Wednesday, February 28, 2007

Stocks' Great Wall of Worry

News Analysis
February 28, 2007

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Stocks' Great Wall of Worry

China's 9% market plunge and U.S. economic concerns led to Dow and S&P free falls. Analysts say it's about time

If Wall Street was overdue for a pullback, it might not be anymore. On Feb. 27, the Dow Jones industrial average and the broader Standard & Poor's 500 index suffered their worst day since Mar. 24, 2003. How much further the market has to fall could depend on the strength of upcoming economic reports.

Tuesday's decline marked an end to a remarkably tranquil eight-month run for stocks. The Dow had gone without a drop of 2% or more since July 17, 2006, only to tumble 3.29% in the latest session. The market's slide puts the Dow on pace for its first monthly loss since June, 2006, and the S&P 500 for its first since last May.

The slide may have awakened investors to the market's inherent risks, after weeks of growing complacency. The Chicago Board Options Exchange Volatility Index (VIX), a measure of investors' risk tolerance often classified as a "fear gauge," surged more than 60% Feb. 27, its biggest-ever increase. The VIX had fallen as low as 8.6 as recently as Dec. 18, 2006, down from a 52-week high of 23.81 set last June.

A sharp overnight drop in China's stock market helped jump-start Tuesday's sell-off. Still, analysts say a weak manufacturing report and broader economic worries were probably more to blame for U.S. losses. Now might be an opportune moment for investors to make sure their portfolios reflect their risk-tolerance levels, though market pros say it's no time to panic just yet.

"It's more opportunity selling right now than anything," says Chris Johnson, CEO and chief investment strategist at Johnson Research Group. "I don't think you can call it a perfect storm that's going to cause us to go down 10%, but certainly the market was in need of a break."

A Sudden Correction

China's stocks posted their biggest one-day drop in a decade (see, 1/27/07, "A Rough Day for China Stocks"). The Shanghai composite index tumbled 8.8% on Feb. 27, its steepest decline since Feb. 18, 1997. Moves by the People's Bank of China to reduce liquidity contributed to the blowout for the market, which reached a record high a day earlier.

Last spring, a drawdown in liquidity precipitated a two-month correction (see, 6/9/06, "A Global Assault on Inflation"). A tightening spree from New York to Tokyo, along with surging oil prices, played a role in last year's short-lived pullback.

China's problems are likely to stay more contained, analysts say. In Hong Kong, the Hang Seng index slid 1.76% on Feb. 27, a much less dramatic drop than in the other Chinese bourses, which have more restrictions on international investment. For U.S. investors, the pullback may have merely provided "an excuse to take some profits" after so many months without a correction, says Jeffrey N. Kleintop, chief investment strategist at PNC Wealth Management (PNC). "I wouldn't chalk it up to more than that."

Meanwhile, economic worries were also weighing on U.S. investor sentiment. On Feb. 26, former Federal Reserve Chairman Alan Greenspan warned a recession is "possible" later this year. A day later, a report showed durable good orders plunged much more than expected in January. At the same time, concerns mounted surrounding the troubled subprime loan market, with mortgage lender Freddie Mac (FRE) announcing tougher lending standards.

Risk Reminders

The slowing economy may represent a bigger potential setback for the market than China's regulatory efforts. The pullback was a "reminder that there's lots of risk in the world and the markets don't just go in one direction," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "I'm much more concerned about housing and about durable goods than I am about China."

Investors face a full plate of economic data in the days ahead. On Feb. 28, the docket holds revised numbers on fourth-quarter gross domestic product and the January reading of the Chicago purchasing managers' index of industrial activity. Reports on vehicle sales, personal income and spending, construction spending, and national manufacturing activity are due later in the week, followed by nonfarm payrolls data on March 9.

The market may have already discounted weaker readings on some of those reports. A recent rise in index put activity, or bets against the stock market, could signal stocks won't have as far to fall if economic data disappoint, notes Todd Salamone, senior vice president at Schaeffer's Investment Research. "I think the pullback will represent a buying opportunity," Salamone says.

Future Volatility

In the meantime, geopolitical uncertainties compounded the market's Feb. 27 stresses. A Taliban suicide bomber reportedly attempted to kill Vice President Dick Cheney in Afghanistan. Separately, Iran continues to defy international authorities with plans to expand its uranium enrichment program.

The sell-off will continue if investors start to acknowledge higher levels of risk by becoming more cautious, some analysts say. Investors should watch whether private equity takeover activity slows going forward, observes Quincy Krosby, chief investment strategist at the Hartford (HIG). "If we start to see any hesitancy in that, you've got one of the main catalysts for the market on the side," Krosby explains.

What about China? The fundamentals that powered emerging markets' surge over the past few years remain steady, market pros say, but investors must be willing to withstand the region's ongoing volatility. "The case for emerging markets is more solid than at any point in modern history," says Rob Brown, chief investment officer at Genworth Financial Asset Management (GNW).

It's too soon to know whether the one-day pullback is the beginning of a broader correction or just a hiccup. Still, investors might not need to hold their breath just yet.

Stocks Stage a Modest Recovery

News Article
February 28, 2007

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Stocks Stage a Modest Recovery

Investors keyed on Bernanke's soothing remarks on the economy, but downbeat data on housing and manufacturing capped gains

U.S. stock indexes Wednesday recovered some of their losses from Tuesday's tumultuous session in heavy trading. The gains were small in relation to the 3%-plus drops seen a day earlier, after Tuesday's plunge in China's stock market sent U.S. indexes to their worst day in years. Shanghai rebounded overnight, but European bourses were lower and most Asian markets took a second straight tumble.

On Wednesday, the Dow Jones industrial average rose 52.39 points, or 0.43%, to 12,268.63. The broader Standard & Poor's 500 index added 7.78 points, or 0.56%, to 1,406.82. The tech-heavy Nasdaq composite gained 8.27 points, or 0.34%, to 2,416.13.

Market breadth was positive, with 21 stocks advancing for each 12 declining on the NYSE. Nasdaq breadth was 17-14 positive. Trading was heavy amid margin calls, notes Standard & Poor's MarketScope.

The rebound in stocks may have been aided by comments Wednesday from Federal Reserve Chairman Ben Bernanke, who was testifying to the House Budget Committee. Bernanke told the panel he didn't see any one factor that triggered yesterday's stock-market decline, and added that the "markets seem to be working well". He said Wednesday's slide did not change the Fed's overall view of the economy. The central bank sees moderate growth going forward and the fourth-quarter revisions today were "more in line with our thinking". Bernanke said "once the inventory correction is over we should see improvement in middle of year."

But upside may have been limited by some less-than-encouraging economic reports. U.S. fourth-quarter gross domestic product growth was revised down to 2.2% from the advance reading of 3.5%, for a third straight quarter below 3%. The headline number was "exactly as expected," says Action Economics.

Meanwhile, U.S. new home sales tumbled 16.6% in January to a 937,000 pace, the largest decline since 1994, from an upwardly revised 1.123 million in December.

The Chicago purchasing managers' index, a gauge of factory sentiment in the Midwest, eased to 47.9 in February, weaker than expected, from 48.8 in January.

Traders watched Wednesday's action closely for signs about the extent of Tuesday's damage. "Odds are [Tuesday's] sell-off represented the long-awaited correction and not the start of a protracted decline," says Richard Dickson, senior market strategist at Lowry's Reports.

The markets direction could depend on technical factors, some analysts say. "In other words, the market will stop declining when it wants to and we will take our cues from its near-term fluctuations," says Sam Stovall, chief investment strategist for S&P Equity Research.

Tuesday's decline marked an end to a remarkably tranquil eight-month run for stocks (see, 2/28/07, "Stocks' Great Wall of Worry"). The Dow had gone without a drop of 2% or more since July 17, 2006, only to tumble 3.29% in the latest session. The market's slide put the Dow on pace for its first monthly loss since June, 2006, and the S&P 500 for its first since last May.

Some market pros saw Tuesday's sharp drop as a buying opportunity. "Various indicators suggest things should calm down," notes Tobias Levkovich, chief U.S. equity strategist at Citigroup. "Drops of 3%-plus in a day have generated an impressive record of market recovery with a near 80% investment success rate within 3 months."

In fact, some analysts see economic growth accelerating later this year. "Our view is that GDP growth slowed temporarily in the second half of 2006 due to the housing adjustment and inventory correction, and the economy is likely to grow at a faster pace in 2007 once these adjustments are behind us," observes John Ryding, chief U.S. economist at Bear Stearns.

Among Wednesday's stocks in the news, Home Depot (HD) was lower after the home-improvement retailer said the housing housing market won't get better until the second half of this year or early 2008. The company cut its 2007 profit forecast.

Sprint Nextel (S) was higher after the wireless carrier said fourth-quarter profits rose 33%, toppping analyst estimates.

Merck (MRK) was also higher after the drugmaker issued a first-quarter earnings forecast that beat Wall Street expectations.

On the downside, Joy Global (JOYG) was sharply lower after the mining equipment maker posted flat earnings for its fiscal first quarter.

In the energy markets, April West Texas Intermediate crude oil futures erased earlier losses to rise 33 cents to $61.79 a barrel, despite a weekly inventory report showing a slightly smaller than expected rise in crude supplies.
European markets finished sharply lower. The FTSE-100 index in London fell 114.6 points, or 1.82%, to 6,171.5. Germany's DAX index dropped 104.21 points, or 1.53%, to 6,715.44. In Paris, the CAC 40 index was down 72.07 points, or 1.29%, to 5,516.32.

Asian markets ended lower for a second straight day, though Shanghai, where yesterday's weakness started, climbed 3.94% overnight. In Japan, the Nikkei 225 index tumbled 515.8 points, or 2.85%, to 17,604.12. In Hong Kong, the Hang Seng index skidded 496.36 points, or 2.46%, to 19,651.51. Korea's Kospi index slid 37.26 points, or 2.56%, to 1,417.34.

Treasury Market
Treasuries fell Wednesday as investors who flocked to the market in the previous session on a flight to safety unwound their positions. The 10-year note fell 13/32 to 100-16/32 for a yield of 4.56%. The 30-year bond tumbled 24/32 to 101-06/32 for a yield of 4.67%.

Tuesday, February 27, 2007

China Slump Fuels Wall St. Meltdown

News Article
February 27, 2007

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China Slump Fuels Wall St. Meltdown

The Dow slumped over 500 points at one point before staging a partial recovery. All eyes are on the Asian trading session Wednesday

Is this the long-awaited U.S. stock market correction, or is there more pain to come? Stocks were sharply, broadly lower in heavy trading Tuesday, with major U.S. stock indexes each down over 3%. Bonds soared as investors fled stocks for the less risky confines of the Treasury market.

What sparked the sell-off? A plunge in China's stock exchange rippled across global markets, spurring big declines in bourses worldwide. A disappointing report on U.S. durable goods orders fanned concerns about a slowing economy.

When the dust settled after a session marked by extremely heavy trading volume, the Dow Jones industrial average tumbled 416.02 points, or 3.3%, to 12,216.24, after being down by more than 500 points at one juncture. Each of the 30 member stocks posted losses, with heavy hitters Disney (DIS) and General Motors (GM) each losing over 5%.

The broader Standard & Poor's 500 index dropped 50.33 points, or 3.47%, to 1,399.04. The tech-heavy Nasdaq composite was the biggest percentage loser on the day, slumping 96.65 points, or 3.86%, to 2,407.87.

Losses were accompanied by an enormous jump in volume on the NYSE and Nasdaq Composite indexes, notes S&P MarketScope, signaling institutions were likely liquidating long positions.

Trading was exceptionally volatile in the session's last hour, with the Dow falling over 500 points -- its worst intraday loss since September, 2001 -- before snapping back somewhat.

The Dow's dizzying 200-point drop around 3:00 pm ET was triggered by a tabulation delay by Dow Jones data systems, according to

Market internals were extremely bearish. NYSE breadth was 29-5 negative, with up/down volume was nearly 90-1 negative. On the Nasdaq, breadth was 28-3 negative, and up/down volume was nearly 11-1 negative.

The unpleasantness started overnight in Shanghai, where the benchmark index tumbled 8.8% Tuesday amid worries about possible government action to cool the market. The benchmark closed at a record high a day earlier. According to a Bloomberg report, the State Council, China's highest ruling body, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market.

Regulators clearly responded to the frothy gains in Chinese exchanges. Beijing must pay attention to "bubbles" in its stock market before they get out of hand, Cheng Siwei, vice chairman of the Nation's People Congress, wrote in a commentary published in the Chinese-language Financial News.

The market's worries were't limited to China. "The perfect storm of geopolitical stress via Iran, Chinese asset reversal, and lingering concerns about the subprime mortgage market" raise concerns about a global growth downturn, according to Action Economics.

The acid test for global markets may well be how the Asian markets fare in Wednesday trading.

In U.S. economic news, durable goods orders tumbled 7.8% in January, much more than expected, erasing a cumulative 5% gain in November and December.

Investors ignored some good economic news. U.S. existing home sales rose 3% to 6.460 million in January, after an upwardly revised 6.27 million rate in December.

And the Conference Board's consumer confidence index rose to 112.5 in February, a new five-year high, from a downwardly revised 110.2 in January.

Among Tuesday's stocks in the news, Xerox (XRX) was lower after the copy machine maker cut its first-quarter profit forecast, citing restructuring costs.

General Electric (GE) was slightly lower even though UBS raised its rating on the stock from neutral to buy.

Shares of Apple (AAPL) fell after the iPod maker announced its highly anticipated Apple TV device will be delayed.

In earnings news, retailer Target (TGT) was lower despite reporting higher fourth-quarter profits.
Brocade Communications (BRCD) was higher, helped by upgrades at Goldman Sachs and Bear Stearns, after the network equipment maker said fiscal first-quarter profit rose sharply.

Sirius Satellite Radio (SIRI) was lower despite logging a narrower fourth-quarter loss.

Federated (FD) fell after the department-store operator posted a 5% uptick in fourth-quarter earnings and announced plans to change its name to Macy's Group.

Fellow clothing retailer Nordstrom (JWN) was lower on a disappointing fourth-quarter earnings report.
Elsewhere, Freddie Mac (FRE) said it will no longer buy some subprime mortgages as the mortage lender tightens its lending standards.

In the energy markets, April West Texas Intermediate crude oil futures rose 7 cents to $61.46 a barrel to reach a fresh closing high for 2007. S&P MarketScope notes that economists said the overnight 9% Chinese stock market slide didn't mean that country's economy would slowdown and cut demand for oil.

European markets also caught the Chinese flu, finishing sharply lower Tuesday. Investor sentiment was also dinged after the Bank of France warned of excessive liquidity. The FTSE-100 index in London fell 148.6 points, or 2.31%, to 6,286.1. Germany's DAX index dropped 207.94 points, or 2.96%, to 6,819.65. In Paris, the CAC 40 index was down 174.15 points, or 3.02%, to 5,588.39.

Asian markets ended lower amid China's biggest tumble in 10 years on a government trading crackdown. In Japan, the Nikkei 225 index shed 95.43 points, or 0.52%, to 18,119.92. In Hong Kong, the Hang Seng index tumbled 360.8 points, or 1.76%, to 20,147.87. Korea's Kospi index slid 15.43 points, or 1.05%, to 1,454.6.

Treasury Market
Treasuries soared Tuesday as investors sought the relative safety of government debt amid the China sell-off and the U.S. and european market routs. The benchmark 10-year note fell 32/32 to 100-01/32 for a yield of 4.49%. The 30-year bond skyrocketed 58/32 to 102-06/32 for a yield of 4.61%.

Monday, February 26, 2007

Stocks Fall amid Economic Worries

News Article
February 26, 2007

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Stocks Fall amid Economic Worries

Investors awaited Tuesday's busy docket of data releases, while Greenspan warned of a possible recession. Plus, deal news

Major stock indexes finished modestly lower Monday, as a burst of takeover news failed to lift stocks. Traders were restrained by worries about a market correction and speculation of weakness in upcoming economic reports, says Standard & Poor's Equity Research.

On Monday, the Dow Jones industrial average slipped 15.22 points, or 0.12%, to 12,632.26, with a Merck (MRK) upgrade capping losses. The broader Standard & Poor's 500 index fell 1.82 points, or 0.13%, to 1,449.37. The tech-heavy Nasdaq composite was down 10.58 points, or 0.42%, to 2,504.52.
NYSE breadth was flat. Nasdaq breadth was negative, with 18 issues declining for every 12 advancing.
In economic news, former Federal Reserve Chairman Alan Greenspan said it's "possible" the economy will enter a recession later this year.

Some analysts agree the economy could face trouble ahead. "Investors, policymakers, and politicians have now succumbed to a dangerous complacency," notes Stephen Roach, chief economist at Morgan Stanley, in a report. "That's the time to worry the most."

Others take a more benign view of recent low readings in investor fear gauges. "The apparent high level of investor complacency is not at all a statement about investor sentiment, but it is a result of aggressive diversification," says Tom Sowanick, chief investment officer at Clearbrook Financial, in a note to clients. "Meager returns from fixed income and the shift in the global economic landscape favoring developing regions have led investors to more aggressively diversify their portfolios."

Among Monday's stocks in the news, TXU (TXU) was up about 13% after the electricity producer agreed to be acquired by a group of private equity firms for about $32 billion, or $69.25 per share, plus $12.38 billion in debt assumption.

Dow Chemical (DOW) was higher on a report the company might be the target of a $54 billion takeover by Kohlberg Kravis Roberts, Blackstone, and Carlyle Group.

Deal talk also bolstered shares of Tribune (TRB), as the newspaper publisher reportedly considered a proposal by real estate developer Sam Zell to take the company private.

Meanwhile, the board of Station Casinos (STN) agreed to $5.5 billion revised buyout offer from a group led by the company's founding family.

DaimlerChrysler (DCX) was reportedly considering swapping its North American Chrysler unit for a stake in General Motors (GM).

On the earnings front, XM Satellite Radio (XMSR) was lower after the company posted a narrower fourth-quarter loss but fell short of analyst expectations.

Nordstrom (JWN) was expected to report fourth-quarter earnings of 90 cents a share following the closing bell, says S&P.

In analyst calls, Merck was higher after Citigroup raised its recommendation the drugmaker from hold to buy.

Coca-Cola (KO) was higher after Deutsche Bank upgraded the beverage maker from hold to buy.
Elsewhere, Gilead (GILD) was slightly higher after the biopharmaceutical company said its GS-9137 class of HIV drugs met goals in a midstage study.

No major economic releases were due this session. In a speech, outgoing Fed Governor Susan Bies reiterated that problem subprime loans make up only a small part of the mortgage-lending universe.
The economic docket picks up Tuesday with data releases on durable goods orders, consumer confidence, and existing home sales.

In the energy markets Monday, April West Texas Intermediate crude oil futures rose 25 cents to $61.39 a barrel, its highest closing price of 2007, amid snowy weather and geopolitical concerns over Iran.
European markets finished higher. The FTSE-100 index in London rose 33.2 points, or 0.52%, to 6,434.7. Germany's DAX index added 35.01 points, or 0.5%, to 7,027.59. In Paris, the CAC 40 index was up 46.16 points, or 0.81%, to 5,762.54.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 26.93 points, or 0.15%, to 18,215.35. In Hong Kong, the Hang Seng index shed 203.7 points, or 0.98%, to 20,507.95. Korea's Kospi index edged up 0.15 points, or 0.01%, to 1,470.03.

Treasury Market
Treasury yields extended Friday's slump amid worries about the subpime lending market and a Greenspan's warning about recession risks. The 10-year note rose in price to 99-31/32 for a yield of 4.63%. The 30-year bond jumped to 100-09/32 for a yield of 4.73%.

Friday, February 23, 2007

Stocks Fall as Oil, Bonds Rise

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February 23, 2007

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Stocks Fall as Oil, Bonds Rise

Crude futures pushed to their 2006 high before paring gains. Elsewhere, Microsoft lost a $1.52 billion patent-infringement ruling

Stocks finished lower in lackluster trading Friday, as investors digested fluctuating oil prices, rising bond prices, and a lack of economic data. Worries over rising subprime mortgage defaults weighed on investment banking and thrift mortgage stocks. Traders were bracing themselves for next week's heavy slate of economic reports, says Standard & Poor's Equity Research.

On Friday, the Dow Jones industrial average fell 38.54 points, or 0.3%, to 12,647.48, declining for a third straight day. The broader Standard & Poor's 500 index dropped 5.18 points, or 0.36%, to 1,451.2. The tech-heavy Nasdaq composite was down 9.84 points, or 0.39%, to 2,515.1.

NYSE breadth was slightly negative, with 17 issues declining for every 16 advancing. Nasdaq breadth was 17-13 negative.

Oil prices climbed to their highest level this year on geopolitical tensions before paring gains. In the energy markets, April West Texas Intermediate crude oil futures rose 19 cents to $61.14 a barrel, after rising as much as 57 cents to $61.52.

Among Friday's stocks in the news, Microsoft (MSFT) was lower after a San Diego jury ruled the software giant must pay $1.52 billion in patent-infringement damages to Alcatel-Lucent (ALU).

On the earnings front, Intuit (INTU) was slightly higher after the personal finance software maker reported a 21% drop in fiscal second-quarter profit.

H&R Block (HRB) was higher after the tax preparer posted a fiscal third-quarter loss and said it plans to sell its Option One mortgage unit for $1.3 billion by the end of March.

Lowe's (LOW) was also up as the home-improvement retailer's 12% decline in fourth-quarter earnings topped analyst expectations.

Clear Channel Communications (CCU) was little changed on a better-than-expected 54% drop in fourth-quarter profit ahead of its planned buyout for nearly $19 billion.

Shares of Domino's Pizza (DPZ) dipped after the pizza delivery chain said fourth-quarter net income fell 23%.

Elsewhere, Broadcom (BRCM) was down slightly and Qualcomm (QCOM) was higher amid news the chipmakers announced an agreement to dismiss a set of patent claims.

Yum! Brands (YUM) was lower amid reports of rats in one of the fast-food chain operator's franchised locations.

No major economic releases were slated for Friday. Dallas Federal Reserve President Richard Fisher said he hopes the U.S. economy is "turning the corner on inflation." San Francisco Fed President Janet Yellen said she looks for a soft landing.

The docket picks up next week with data releases on personal income and spending, housing sales, fourth-quarter economic growth, and manufacturing activity.

European markets finished slightly higher. The FTSE-100 index in London rose 20.6 points, or 0.32%, to 6,401.5. Germany's DAX index added 18.85 points, or 0.27%, to 6,992.58. In Paris, the CAC 40 index was up 8.52 points, or 0.15%, to 5,716.38.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 79.638 points, or 0.44%, to 18,188.42. In Hong Kong, the Hang Seng index shed 97.58 points, or 0.47%, to 20,711.65. Korea's Kospi index advanced 4.47 points, or 0.31%, to 1,469.88.

Treasury Market
Treasury yields pared their recent gains Friday amid short-covering. The 10-year note climbed in price to 99-19/32 for a yield of 4.68%. The 30-year bond jumped to 99-15/32 for a yield of 4.68%.

Thursday, February 22, 2007

Stocks End Mixed amid Oil, Rate Worries

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February 22, 2007

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Stocks End Mixed amid Oil, Rate Worries

Crude futures climbed near $61 as Iran reportedly expanded its uranium enrichment. Plus, Whole Foods agreed to buy Wild Oats

Stocks finished mixed Thursday, as the Dow Jones industrial average extended its pullback from Tuesday's all-time high. Higher bond yields, a rise in oil prices, and a report that Iran has expanded uranium enrichment weighed on sentiment. A huge selling program based on technical factors halted an early rally attempt, says Standard & Poor's Equity Research.

On Thursday, the Dow fell 51.91 points, or 0.41%, to 12,686.5, paced lower by General Motors (GM). The broader Standard & Poor's 500 index slipped 1.24 points, or 0.09%, to 1,456.39. The tech-heavy Nasdaq composite was down 6.52 points, or 0.26%, to 2,524.94, boosted by semiconductor stocks.
NYSE breadth was negative, with 18 issues declining for every 15 advancing. Nasdaq breadth was 16-13 positive.

Oil prices gained amid geopolitical concerns over Iran, helping corresponding shares. In the energy markets, April West Texas Intermediate crude oil futures rose 88 cents to $60.95 a barrel.

Among Thursday's stocks in focus, Whole Foods was up about 14% after the natural and organic foods giant announced plans to buy smaller rival Wild Oats (OATS) for $565 million.

Apple (AAPL) edged up after settling a patent suit from Cisco (CSCO) by agreeing to share the "iPhone" brand name.

Meanwhile, Microsoft (MSFT) broadened its legal battle with Alcatel-Lucent (ALU), claiming the Paris-based company violated four of the software maker's patents.

On the earnings front, Toll Brothers (TOL) was lower after the homebuilder reported a 67% decline in profits for its fiscal first quarter.

Abercrombie & Fitch (ANF) was also down, after the clothing retailer posted a 20% rise in fourth-quarter earnings but said its profits for the first half of this fiscal year would match or narrowly miss analyst expectations.

Shares of J.C. Penney (JCP) dipped as the retailer forecast first-quarter earnings below Wall Street expectations and said fourth-quarter profit fell 13%.

On the upside, ValueClick (VCLK) was up more than 10% after the online marketing company logged a 56% jump in fourth-quarter profit.

In analyst calls, shares of Analog Devices (ADI) also gained more than 10% after Citigroup raised its rating on the semiconductor maker from hold to buy.

Elsewhere, Genentech (DNA) was lower following federal regulators' rejection of a key patent.
In economic news, U.S. jobless claims fell 27,000 to 332,000 in the week ended Feb. 17, slightly higher than expected, from an upwardly revised 359,000 a week earlier. Weather and holiday distortions will probably lead traders to overlook this data, says Action Economics.

The jobless claims data require a careful look, some analysts observe. "Initial jobless claims remained elevated for the second consecutive week, which, taken at face value, would point to some slowing in job creation," says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients. "However, given severe winter storms in the last two weeks, it is likely that the weather has boosted jobless claims in February."

No major economic releases were slated for Friday. The docket was set to pick up next week with data releases on personal income and spending, housing sales, fourth-quarter economic growth, and manufacturing activity.

European markets finished higher. The FTSE-100 index in London rose 23.8 points, or 0.37%, to 6,380.9. Germany's DAX index added 32.07 points, or 0.46%, to 6,973.73. In Paris, the CAC 40 index was up 13.3 points, or 0.23%, to 5,707.86.

Asian markets ended higher. In Japan, the Nikkei 225 index bounced 195.58 points, or 1.09%, to 18,108.79. In Hong Kong, the Hang Seng index gained 157.81 points, or 0.76%, to 20,809.23. Korea's Kospi index advanced 14.03 points, or 0.97%, to 1,465.41.

Treasury Market
Treasury yields pushed higher, as investors continued to digest Wednesday's increase in consumer prices. The 10-year note fell in price to 99-06/32 for a yield of 4.73%. The 30-year bond dropped to 98-24/32 for a yield of 4.83%. The higher inflation reading and recent cautionary comments from Fed officials are seen ruling out the chances of a interest-rate cut anytime soon, says S&P.

Wednesday, February 21, 2007

Dow Retreats on HP, Inflation News

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February 21, 2007

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Dow Retreats on HP, Inflation News

Consumer prices rose more than expected in January. Hewlett-Packard forecast tepid second-quarter earnings, while oil prices topped $60

Stocks finished mixed Wednesday, as the Dow Jones industrial average pulled back from a fourth straight record close following a report showing higher consumer prices. The minutes from the most recent Federal Reserve meeting indicated a continued focus on inflation, while a computer maker's lackluster earnings forecast weighed on the blue chips.

On Wednesday, the Dow fell 48.23 points, or 0.38%, to 12,738.41. The broader Standard & Poor's 500 index slipped 2.05 points, or 0.14%, to 1,457.63. The tech-heavy Nasdaq composite rose 5.38 points, or 0.21%, to 2,518.42, helped by strength in Apple (AAPL).

NYSE breadth was negative, with 18 issues declining for every 15 advancing. Nasdaq breadth was flat.

Technical indicators suggest that stocks may still have room to run after recent record highs, some analysts say. "The market still appears to be firing on all cylinders," says Richard Dickson, senior market strategist at Lowry's Reports. "With short-term indicators close to overbought levels, there is always the risk of a near-term pullback. But, with none of the major indexes close to identifiable overhead supply levels, the chances that a near-term pullback develops into a significant decline appear nominal."

A firm inflation report was in focus Wednesday. The consumer price index, or CPI, rose 0.2% in January, while the core CPI advanced 0.3%, both slightly above expectations. Medical care costs rose 0.8%, to their biggest increase since August, 1991.

These numbers suggest the Fed won't be cutting rates anytime soon, analysts say. "The news on inflation is disappointing after the relatively good PPI report, but the concentration in medical care means the rest is doing OK," says David Wyss, chief economist at S&P. "Still, the Fed is certainly not going to loosen after this report, and the odds of a rate hike have increased."

Inflation could remain on the rise, others observe. "Core CPI inflation stopped moderating in late 2006 and has started to pickup again at the start of 2007," says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients. "We expect core inflation will continue to pick up in the months ahead."

Investors were also digesting the minutes of the Fed's Jan. 30-31 policy meeting. The minutes showed policymakers expressing continued concerns about inflation. However, there was little new in this release, says Action Economics.

Elsewhere, U.S. leading indicators rose 0.1% in January, less than expected, after December's upwardly revised 0.6% uptick.

The economic calendar Thursday holds the release of weekly jobless claims. Initial claims are expected to fall 37,000 to 320,000 for the week ended Feb. 17, says Action Economics.

Oil prices rebounded sharply Wednesday, supporting corresponding shares after Tuesday's declines. In the energy markets, April West Texas Intermediate crude oil futures rose $1.22 to $60.07 a barrel amid pipeline and refinery closures.

Among stocks in the news, Hewlett-Packard (HPQ) fell after the computer maker forecast earnings of 57 cents to 58 cents a share for its fiscal second quarter, missing analyst estimates. HP also reported a 26% jump in fiscal first-quarter profit.

Medical device maker Medtronic (MDT) was lower as well, as the company's 6% increase in fiscal third-quarter earnings came amid declining defibrillator sales.

Shares of Novastar Financial (NFI) skidded after the mortgage bank posted a loss of more than $14 million in the fourth quarter.

On the upside, Jack in the Box (JBX) was solidly higher on a 48% increase in fiscal first-quarter profit.
Shares of stun gun maker Taser International (TASR) also gained, following a jump in fourth-quarter net income on stronger-than-expected revenue.

Companies set to announce quarterly results after the closing bell Wednesday include Whole Foods (WMFI).

JetBlue (JBLU) climbed despite projecting a first-quarter loss, after Merrill Lynch raised its recommendation on the recently beleaguered airline from neutral to buy.

In other analyst calls, UBS lowered its rating from buy to neutral on railroad operators CSX (CSX) and Kansas City Southern (KSU).

Meanwhile, Boeing (BA) edged up amid news British Airways ordered four Boeing 777 planes, with options for four more, choosing the airplane maker over rival Airbus.

European markets finished lower. The FTSE-100 index in London fell 55.2 points, or 0.86%, to 6,357.1. Germany's DAX index dropped 41.25 points, or 0.59%, to 6,941.66. In Paris, the CAC 40 index was down 18.89 points, or 0.33%, to 5,694.56.

Asian markets ended mixed. In Japan, the Nikkei 225 index shed 25.91 points, or 0.14%, to 17,913.21. In Hong Kong, the Hang Seng index gained 83.51 points, or 0.41%, to 20,651.42. Korea's Kospi index slipped 1.58 points, or 0.11%, to 1,451.38.

Treasury Market
Treasury yields rose after the higher CPI reading indicated the Fed won't cut rates in the near future. The 10-year note fell in price to 99-15/32 for a yield of 4.7%. The 30-year bond dropped to 99-14/32 for a yield of 4.8%. It's not clear how the market will react to Thursday's expected drop in weekly jobless claims, says S&P.

Five Stocks With the Most Cash

News Analysis
February 21, 2007

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Five Stocks With the Most Cash

Companies are facing increasing pressure to put their cash to good use. Here are five sitting on vast hoards of unspent dollars

The pressure is on for companies hoarding enormous amounts of cash. Investor activists like Carl Icahn have been hounding cash-rich companies to put their unspent dollars to use for their shareholders. The question is, which cash-laden company could be next in the crosshairs?

Icahn's latest target was Motorola (MOT). On Jan. 30, the cell-phone maker disclosed that the billionaire financier was seeking a seat on its 13-member board of directors (see, 1/31/07, "Icahn Sets His Sights on Motorola"). In recent years, Icahn has also pushed for change at ImClone Systems (IMCL), Time Warner (TWX), and Lear (LEA).

Motorola was sitting on $14.8 billion in cash as of Sept. 30, 2006, according to Standard & Poor's(MHP). That would be good enough to place the handset maker among the five U.S. stocks with the biggest cash stockpiles as tracked by S&P. However, a Motorola spokesman says the company's "gross" cash position—adjusted for acquisitions—was a significantly smaller $11.3 billion at the end of 2006. (Motorola plans to make a regulatory filing next week to resolve this confusion.)

It can be tricky to determine which companies are truly the most cash-rich. Not all report their cash levels, observes Howard Silverblatt, S&P's senior index analyst. Based on available data, this week's Five for the Money looks at the five companies with the biggest cash hoards—not including Icahn's latest target.

1. Exxon Mobil (XOM)
The sheer size of Exxon Mobil helps ensure its place atop this list, but a recent string of record profits certainly didn't hurt. The oil giant has $37.4 billion in cash, equivalent to 8.5% of its market value and 577.6% of the company's long-term debt, according to S&P. Exxon's massive market value—roughly fives times the number for Time Warner, and nearly 10 times that of Motorola—also tends to insulate it from shareholder activists like Icahn.

Exxon hasn't just been letting its cash collect dust, though. The Irving (Tex.)-based company has consistently been at the forefront of Corporate America's recent trend of buying back its stock (see, 8/28/06, "Buyback Binge: Bane or Boon?"). Exxon distributed $32.6 billion to shareholders last year through dividends and share repurchases, a 41% jump from 2005.

The company's 2005 earnings topped Wal-Mart's (WMT), Microsoft's, and Johnson & Johnson's (JNJ) combined, notes Morningstar (MORN) analyst Justin Perucki. "Any way you slice them, the figures are impressive," Perucki notes in a Feb. 1 research report. "With more cash than debt and an 87-year-old AAA credit rating, the company's financial strength is almost unrivaled."

2. Microsoft (MSFT)
Calls to spend its cash pile must be nearly as familiar to Microsoft as the old Windows startup sound. Last year, the software giant answered some of that criticism by unveiling a plan to repurchase as much as $40 billion in stock over the next five years (see, 7/21/06, "Microsoft Buyback: Should You Bite?").

So far, the buyback splurge has only begun to dent the Redmond (Wash.)-based company's formidable cash stockpile. According to S&P, Microsoft has $28.9 billion—10.2% of its market value—in cash and no long-term debt.

The company has also boosted spending as it battles rivals like Google (GOOG). Goldman Sachs (GS) projects a $2.7 billion increase in Microsoft's operating costs for fiscal 2007, followed by a $3.2 billion rise in 2008. "It is our sense that customer acquisition costs are not yet well formulated and that competitive pressures may escalate costs," says Goldman analyst Rick Sherlund in a Feb. 15 report. (Goldman has an investment banking relationship with Microsoft and makes a market in its securities.)

3. Cisco (CSCO)
Cisco has a bit less cash at its disposal than the software giant. Proportionally, though, the networking equipment maker's $19.5 billion cash hoard isn't far off, according to S&P data. That sum represents 11.6% of Cisco's market value and 302.4% of its long-term debt.

Again, it's not as if Cisco hasn't been spending. The San Jose (Calif.)-based company continues to make acquisitions, such as the $135 million deal announced on Feb. 21 for router maker Reactivity and last year's $6.9 billion Scientific Atlanta takeover. Cisco has been another company leading the wave of stock buybacks, cutting its share count sharply through more than $40 billion in repurchases (see BusinessWeek, 1/23/06, "The Dirty Little Secret About Buybacks").

Looking ahead, Cisco's gross margins may decline while spending on new products and sales coverage products ramps up, some analysts say. A push into emerging markets could put pressure on margins now while driving earnings growth down the road, according to CIBC World Markets analyst Ittai Kidron. "Though some level of margin impact is possible, the aggressive penetration into these growth markets has led, and will continue to lead to upside and offset more mature and slow growing North American, Western European and Japanese markets," Kidron wrote in a Feb. 7 report. (CIBC has an investment banking relationship with Cisco and makes a market in its securities.)

4. Hewlett-Packard (HPQ)
Last year's leaks scandal did nothing to sink Hewlett-Packard's status among the most cash-rich companies on Wall Street (see, 7/7/05, "Meet Tech's Cash-Rich Royalty"). HP has amassed a cash stockpile of $16.4 billion, according to S&P. That's a whopping 652.9% of the software maker's long-term debt and 13.9% of its market value.

What does the Palo Alto (Calif.)-based company plan to do with all that cash? For now, CEO Mark Hurd aims to continue aggressively cutting costs (see, 2/21/07, "HP Bests Dell, Again"). HP may eventually have to spend to maintain its market share lead over Dell (DELL) in computing and Eastman Kodak (EK) in printers. The company will also likely keep buying back stock, after repurchasing $2.3 billion of its shares in the three months ended Jan. 31.

Strategic acquisitions could be another possibility, according to Citigroup (C) analyst Richard Gardner. In addition, Gardner notes that the company has been investing in future growth, hiring 1,000 new salespeople in its commercial printing and enterprise division. "HP remains one of our top 2007 picks," he says in a Feb. 21 report. (Citigroup has an investment banking relationship with HP and makes a market in its securities.)

5. Aetna (AET)
Talk about a healthy cash stockpile. Aetna sits on $14.7 billion in cash, according to S&P, just a bit less than Icahn's recent target Motorola. The health insurer's ratio of cash to long-term debt, at 602.4%, actually dwarfs those of the companies above it on this list. In fact, Aetna's cash hoard represents 60.8% of its market value.

Like its cash-rich peers, Aetna has poured some of its money into stock buybacks, including $2.3 billion in 2006. On Feb. 8, S&P downgraded the shares to hold from buy, citing in part the company's reliance on share repurchases to boost earnings-per-share growth. The company's guidance assumes another $200 million in stock buybacks next year, but an additional $500 million to $800 million would lift EPS by three to four cents.

Aetna CEO Ron Williams has also declared an interest in strategic acquisitions. Last year, the Hartford (Conn.)-based company bought the disability business of privately held Broadspire for about $160 million.

While not every cash-rich company is a likely target for shareholder activists, the rise of private equity investors such as Icahn may be helping to support stock prices more generally. "It seems that lots of companies, even those with good fundamentals, are potential targets of such buyers or other companies," notes Ed Yardeni, chief investment strategist at Oak Associates, in a Feb. 20 report. Like the mantra made famous by the film Jerry Maguire, shareholders just want companies to "show me the money."

Tuesday, February 20, 2007

Dow Hits New High amid Profits, M&A

News Article
February 20, 2007

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Dow Hits New High amid Profits, M&A

Wal-Mart's earnings topped expectations, while Home Depot disappointed. Also in focus: merger news, including a Sirius-XM deal

Stocks finished modestly higher Tuesday, recovering from initial lows, as investors digested mixed earnings news from Wal-Mart (WMT) and Home Depot (HD), along with some takeover deals. The Dow Jones industrial average hit a new all-time closing high.

On Tuesday, the Dow rose 19.47 points, or 0.15%, to a record 12,787.04, after touching a new all-time intraday high of 12,795.85. The broader Standard & Poor's 500 index added 4.15 points, or 0.29%, to 1,459.69. The tech-heavy Nasdaq composite was up 16.73 points, or 0.67%, to 2,513.04.

Last week's record highs put the market on strong technical footing, some analysts say. "These moves are not a sign of a nearing bear market, but a sign we believe, that the equity market is possibly entering a 'new' leg of a bull market," says Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch, in a note to clients.

Other market watchers see less reason for excitement. "Buying has dried up after the market registered its best week since November and a light economic calendar won't be inspirational," says Action Economics.

In earnings news, Wal-Mart beat analysts' expectations with net income rising to $3.9 billion.
However, Home Depot disappointed as weakness in the housing market netted profits of only $925 million in the fourth quarter, a record 28% year-over-year decline for the home-improvement giant.

On the M&A front, Sirius Satellite Radio (SIRI) agreed to merge with XM Satellite Radio (XMSR) in a stock swap deal, including debt, worth about $1.6 billion. Both both stocks rallied on the news.
Florida Rock (FRK) shot higher on news it will be acquired by Vulcan Materials (VMC) in a cash and stock deal valued at approximately $4.6 billion.

Lesco (LSCO) agreed to be acquired by Deere & Co. (DE) for $14.50 per share in cash.

Meanwhile, New River Pharmaceuticals (NRPH) agreed to be acquired by Shire PLC in a $2.6 billion deal, or $64 cash per New River share.

In other news, General Electric (GE) was modestly higher despite news the company will record a $115 million expense (about 1 cent per share) after losing an appeal over asbestos-related payments.
Altria (MO) was slightly lower, showing little reaction to news the U.S. Supreme Court set aside a $79.5 million punitive damages award won against the cigarette maker.

Shares of JetBlue (JBLU) extended their skid after the airline had to cancel over 1,000 flights since last week's ice storm.

SanDisk (SNDK) was higher on news it will cut about 250 jobs to reduce costs.

There were no major economic reports today. Wednesday's CPI report highlights the week's docket, and it is not expected to show much inflation. Tomorrow's calendar also holds a report on U.S. leading indicators and the release of the minutes for the Federal Reserve's Jan. 30-31 policy meeting.

In a speech, Fed Governor Susan Bies voiced concerns about the subprime mortgage market, but said housing demand may be nearing a bottom.

Oil prices skidded, weighing on corresponding shares. In the energy markets, March West Texas Intermediate crude oil futures fell $1.32 to $58.07 a barrel amid warmer weather in the eastern U.S.
European markets finished modestly lower. The FTSE-100 index in London fell 32.1 points, or 0.5%, to 6,412.3. Germany's DAX index edged down 4.17 points, or 0.06%, to 6,982.91. In Paris, the CAC 40 index was down 26.45 points, or 0.46%, to 5,713.45.

Asian markets ended narrowly mixed. In Japan, the Nikkei 225 index edged down 0.97 points, or 0.01%, to 17,939.12. Korea's Kospi index advanced 4.15 points, or 0.29%, to 1,452.96. In Hong Kong, markets were closed after the Hang Seng index on Friday gained 29.49 points, or 0.14%, to 20,567.91.
Treasury Market
Treasury prices drifted higher amid a quiet session for economic data, ahead of Wednesday's CPI data. The 10-year note edged up in price to 99-18/32 for a yield of 4.68%. The 30-year bond rose modestly to 99-16/32 for a yield of 4.78%.

Thursday, February 15, 2007

Dow Hits New Record as Bernanke Speaks

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February 15, 2007

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Dow Hits New Record as Bernanke Speaks

Amid a flood of economic reports, the Fed chief finished his second day of Congressional testimony. Plus, Caterpillar's $7.5 billion buyback

Major stock indexes advanced modestly Thursday, with the Dow Jones industrial average reaching a new all-time closing high for a second straight session, as investors digested day two of Federal Reserve Chairman Ben Bernanke's congressional testimony along with a host of economic reports. Stock buyback news and deal talk in the automotive sector helped boost the blue chips.

On Thursday, the Dow rose 23.15 points, or 0.18%, to a record 12,765.01, after touching a new trading high of 12,779.03. The broader Standard & Poor's 500 index added 1.51 points, or 0.1%, to 1,456.81. The tech-heavy Nasdaq composite was up 8.72 points, or 0.35%, to 2,497.1.

NYSE breadth was positive, with 20 issues advancing for every 14 declining. Nasdaq breadth was flat.
In economic news, Bernanke spoke before the House Finance Commmittee for the second round of his semiannual monetary policy testimony. The Fed chief's prepared remarks were identical to Wednesday's, but the question-and-answer session found lawmakers probing Bernanke on such topics as Social Security and income inequality (see, 2/14/07, "For Bernanke, Capitol Hill's No Easy Street").

Meanwhile, U.S. industrial production declined 0.5% in January, following an upwardly revised 0.5% rise in December. Capacity utilization fell to 81.2% from 81.8%.

This weakness in industrial production may not last, some analysts say. "The January industrial production data paint a weak picture of the activity in the factory sector at the start of 2007," says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients. "However, this weakness in output is likely related to an adjustment in inventories and, given very low inventory-to-sales ratios, we see the sector as being in a solid position to rebound later in the first quarter."

U.S. import prices dipped 1.2% in January after climbing 1.1% a month earlier. Export prices rose 0.3%.

U.S. initial jobless claims jumped 44,000 to 357,000 in the week ended Feb. 10, reportedly due in part to bad weather, following an upwardly revised 313,000 initial claims the prior week.

The New York Empire State index of regional manufacturing activity bounced to 24.35 in February, better than expected, following January's unexpected drop to 9.1. Separately, the Philadelphia Fed index fell to 0.6 in February, weaker than expected, after rising to 8.3 in January.

Investors were awaiting another flood of economic reports set for Friday. Data releases on the way include January housing starts, wholesale inflation, and consumer sentiment.

Among Thursday's stocks in the news, Caterpillar (CAT) led the Dow higher after the heavy equipment maker announced a $7.5 billion stock buyback program.

Qualcomm (QCOM) boosted the Nasdaq, gaining 4% after Oppenheimer upgraded the stock from neutral to buy.

DaimlerChysler (DCX) was higher on speculation that the automaker may sell its Chrysler unit.

On the earnings front, NutriSystem (NTRI) was sharply higher after the weight management products maker issued first-quarter earnings guidance that topped Wall Street expectations.

Guess (GES) was solidly higher after the clothing retailer reported a 77% surge in fourth-quarter profit that topped analyst forecasts.

Evergreen Solar (ESLR) was sharply lower after the solar power product maker said its fourth-quarter loss widened, missing analyst estimates.

In M&A talk, Anheuser-Busch (BUD) was higher following a report indicating the brewer is in merger discussions with Belgium-based brewing giant InBev.

Elsewhere, Time Warner (TWX) was higher despite an SEC filing revealing billionaire investor activist Carl Icahn cut his holdings in the media conglomerate by 65% and tripled his holdings in Federated Department Stores (FD).

Hershey (HSY) said it is cutting about 1,500 jobs as the chocolate maker overhauls its manufacturing.
Nokia (NOK) said it will lay off 700 workers as it looks too boost efficiency.

In the energy markets, April West Texas Intermediate crude oil futures fell 1 cent to $57.99 a barrel, recovering from early lows after Wednesday's slide. "There was little news around to move the markets," says S&P.

European markets finished narrowly mixed. The FTSE-100 index in London rose 12.1 points, or 0.19%, to 6,433.3. Germany's DAX index edged down 2.56 points, or 0.04%, to 6,958.62. In Paris, the CAC 40 index slipped 4.96 points, or 0.09%, to 5,720.88.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 144.59 points, or 0.81%, to 17,897.23. In Hong Kong, the Hang Seng index rallied 328.51 points, or 1.63%, to 20,538.42. Korea's Kospi index advanced 7.53 points, or 0.52%, to 1,443.63.

Treasury Market
Treasury yields dipped following the mix of data on industrial production, import prices, jobless claims, and the Empire State index. The 10-year note rose in price to 99-13/32 for a yield of 4.7%. The 30-year bond climbed to 99-06/32 for a yield of 4.8%. Technical buying may have fueled the rally in bonds, says Action Economics.

Wednesday, February 14, 2007

For Bernanke, Capitol Hill's No Easy Street

News Analysis
February 14, 2007

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For Bernanke, Capitol Hill's No Easy Street

The Fed chief returned to give upbeat news on the economy to lawmakers. Wall Street cheered, but Dems remain skeptical

Ben Bernanke had little trouble winning the heart of the stock market on Valentine's Day. Shortly after the Federal Reserve chairman began his two-day testimony to Congress, the Dow Jones industrial average climbed to a new all-time trading high (see, 2/14/07, "Dow Hits New Record after Bernanke Speaks"). While Wall Street and economists cheered, lawmakers on Capitol Hill would prove trickier to satisfy.

A year into his chairmanship, Bernanke returns to Washington for his semiannual remarks backed by new credibility. The economic "soft landing" his Fed outlined in previous testimony and policy statements has been borne out in recent data releases. In Bernanke's Feb. 14 comments before the Senate Banking Committee, the no-longer-so-new Fed chief solidified his role as a plain-speaking central banker with modest policy goals.

Improved Performance

Bernanke used straightforward English to describe an economy with moderate growth, gradually cooling inflation, and some early signs of stability in the housing market. He answered senators' questions for more than two hours on such topics as entitlement spending, corporate regulations, and trade deficits, but largely steered away from offering fiscal policy prescriptions.

In short, Bernanke hit his marks, but he still has his work cut out for him. "He's established his credibility," says Peter Rodriguez, a Darden Graduate School of Business economist and one of Bernanke's former students. "Now it's onto making himself known for deeper changes."

The Fed chief's market-boosting performance was particularly notable in light of his earlier missteps. In Bernanke's first policy meeting as chairman, the Federal Open Market Committee surprised hopeful traders with hawkish language and an interest-rate hike. Later, the meeting minutes and Bernanke's Apr. 27, 2006, congressional testimony sent Wall Street conflicting signals. When Bernanke went on to tell CNBC reporter (and BusinessWeek columnist) Maria Bartiromo the markets had misread him, investors were in uproar.

"A Little Inadequate"

These days, Bernanke may have found a balance between transparency and too much information. "Since the [2006] second quarter, he's done a fairly stellar job of communicating the Fed's position to the market and of guiding the FOMC's outlook on growth and inflation," says Michael Englund, chief economist at Action Economics. For now, the Fed intends to remain on the sidelines, Bernanke made clear in his Feb. 14 testimony, but higher-than-expected inflation could prompt further rate hikes.

In the question-and-answer session that followed Bernanke's testimony, members of the Senate Banking Committee pressed the Fed chief for his views on a variety of issues outside of monetary policy. Some of the harshest questioning came from Senate Banking Committee Chairman Christopher Dodd (D-Conn.), who asked the Fed chief about deceptive lending practices. Bernanke said regulators were considering the issue—a response Dodd criticized as "a little inadequate."

Bernanke gave lawmakers greater detail on some of their other concerns. He reiterated his recent warnings on the rising costs of entitlements like Medicare, expressed support for opening foreign markets, and said China needs to do more to improve its currency policy. However, he stopped short of giving legislators specific policy advice. "Perhaps one of the things Bernanke is trying to do here is keep the testimony today on topic," says Conrad DeQuadros, senior economist at Bear Stearns (BSC).

As Good as Your Data?

The Fed chairman's clear syntax and reluctance to venture beyond monetary policy put him in stark contrast with legendary predecessor Alan Greenspan, the famously cryptic "maestro" whose support for President Bush's 2001 tax cuts likely helped get them enacted. Some economists say avoiding matters of fiscal policy, though a laudable goal, may be easier said than done for Bernanke. "You now have a Congress that's conditioned to get the Federal Reserve chairman to talk about almost anything," says Alan Blinder, a Princeton economist and former vice-chairman of the Federal Reserve.

The new Democratic majority in Congress could pose other challenges for Bernanke. Some analysts expect the Fed chief to receive a grilling in the Feb. 15 Q&A session with the House Financial Services Committee, chaired by Barney Frank (D-Mass.). Meanwhile, it may take time to get a fresh set of congressional leaders to support one of Bernanke's key goals, publicly announced inflation targets (see, 11/7/05, "The New Fed"). "You have to develop new relationships," explains Stephen Cecchetti, a professor at Brandeis International Business School.

On the other hand, Bernanke's reputation on Wall Street may only be as good as the latest readings on the major indexes, other economists observe. Bernanke's emphasis on transparency may earn him favor from economics professors and foreign central bankers, but "it doesn't mean a thing to Wall Street," says Nobel laureate Paul Samuelson. "Wall Street wants him to be very transparent-on their side."

Inflation Wariness

Bernanke's biggest challenges are probably still to come. So far, he has shepherded the economy through a housing slowdown and volatile oil prices, but he has yet to face a large-scale financial crisis. "He gets a good grade for basically taking a stable situation and managing it well," says Johns Hopkins economist Laurence Ball. Sooner or later, unforeseen circumstances may force Bernanke to prove his mettle.

Inflation remains a possible concern. The Fed's forecasts for core inflation this year remain above Bernanke's stated comfort zone of 2%. With the housing market apparently stabilizing, some economists wonder what the catalyst could be for a drop in inflation—other than interest-rate hikes. At the same time, a sudden spike in oil prices could slow economic growth and drive inflation higher in a dangerous combination.

For now, investors are applauding Bernanke as an able and highly qualified successor to the maestro: The Dow finished at an all-time closing high on Feb. 14. "He deserves a good pat on the back," says Jeff Kleintop, chief investment strategist at PNC Wealth Management. But facing a skeptical group of lawmakers in the second and final leg of his February testimony, Bernanke may get a far different reception.

Dow Hits New Record after Bernanke Speech

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February 14, 2007

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Dow Hits New Record after Bernanke Speech

The Fed chief's remarks suggested policymakers may keep interest rates steady. Also in focus: DaimlerChrysler restructuring, retail sales

Stocks rallied Wednesday, with the Dow Jones industrial average reaching a new all-time closing high, as investors cheered Federal Reserve Chairman Ben Bernanke's moderately upbeat testimony to Congress. A big automaker's realignment and some upbeat earnings news helped offset lackluster reports on January retail sales and December business inventories.

On Wednesday, the Dow Jones industrial average rose 87.01 points, or 0.69%, to 12,741,86. The broader Standard & Poor's 500 index added 11.04 points, or 0.76%, to 1,455.30. The tech-heavy Nasdaq composite was up 28.50 points, or 1.16%, to 2,488.38.

The rally was broad-based, with NYSE breadth 23-10 positive and Nasdaq breadth 18-12 positive.

In economic news Wednesday, Bernanke said in his prepared remarks that inflation is showing signs of easing. "Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," the Fed chief said during the first leg of his 2-day appearance before lawmakers.

The testimony held little in the way of surprises, says Action Economics. "There's no sign the Fed will be moving off the sidelines anytime soon," the economic-research outfit notes.

Meanwhile, U.S. retail sales were disappointingly flat in January, following an upwardly revised 1.2% increase in December. Sales rose 0.3% excluding autos, from an upwardly revised 1.3% jump in December.

And U.S. business inventories were flat in December, as expected, but after a downwardly revised 0.2% increase in November (0.4% before). The overall inventory reading was just under expectations, according to S&P economists.

Investors will digest a number of reports due Thursday, including industrial production and the Philadelphia Fed's index of economic conditions.

Among stocks in the news Wednesday, DaimlerChrysler (DCX) was higher after the automaker said it's going to cut 13,000 jobs as part of a restructuring plan to save $4.5 billion by 2009. The company also reported a 40% drop in fourth-quarter profit.

In other earnings reports, Coca-Cola (KO) was lower after the soft drink maker posted a 22% drop in fourth-quarter profit.

The Nasdaq got a boost from strength in semiconductor equipment maker Applied Materials (AMAT), which logged sharply higher fiscal first-quarter earnings. CEO Mike Splinter also forecast a rise in orders for the second quarter.

Insurer MetLife (MET) was slightly lower despite reporting a five-fold increase in fourth-quarter earnings, beating analyst expectations.

Farm equipment maker Deere (DE) was sharply higher on an unexpectedly strong earnings report for its fiscal first quarter.

Office supplies retailer Office Depot (ODP) was lower despite posting a 27% uptick in fourth-quarter profit.

Elsewhere, shares of Alcoa (AA) dipped after surging Tuesday on reports of a possible takeover bid for the aluminum maker.

Nasdaq (NDAQ) was higher after J.P. Morgan resumed coverage on the stock with an overweight recommendation. Shares plunged Tuesday on a lower earnings outlook.

In the energy markets, April West Texas Intermediate crude oil futures fell $1.06 to $58.00 a barrel after briefly bouncing above $59 following a weekly inventory report showing an unexpected decline in crude supplies.

European markets finished higher. The FTSE-100 index in London rose 39.4 points, or 0.62%, to 6,421.2. Germany's DAX index added 65.84 points, or 0.95%, to 6,961.18. In Paris, the CAC 40 index was up 43.15 points, or 0.76%, to 5,725.84.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 131.19 points, or 0.74%, to 17,752.64. In Hong Kong, the Hang Seng index advanced 77.66 points, or 0.39%, to 20,209.91. Korea's Kospi index climbed 17.66 points, or 1.25%, to 1,436.1.

Treasury Market
Treasury yields skidded after the soft retail sales data and benign Fed testimony suggested central bankers may remain on hold. Rates are likely to continue falling unless Thursday's heavy dose of economic data is stronger than expected, notes S&P MarketScope. The 10-year note rose 19/32 to 99-06/32 for a yield of 4.73%. The 30-year bond rallied 34/32 to 98-25/32 for a yield of 4.83%.

Monday, February 12, 2007

Can Small Caps Keep Up Big Gains?

News Analysis
February 12, 2007

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Can Small Caps Keep Up Big Gains?

The durability of the sector's multiyear advance has proved detractors wrong again and again. They might not be done yet

Small-cap stocks continue to defy the skeptics. Despite some market soothsayers' annual predictions of large-cap supremacy, shares of small companies have piled up an impressive seven-year run (see, 1/3/07, "Style Wars: Growth or Value in '07?"). How much longer can they keep it up?

Small caps—broadly defined as those issues with a market capitalization below $1 billion—did briefly lag the broader indexes during 2006's postsummer rally, but they've since regained their winning ways (see, 10/2/06, "Small Caps: Out in the Cold"). On Feb. 8, the small-cap Russell 2000 index finished at 816.39, a new all-time closing high, up 35% from its 2000 peak. The broader New York Stock Exchange composite index also reached a new all-time high, while the Standard & Poor's 500-stock index still hovered nearly 6% below its seven-year-old record high.

New Record Highs Possible

Investors poured assets into small caps to end 2006. Small-cap exchange-traded funds received three times as much inflows as large-cap ETFs in December, according to data from Barclays Global Investors (BCS). The iShares Russell 2000 (IWM) ETF led in popularity, with $2.6 billion in inflows.

Unexpectedly upbeat economic data and positive technical factors could help keep small caps—and the overall market—going full steam ahead, some analysts say. Others expect bigger-cap names to weather slowing earnings growth and possible rate hikes better than their small-cap peers. In the short term, anyway, the Russell 2000 may continue to set new highs.

Recent economic reports have surprised to the upside, which tends to bode well for riskier assets, including small caps. On Jan. 31, the Commerce Dept. said fourth-quarter gross domestic product surged at a greater-than-expected 3.5% annual clip. On Feb. 7, another government report showed an unexpectedly strong 3% rise in fourth-quarter nonfarm productivity (see, 2/8/07, "A Welcome Pop in Productivity").

Positive Outlook

"Small caps are going to outperform again this year," says Alec Young, equity market strategist at S&P Equity Research Services (MHP). "What it's about is confidence in the economy, confidence that growth is going to continue to be O.K. The macroeconomic backdrop is very healthy."

While Young expects small caps to keep up their recent strength, he expects midcaps—companies with between $1 billion and $4.5 billion in market capitalization—to perform even better. The reason: Midcap stocks look cheaper than large caps or small caps based on their price-to-earnings growth ratio (see, 8/17/06, "A Small PEG to Hang Your Hat On").

From a technical perspective, small caps still look well situated, some market pros say. "The 800 level had been holding the Russell 2000 back," says Chris Johnson, chief executive and chief investment strategist of Johnson Research Group. "Now it's broken above that psychologically important level. The technical environment for the Russell 2000 has resolved itself to the upside."

Slowed Growth Poses Risks

However, small caps still face plenty of hurdles. Slowing earnings growth and the risk that the yield on the 10-year Treasury note will rise above 5% could give an advantage to large caps, which are expected to weather such troubles better, others say. "On a stock-specific basis, small and midcaps can do well, but as an overall group I think they may find it a little bit hard to maintain their reign," says Quincy Krosby, chief investment strategist at The Hartford (HIG).

The earnings slowdown may have a disproportionately severe impact on small caps, some analysts say. Sell-side forecasts for a small-cap earnings growth rebound in the second half of 2007 may prove overly aggressive, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup (C). "Small-cap stocks are more likely to miss earnings estimates than large-caps, in our opinion," Levkovich writes in a Jan. 26 report.

Still, the recent boom in mergers-and-acquisition activity could help cushion the blow for some small-cap issues. Financial-services sector consolidation has been strong, with deals brewing among banks and real estate investment trusts (see, 12/21/06, "Real Estate M&A Roars Ahead"). With 106 deals last year, financials passed technology as the sector with the most smaller cap M&A, notes Denise Saunders, small-cap strategist at Merrill Lynch (MER), in a Feb. 8 report.

Proceed with Caution

Are small-cap bulls enjoying a false sense of security? Volatility indicators don't rule out the possibility investors may be getting complacent. Merrill's MOVE index, which measures volatility in U.S. Treasuries, fell to a record low on Feb. 5. The VIX, a gauge of worry about stocks, remains near a 13-year low set in January.

Brian Gendreau, an investment strategist at ING Investment Management (ING), suspects stocks—particularly small caps—may get hurt in the event of unpleasant surprises, such as interest-rate hikes. "Valuations on small caps have become stretched," Gendreau says. "They don't look cheap, and they look vulnerable to any disruption in the market." The length of the small caps' run may depend on how long investors can expect to keep avoiding the unexpected.

Friday, February 9, 2007

Stocks Fall amid Interest-Rate Worries

News Article
February 9, 2007

BusinessWeek Logo

Stocks Fall amid Interest-Rate Worries

Fed officials Poole and Fisher warned that further rate hikes could be needed. Also in focus: Micron, MasterCard

Stocks finished broadly lower Friday, as Federal Reserve officials' warnings on inflation and a chipmaker's sales warning weighed on the market. Analyst upgrades boosted the auto sector.

On Friday, the Dow Jones industrial average fell 56.8 points, or 0.45%, to 12,580.83. The broader Standard & Poor's 500 index dropped 10.25 points, or 0.71%, to 1,438.06. The tech-heavy Nasdaq composite slid 28.85 points, or 1.16%, to 2,459.82.

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

In economic news, a quiet calendar was highlighted by remarks from Fed officials indicating more interest-rate hikes could be in the cards. St. Louis Fed President William Poole predicted inflation will fall into a reasonable range this year, but said core inflation above 2% would be unacceptable.

Cleveland Fed President Sandra Pianalto said inflation statistics were improving, but further policy firming may be needed. Dallas Fed President Richard Fisher said he's "fairly comfortable" with the inflation outlook. Meanwhile, Fed Governor Susan Bies announced her retirement.

Next week's calendar holds reports on retail sales, industrial product, and housing starts, along with Fed Chairman Ben Bernanke's testimony on the economic outlook.

Among Friday's stocks in the news, Micron (MU) weighed on the tech sector after the semiconductor maker said it was seeing softness in some of its flash memory chip sales.

MasterCard (MA) was sharply lower after the credit card maker warned operating margin growth may slow this year, although its fourth-quarter profit still topped Wall Street expectations.

Alcatel-Lucent (ALU) was lower as the telecom equipment maker said it plans to cut another 3,000 jobs after it swung to a fourth-quarter loss.

On the upside, Broadcom (BRCM) was higher after the semiconductor maker reported a 76% plunge in fourth-quarter earnings on higher sales than analysts projected. The company said it may buy back up to $1 billion in shares.

Companies due to report earnings next week include Coca-Cola (KO), Whole Foods (WFMI), and Yum! Brands (YUM).

Outside of earnings, Bank of America (BAC) was lower after the banking giant entered a "leniency agreement" with the Justice Department relating to an investigation into municipal derivatives. Separately, the company agreed to a $14.7 million settlement with the IRS.

General Motors (GM) and Ford (F) were higher after Deutsche Bank upgraded the automakers from hold to buy amid expectations of a possible agreement this year with the United Auto Workers union about health-care obligations.

U.S. Steel (X) was lower following a downgrade by Bank of America from buy to neutral.
Fortress Investment Group (FIG) was up in its first day of trading.

On the M&A front, auto parts maker Lear (LEA) reportedly accepted a $2.31 cash buyout offer from top shareholder and billionaire investor activist Carl Icahn.

Elsewhere, U.S. Airways (LCC) was lower amid news CEO Doug Parker was arrested on a drunken driving charge.

In the energy markets Friday, March West Texas Intermediate crude oil futures rose 18 cents to $59.89 a barrel in choppy trading following Thursday's late surge.

European markets finished higher. The FTSE-100 index in London rose 36.4 points, or 0.57%, to 6,382.8. Germany's DAX index added 34.38 points, or 0.5%, to 6,911.11. In Paris, the CAC 40 index was up 27.35 points, or 0.48%, to 5,692.45.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 211.85 points, or 1.23%, to 17,504.33. In Hong Kong, the Hang Seng index lost 57.39 points, or 0.28%, to 20,677.66. Korea's Kospi index added 4.1 points, or 0.29%, to 1,427.68.

Treasury Market
Treasury yields climbed after rising during the week amid strong demand for the Treasury Department's three quarterly refunding auctions. The 10-year note fell in price to 98-25/32 for a yield of 4.78%, while the 30-year bond dropped to 98-07/32 for a yield of 4.86%. Profit-taking caused a defensive tone to take hold, says Action Economics.

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