Thursday, August 31, 2006

Stocks Slip after Bernanke, Mild Data

News Article
August 31, 2006

Business Week Online

Stocks Slip after Bernanke, Mild Data

The Fed chairman said productivity should keep growing at a solid clip. July personal income rose, while the Fed's favored inflation gauge was relatively stable

Major stock indexes finished modestly lower Thursday, but gained for the month, as Federal Reserve Chairman Ben Bernanke said productivity will probably grow for some time. Earlier, a closely watched inflation gauge held relatively steady, while other economic reports bucked fears of a sharp slowdown.

The Dow Jones industrial average edged down 1.76 points, or 0.02%, to 11,381.15, a gain of 1.7% for August. The broader Standard & Poor's 500 slipped 0.46 points, or 0.04%, to 1,303.81, a 2.1% monthly increase. The tech-heavy Nasdaq composite lost 1.98 points, or 0.09%, to 2,183.75, jumping 4.4% on the month.

Trading was moderate ahead of the holiday weekend. NYSE breadth was positive, with 20 issues advancing for every 13 declining, while Nasdaq breadth was 16-14 positive.

A set of economic data Thursday suggested the economy still has some strength. Personal income rose 0.5% in July, in line with expectations. A gauge of personal consumption expenditures excluding food and energy, the core PCE deflator, rose 0.1% after a 0.2% increase in June. The core PCE deflator is the Fed's preferred measure of inflation.

The numbers suggest the Fed should not raise interest rates further, some analysts say. "With savings so low, higher interest rates, especially mortgage rates, could cause an abrupt change in consumer behavior," says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. "A sharp increase in savings could throw the economy into recession."

However, others expect inflation to continue its rise. "Monthly core PCE inflation was below its recent trend due to the impact of lower apparel prices, which we expect to reverse," says John Ryding, chief U.S. economist at Bear Stearns. "We see core inflation moving above the forecast range for 2006 in the coming months."

Meanwhile, jobless claims dropped 2,000 to 316,000 in the week ended Aug. 26, from an upwardly revised 318,000 the week before. The Chicago purchasing managers index of regional business activity fell to 57.1 in August from 57.9 in July. Factory orders dipped 0.6% in July after increasing 1.5% in June.

Fed Chairman Bernanke, speaking in Greenville (S.C.), said productivity growth is likely to continue its healthy post-1995 trend, but did not comment specifically on interest rates or inflation. Elsewhere, the European Central Bank kept its key interest rate unchanged at 3%, but policymakers indicated they would consider a rate hike in October to combat inflation pressures.

Friday's calendar holds a key report on August payrolls. Other data releases are set to include vehicle sales, construction spending, and the Institute for Supply Management's index of manufacturing activity.

On the company side, many retailers reported solid August sales. Wal-Mart (WMT ), Federated (FD ) and Limited Brands (LTD ) were among store chains topping analyst estimates. Disappointments included Target (TGT ), J.C. Penney (JCP ) and Gap (GPS ).

Among other stocks in focus, Ford (F) said it has begun exploring strategic options for its Aston Martin luxury brand, including a potential sale of all or part of the business.

Chemical maker Dow Chemical (DOW ) said it would shut down three plants around the world as a measure to cut annual operating costs by $160 million.

Shares of Clorox (CLX ) dipped after the consumer products maker tapped the president of Coca-Cola's (KO ) North American unit, Donald Knauss, as its new chief executive.

In earnings news, telecom equipment maker JDS Uniphase (JDSU ) was down sharply after the company said it expects its fiscal first-quarter revenue to fall below analyst expectations.

On the deal front, Vancouver-based miner Goldcorp (GG ) offered $8.6 billion in stock for fellow Canadian miner Glamis Gold (GLG ).

In the energy markets, October West Texas Intermediate crude oil futures closed up 23 cents at $70.26 a barrel, a decline of 7% for the month, ahead of an expected showdown between the U.N. and Iran over Tehran's nuclear plans.

European markets finished modestly lower. In London, the Financial Times-Stock Exchange 100 index lost 23.2 points, or 0.39%, to 5,906.1. Germany's DAX index slipped 7.96 points, or 0.14%, to 5,859.57. In Paris, the CAC 40 index was down 17.75 points, or 0.34%, to 5,165.04.

Asian markets ended higher. Japan's Nikkei 225 index rebounded 268.74 points, or 1.69%, to 16,140.76. In Hong Kong, the Hang Seng index gained 107.56 points, or 0.62%, to 17,392.27. Korea's Kospi index advanced 11.39 points, or 0.85%, to 1,352.74

Treasury Market

Treasury yields remained near five-month lows after the relatively tame core PCE reading, says Action Economics. The 10-year note rose modestly in price to 101-04/32 for a yield of 4.73%, while the 30-year gained to 94-04/32 for a yield of 4.88%.

Tuesday, August 29, 2006

The Economy's Fear Factor

News Analysis
August 29, 2006

Business Week Online


The Economy's Fear Factor

Will Republicans' focus on the threat of terrorism heighten voter pessimism about the economy ahead of the November elections?

Sex sells, but what about fear? It's been evident for months that terrorism and the war in Iraq would be central to Republicans' bid to hold Congress through November's midterm elections. Indeed, the specter of a terrorist attack looms large in the minds of economists, a new survey shows, highlighting a possible contradiction in the GOP strategy.

The biggest short-term problem facing the U.S. economy continues to be terrorism, say 34% of economists polled in August by the National Association for Business Economics (NABE). Among other leading economic trouble spots were energy prices, cited by 29% of economists, followed by inflation. The portion of economists listing terrorism as the biggest threat jumped from 26% in March.

While the latest survey coincided with the outbreak of war in Lebanon, economists' heightened concerns about terrorism are real, analysts say. Recent headlines about alleged plots against airliners have only underscored the anxiety. "Everybody is worried that the next terrorist attack is going to cause problems—both for oil prices and for consumer confidence—that could create a recap of the kind of recession we saw back in 2001," says David Wyss, chief economist at Standard & Poor's.

BACKFIRE RISK.  Economists aren't the only ones expressing concern about terrorism and the economy (see, 8/21/06, "That Sinking Feeling"). Nearly two-thirds, or 64%, of Americans think it is at least somewhat likely that there will be another terrorist attack in the U.S. within the next few months, according to a recent CBS News poll, up from 53% in January.

As for the economy, American voters have offered dismal forecasts in public opinion polls for months, while Republicans are burnishing their antiterrorism bona fides. The new survey results raise an interesting question: Could an electoral strategy focused on stoking voters' terrorism fears backfire by increasing their economic pessimism?

The latest view from economists comes as conservative columnists such as George Will and Fred Barnes have been wondering why voters give President George W. Bush so little credit on the economy. In the most recent Wall Street Journal–NBC poll, only 14% of respondents say they believe the economy will get better in the next 12 months, down from 16% in June and 17% in April.

STRONG EARNINGS.  Center-left pundits have raised similar questions. The economic news is "absolutely good," ABC News political commentator Cokie Roberts said Dec. 4, 2005, on This Week, but "voters don't seem to be feeling it." On July 12, Hardball host Chris Matthews asked: "If it's that great out there, why isn't [Bush] getting credit for it?"

By some measures, the economy is indeed strong (see, 9/4/06, "Housing: The Roof Won't Collapse on the U.S. Economy"). S&P 500 companies have posted 17 consecutive quarters of double-digit earnings growth. The advance reading for second-quarter gross domestic product, however, showed a 2.5% rise, down from 5.6% in the first quarter. Investors will get another reading on second-quarter GDP on Aug. 30, ahead of Sept. 1's payrolls report.

Renewed fears of terrorism might be one key reason for Americans' pessimism toward the economy. Indeed, views on the economy surged 13 percentage points after U.S. forces killed Al Qaeda affiliate Abu Musab al Zarqawi in Iraq, according to Ed Lazear, chairman of the White House Council of Economic Advisers. "Of course, that had almost no effect on the economy to speak of, and yet people's opinion of it went way up," Lazear said in an Aug. 18 press briefing.

NO THANK-YOU CARDS.  Top Republicans have kept the threat of terrorism front and center in recent weeks. "People will focus on that issue," Senator John Thune (R-S.D.) told a Lincoln (Neb.) newspaper in the wake of the foiled London airplane bombings. On Aug. 9, Vice-President Dick Cheney said the Connecticut primary victory of antiwar Democratic Senate nominee Ned Lamont may encourage "the Al Qaeda types."

Americans tend to vote based on their pocketbooks, but the White House isn't doing enough to highlight economic issues right now, according to Grover Norquist, president of the conservative Americans for Tax Reform. "They're wrapped up in foreign policy, but just because you're interested in something doesn't mean most voters are," Norquist says. "What matters for voters is: What are you going to do for them next? Don't expect a lot of thank-you cards for an O.K. economy."

That may be an acceptable risk to the Republicans, who are keen to retain their edge in Congress. The GOP may be willing to take a short-term hit on economic issues to draw attention to terrorism, where Republicans have traditionally outpolled their Democratic rivals. "The Republicans have put all their political eggs in the war-on-terror basket," says Peter Rundlet, vice-president for national security at the liberal Center for American Progress. (Representatives from the Republican and Democratic parties did not return calls prior to publication of this article.)

MISPLACED JITTERS?  Like economists, ordinary Americans probably see terrorism as only one of a rogue's gallery of threats to the economy, with inflation and a softening housing market also causing some agita. Some liberal pundits charge that Americans are unhappy because double-digit corporate profits and solid economic growth have yet to trickle down to typical workers. "It's hard to convince people that the economy is booming when they themselves have yet to see any benefits from the supposed boom," wrote New York Times columnist Paul Krugman on Dec. 5, 2005.

Meanwhile, Wall Street's terrorism jitters could be misplaced, economists say. While a terrorist attack would likely send oil prices higher and dampen travel spending, it wouldn't necessarily derail the economy, notes S&P's Wyss. Terrorism "changes what people spend money on, but it doesn't change them spending money," he says.

When asked to name longer-term threats to the economy, economists named a number of other daunting challenges. One-fifth of respondents point to the federal deficit as their biggest long-term concern, according to the NABE poll, while another fifth cite an inadequate educational system. Separately, only 38% of respondents believe that any combination of policies can eliminate U.S. dependence on foreign oil.

DEFICIT CONCERN.  The survey results also indicate uncertainty from a Fed policy standpoint. While 29% of economists polled want further interest-rate hikes, another 17% prefer cuts, and 53% favor keeping rates steady. Still, 71% say current monetary policy is about right, and just 57% expect the Fed to raise rates, down from 89% six months ago. In fiscal policy, 75% of respondents want budget deficits to drop, but only 17% expect them to do so.

In a market environment fraught with question marks, terrorism remains one of the biggest uncertainties—for economists and voters alike. But the complex feelings the issue evokes leave no clear indication as to how voters will respond in November—perhaps making the GOP a little nervous as to whether its trump card will ensure victory.

Click here for the slide show.

Monday, August 28, 2006

Buyback Binge: Bane or Boon?

News Analysis
August 28, 2006

Business Week Online

Buyback Binge: Bane or Boon?

S&P 500 companies snapped up their own stock at record levels in the second quarter. What does the repurchase rush mean for investors?

Buybacks are back with a bang on Wall Street. According to Standard & Poor's, companies in the S&P 500 index repurchased a record $115 billion of their own shares in the second quarter, up 43% from 2005 and 175% from 2004. The wave of stock buybacks could boost per-share earnings at a time when corporate profits are hard-pressed to keep up their recent double-digit gains.

Oil giant Exxon Mobil (XOM) led the S&P 500 in buyback activity during the second quarter, plowing $6.6 billion into its own shares. Not far behind were Procter & Gamble (PG ) and Time Warner (TWX ). Microsoft (MSFT ) recently made headlines when it bought back $3.8 billion of its shares, and set a $20 billion tender offer to snap up even more (see, 7/21/06, "Microsoft Buyback: Should You Bite?"). On Aug. 25, Home Depot (HD ) tooled up to make an additional $3.5 billion in stock buybacks, raising its total repurchase authorization to $17.5 billion.

For investors, the buyback boom means it's especially important to look beyond per-share earnings when evaluating a company's quarterly performance, analysts say. It might also be a reason to pay more attention to M&A prospects. However, buyback watchers don't expect companies to repeat the mistakes of the late-1990s rash of repurchases, which came back to haunt some stocks after the bull market went bust.

Share repurchases have risen as investors push for companies to put their growing cash hoards to use (see BusinessWeek, 4/17/06, "Blue-Chip Blues"). Buybacks reduce the number of shares outstanding, improving earnings per share. They also absorb excess shares created when employees exercise stock options.

NOTE TO SHAREHOLDERS.  The phenomenon probably isn't going away anytime soon, analysts say. "Buybacks are going to increase as long as the corporate bond market lets them," says Brian Reynolds, chief market strategist at MS Howells. Companies sometimes turn to the bond market to fill the tank with extra cash for repurchases.

Also, a buyback is typically safer for a company than paying a dividend in case earnings should nosedive. "A company can easily raise and lower a share repurchase program," says Jim Clark, an analyst at Sound Shore Management who acts as a sub-advisor for New Covenant Funds. "Doing so with a dividend is much more difficult."

Trouble is, the boost buybacks give to per-share earnings can be misleading. "Investors need to look at the numbers and do a bit more math than sometimes they're given," says Howard Silverblatt, S&P's senior index analyst. For instance, a share might be appropriately valued at 18 times earnings. However, the same share could be overpriced at 18 times an EPS figure inflated by reduced share count.

Lowering the number of outstanding shares through buybacks may also bump the price of stocks higher, if only in the short term, some analysts say. The reason is simple economics: As the supply of shares decreases, the demand should remain steady.

QUESTIONING PRIORITIES.  In fact, buybacks may be helping to hold up the market as consumer spending winds down, according to David Rosenberg, North American economist for Merrill Lynch (MER ). "This is where the 'baton' is being handed off—from the consumer to the shareholder," Rosenberg says in an Aug. 25 report.

Repurchased shares end up back in a company's vault as treasury shares. Many companies will eventually put this wealth to use in M&A activity, says S&P's Silverblatt. So investors should be assessing management's track record at making and executing deals. Silverblatt explains, "It's not how good you are at making widgets, but how good you are at putting companies together."

Meanwhile, the dollar amount of stock buybacks in the second quarter was about equivalent to capital expenditures, according to S&P. This trend raises questions about corporate executives' priorities, some analysts say. "If they can't find anything to do with their money, it makes me wonder what these guys are doing," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "You would think if you're that flush you would be pouring it into R&D and trying to come up with the next iPod."

Still, companies are snapping up their own stocks for different reasons than in past eras. Buybacks surged in the late 1990s, too, peaking in 2000 at $262.6 billion, according to Merrill Lynch estimates. In those days, many companies repurchased shares primarily to offset the dilution of stock created by stock options, analysts say. Other outfits announced buybacks in hopes of buoying their share prices (see, 9/23/02, "The Buyback Boomerang").

NO LONG-TERM EFFECT.  Most companies today repurchase shares as a way of delivering increased value to shareholders, according to Charles Plohn Jr., managing director and head of Merrill Lynch's special equity transactions group, which specializes in buybacks. "It just seems to be a more rational process at this point," Plohn says. "The fact that we're seeing fewer companies than in the late '90s make the announcements indicates a shakeout from those companies who were implementing them for the wrong reasons."

Further, though buybacks may give shares a quick pick-me-up, they're unlikely to change a stock's direction over the long term. "The price is going to go up or down with or without an open-market buyback program in place," says Plohn, who has followed this area for about three decades.

The repurchase rush may not overturn the entire investing landscape, but it signals that many blue-chips are finding the most appealing place to put their profits is right back into their own shares. Increasingly, investors will want to keep buybacks in mind as they consider which stocks are worth buying—and selling—in the first place.

Friday, August 25, 2006

Harley-Davidson: High on the Hog

News Analysis
August 25, 2006

Business Week Online

Harley-Davidson: High on the Hog

Shares hit a 52-week high, but can innovations and international interest make up for a drop in the number of boomers with sagging Harley tattoos?

Believe it or not, Wall Street just hosted a motorcycle rally. No, not that kind. On Aug. 18, shares of Harley-Davidson (HOG ) vroomed to a 52-week high of $59.49, a 16.4% gain for the year when adjusted for dividends. The Milwaukee-based motorcycle maker's stock may still have open road ahead of it, though investors, like bikers, should expect to feel some headwinds.

Harley stock has been riding high in recent weeks. On Aug. 15, Harley changed its ticker from HDI to HOG, a long-running nickname for the company's iconic motorcycles. The price of shares climbed a day later as President George W. Bush visited a York (Pa.) Harley factory to talk up the U.S. economy. Shares sputtered lower to $57.99 in afternoon trading Aug. 24.

So what makes Harley run? For starters, the 103-year-old manufacturer has one of the few brand names actually tattooed on its customers' flesh. Investor focus on this powerful brand should help support the stock, according to Standard & Poor's analyst Tom Graves, who has a buy recommendation (see, 8/7/06, "Best Global Brands: Harley Davidson").

INTERNATIONAL JUMP.  Strong industry sales trends may keep the shares in high gear. U.S. motorcycle sales rose 11% in the first six months of the year, on pace for a 14th straight year of gains according to Motorcycle Industry Council statistics. Harley's 23.7% share of the new motorcycle market trailed only Honda's (HMC ) 27.4% stake as of 2004, the most recent year for which the trade group keeps these data.

Harley's most recent earnings report showed solid results. On July 10, it posted a 3% rise in second-quarter earnings, in line with Wall Street expectations, boosted by a 17.1% jump in international sales. "This momentum demonstrates the continued strong appeal of our products and the Harley-Davidson experience," Harley Chief Executive Jim Ziemer said in a prepared statement.

Meanwhile, Harley's 2007 models are getting a positive reception. The new Twin Cam 96 engine and now-standard six-speed transmissions may drive more hog riders to trade up, says RBC Capital Markets analyst Edward Aaron, who has a sector-perform recommendation on the stock. (RBC has a non-investment-banking relationship with Harley.)

BIG BUYBACK.  Goldman Sachs analyst Julia Crowell upgraded Harley from neutral to buy on July 27, citing the strength of this new product line. "Both dealers and consumers continue to praise the new models," Crowell says in an Aug. 13 note following the company's analyst meeting in Sturgis, S.D., where tens of thousands of bikers go hog-wild each summer at an annual motorcycle bash. (Goldman has an investment-banking relationship with Harley.)

Harley has given its shareholders some trade-in opportunities of their own. The company bought back 9.9 million shares in the first half of 2006, at a total cost of $499.5 million. As of July 17, the bike maker had authorization to repurchase about 10 million additional shares. Companies and investors like stock buybacks because they boost per-share earnings and ease stock-options awards.

From a valuation perspective, Harley may also be sitting pretty. Based on analyst estimates for 2007 earnings, the stock is trading at a discount to the Standard & Poor's 500 index, while growing earnings per share at twice the rate of that broad benchmark, A.G. Edwards analyst Timothy Conder says in an Aug. 16 report. Conder gives the stock a buy recommendation. (A.G. Edwards has a non-investment-banking relationship with Harley.)

AGING AUDIENCE.  But there may be some bumps in the road ahead as the impact of demographic trends could be less clear for the motorcycle maker. According to A.G. Edwards' Conder, who defines Harley's core age bracket as mid-40s to late 50s, positive demographics should pump some fuel into demand over the next 5 to 10 years. Conder adds, "Opportunities remain for additional U.S. market penetration via expanding sales to women and ethnic groups."

However, Morningstar analyst Marisa Thompson says Harley's key consumers are really mostly ages 35 to 45. Thompson notes that their numbers are diminishing as affluent baby boomers age, making sales to new and international market groups increasingly vital. She rates the stock two stars out of five. Harley spokespeople failed to return calls prior to deadline (see, 3/29/06, "Hog Heaven in Beijing").

The uncertain economic environment also poses serious risks. Like General Motors' (GM ) Corvette, a Harley is hardly a household necessity—no matter how dramatic the midlife crisis. A sharp slowdown in economic growth or consumer spending could put the brakes on demand for big-ticket discretionary items, analysts say. A cooling housing market may also reduce the amount of home equity available to tap for potential cycle purchases (see, 7/6/06, "The Housing Outlook and Its Impact").

EYES ON THE ROAD.  Paradoxically, another worry is that the 2007 models may be too well-received. "If used bike prices come down significantly because of the new innovations, this may result in less buying power (due to lower trade-in values) for [Harley] customers to purchase the new bikes," says Citigroup analyst Gregory Badishkanian in an Aug. 11 report. He gives the stocks a hold rating. (Citigroup has an investment-banking relationship with and a significant financial interest in Harley.)

Still, the motorcycle maker's stock might not be as, well, cyclical as it seems, others contend. Says A.G. Edwards' Conder: "Shares have historically traded more like a defensive vs. a cyclical name."

A famous brand and popular new products should help the venerable hog merchant cruise along nicely. But if the economic road turns rough, investors might want to put on their helmets.

Stocks Drift after Bernanke Speech

News Article
August 25, 2006

Business Week Online

Stocks Drift after Bernanke Speech

The Fed chief's remarks did not touch on interest rates or the U.S. economy. All three major indexes finished down on the week

Stocks finished narrowly mixed Friday, with major indexes posting weekly losses, after Federal Reserve Chairman Ben Bernanke avoided references to monetary policy or the U.S. econonomy in a highly anticipated speech. Volume was light in an otherwise quiet session for corporate and economic news.

The Dow Jones industrial average fell 20.41 points, or 0.18%, to 11,284.05, a weekly decline of 0.9%. The broader Standard & Poor's 500 inched lower 0.97 points, or 0.07%, to 1,295.09, finishing the week down 0.5%. The tech-heavy Nasdaq composite was up 3.18 points, or 0.15%, to 2,140.29, a loss of 1.1% on the week.

NYSE breadth was slightly positive, with 17 issues advancing for every 16 declining, while Nasdaq breadth was 16-14 positive

Bernanke's speech was in focus Friday. The Fed chief praised globalization and warned policymakers against protectionism in prepared remarks delivered in Jackson Hole (Wyo.). The remarks followed a week when weaker-than-expected data on the housing market fanned concerns the economy may be slowing more than the Fed expected.

The recent numbers rule out an "orderly" slowdown for housing, some analysts say. "The Fed is clearly done, in our view," says David Rosenberg, North American economist at Merrill Lynch, in a report. "The only thing 'orderly' out there right now is the guy carrying the stretcher."

Investors await a raft of economic reports next week. August payrolls tops the calendar, while data releases are also due on consumer spending, consumer confidence, and personal income. In addition, the week holds the release of the minutes to the Fed's Aug. 8 monetary policy meeting.

In corporate news, Home Depot (HD) was modestly higher after the home-improvement retailer authorized an additional $3.5 billion in share repurchases, upping its buyback total to $17.5 billion.

Automaker Ford (F) was higher amid continued deal buzz. The head of a U.K. construction-machinery outfit reportedly said he was interested in buying Ford's beleaguered Jaguar brand. Separately, Robert Rubin, a director at Citigroup (C ), resigned from the automaker's board citing the appearance of a conflict of interest.

Japanese rival Toyota (TM ) was lower following reports the company may delay the introduction of some new models by up to six months.

Clothing retailer J. Crew (JCG ) was lower after the company posted a wider second-quarter loss of $2.76 million.

Shares of KB Home (KBH ) fell slightly as the homebuilder said it was notified the SEC will be conducting an informal investigation into the company's stock-options grants.

In the energy markets, October West Texas Intermediate crude oil futures closed up 15 cents at $72.51 a barrel after surging at the outset on concerns a storm brewing in the Caribbean could threaten drilling operations in the Gulf of Mexico.

European markets finished narrowly mixed. In London, the Financial Times-Stock Exchange 100 index rose 9.5 points, or 0.16%, to 5,878.6. Germany's DAX index shed 2.61 points, or 0.04%, to 5,811.47. In Paris, the CAC 40 index edged down 1.72 points, or 0.03%, to 5,111.13.

Asian markets ended mixed. Japan's Nikkei 225 index eased 21.96 points, or 0.14%, to 15,938.66. In Hong Kong, the Hang Seng index gained 72.41 points, or 0.43%, to 16,955.45. Korea's Kospi index advanced 13.62 points, or 1.04%, to 1,329.35.

Treasury Market

Treasuries drifted higher after Bernanke's speech lacked market-moving comments. The 10-year note edged up in price to 100-22/32 for a yield of 4.79%, while the 30-year bond rose modestly to 93-11/32 for a yield of 4.93%. "Month-end bond index duration extensions may be a bullish factor next week," says Action Economics.

Wednesday, August 23, 2006

Stocks Drop on Weak Housing Data

News Article
August 23, 2006

Business Week Online

Stocks Drop on Weak Housing Data

July existing home sales declined more sharply than expected. Meanwhile, U.S. officials said Iran's response in the nuclear standoff "falls short"

Stocks finished lower for a third straight day Wednesday, as an unexpectedly sharp drop in July existing home sales offset buzzing tech deal news. The damp housing-market data raised concerns that the economy could be headed for a hard landing, says Standard & Poor's Equity Research. Losses deepened slightly after the U.S. State Department said Iran's response to calls that the country abandon its nuclear program "falls short."

The Dow Jones industrial average fell 41.94 points, or 0.37%, to 11,297.9. The broader Standard & Poor's 500 dropped 5.82 points, or 0.45%, to 1,293. The tech-heavy Nasdaq composite slid 15.36 points, or 0.71%, to 2,134.66.

NYSE breadth was decidedly negative, with 23 issues declining for every 10 advancing. Nasdaq breadth was 20-10 negative.

Investors were digesting weak housing-market figures Wednesday. Existing home sales fell 4.1% in July to a growth rate of 6.33 million units, a much sharper decline than economists expected. A report on July new home sales was due Thursday, along with data on monthly durable goods orders and weekly jobless claims.

The housing numbers prompted worries that the economy may not be slowing as gently as the Federal Reserve expects. "The question is, again, are we headed for a soft or hard landing in the housing market?" says Peter Cardillo, chief market analyst at S.W. Bach. "That's the reason why the market is selling off."

However, the decline in home sales could also have implications for interest rates, a day after Fed officials indicated the central bank would hike rates again if necessary to fight inflation. "These housing data should help keep the Fed on hold in September as it attempts to evaluate how much economic growth has moderated by," says John Ryding, chief U.S. economist at Bear Stearns.

The supply of homes on the market rose to 7.3 months worth of sales, the highest level in more than a decade, analysts note. "While declines in mortgage rates may help to cushion the extent of the downturn, the key data on the housing market consistently suggest that the deterioration will continue for some time," says Goldman Sachs. 

M&A activity was in focus on the corporate side. Information-technology giant IBM (IBM ) agreed to buy Internet Security Systems (ISSX ), an outfit that helps companies protect themselves against Internet attacks, for $1.3 billion in cash, or $28 a share.

Computer maker Gateway (GTW ) was sharply higher after receiving an unsolicited offer from eMachines founder Lap Shun Hui to acquire the company's retail operations for $450 million. Hui sold PC maker eMachines to Gateway in 2004 for roughly $290 million in cash and stock.

Chipmaker National Semiconductor (NSM) was higher despite cutting its revenue forecast, citing disappointing sales to mobile phone customers. Analysts attributed the slowdown to seasonal factors.

Shares of Borders (BGP ) fell after the bookseller swung to a second-quarter loss.

In other earnings news, Medtronic (MDT) was modestly lower after the cardiac-device maker posted an 87% surge in fiscal first-quarter profit but reduced its forecasts for fiscal 2007 and 2008.

Among other stocks to watch, Rambus (RMBS) was up sharply as the memory-chip licensing company said a court stayed the final stage of its patent dispute with Hynix Semiconductor.

In the energy markets, October West Texas Intermediate crude oil futures closed down $1.34 at $71.76 a barrel after a weekly inventory report showed an unexpectedly modest supply decline.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index lost 42.6 points, or 0.72%, to 5,860. Germany's DAX index fell 42.87 points, or 0.74%, to 5,775.54. In Paris, the CAC 40 index was down 45.6 points, or 0.89%, to 5,082.73.

Asian markets ended in the red. Japan's Nikkei 225 index edged down 18.14 points, or 0.11%, to 16,163.03. In Hong Kong, the Hang Seng index dropped 61.63 points, or 0.36%, to 17,088.39. Korea's Kospi index declined 10.01 points, or 0.75%, to 1,324.95.

Treasury Market

Treasuries ticked lower after the unexpectedly steep decline in existing home sales. The 10-year note edged down in price to 100-16/32 for a yield of 4.81%, while the 30-year bond crept lower to 93-03/32 for a yield of 4.95%.


Tuesday, August 22, 2006

Big Box Battle: Home Depot vs. Lowe's

News Analysis
August 22, 2006

Business Week Online

Big Box Battle: Home Depot vs. Lowe's

The home-improvement giants have been hammered by housing-market worries. Which can better withstand a slump?

A tough year for home-improvement retailers just got tougher. Home Depot (HD ) reported soft second-quarter earnings on Aug. 15 and cautioned that it expects only slight gains for the rest of 2006 (see, 8/16/06, "Wal-Mart, Home Depot Hit Potholes"). Fast-forward nearly one week, and it's a similar story: Lowe's (LOW ) echoed its larger rival on Aug. 21, posting lackluster second-quarter results and warning of a sales slowdown.

Higher energy prices and a weakening housing market have already helped pour cold water on both companies' stock prices. Adjusting for dividends and splits, shares of both Atlanta-based Home Depot and Mooresville (N.C.)-based Lowe's were down about 15% for the year through Aug. 21. By comparison, the broader Standard & Poor's 500 stock index gained 3.9% over the same period.

By and large, analysts expect both of the fix-it chains to grow impressively over the long term. In the months ahead, however, the company best known for its big orange boxes may be a better bet to ward off the retail blues. Home Depot's expanded wholesaling business could help insulate its stock against a consumer-spending freeze, analysts say.

BATTEN DOWN THE HATCHES.  Either way, the economic headwinds blowing against the chains are formidable. The latest data suggest the worst is yet to come in the housing slowdown (see, 8/21/06, "Why the Housing Market Looks a Little Rickety"). An Aug. 23 report is expected to show that existing home sales declined again in July. Specialty retailers, such as home-improvement stores, are "particularly sensitive" to existing home sales, according to Jack Ablin, chief investment officer at Harris Bank.

Meanwhile, a closely watched gauge of consumer sentiment recently hit its lowest level since the aftermath of last year's hurricanes (see, 8/18/06, "Those Gloomy Consumers"). Energy prices remain high, with West Texas Intermediate crude oil futures holding above $70 a barrel despite a Mideast ceasefire.

Home Depot's advantage? The chain has diversified away from its 2,079-store retail business. In the past three years, the company has spent more than $7 billion on acquisitions. Home Depot projects that its new commercial wholesale division, dubbed Home Depot Supply, will reach about $12 billion in revenue this year. The unit posted same-store sales growth of 12% in the second-quarter vs. the year-earlier period.

WHOLESALE CUSHION.  Home Depot Supply gives the company a foothold in the commercial building market. Nonresidential construction is growing at double-digit rates while residential business is floundering, according to investment-research outfit Action Economics (see, 8/22/06, "Construction: A Tale of Two Sectors").

The company's wholesale exposure could ease the pain on its bottom line if retail shoppers tighten their purse strings, analysts say. "If the whole economy slows, that part of the business should remain pretty stable," says S&P industry analyst Mike Souers, who covers the specialty retail sector. Souers has a strong buy recommendation on Home Depot and a buy recommendation on Lowe's.

All is not rosy for Big Orange. Home Depot fell to last place in the University of Michigan's annual American Customer Satisfaction index, 11 points behind Lowe's (see, 6/19/06, "Home Depot: Last Among Shoppers"). More recently, Home Depot has unveiled plans to invest $350 million on in-store programs, including customer-service initiatives.

BUYING OPPORTUNITY.  Home Depot raised Wall Street's ire when it said it would stop disclosing the key retail benchmark of same-store sales—sales at stores open a year or more—but the company reversed that decision in the second quarter. Home Depot Chief Executive Robert Nardelli has drawn criticism over his $38.1 million in total 2005 compensation (see, 5/23/06, "Home Depot's CEO Cleans Up"). In addition, the chain has gotten caught up in the Securities& Exchange Commission's stock-options probe, though company executives say they do not anticipate a "material adverse impact."

However, the negative publicity may already be reflected in Home Depot's shares, which fell 1.35%, to $34.30, on Aug. 21. The stock "is pricing in more bad news than good news," says Merrill Lynch analyst Danielle Fox in an Aug. 15 report, citing a price-to-earnings (p-e) ratio of 11. Fox has a buy rating on both Home Depot and Lowe's. (Merrill Lynch has an investment banking relationship with the two companies and makes a market in their securities.)

Lowe's latest dip, too, may represent a buying opportunity, analysts say (see BusinessWeek, 7/3/06, "Lowe's Is Not Riding High"). In an Aug. 21 report, Fox says Lowe's p-e of 13.3 times her forward earnings estimate is the stock's lowest multiple since 1991. Shares fell 3.96%, to $28.35, at the close of trading on Aug. 21.

That's not to say that the North Carolina chain's stock has been stagnant. Since scraping a 52-week low in mid-July, Lowe's shares had been on the rise going into the second-quarter earnings report. From July 14 to Aug. 18, shares of the company climbed 7.8%, adjusting for dividends and splits, compared to a 2% increase for Home Depot.

LONG-TERM OUTLOOK . On the big box front, Lowe's stores may be positioned to continue grabbing market share away from Home Depot, says Michael Tesler, president of, a retail consulting firm based in Norwell, Mass. "Lowe's has more positive momentum right now," Tesler explains. Moreover, women typically find the chain to be more comfortable than Home Depot, he adds.

Despite short-term challenges, some analysts see both home-improvement chains building up gains in the long run. "They will have very good growth prospects as they continue to open new stores and take market share," says Morningstar stock analyst Anthony Chukumba. "We think for the most part they both have great store models and great management teams."

The economic environment may leave the fix-it chains hoping for some quick repairs. While both Home Depot and Lowe's both have plenty of tools at their disposal, Big Orange's recent efforts to extend its reach beyond the weekend handyman may give it a better chance of staying warm while the housing market cools.

Stocks Finish Mixed amid Iran Worries

News Article
August 22, 2006

Business Week Online

Stocks Finish Mixed amid Iran Worries

Iran responded to calls for the country to suspend its nuclear program. Toll Brothers beat estimates but lowered its full-year guidance

Stocks finished narrowly mixed in slow trading Tuesday, as a homebuilder's better-than-expected quarterly results offset concerns about the latest twist in the Iran nuclear standoff. Chicago Fed President Michael Moskow's prediction that "more rate hikes may still be necessary to cut inflation" prompted some afternoon selling.

The Dow Jones industrial average edged down 5.21 points, or 0.05%, to 11,339.84. The broader Standard & Poor's 500 rose 1.29 points, or 0.1%, to 1,298.81. The tech-heavy Nasdaq composite added 2.27 points, or 0.11%, to 2,150.02.

NYSE breadth was slightly positive, with 19 issues advancing for every 14 declining. Nasdaq breadth was 17-13 positive.

Iran delivered its response Tuesday to a U.N. demand that Tehran suspend uranium enrichment in exchange for an incentive package. Details of the response remained unclear, though the oil exporter's top negotiator said the country was ready to enter "serious negotiations."

In the energy markets, September West Texas Intermediate crude oil futures settled and expired up 18 cents at $72.63 a barrel. Earlier, Iranian gunners fired on a Romanian oil rig in the Persian Gulf.

Among stocks to watch, Toll Brothers (TOL) was higher after the luxury homebuilder beat Wall Street expectations despite reporting a 19% drop in fiscal third-quarter profit and cutting its full-year outlook.

Software giant Microsoft (MSFT ) was lower amid news the company plans to offer discounts for upgrades to its Windows Vista operating system.

Shares of Advanced Micro Devices (AMD) rose after the chipmaker said it aims to raise its share of the global market for computer processors to about 30% by 2008. Bear Stearns raised its rating on the stock from peer perform to outperform.

Wireless carrier Sprint Nextel (S) was lower after the company said Len Lauer, its chief operating officer, was leaving the company. President and Chief Executive Gary Forsee will assume Lauer's responsibilities. Merrill Lynch reportedly downgraded the stock from buy to neutral.

In other analyst calls, XM Satellite Radio (XMSR ) was sharply higher as Bear Stearns upgraded the stock from underperform to outperform.

Companies set to announce quarterly results after the close included medical device maker Medtronic (MDT ).

The economic calendar was quiet again Tuesday, with a report on existing home sales due Wednesday and new home sales a day later. Durable goods orders and weekly jobless claims data will also be on tap Thursday.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index lost 12.6 points, or 0.21%, to 5,902.6. Germany's DAX index rose 23.58 points, or 0.41%, to 5,818.41. In Paris, the CAC 40 index was up 23.68 points, or 0.46%, to 5,128.33.

Asian markets finished higher. Japan's Nikkei 225 index shot up 212.13 points, or 1.33%, to 16,181.17. In Hong Kong, the Hang Seng index gained 141.87 points, or 0.83%, to 17,149.75. Korea's Kospi index advanced 13.29 points, or 1.01%, to 1,334.96.

Treasury Market

Treasuries finished mixed to higher ahead of Wednesday's housing data. The 10-year note was little changed at 100-17/32 for a yield of 4.81%, while the 30-year bond edged up in price to 93-03/32 for a yield of 4.95%. Chicago Fed President Moskow's hawkish comments helped bond prices pull back from modest early gains.

Monday, August 21, 2006

Stocks End Lower after Five-Day Rally

News Article
August 21, 2006

Business Week Online

Stocks End Lower after Five-Day Rally

Lowe's quarterly results fell below Wall Street expectations. Oil futures rose near $72

The five-session rally for stocks ended Monday, as oil prices rebounded on geopolitical concerns. Profit-taking and some unwinding of positions after Friday's expiration of options weighed on the stock market, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 36.42 points, or 0.32%, to 11,333.44. The broader Standard & Poor's 500 dropped 4.78 points, or 0.37%, to 1,297.52. The tech-heavy Nasdaq composite slid 16.2 points, or 0.75%, to 2,147.75.

In the energy markets, September West Texas Intermediate crude oil futures jumped $1.41 to $72.55 a barrel amid reports Iran said it won't suspend its uranium enrichment program by Aug. 31, jeopardizing an incentive package backed by six world powers. Meanwhile, President George W. Bush called for an international force to keep peace at the Israel-Lebanon border.

From a technical perspective, the market's recent rally may have paved the way for a reversal starting in September, some analysts say. "The low-volume bounce could face significant headwinds as the market approaches the worst seasonal month (performance-wise) of the year," says Morgan Stanley technical analyst Mark Newton.

Even if gains carry over into September, the eventual pullback could be severe, others say. "While this 'summer rally' may set new bull-market benchmarks for the senior averages, the potential for a decline in excess of 20% remains high," says Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch.

The economic calendar is light on Tuesday. However, a few Federal Reserve members will give speeches. Atlanta Fed's Guynn on Tuesday will cover "Transitions in the U.S. Economy and Financial System" from at the Atlanta Kiwanis Club. Moskow of the Chicago Fed will follow shortly thereafter on the economy from Bloomington, Indiana. "Either could provide a little policy fodder and put a floor under yields ahead of Chairman Bernanke's keynote speech on "Global Economic Integration" from Jackson Hole, Wyoming, on Friday morning," says Action Economics.

Investors were digesting a mix of corporate news Monday. Lowe's (LOW) was lower after the home-improvement retailer reported an 11% rise in second-quarter profit, missing analyst estimates, and reduced its full-year guidance.

Elsewhere in retailing, Dollar General (DG) lost ground after the company said it expects second-quarter EPS of 14-15 cents, which is below prior guidance of 18-22 cents. It cited lower-than-expected gross margin.

And AnnTaylor Stores (ANN ) fell after Prudential downgraded the stock to underweight from neutral.

Stock-options troubles also remained in focus. Medarex(MEDX) was lower after the biopharmaceutical company said it will restate annual and quarterly financial statements as far back as 2000 due to an investigation into improperly dated employee stock options.

Meanwhile, Broadcom (BRCM) was lower on a report the chipmaker will start an appeal process to retain its listing on Nasdaq after delaying filing its quarterly report because of a stock-options probe.

Computer maker Apple (AAPL ) was also lower amid continuing legal concerns related to stock-options practices and SanDisk's (SNDK ) launch of a new digital music player to rival Apple's iPod.

Shares of Google (GOOG ) fell on news the Internet search company's market share fell 1% in July as the company faces another click-fraud lawsuit.

On the upside, Procter & Gamble (PG ) was modestly higher on a report the consumer-products giant could be poised to continue its recent earnings growth.

In deal news, Citadel Broadcasting (CDL ) was reportedly hoping to renegotiate parts of of its $2.7 billion agreement to buy Disney's (DIS ) ABC radio business.

Chicken processor Pilgrim's Pride (PPC ) late Friday offered about $1 billion, or $20 a share in cash, to buy peer Gold Kist (GKIS ).

In analyst calls, Ford (F ) was lower after Credit Suisse downgraded the automaker from neutral to underperform.

The economic calendar was light Monday. Later in the week, investors will be weighing releases on July new and existing home sales, as well as durable goods orders.

European markets were mixed. In London, the Financial Times-Stock Exchange 100 index gained 11.8 points, or 0.2%, to 5,915.2. Germany's DAX index slipped 22.19 points, or 0.38%, to 5,794.83. In Paris, the CAC 40 index was down 31.04 points, or 0.6%, to 5,104.65.

Asian markets finished lower. Japan's Nikkei 225 index lost 136.94 points, or 0.85%, to 15,969.04. In Hong Kong, the Hang Seng index slid 322.86 points, or 1.86%, to 17,007.88. Korea's Kospi index declined 9.43 points, or 0.71%, to 1,321.67.

Treasury Market

The 10-year note edged up in price for a yield of 4.819%. According to Action Economics, U.S. yields idled near post-inflation data lows as the bond market set up for a round of housing data midweek and a brief defensive sell-off proved short-lived. Some rotation out of equities kept a lid on yields as well, in addition to friendly technicals amid moderate volumes and a lack of hard data, says Action Economics.

Can the Rally Keep Up?

News Analysis
August 21, 2006

Business Week Online

Can the Rally Keep Up?

Stocks have risen to their highest levels since May. Sentiment has turned positive, but uncertainties remain, analysts say

It looks as if stocks have finally have shaken off the summertime blues. In the week of Aug. 14, a Mideast ceasefire and mild inflation data helped stocks climb to their highest levels since mid-May. The major indexes pieced together five straight days of gains, with the Dow Jones industrial average finishing the week up 2.6% and the tech-heavy Nasdaq composite index surging 5.1%.

Indeed, some market watchers have been calling for a summer rally. But can it last?

The bulls insist that the winds of investor sentiment have shifted for the better. "Right now the path of least resistance is higher," says Steve Sachs, director of trading at Rydex Investments. "The market is pricing in that 'Goldilocks' environment. We just don't have enough data to know if that's actually the case yet."

Still, with plenty of economic figures pending and about a month to go before the next Federal Reserve meeting, inflation hawks and investors worried about a slowing economy are staying on high alert. "The market is a little ahead of itself, and I suspect we're in for some sort of pullback," says Peter Cardillo, chief market analyst at S.W. Bach.

GOOD NUMBERS.  Some recent economic data have gotten positive spin. On Aug. 15 the Labor Dept.'s producer price index came in softer than expected for July. Another closely watched inflation gauge, the consumer price index, provided more tame numbers a day later. The info lent support to the Federal Reserve's Aug. 8 decision to keep interest rates steady on the premise that a slowing economy would reduce inflation pressures (see, 8/16/06, "Is the Fed Out of the Picture?").

A week earlier, the Fed's long-awaited pause wasn't enough to send stocks higher on its own, as an accompanying policy statement left the door open to more rate hikes (see, 8/8/06, "The Pause That Perplexes"). "The market's been missing something," says Chris Johnson, managing quantitative analyst at Schaeffer's Investment Research. "The last two reports that we've seen were supportive of what the market's been looking for."

Unfortunately, the latest inflation figures don't entirely remove interest-rate uncertainty, either. Economists and investors continue to disagree over whether upcoming data will force policymakers to tighten at the Sept. 20 Federal Open Market Committee meeting or later this year, notes the Standard & Poor's Investment Policy Committee (see, 8/8/06, "Bulls Win, Bears Lose").

CRUDE RELIEF.  Plus, even if the Fed is done tightening rates, the world's other central banks may not be. On Aug. 18, China raised its key rates by 0.27 percentage points, following hikes by Iceland and Norway earlier in the week.

One factor that might keep inflation under control is a decline in energy prices. On Aug. 17, three days after a truce began between Israel and Hezbollah, September West Texas Intermediate crude oil futures dropped to a new two-month low of $70.06 a barrel, before closing the week at $71.14.

Further softening in oil prices could propel stocks to fresh gains while keeping the Fed's foot off the rate-hike pedal, analysts say. "If we have any continuity in the economic data stream and a continuation of lower energy prices, I think we can have three weeks of rallies, instead of three days," says Art Hogan, chief market analyst at Jefferies & Co.

HOUSING DRAG.  On the other hand, there's also concern the Fed may have slowed the economy too much, paving the way for a hard landing. Investors will get a fuller picture of the economy the week of Aug. 21 with reports on durable goods orders along with new and existing home sales (see, 8/18/06, "Vital Signs: Dog Days for Housing"). The next readings on wholesale and consumer inflation aren't due until mid-September.

The cooling housing market continues to loom as another potential drag on the economy (see BusinessWeek, 8/21/06, "Why Housing Looks a Little Rickety"). Some analysts are unconcerned, however. "We don't expect the falloff to cause an economywide recession, or much of a slowdown," says Ed Yardeni, chief investment strategist at Oak Associates, in an Aug. 18 dispatch.

From a technical standpoint, indicators suggest stocks may keep moving higher, analysts say. The market could be "in the early stage of a tradeable uptrend that carries the potential of testing the early May highs for the major indexes," says Richard Dickson, senior market strategist at Lowry's Reports.

FEW CATALYSTS.  Which stocks will stand out? Some analysts expect large-cap stocks to continue to beat small-caps, as they have since May. "It's just the start of large-cap outperformance," says Goldman Sachs strategist David Kostin in an Aug. 18 note, citing strong second-quarter earnings and upward revisions to 2006 and 2007 forecasts.

More specifically, some market watchers continue to expect defensive sectors to outperform, despite recent strength in technology stocks. Utilities, health care, and consumer staples all remain attractive, according to Jack Ablin, chief investment officer at Harris Bank.

Nevertheless, the last two weeks of August tend to be quiet as investors take vacations before school starts. With earnings season in the rearview mirror, stocks will have fewer likely catalysts for major movements. And some analysts aren't convinced the summer doldrums are over. "I'll take the last few days," says Jay Suskind, co-head of capital markets at Ryan Beck. "But two or three days don't make the market."

Friday, August 18, 2006

Stocks Gain for Fifth Straight Day

News Article
August 18, 2006

Business Week Online

Stocks Gain for Fifth Straight Day

Microsoft and Altria boosted the Dow, while disappointing second-quarter earnings from Dell capped Nasdaq gains

Stocks finished higher Friday for a fifth consecutive session, recovering from early lows as investors digested Dell's (DELL ) lackluster quarterly results. A lower-than-expected reading of the University of Michigan's consumer sentiment index provided further indications of economic slowdown, boosting bond prices, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 46.51 points, or 0.41%, to 11,381.47, finishing the week up 2.6%. The broader Standard & Poor's 500 added 4.82 points, or 0.37%, to 1,302.3, a gain of 2.8% for the week. The tech-heavy Nasdaq composite was up 6.34 points, or 0.29%, to 2,163.95, a 5.1% weekly rise.

NYSE breadth was positive, with 19 issues advancing for every 13 declining, while Nasdaq breadth turned positive in the closing hour. Trading volume was moderate and "typical for a Friday in August," says S&P.

Economic reports and positive geopolitical news cheered Wall Street in recent days, analysts say. "An encouraging producer price report and the outbreak of peace (at least temporarily) in the Middle East encouraged stock and bond markets this week," says David Wyss, chief economist at Standard & Poor's. "Markets are more hopeful that the Fed's pause will be permanent, although we still expect one more rate hike."

Investors were focusing on a computer maker's disappointing earnings report Friday. Dell shares fell sharply after the company said second-quarter profit dropped 51% and disclosed an SEC investigation. Goldman Sachs lowered its rating on the stock from neutral to sell.

On the upside, Microsoft (MSFT) gained ground after the software giant said it hiked its share-buyback plan by $16.2 billion to a total of $36.2 billion. The company also says it plans to spend about $3.8 billion buying shares in a recent Dutch auction, according to news reports.

Altria (MO ) and Reynolds American (RAI ) rose after a federal judge did not impose penalties in ruling that the cigarette makers violated anti-racketeering laws.

Shares of Ford (F) fell after the company announced steep cuts in production that would cause 10 North American plants to be shut for substantial periods during the rest of the year.

Digital video-recording company TiVo (TIVO ) surged after a federal judge granted the company's motion for a permanent injunction to prevent EchoStar Communications (DISH )from manufacturing and selling its DVR products in the U.S.

Some companies continued to face accounting issues. Marvell Technology (MRVL) was sharply lower after the chip designer delayed the release of its full second-quarter results as the company reviews its stock-options practices.

Software maker Autodesk (ADSK ) also delayed reporting its full second-quarter results amid an internal stock-options review.

The economic calendar was light Friday after a full week of data. The preliminary release of the University of Michigan's consumer sentiment survey showed a lower-than-expected 78.7 level in August, down from 84.7 in July.

The docket is quiet next week for economic data. Investors will be sifting through releases on July new and existing home sales, as well as durable goods orders.

In the energy markets, September West Texas Intermediate crude oil futures rose $1.08 to $71.14 a barrel after closing the previous session at a two-month low.

European markets finished mostly lower. In London, the Financial Times-Stock Exchange 100 index inched higher 3 points, or 0.05%, to 5,903.4. Germany's DAX index lost 16.49 points, or 0.28%, to 5,135.69. In Paris, the CAC 40 index was down 9.15 points, or 0.18%, to 5,135.69.

Asian markets finished mixed. Japan's Nikkei 225 index gained 85.52 points, or 0.53%, to 16,105.98. In Hong Kong, the Hang Seng index lost 42.35 points, or 0.24%, to 17,330.7. Korea's Kospi index advanced 3.32 points, or 0.25%, to 1,331.1.

Treasury Market

Treasury yields ticked lower after the soft Michigan sentiment reading. The 10-year note rose in price to 100-11/32 for a yield of 4.83%, while the 30-year bond gained to 92-25/32 for a yield of 4.97%.

Kohl's and TJX: Money in the Middle

News Analysis
August 18, 2006

Business Week Online

Kohl's and TJX: Money in the Middle

The two chains, which sell apparel and other items to middle-income consumers, hit 52-week highs while larger retailers disappoint the Street

Move over, Wal-Mart (WMT ). With slowing consumer spending beginning to crimp quarterly results for large retailers, some investors have been thinking outside the usual big boxes (see, 8/16/06, "Wal-Mart, Home Depot Hit Potholes"). Shares of both Kohl's (KSS ) and TJX (TJX ) recently touched 52-week highs, though it's uncertain how long either can avoid their peers' troubles.

Menomonee Falls (Wisc.)-based Kohl's operates about 750 stores in 43 states, up from 670 at the midpoint of 2005. Headquartered in Framingham, Mass., TJX runs such chains as T.J. Maxx, Marshalls, HomeGoods, Bob's Stores, and A.J. Wright. The two retailers have thrived selling apparel and accessories to middle-income shoppers, rather than those at either extreme of the income spectrum.

Midrange consumers are still opening up their pocketbooks, analysts say. "Strength has been seen across the moderate apparel space," notes Goldman Sachs analyst Adrianne Shapira in an Aug. 11 note. However, this spending may not last. Shapira has a neutral recommendation on Kohl's, citing "macro and competitive headwinds." (Goldman has an investment banking relationship with Kohl's and is a specialist in the company's securities.)

Solid sales have helped buoy the retailers' stock prices. Through afternoon trading on Aug. 17, Kohl's rose 27.4% for the year, while TJX was up 17%, adjusted for dividends. Fellow middle-market retailer J.C. Penney (JCP ) gained 24.6% (see, 7/13/06, "J.C. Penney's Stock: Wearing Well"). By comparison, the Standard & Poor's Retail Index lost 2.3% over the same period.

EARNINGS JUMP.  On Aug. 10, Kohl's reported a 24% jump in its second-quarter profit. The stock price moved steadily higher in subsequent days, climbing to a 52-week high of $62.45 during trading on Aug. 17 before pulling back and closing at $62. "We continue to see consistency in all lines of business and all regions of the country," said Larry Montgomery, Kohl's chairman and chief executive officer, in an Aug. 10 statement.

Bear Stearns, which has an outperform recommendation on the stock, projects Kohl's to open 200 stores in 2006 and 2007. In addition, a $2 billion share repurchase program announced in March stands to boost Kohl's earnings per share and absorb extra stock created when employees exercise stock options.

TJX turned in similar results less than a week later. On Aug. 15, the company posted a 25% increase in second-quarter earnings. Its shares touched a 52-week high of $27.23 on Aug. 17 before fading to $26.97.

"While pleased with our overall performance, we continue to address areas of our business in which we can improve," Ben Cammarata, chairman and acting chief executive officer of TJX, said in an Aug. 15 statement. (Company spokespeople for Kohl's and TJX did not return phone calls prior to deadline.)

TJX's second-quarter earnings showed no signs of consumer weakness, observes Credit Suisse analyst Paul Lejuez, who rates the stock outperform. "We believe management has positioned the company to continue to achieve upside to earnings over the next several quarters," Lejuez says in an Aug. 15 report. (Credit Suisse has an investment banking relationship with TJX.)

RETAIL STANDOUTS.  Both retailers have put the heat on their rivals with competitive pricing and low overhead, analysts say. Morningstar analyst Kimberly Picciola says of Kohl's in a June 15 report: "Although this discount department store chain competes in a crowded field, its big-box, off-mall concept is less costly to operate than many of its rivals, which results in healthy operating margins and solid returns on invested capital." However, Picciola rates the stock two stars out of five, estimating its fair value at $53.

Meanwhile, TJX has made strides recently to improve its cost structure. Some executives have taken salary cuts, and the company has also lowered its headcount. "We are encouraged by recent cost-cutting initiatives," says UBS analyst Meredith Love Kent, who has a neutral recommendation on the stock, in an Aug. 11 note. (UBS makes a market in TJX securities.)

Others have also cheered the retailers' merchandising programs. On Aug. 11, S&P raised its fiscal 2007 earnings estimates for Kohl's. S&P analyst Jason Asaeda lauded the company's "investments in more exclusive, higher-quality brands and products" (see, 12/20/05, "Kohl's Is Worth Trying On"). On Aug. 15, Asaeda also raised his earnings projections for TJX, noting that its T.J. Maxx and Marshalls chains posted a 6% same-store sales increase in the challenging women's sportswear category.

GROWTH PLATEAU?  Nevertheless, a slowing economy could affect these retailers eventually (see, 7/18/06, "Target: The Canary in the Economy?"). "We do not believe that there are enough short-term catalysts in the face of a slowing economy to generate significant upside," says Merrill Lynch analyst Stacy Turnof in an Aug. 10 report on Kohl's. Turnof's recommendation on the stock is neutral. (Merrill has an investment banking relationship with Kohl's, owns more than 1% of the company's stock, and makes a market in its securities.)

Another set of complex challenges greets TJX. "As its more mature concepts reach the maximum number of stores, TJX will have to increasingly rely on its newer chains to grow, and so far results have been disappointing," notes Morningstar's Picciola, who rates the stock three stars out of five. The company's A.J. Wright chain continues to lag.

Kohl's and TJX have been looking sharp in recent months. Still, they'll have to strike some impressive poses to stay in vogue if their customers tighten their purse strings.

Thursday, August 17, 2006

Stocks Up Slightly as Oil Tumbles

News Article
August 17, 2006

Business Week Online

Stocks Up Slightly as Oil Tumbles

H-P posted better-than-expected quarterly earnings, while crude futures fell to a two-month low near $70

Stocks were trading modestly higher late Thursday afternoon, extending a two-day rally amid solid earnings reports and a drop in oil prices. However, mixed economic data did little to clarify whether the Federal Reserve will raise interest rates later in the year, says Standard & Poor's Equity Research.

In afternoon trading, the Dow Jones industrial average rose 23.85 points, or 0.21%, to 11,350.97. The broader Standard & Poor's 500 added 2.43 points, or 0.19%, to 1,297.86. The tech-heavy Nasdaq composite was up 6.7 points, or 0.31%, to 2,156.24.

Recent inflation readings have supported the Fed's case for leaving interest rates unchanged, some analysts say. "The key to continuing this trend will be further signs that growth is slowing as we expect it to," notes Goldman Sachs economist Dominic Wilson. "On that front, alongside the inflation news, the last few days have provided strong confirmation of the damage on the housing side, with news still clearly worse than expected there."

The markets continue to face a number of uncertainties, others observe. "Investors seem pressured by slowing growth concerns on one hand and inflation on the other, making the investment call very unpredictable," says Tobias Levkovich, chief U.S. equity strategist at Citigroup.

Economic reports remained in the spotlight Thursday. The Philadelphia Fed index of regional business activity jumped to 18.5 in August, about twice the expected level, after falling to 6.0 in July. Jobless claims fell 10,000 to 312,000 in the week ended Aug. 12, slightly lower than expected. Leading indicators fell 0.2% in July, a little weaker than forecast.

On the company side, Dow member Hewlett-Packard (HPQ ) was higher after the computer maker reported fiscal third-quarter profits that beat analysts' estimates. Rival Dell (DELL ), which last month lowered its outlook for quarterly earnings and revenue, posts results after the close.

Retailer Sears Holdings (SHLD ) was lower despite posting better-than-expected second-quarter earnings as margins improved at its Sears and Kmart stores.

Shares of Merck (MRK) fell after a New Orleans jury said the drugmaker was negligent in a federal case involving its Vioxx painkiller and must pay $50 million.

In analyst calls, General Motors (GM) was lower after J.P. Morgan Chase lowered its recommendation on the automaker from overweight to neutral. J.P. Morgan also upgraded hotel and gaming operator Las Vegas Sands (LVS ) to overweight, sending shares higher.

Chipmaker Advanced Micro Devices (AMD ) was higher after Citigroup raised its rating on the stock from hold to buy.

In the energy markets, September West Texas Intermediate crude oil futures fell $1.83 to $70.06 a barrel, a two-month closing low, amid worries a slowing economy could reduce demand.

European markets finished slightly higher. In London, the Financial Times-Stock Exchange 100 index edged up 3.8 points, or 0.06%, to 5,900.4. Germany's DAX index gained 20.57 points, or 0.35%, to 5,833.51. In Paris, the CAC 40 index was up 7.53 points, or 0.15%, to 5,144.84.

Asian markets finished mixed. Japan's Nikkei 225 index slipped 50.52 points, or 0.31%, to 16,020.84. In Hong Kong, the Hang Seng index lost 77.98 points, or 0.45%, to 17,373.05. Korea's Kospi index advanced 12.17 points, or 0.93%, to 1,327.78.

Treasury Market

Treasuries drifted after the strong Philly Fed index reading. The 10-year note was little changed at 100-02/32 for a yield of 4.86%, while the 30-year bond edged down in price to 92-13/32 for a yield of 5%.

Wednesday, August 16, 2006

Stocks Climb on Mild Inflation Data

News Article
August 16, 2006

Business Week Online

Stocks Climb on Mild Inflation Data

Major indexes touched three-month highs after a consumer inflation report came in close to expectations. Crude futures fell near two-month lows

Another day, another market rally fueled by mild inflation numbers. Stocks finished broadly higher Wednesday for a second straight session, with major indexes reclaiming their May heights as reports on consumer inflation and the housing market provided further signs of a slowing economy. Still, it remains uncertain whether the Federal Reserve will have to raise interest rates again this year, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 96.62 points, or 0.86%, to 11,326.88, its highest closing level since May 16, paced by Caterpillar (CAT ). The broader Standard & Poor's 500 added 9.1 points, or 0.71%, to 1,294.68, its highest since May 11. The tech-heavy Nasdaq composite climbed 28.29 points, or 1.34%, to 2,143.3.

NYSE breadth was decidedly positive, with 26 issues advancing for every 8 declining. Nasdaq breadth was 20-10 positive.

Investors were digesting another set of economic figures Wednesday. The overall consumer price index, or CPI, rose 0.4%, while the core CPI edged up 0.2%, in line with expectations. Housing starts fell 2.5% in July, a bigger drop than projected. Meanwhile, industrial production rose 0.4% in July.

The moderate inflation data, coupled with yesterday's tame producer price index reading, could help forestall additional Fed interest-rate hikes, analysts say. "The softer core inflation data provide some comfort to Fed officials regarding their decision to pause on Aug. 8, and gives them a bit of breathing room in terms of the September meeting," says Goldman Sachs. "That said, the underlying drivers of inflation remain sources of worry."

Others expect the Fed to raise interest rates later in 2006. "The rate [of inflation] is still accelerating, suggesting another Fed rate hike in September unless the August data show a clear slowdown," says David Wyss, chief economist at Standard & Poor's.

Nevertheless, technical indicators suggest stocks' rally may not have much further to go, others say. "It's not the time to be buying if looking out over the longer term," says David Solin, a partner at Foreign Exchange Analytics.

Elsewhere on the economic front, Dallas Fed President Richard Fisher said monetary policy and the economy are at a "crossroads." Though Fisher is a non-voting Fed president, his remarks were somewhat hawkish on inflation, says Action Economics.

Thursday is set to be another busy day for economic data, with releases including weekly jobless claims, July leading economic indicators, and the August reading of the Philadelphia Fed index of regional business activity.

On the company side Wednesday, General Motors (GM) was higher despite news the automaker's second-biggest investor, Capital Research & Management, reduced its stake by 24% in the second quarter.

Shares of Home Depot (HD) were little changed after falling in early trading as Morgan Stanley cut its earnings estimates for the home-furnishings retailer.

Semiconductor equipment maker Applied Materials (AMAT ) was modestly higher after posting a 29% increase in fiscal third-quarter profit.

Clothing retailer Abercrombie & Fitch (ANF ) was up sharply on a 14% increase in second-quarter profit, beating analyst estimates.

Among companies set to report quarterly results after the close is Dow member Hewlett-Packard (HPQ ). Rival Dell (DELL ) is scheduled to post earnings Thursday.

In the energy markets Wednesday, September West Texas Intermediate crude oil futures closed down $1.16 at $71.89 a barrel despite a weekly inventory report showing a modestly larger than expected decline in oil supplies.

European markets finished mostly higher. In London, the Financial Times-Stock Exchange 100 index edged down 1.3 points, or 0.02%, to 5,896.6. Germany's DAX index rose 36.14 points, or 0.63%, to 5,812.94. In Paris, the CAC 40 index was up 22.29 points, or 0.44%, to 5,137.31.

Asian markets finished sharply higher. Japan's Nikkei 225 index shot up 255.17 points, or 1.61%, to 16,071.36. In Hong Kong, the Hang Seng index advanced 176.96 points, or 1.02%, to 17,451.03. Korea's Kospi index climbed 20.5 points, or 1.58%, to 1,315.61.

Treasury Market

Treasury yields dropped after the inflation and housing starts data. The 10-year note rose in price to 100-02/32 for a yield of 4.87%, while the 30-year bond climbed to 92-11/32 for a yield of 5%.

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