the tech sector, but the longer-term outlook is improving. The market is coming to grips with the reality that earnings growth will have to slow down in the quarters ahead. The end of the rate hike cycle is clearly nearing. And valuation measures have improved significantly.

The crisis in the Middle East remains an important wild card, but at least oil prices came off their highs to end near $74 a barrel. The market faces another week of heavy earnings reports, and individual companies that warn will get slammed. The foundations for a year-end rally, however, may be falling into place.


Bears Keep A Tight Lid On Stocks

The market was never able to really bounce today. All of the major indexes closed down for the day. Semis got hit the hardest, down nearly 5% for the day. The only groups I see that were higher were defensive stocks like utilities.

Breadth was awful today. The Nasdaq saw 275 new lows, which I believe is the highest level of the year. Volume rose today, which also makes for a distribution day.

The SPX rose +0.3% this week, but the Nasdaq and Russell 2000 both fell again on the week. It appears that as quickly as this nascent rally started, it might just as soon be cooked. The SPX has not undercut Wednesdays lows, but the Nazz and Rut have. We need to see some real strength early next week.

Measures of investor anxiety were all higher again today, but we all know by now that these are secondary measures of the market, and what is needed is for some strong price/volume follow-thru to one of these rally attempts.

It was nice to see AAPL and GOOG buck the weakness today, but overall there was little to smile about.


AMGN Breaking Out of Downtrend

Shares of Amgen (AMGN) are up roughly 5% today, bucking the overall weakness, on the heels of a strong earnings report. The company beat estimates, reporting strong growth in nearly all of its product lines. Additionally, management raised EPS guidance for the year.

The stock is breaking above its downsloping 50-day average on strong volume. I think this could spark the beginnings of a new uptrend for the stock. There has been a great deal of uncertainty regarding the legal threat of CERA in the EPO market, but like most things, this too gets fully priced in at some point.

long AMGN


Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: MSFT +5.9%, HYSL +8.1% (also Roth upgrade), BUCY +5.7% (also Stifel upgrade), CERN +5.3%, INFA +5.3% (also Goldman upgrade), SAY +3.2%, AMGN +3.1%, JCI +3.1% (also multiple upgraeds), COGN +3%, CAT +2.7%, SLB +2.2%, ACI +2%, GOOG +1%... Other News: PETD +15% (announces sale of property), TSRA +13% (enters licensing pact with Micron, raises guidance), CELL +7.4% (Deutsche upgrade), NANO +5.6% (bounces after recent weakness), NL +4.7% (recovers after 6% drop yesterday), LUB +4.4%, DENN +4.1% (positive CL King comments), AVCI +2.6% (extends yesterday's 34% move), CTXS +1.7% (Goldman upgrade), MT +1.6%, MOT +1% (added to Focus List at Merrill), EBAY +1% (recovers a bit after 5% drop yesterday).
  • Gapping Down
    Gapping down on disappointing earnings/guidance: DELL -13% (down in sympathy: HPQ -4%, MRVL -3.2%, NVDA -1.9%, AAPL -1.2%, INTC -1.1%), HTCH -15% (down in sympathy: STX -1.4%), FFIV -12% (also Kaufman downgrade), PKTR -10%, SWKS -10% (also Piper downgrade), BRCM -10%, ACO -9.5%, BTUI -12% (also Needham downgrade), AMD -7.7%, SEPR -7.2%, COF -6%, PMCS -5.9% (also Stanford downgrade), VRSN -3.1%, MDCC -3.6%, AMLN -3.1% (Lehman downgrade), GILD -1.7%, ERICY -2.1%, HAL -2.1%, RSH -1.7%, LLY -1.4%, COGN -1.2%, Under $3: ZHNE -23%... Other News: GYMB -6.3% (chief creative officer retires), WTI -3.7% (prices offering), NTES -3.6% (JP Morgan downgrade), MU -3.5% (in sympathy with weak IFX qtr), WFR -2.5% (negative broker comments), ASML -1.7%, ATHR -1.3%.
  • AAPL Apple Computer: iPod phone may ring in - NY Post (60.50 )
    NY Post reports the co may have a new product in the works to ring up sales: an iPod phone. The gadget, which would combine the co's popular portable music player with a mobile phone, has been rumored for months. The co is notoriously tight-lipped about new merchandise, but a top exec hinted earlier this week that the co is working on a mobile phone music player.
  • SLB Schlumberger beats on the top and bottom line (61.66 )
    Reports Q2 (Jun) earnings of $0.73 per share, excluding non-recurring items, $0.10 better than the Reuters Estimates consensus of $0.63; revenues rose 36.7% year/year to $4.69 bln vs the $4.44 bln consensus. "The second-quarter growth patterns proved to be the opposite of the first quarter of 2006. Sequential growth in North America slowed as impressive results in US Land and exceptional performance in the US Gulf Coast were partially offset by a prolonged spring break-up in Canada. In North America some temporary slowing of natural gas drilling activity cannot be excluded though currently there are no clear signs of this."
  • Cramer's 'Mad Money' Recap -
    On Thursday's edition, Jim recommends buying bank stocks at this part of the business cycle. Reason No. 1 is that banks have stopped issuing stock and are beginning to buy back stock. Secondly, whereas banks used to have pretty bad credit card losses when people declared bankruptcy, now with the new bankruptcy law, it is tough to declare it, Cramer said. The third reason he gave was that banks are cheap. The final reason was that after 17 rate increases, when banks should be experiencing loan losses and mortgage problems, they actually have the fewest loan losses and mortgage problems they've had in years. Banks have created a slew of businesses that are fee-based by relying less on interest rates and more on fee-based business, he said. He predicted bank shares should move up 15% to 20% over the next 12 to 18 months.

Market Comments: Is it just me, or does all of this volatility make for some really long weeks. I guess having a new baby at home doesn't help, especially in the sleep department, but who's complaining?

The market opened under heavy selling pressure this morning, which looks like it could be related to options expiration today. I expect the early declines to moderate later in the session.

Oil and gold are trading higher, the dollar is lower, and bond yields are flat around 5.03%.

DELL's warning really didn't help things this morning, and is probably exacerbating much of the weakness in techland today. Funny that CDWC reported blowout earnings a few days ago. Where is the correlation?

AAPL has gone positive, and GOOG is trying hard to do the same. A rally today would really catch a lot of people leaning the wrong way. I'm just saying...


Thursday, July 20, 2006

Was Yesterday's Rally a 1-day Wonder?

I was hoping today would turn out to be one of those quiet days that I call benign consolidation. But that was wishful thinking. I guess that's why they say you need to accept the markets as they are, and not how you wish them to be.

The COMP gave back all of yesterday's gains. So much for the market having any day-to-day memory. But the SPX fared better, giving back only half of yesterday's rally. And volume levels declined, so we avoided a distribution day.

The companies that reported strong earnings yesterday (AAPL, MOT, EWBC) were able to buck the weakness and close up nicely on the day.

After the close, we had some very strong earnings reports from tech bellwethers GOOG, MSFT, and biotech bigwig AMGN. All of those stocks were nicely higher after hours. Of course there are the BRCMs that will hit new lows tomorrow, but the other companies are more important to sentiment.

The 10-year yield closed lower at 5.03%, well below the current fed funds rate. And commodities from gold to oil all finished lower. The FOMC minutes basically acknowledged the slowdown underway, and sounded more dovish than previous statements. I continue to think the Fed is done raising rates.

The CEO from DR Horton said that sales have "fallen off the Richter scale". That's a pretty bold statement about the weakness in the housing market, and I don't think the Fed wants to risk a hard landing in that sector, as that would likely imply a looming recession.

In prior market bottoms, we have seen days like today that turned out to be headfakes, or just a misdirection day that kept the bulls off balance before the rally resumed. Given the aciton in the SPX today, that is how I see things currently, and expect to see a follow-thru rally next week.


EWBC Is Ramping

A stock we own for clients and that I have recommended on Street Insight is East West Bancorp. EWBC is bucking today's weakness and ramping hard. The company beat earnings estimates last night for the 5th consecutive quarter. EPS came in 3 cents ahead, and grew +26% from the year-ago period.

Management also raised their guidance for 2006 by a few pennies, and reitereated 2H guidance of 15-17% loan growth and 10-15% deposit growth.

Keffe, Bruyette & Woods said that EWBC continues to post the strongest fundamentals in their coverage universe. Despite a small dip in net interest margins, net interest income grew substantially (+41%). Loan growth also fared very well, despite the supposed slowdown, growing at a 29% annualized rate.

The stock is ramping 7% higher on a surge in volume. It is close to a new high.

long EWBC

Can We Build On Yesterday's Gains?

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: AVCI +54% (up in sympathy: SCMR +4.1%), AAPL +13% (also Goldman upgrade), REDF +12%, SPWR +11% (up in sympathy: ESLR +2.4%), LOGI +10%, MOT +9.5% (also Piper upgrade; up in sympathy: RFMD +3.6%, IFO +5%), CHIC +9.3%, STLD +7.5%, BHE +7.5%, CY +7.5%, NDAQ +6.2%, EBAY +5.3%, ELNK +4.8%, AEHR +2.4%, IMCL +2.4%, SAP +2.2%, ALL +2%, PFE +1.9%... These strong Q2 results are driving much of the tech sector higher: SNDK +3.8% (Deutsche upgrade), STXN +3%, NTAP +2.8% (Goldman upgrade), GNSS +2.8%, EMC +2% (FBR upgrade), SUNW +2%, MRVL +1.8%, YHOO +1.6%, NVDA +1.5% (Deutsche upgrade), BRCM +1.5%, GOOG +1.2%... Other News: UN +2.8%, SBUX +2.2% (Citigroup upgrade), MWIV +1.9% (prices offering), AMTD +1.7% (in sympathy with ET report), TIE +1.6%... Under $3: NGRU +145%.
  • Gapping Down
    Gapping down on disappointing earnings/guidance: MOGN -28% (also multiple downgrades), OPWV -12% (also Kaufman downgrade), CTXS -7.1%, BTU -4.9% (down in sympathy: ACI -3.5%), TER -3.9%, LRCX -3.3%, TZOO -3.1%, INTC -2.5% (down in sympathy: DELL -1%), ISIL -1.9%, CAL -1.5%, QCOM -1.2%... Other News: KNOT -10% (Merriman downgrade), BGO -5.5%, UNF -2.9% (prices offering), AHT -2.4% (prices offering), XMSR -2.9% (UBS downgrade), SIRI -2.2% (UBS downgrade), NKTR -1.8%.
  • QCOM Qualcomm: Color on quarter (36.73 )
    CIBC believes their long-term thesis on 3G is secure, but cautions that mixed signals may be ahead. Firm believes QCOM's chipset market share may be peaking as Samsung and LG continue to struggle against MOT and NOK.
  • MNST Online recruitment activity declines in 24 of top 28 U.S. metro markets in June, according to Monster Local Employment Index (37.35 )
    According to the latest findings of the Monster (MNST) Local Employment Index, online job availability declined in 24 of the 28 top U.S. metropolitan areas during June, suggesting a slight easing in online recruitment activity across major U.S. metro areas at the start of Q3.
  • Cramer's 'Mad Money' Recap -
    On Wednesday's edition, Jim says he uses a four-point checklist to determine which industrial issues are worth buying and selling. He uses United Technologies (UTX) as an example. First, the co must be levered to BRIC (Brazil, Russia, India and China), he said. Because United Tech gets more than half of its revenue from outside the U.S., it gets a check. Second, the stock must be levered to bull markets. As United Tech is focused on defense, aerospace, infrastructure and commercial real estate growth worldwide, it gets a check on this point, too, Cramer said. The third point is that that co's outlook must be bright, which United Tech's is. Finally, the industrial should be buying back stock and United has an aggressive buyback in place.

Market Comments: The market opened on a soft note this morning, but could easily shake off this early weakness and close higher again today. That is how bull rallies sustain themselves, by opening weak and closing strong.

Of course, the SPX bumped right into its overhead 50-day yesterday (on rising volume), so it might not spike through this level on its first try. But I think it will be successful in recapturing this key average in the near-term.

The markets are still working off their oversold condition, so this rally has room to run before we get back to overbought levels. Moreover, negative sentiment is still off the charts high, and it will take more of a sustained rally to shake the bearish foundation of so many investors. My colleage at Street Insight has termed this the "negativity bubble".

Bond yields are lower again today, with the 10-year yield at 5.04%. The dollar is also weaker this morning, while oil is up slightly.

long UTX

Wednesday, July 19, 2006

Bond Market Not Worried About Inflation

The market continues to build on its gains, with the DOW up more than 200 points now. The SPX is up +1.8%, while the small and mid-cap indexes are up over 2%.

Bond yields continue to decline, with the 10-year yield falling further to 5.06%. The odds of an additional fed rate hike continue to fall also, and there is not one contract that is predicting anyting above 5.50% anymore.

Bill Gross from PIMCO just said that he thinks the Fed could be done, and that rather than it being a pause, he thinks it is more like a halt. He sees it more likely that the next move after a pause would be to lower rates, not raise them again.

Nearly every sector is up big today. GOOG is being held down by YHOO's poor report, but there aren't a lot of other stocks in the red today.

We have some big earnings reports after the close, so get ready.

long GOOG

Gentle Ben To The Rescue

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: ILMN +20%, DTLK +8.7%, NITE +8% (up in sympathy: ET +3.1%), LUFK +6%, LUV +6%, JPM +2.9%, UNH +2.9%, ASML +2.1%, BAC +1.6%, IBM +1.3%... Other News: FCEL +6.9% (power outage disrupts LAX air traffic), ESLR +4.8% (announces large contract), ACSEF +4.6% (recovers after recent sell-off), ERICY +4% (selected to upgrade Bite's 3G network), LFB +3.9% (to explore stategic alternatives), NVAX +3.1%, FAL +2.4% (Xstrata raises bid), BBY +2% (Pru upgrade), XING +2%, STM +1.9% (positive court ruling - ThinkEquity), DXPE +1.6%, NOK +1.4% (Lehman upgrade).
  • Gapping Down
    Gapping down on disappointing earnings/guidance: YHOO -17% (also downgrades from JP Morgan and Deutsche; down in sympathy: BIDU -1.8%, EBAY -1.8%, GOOG -1.7%), DTAS -23% (also Piper downgrade), ADCT -14% (merger partner ANDW -9.4% also down), PLXT -10%, JBHT -4.4% (also Baird and AG Edwards downgrades), CSX -2.9%, WIT -2.7%, FLIR -1.9%, CHKP -1.8%... Other news: RMBS -10% (to restate results), AFFX -5.6% (strong ILMN qtr seen as bad news for AFFX; also AFFX announced it would lower prices for its 500K genotyping set to $250), NTES -4.5% (Susquehanna downgrade), AAA -2.6%, TOT -1.8% (weak European mkt), WYNN -1.3% (CIBC downgrade), NVS -1.2%, EON -1.1%.
  • GOOG Google upgraded to Buy from Hold at AmTech; tgt $500 (403.05 ) -Update-
    AmTech upgrades GOOG to a Buy from a Hold with a $500 tgt sayin that following the YHOO news that they would experience search delays, GOOG was trading down to around $390 in the aftermarket. Firm believes YHOO's delay is GOOG's gain, and would be buyers on the weakness. Firm believes GOOG will report solid upside to expectations on Thursday. Firm's EPS est of $2.37 is ahead of consensus at $2.21 and they see potential for upside to their forecast.
  • AAPL Walt Mossberg profiles iPod/Nike fitness device - WSJ (52.90 )
    Walt Mossberg reports "While the kit's $29 price tag is slight, you also must factor in the price of Apple's iPod Nano and the special Nike+ (NKE) shoes. We found it worked well and enhanced our exercise experience. One weakness of the Nike + iPod system is that it can't record your heart rate, the key measurement used in cardiovascular workouts.
  • UNH UnitedHealth reports; guides in-line (48.40 )
    Reports Q2 (Jun) GAAP earnings of $0.70 per share, may not compare to the Reuters Estimates consensus of $0.68; revenues rose 57.3% year/year to $17.92 bln vs the $17.88 bln consensus. Co also reports Part D normalized earnings of $0.73 per share. It is not clear which EPS figure is comparable to the Reuters consensus. Co issues in-line guidance for FY06, sees EPS of 2.91-2.95 vs. $2.92 consensus.
  • DIS Disney to produce fewer movies, cut 650 jobs - Reuters (29.10 )
    Reuters reports Disney (DIS) said late on Tuesday its chief of film production would leave the co, part of a move to boost profits at its studio division that include cutting annual movie production and eliminating 650 jobs. The co said it will produce and distribute about 10 Disney live-action and animated films a year and two to three Touchstone films a year.

Market Comments: The markets are spiking higher in early trading, following the release of the prepared remarks by Bernanke. The Fed chief is acknowledging the slowdown in the economy, and also forecasting an easing of inflation pressures into 2007.

I had speculated that the Fed would likely take a more dovish tone relative to previous comments. The market is really taking this to heart, as it implies that the Fed will stop raising rates sooner rather than later.

On this last point, the evidenc is in the bond market. The yield on the 10-year note has plunged from 5.18% this morning to 5.09% currently. And the odds in the fed funds futures for more rate hikes is falling fast. An end to the fed rate hikes should remove a considerable headwing from both the stock and bond markets.

Strong earnings reports this morning from JPM, BAC, ABT, GD, and CDWC gave the market an initial boost. But Bernanke's comments acted like a turbo boost, pushing all of the major indexes above +1.0% on the day. And upside volume is swamping downside volume.


Tuesday, July 18, 2006

After Hours Update

The market closed on a strong note today. The market rallied hard in the last hour to close positive on the day. Volume levels rose, making the positive reversal an accumulation day as well. So maybe this is the start of a new rally. As always, follow-thru will be the key.

Oil reversed sharply today, after nearing $77 it reversed and closed down at $73.60. Gold also suffered a big decline, taking it below its 50-day average. Bond yields finished higher at 5.13%.

After-hours, IBM reported solid numbers and the stock is higher. YHOO reported disappointing results and the stock is down -10% in late trading. The news is also hitting GOOG, but I think they will report a solid number later this week as they have been taking more market share.

Tomorrow, Bernanke will be speaking, and everyone (except the bears) is hoping that he will sound at least a little more dovish relative to recent comments. I think the odds of a pause in August have been raised, but the market won't breathe a sigh of relief until it senses this from the Fed.

long GOOG

Standout Stocks

Here are some stocks making notable moves on rising volume:
  • PPDI - reported strong earnings
  • CVD - up in sympathy with PPDI
  • IBCA - earnings related
  • JTX - breakout to new highs
  • CSH - ditto
  • BLK - earnings related
  • MTG - reports earnings decline
  • UFPI - earnings related
  • CRYP - online gaming sector down
  • MOH - down in sympathy with CNC outlook

Market Comments: The market has been under severe pressure since the first hour lift. It tried to rally back to breakeven just now, but again turned lower. This weeks is options expiration, so some of this may be positioning ahead of expiration. We usually get one big down day on expiration week, so this could be it.

Blue Chips Deliver Solid Earnings

Morning News of Note:
  • Gapping Up
    Gapping up on strong earnings/guidance: AMTD +6.5%, PPDI +5.7%, FCX +3.6%, FRX +2.5%, SCHW +2.4%, UTX +1.6%, PHG +1.4%, KO +1%... Other News: NTAP +5.7% (affirms guidance; up in sympathy: XRTX +3.3%), BDCO +8.5% (bounces after 15% drop yesterday), CRXL +3.8% (halts vaccine development, but does not impact co's guidance), PALM +3.7% (Bear Stearns upgrade), NVDA +3.6% (Amtech upgrade), WDC +3% (Kaufman upgrade), TIE +2% (Barron's Online mention), NBR +1.7% (Cramer bullish on Mad Money, says stock is cheap), ITT +1.7% (Merrill upgrade), NOK +1.5% (traded higher in Europe), MT +1.6% (minimum tender offer for Arcelor shares has been met), USO +1.3%, AAPL +1% (Second-gen iPod nano on tap for August - ThinkSecret)... Mining stocks are strong on big qtr from FCX: AUY +3.2%, SLV +2.5%, GLD +1.6%, GFI +1.1%, RTP +1%... Under $3: AIS +14% (announces it's developing a new device for Teva).
  • Gapping Down
    CNC -29% (guides sharply lower; Deutsche initiates at Hold), ENT -12% (slashes payout by 33%), SANM -12% (guides lower), NBIX -6.7% (reports Q2 results, loss widens), INVX -3.7% (reports MarQ), TGT -3.6% (lowers July sales forecast; AG Edwards downgrade), MICC -2.8%, RMBS -2.5% (Ruling suggests award in patent case could be lowered - WSJ; also WR Hambrecht downgrade), LTXX -2% (FBR downgrade), ICE -1.9% (prices offering), MEDI -1.7% (says FDA wants more info on flu vaccine), RCL -1.5% (orders another luxury ship), BRCM -1.4% (Amtech downgrade), TXN -1.3% (FBR downgrade), TS -1.2% (Argentina stocks are weak on mideast violence)... Under $3: MGIC -9% (profit taking after 65% move yesterday), EAG -6% (reports MayQ).
  • JNJ Johnson & Johnson beats by a penny (60.91 )
    Reports Q2 (Jun) earnings of $0.98 per share, excluding non-recurring items, $0.01 better than the Reuters Estimates consensus of $0.97; revenues rose 4.7% year/year to $13.36 bln vs the $13.29 bln consensus.
  • AAPL Apple Computer: Second-gen iPod nano on tap for August - ThinkSecret (52.37 )
    ThinkSecret reports the co will roll out the second generation of its iPod nano music player at its Worldwide Developers Conference, insiders tell Think Secret. The new nano is said to be very similar to the co's current offering but will feature increased capacity and be available in multiple colors, some of which will feature a metal alloy enclosure. Exact capacities are not known, but reasonable speculation suggests the line will top out at 6GB or 8GB. Separate rumblings suggest that the co has procured a large number of 40GB and 80GB 1.8-inch hard drives for use in an updated 5G iPod. While it's not known when an exact announcement regarding the higher capacity iPods might take place, the new models are not expected at WWDC.
  • UTX United Tech beats by a penny, ex items; raises FY06 guidance (57.96 )
    Reports Q2 (Jun) earnings of $1.02 per share, excluding non-recurring items, $0.01 better than the Reuters Estimates consensus of $1.01; revenues rose 10.0% year/year to $12.26 bln vs the $11.85 bln consensus. Co raises guidance for FY06, to EPS of $3.55-3.65 from $3.50-3.60 vs. $3.62 consensus; sees FY06 revs of $46-47 bln vs. $46.15 bln consensus.
  • TGT Target lowers its July same-store sales forecast - WSJ (47.55 )
    WSJ reports according to a recorded message late yesterday, the co now says it expects July sales at stores open more than a year to rise 3% to 4%, below its earlier forecast of a 4% to 6% rise. Last July, the co's same-store sales climbed 5%. Same-store sales are one of the best measures of a retailer's underlying health. The co didn't say why its sales have slipped. The retailer has so far avoided the tough environment caused by higher fuel prices and interest rates, in part because of its higher-income clientele.
  • Cramer's 'Mad Money' Recap -
    On Monday's edition, Jim notes that in terms of sector, Nabors (NBR) doesn't have much going for it. However, compared with other companies in its sector, it is cheap. He thinks their oil exposure is a plus, and the future of natural gas doesn't look that bad either, he said. He also mentions that Lowe's (LOW) is cheaper than Home Depot (HD) in terms of margins, management and its opportunity to expand. Finally, he believes investors should stay away from DuPont (DD), citing that General Electric's (GE) plastic division is weak. GE's infrastructure business is doing well, he believes that people should buy ABB (ABB). However, he recommended buying ABB in three days, and not before then. Playing on General Electric's earnings, Cramer also said CIT Group (CIT), Boeing (BA), Whirlpool (WHR) and Varian Medical Systems (VAR) are good buys. In addition, General Electric's wind-power business is getting stronger, and for this there are two pure plays, Cramer said: Vesta (VWSYF) and Gamesa (GCTAF). However, because General Electric reported slowing medical equipment demand in China, Cramer advised selling China Medical Technologies (CMED).

Market Comments: The market has opened on an up note, despite oil trading higher and bond yields moving higher (5.12%) as well. The core PPI report came in in-line with expectations.

Solid earnings reports from JNJ, NCC, UTX, WFC, etc. may be helping a bit. TGT lowered its sales forecast, and that is weighing heavily on the retail complex.

Most of the sectors are mixed so far. I am also not hearing much of anything out of the middle east, so maybe it can take a backseat today and let the market lift a little.


Monday, July 17, 2006

Energy Tanks Without Taking Down The Market

The market finished down slightly, judging by the SPX. The COMP was flat, while mid- and small-caps underperformed today. Volume eased from Friday's levels, and slowed as the day progressed.

Breadth was negative, and measures of investor anxiety were mostly higher. Energy definitely was hit the hardest, the the XLE off -3.2%. But unlike previous days, it did not take the whole market down with it. Defensive stocks fared the best, things like beverages, drugs, etc.

There was continued bombing in the Middle East today, but the market finally seemed to shrug this off also. I am hearing that the surgical strikes from Israel could be winding down sooner rather than later, so barring any unforseen escalation, I anticipate further calming out of the region.

Most investors are not very optimistic about the upcoming earnings season. That likely means that if we get just a few better-than-expected reports, it could spark a rally. The markets are now back to oversold levels, though just barely on the NYSE (oscillator).

Commodities Rolling Over

After a brief dip into the red this morning, the major indexes are struggling to stay in positive territory. Small and mid-caps are still down on the day.

The dollar is rebounding strongly today, and that is weighing on all commodity-related investments. Oil is down nearly $2 to $75.25, natural gas is down, and precious metals are under pressure as well.

This is causing energy-related stocks to come under heavy selling. But it hasn't really spilled over onto the broader market as it has in many past trading sessions. Techs are still fairly strong, financials are up, as are many healthcare issues.

The put/call ratios are elevated today, as bearish sentiment continues to build. Last week, the AAII sentiment index registered more bears than bulls for the 9th consecutive week. This is rare, and often coincides with a market bottom. But, as we have witnessed, bottoms can be a frustrating and painful process.

I expect to start seeing some new breakouts and leadership emerge soon.

Monday Morning Musings

Morning News of Note:
  • Gapping Up
    IFO +14% (Kaufman upgrade, $12 tgt), LBIX +4.1% (extends momentum, stock +124% in one month), LVLT +2.7% (Needham upgrade), AAPL +2.2% (mentioned positively in Barron's), MCD +2.2% (guides above consensus on strong Jun same store sales), QCOM +1.7% (UBS upgrade), HDI +1.6% (reports Q2 in-line, beats on revs), SNDK +1.5% (introduces new product)... Mining stocks are strong driven by escalalting violence in Mideast: PAAS +4.7%, N +2.7%, RGLD +2.3%, EZM +1%.
  • Gapping Down
    SPC -8% (guides lower; may sell some assets), ONXS -2.7% (guides below consensus), NTAP -2.5% (Morgan Stanley downgrade), PD -2.2%, ING -2.2%, CCL -1.6%, C -1% (reports Q2)... European stocks remain weak on escalating Mideast violence: CRXL -5.3%, UBS -4.4%, ABB -4%, RTP -3.6%, TS -3.3%, ALA -3.1%, BOBJ -2.9%, TOT -2.7%, ABN -2.5%, VOD -2.4%, NOK -2.3%, AAUK -1.9%, ASMI -1.9%, BP -1.5%... Under $3: IMR -80% (judgment goes against company), THLD -42% (prostate drug fails to meet endpoints), TCX -7.5%, LU -1.9% (in sympathy with ALA).
  • Israel's Lebanon assault could end in days, according to Israel TV - Reuters
    Reuters reports that Israel could wrap up its offensive in Lebanon within days, Israel's Channel 10 television said on Monday, quoting a senior military officer. But with Lebanese Hizbollah guerrillas continuing their cross-border rocket strikes, Channel 10 also quoted the military officer as saying Israel could escalate its assault by destroying Lebanon's electricity grid.
  • C Citigroup reports in-line with Reuters consensus, penny below First Call consensus (47.58 )
    Reports Q2 (Jun) earnings of $1.05 per share, in-line with the Reuters Estimates consensus of $1.05 and a penny below the First Call consensus of $1.06; revenues rose 10.0% year/year to $22.18 bln vs the $22.34 bln consensus.
  • Study finds backdating of options widespread - NY Times
    The New York Times reports more than 2,000 companies appear to have used backdated stock options to sweeten their top executives' pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed. The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2% of companies have used backdated options and 13.6% of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated.
  • AAPL Apple Computer mentioned positively in Barron's (50.67 )
    Barron's reports as interest in Macintosh computers picks up market share, bulls on Apple Computer (AAPL) maintain that shares will jump anywhere from 45% to 75% in the next twelve months. Right now, Apple's stock is cheaper than it has been for a long time. It's trading at about 25 times the consensus estimate for this fiscal year's earnings -- down from an average multiple of 61 since the beginning of 2002. This is reasonable in view of the co's growth prospects: The consensus is for earnings growth averaging 20% a year over the next five years.

Market Comments: The market is getting a nice bounce at the open; let's just hope it lasts. Most people were probably very nervous about how the market would open on Monday morning, given the escalating violence in the Middle East. But absent any major developments, there has been a bit of a sigh of relief.

The dollar is trading higher (flight to safety), which is weighing on the commodity complex, including gold and oil. This has the energy stocks trading lower. Financials are mostly higher, despite a slight disappointment in Citi's earnings.

Tech is up across the board in early trading. Barron's did a positive piece on Apple, which is boosting the stock. GOOG is also higher, despite more noise about click fraud. And the semis are up as well.

Earnings season really heats up this week. I will do my best to provide color on any notable earnings reports, and links to updates/transcripts from the conference calls.

long AAPL, C, GOOG

Saturday, July 15, 2006

Weekly Recap

The market started the week optimistic about the outlook for second quarter earnings reports. The week ended on a dismal note, with concerns about war in the Middle East and oil prices dominating the action.

The S&P 500 index gained 2 points on Monday. That reflected a decent underlying tone. Merrill Lynch downgraded the technology sector to "underweight" and that led to a 13 point drop in the Nasdaq. The critically important technology sector continues to be the weakest of the ten S&P categories, but the overall S&P held steady.

On Tuesday, the S&P 500 index gained another 5 points. Alcoa reported decent earnings and the general tone was moderately bullish. The Nasdaq even snapped back 11 points. Then, the roof caved in.

Wednesday the market tanked. The S&P lost 14 points and the Nasdaq 38. Semiconductor stocks got slammed and a number of analysts cut earnings estimates for key companies such as IBM, Dell, and Apple for the second half of the year.

Also of concern were increased tensions in the Middle East which pushed oil prices towards $75 a barrel.

The tensions were soon labeled "war" and the S&P plunged another 16 points on Thursday. Oil prices rose towards $77 a barrel. Analysts didn't help, as Wal-Mart and Walt Disney received notable downgrades. There was no sign of a bounce.

It didn't get any better on Friday, as the S&P dropped significantly again. The war and oil prices were a primary factor, but there was also no good news to reverse the selling. Oil prices rose above $78 during the day, and fears of a significant consumer slowdown were exacerbated by a drop in June retail sales of 0.1%.

It was supposed to be the week that got earnings season off to a start, but war concerns and lowered expectations for second half earnings trumped the few reports that came out.

The earnings reports that did come out were decent. Alcoa, Pepsi Bottling, Genentech, Gannett, M&T Bank, Marriott, and PepsiCo all beat estimates. General Electric reported in line with forecasts. But it wasn't close to enough to boost market sentiment. Any company that gave even a hint of lowered expectations for upcoming quarters, or missed revenue estimates on a key product line, saw their stock price get slammed.

There was no help from the few economic releases. The May trade balance was a bit lower than expected, but initial claims for unemployment were up, and retail sales were down a bit. These weren't key numbers, but they did nothing to alleviate concerns that economic growth is hitting the wall.

The week thus ended on a very sour note. Earnings reports start in earnest next week, but the key driver may be developments in the Middle East. These are impossible to quantify, and the fears associated with the war are a leading cause of the current market malaise.

Oil prices are rising again at a time when consumer spending is already slowing down. It may no longer be a question of whether the Fed raises rates further; it may be a matter of just how significant is the economic slowdown. Most economists continue to forecast 2% to 3% real GDP growth in the second half of the year, but there are fears of weaker growth.

Another problem is that earnings estimates for the coming quarters are finally coming down. Just a few weeks ago, estimates were for 12% growth over the second half of the year. Those were way too high given that economic growth is slowing. Now, the market has to adjust to an uncertain degree of lower earnings growth.

The market is likely to face further volatility in the weeks ahead.


Friday, July 14, 2006

Trying To Stabilize

The market is trying to find some support, but the continued exchange of attacks between Israel and Lebanon is not helping the matter. The semis are trying to stabilize, and the SMH is actually up.

Some other stocks that have reversed higher include: SIRF, TXN, BRCM, and WFR.

But most stocks are down again today, while bearish sentiment is growing. The 10-year is down a little more to 5.06%, and oil is still trading near $78.

It seems like the violence in the mid-east is escalating, so traders will likely stay nervous ahead of the weekend. But with sentiment this negative, any progress on negotiations will likely cause a big relief rally.

Other stocks moving on high-volume today include:
  • CACB
  • BIDU
  • TRMA
  • CHE
  • DHI
  • VPRT
  • AIB
  • MTW
  • RTI
  • BFAM
  • AMR

long SIRF, WFR

Heading Into An Uncertain Weekend

Morning News of Note:
  • Gapping Up
    PETC +44% (to be acquired by private equity group; up in sympathy: PETM +6.5%), FRX +14% (Lexapro patent upheld; Jefferies upgrade), STXN +9.4% (reiterates guidance), BIDU +5.2% (Piper upgrade), MT +4.1% (extends momentum related to Arcelor deal; stock +13% in last week or so), HOM +3.5% (extends yesterday's late run), SCUR +3.2% (Matrix upgrade), BDCO +2.9%, LBIX +2.7% (in sympathy with FIZ), PEIX +2.2% (Gov Schwarzenegger visits plant), TS +2.1%, NBR +1.8% (bounces after 3% drop yesterday), CREE +1.5% (bounces after 22% drop yesterday), CHK +1.3%, LHCG +1.2% (prices offering), SAP +1.4% (Citigroup upgrade)... Mining stocks are strong: TGB +7.6%, EZM +4.8% (Canaccord Adams upgrade), AUY +3.3%, GG +1.4%, AAUK +1.3%, GLD +1%.
  • Gapping Down
    BGP -12% (guides lower; Deutsche downgrade), CAMP -12% (reports MayQ), DHI -11% (guides lower), NWRE -11% (TWP says co provides more clarity on recent revenue shortfall), DTAS -13% (extends recent weakness; although low volume: 2,000 shares), RSH -2.7% (co says it will end qtrly conf calls), WEBX -2.4% (ThinkEquity says it was surprised to see competitor IBM announce a $17 mln contract ), EMC -2.4% (reports Q2), BIIB -2.1% (Bernstein downgrade), CTAS -1.9% (reports MayQ; Baird downgrade), BF -1.2%, ALA -1% (extends recent slide), BRCM -1% (finds backdated options)... Under $3: AMCC -2.6% (announces lawsuit on option grants).
  • GOOG Google: High expectations for quarter are warranted; see "blow-out" potential - Amtech (408.83 )
    Amtech believes high expectsations for GOOG's Q2 are warranted, and the firm sees "blow-out" potential. They raise their pro-forma EPS estimate to $2.37, which is near street-high ($2.40), compared to consensus of $2.20. They say third party search traffic data shows a very robust Q2 and continued share gains for GOOG. While they note accuracy of third-party data is questionable, there is definite correlation with GOOG's revenue results. Firm notes comScore data for U.S. search queries was down 3% sequentially in Q205 and up 8% in Q204, so indications for greater than 20% growth this year does seem unusual. On their model, traffic growth inline with comScore would represent $0.30-0.35 upside to their estimate for the quarter, about $0.40-0.45 ahead of consensus. As a trading call, they would be long into the report as they see a good chance for material upside.
  • GE General Electric reports EPS in line, beats on revs, guides Q3 in line, reaffirms FY06 (32.67 )
    Reports Q2 (Jun) earnings of $0.47 per share, in line with the Reuters Estimates consensus of $0.47; revenues rose 9.3% year/year to $39.9 bln vs the $39.41 bln consensus. Co issues in-line guidance for Q3, sees EPS of $0.48-0.50 vs. $0.50 consensus; co issues in-line guidance for FY06, reaffirms EPS of $1.94-2.02 vs. $1.99 consensus. Co expects double-digit segment profit growth in five of its six businesses.
  • BONDX Bond Watch: Treasuries Bag More Gains
    The market is better this morning following another global rally in bonds overnight while equities continue their sell-off. Bonds around the world have been the beneficiaries of a gradually building safe-haven bid that began when NK missiles fluttered into the Sea of Japan over a week ago. The 10-yr yield is down at 5.049% as technical momentum gathers steam behind this rally. The 2-10-yr yield spread is slightly less-inverted at -4.5 as demand for the long end of the curve is keeping the inversion play in check. Bond prices in the EuroZone are well-higher on geopolitics & weak equities while in Japan, bond prices are similarly well-bid though in this case in spite of the BOJ's first rate hike in 6 years as the statement indicated there would be no rush to add to that hike.
  • SNDK Samsung guidance does not bode well for the NAND industry; cutting numbers on Sandisk again - AmTech (41.33 )
    AmTech notes Samsung Q2 bit growth was 17% and ASPs were down 32%. The firm believes the NAND flash rev generated by Samsung in Q206 suggests that NAND royalties for the co in Q3 will decline by about $12-13 mln compared to their model of $81 mln. This is primarily attributable to lack of demand, as they observed for the co sell-through. 8Gb MLC was also delayed by a quarter. Samsung's pricing guidance validates that the demand equation is clearly soft. The firm maintains their longer term positive view on SNDK.

Market Comments: The market has opened under some pressure this morning, but is attempting to stabilize. Financials have reversed their early weakness and are mostly trading up. Semis are also trading higher so far, which is a good sign.

Oil briefly touched $78 this morning, which is worrisome to almost everyone, even if it has the energy stocks trading higher. There is a lot of fear about escalating violence in the mid-east, and the possibility of supply disruptions.

The 10-year yield is slightly lower so far (5.07%), falling further below its 50-day average.

GE reported in-line results this morning, but the stock gapped slightly lower and is flirting with new lows. EMC also reported lackluster earnings and has extended its recent decline.

Normally, I would think the market can stage a rally today and finish green, but it is possible that investors are nervous about being long over the weekend and that could pressure the market into the close.

long GE, GOOG