News Analysis
BusinessWeek.com
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

by Marc Hogan

 

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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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."

News Article
BusinessWeek.com
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

by Marc Hogan

 

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%.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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 BusinessWeek.com, 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.

News Analysis
BusinessWeek.com
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

by Marc Hogan

 

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 BusinessWeek.com, 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 BusinessWeek.com, 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.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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%.

News Analysis
BusinessWeek.com
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

by Marc Hogan

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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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 BusinessWeek.com, 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.

News Article
BusinessWeek.com
February 9, 2007
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Stocks Fall amid Interest-Rate Worries

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

by Marc Hogan

 

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.

News Analysis
BusinessWeek.com
February 8, 2007
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The Weird World of ETFs

The proliferation of exchange-traded funds has led to the creation of increasingly specialized products. Here are some of the most exotic

by Marc Hogan

 

Exchange-traded fund launches are quickly becoming as routine as the launches at Cape Canaveral. Fund companies rolled out 155 new ETFs in 2006, according to Boston consultancy Financial Research Corp. As new products hit the market, the nature of the products is changing (see BusinessWeek.com, 5/5/06, "ETFs: Sliced, Diced, and Razor-Thin"). Best known as cheap, tax-efficient portfolio diversifiers, ETFs now provide exposure to even the narrowest—and sometimes most outlandish—investment niches.

Just last week, 22 new ProShares ETFs from Bethesda (Md.)-based ProFunds Group started trading on the American Stock Exchange. Boston's State Street Global Advisors (STT) unveiled its new SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII). Meanwhile, New York upstart XShares (formerly Ferghana-Wellspring) announced a deal with the Chicago Climate Exchange to build ETFs based on carbon emissions credits.

Investors shouldn't assume something is a smart investment simply because it's an ETF. "The package does not make the product," says Philip Edwards, managing director of Standard & Poor's Investor Services (MHP). "Don't invest in anything you don't understand."

ETFs may be carving the market into thinner and thinner slices, but a well-diversified portfolio remains as important as ever for investing success (see BusinessWeek.com, 6/22/06, "Spread Your Bets in ETFs"). This Five for the Money looks at five of ETF providers' most unusual offerings.

1. PowerShares Lux Nanotech Portfolio (PXN)

Fast-growing Wheaton (Ill.)-based PowerShares has contributed its share of today's vast pool of niche-oriented ETFs. Since being acquired by Amvescap (AVZ) early last year, the company has nearly doubled its ETF lineup, from 36 to about 70. Many of those funds, such as PowerShares Lux Nanotech Portfolio, focus on such narrow slivers of the market that they could be unduly risky for most investors.

Some nanotechnology stocks could certainly thrive in the future, but for most of us the potential volatility may not be worth it. "Focusing on these industries in one fund is a rather perilous course," says Morningstar (MORN) ETF analyst Dan Culloton. "They're going to be very volatile, because not all of these firms are going to survive."

Culloton says industries like nanotech can be so narrow that ETFs tracking them must buy some unlikely stocks to fill out their portfolios. For example, PowerShares Lux Nanotech's holdings include such household names as Toyota Motor (TM), IBM (IBM), Hewlett-Packard (HPQ), Intel (INTC), 3M (MMM), and General Electric (GE). Such blue-chips could decrease the ETF's aforementioned volatility, but they mean investors aren't exactly getting a pure nanotech play.

PowerShares Lux Nanotech Portfolio logged a total market return of –6.3% for the year ended Feb. 6, trailing the Standard & Poor's 500-stock index by 22.95 percentage points. The ETF carries an expense ratio 0.73%. Investors should remember that buying or selling ETF shares also incurs brokerage commissions.

2. HealthShares Enabling Technologies ETF (HHV)

Speaking of ETFs for tiny subsectors: XShares' HealthShares ETFs each target a specific segment of the health-care, life-science, and biotech industries. Launched in late January, the five HealthShares offerings so far include the likes of HealthShares CardioDevices ETF (HHE), HealthShares Diagnostistics ETF (HHD), and HealthShares Emerging Cancer ETF (HHJ). HealthShares Enabling Technologies ETF tracks companies involved in technologies "that enable and support the discovery, clinical development, and manufacturing activities of pharmaceutical and biotechnology companies," according to the prospectus. Top holdings include Sangamo Biosciences (SGMO) and Illumina (ILMN).

The same caveats about potential volatility apply to these narrowly focused ETFs. Furthermore, the stocks such funds invest in might not even be the ones that ultimately profit from new technologies, Morningstar's Culloton notes. In The Future for Investors, Wharton professor Jeremy Siegel writes that companies that benefit from technological advances usually tend to be big, boring ones, not necessarily those laying the wires and expanding the networks. "That's an important thing for investors to remember," Culloton says.

Net annual operating expenses for each HealthShares ETF are capped at 0.95%, not including brokerage commissions. XShares has also filed with the Securities & Exchange Commission to launch a series of ETFs dubbed StateShares, which would home in on geographic subsectors. The funds would track S&P indexes for California, Ohio, Missouri, North Carolina, and 18 other states.

3. Claymore MACROshares Oil Down Tradable Shares (DCR)

While the share price of an ETF changes constantly, its net asset value (NAV) is set only once a day. Because the two don't always match, an investor could buy an ETF at a premium to the NAV and sell at a discount, substantially lowering returns.

Claymore MACROshares Oil Down Tradable Shares has only traded near its NAV 11% of the time, according to Amex.com. Almost 60% of the time, the product has traded at more than a 2.5% discount to its NAV. Technically a trust, not a fund, this exchange-traded security tries to make money from the downward movements of crude futures.

S&P's Edwards has concerns about the product's low trading volume, too. "If an investor wanted to get out, they would need to offer a large discount to attract a buyer," says S&P's Edwards. He advises ETF investors against investing "in anything thinly traded."

Claymore MACROshares Oil Down Tradable Shares has posted year-to-date total market returns of 2.95%, beating the S&P 500 by 0.53 percentage points. The exchange-traded security has come under criticism for its expenses of 1.6%.

4. Internet HOLDRS (HHH)

Not all exotic ETF offerings are thinly traded. In fact, some aren't even new. Merrill Lynch (MER) introduced its first HOLDRS exchange-traded security baskets in 1998, and the HOLDRS' are often among the top-volume traders on the Amex.

Though generally lumped in with ETFs, the various HOLDRS are technically trusts, so they can't rebalance—or even add new stocks. As a result, the HOLDRS' holdings and performance may diverge markedly from those of traditional indexes tracking the same sector. Ron DeLegge, publisher of ETFGuide.com, observes, "Who in their right mind would want to own an investment product that's not rebalanced or not updated to properly reflect the sector it's supposed to be representing?"

The Internet HOLDRS comprises just 11 stocks, including Yahoo! (YHOO) and eBay (EBAY) but not Internet heavyweights like Google (GOOG), which came out after the HOLDRS debut. By contrast, the First Trust Dow Jones Internet Index Fund (FDN) ETF holds 40 stocks.

Investors may not be quibbling with Internet HOLDRS' performance, however. It has posted total annualized market returns of 14.42% over the past five years, beating the S&P 500 by 5.4%. On a one-year basis, though, Internet HOLDRS trails that benchmark by 23.18 percentage points.

5. iShares MSCI Belgium Index (EWK)

While Kazakhstan does not yet have its own country-specific ETF—sorry, Borat—many other countries, large and small, do. The iShares MSCI Belgium Index is one of the most unusual of them. That's no knock on Belgium, however. Not only are iShares MSCI Belgium Index shareholders investing in only a slim segment of the world market, but the fund's top five holdings make up 60% of the portfolio, creating even more potential volatility.

Still, the iShares MSCI Belgium Index can boast close to blockbuster-caliber performance. The ETF has posted total five-year annualized market returns of 23.91%, besting the MSCI EAFE index by 6.42 percentage points. It has an expense ratio of 0.54%.

This fund may be out of the ordinary, but there are still practical uses for exotic ETFs, says Tom Lydon, president of financial advisory firm Global Trends. "Individual investors and advisers are utilizing ETFs more for specific asset allocation and identifying changing trends in the marketplace," Lydon says. "The only concern is when individual investors get too enthusiastic about a sector or global region after the lion's share of its upside performance is behind."


Either way, investors should make sure they know what they're getting into if they're considering new and unusual ETFs.

News Article
BusinessWeek.com
February 7, 2007
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Stocks Edge Up amid Solid Data, Oil Drop

Fourth-quarter U.S. productivity jumped, while labor costs slowed. Crude futures slid below $58 after failing for a third straight day to top $60

by Marc Hogan

 

Stocks finished modestly higher in a choppy session Wednesday, as upbeat earnings news boosted tech names and investors weighed a solid report on U.S. productivity. Falling oil prices and a corresponding retreat in energy shares helped pull the Dow back down after crossing 12,700 for the first time ever.

On Wednesday, the Dow Jones industrial average edged up 0.56 points, or less than 0.01%, to 12,666.87, after bobbing above its all-time closing high of 12,673.68, set Feb. 1. The broader Standard & Poor's 500 index rose 2.02 points, or 0.14%, to 1,450.02. The tech-heavy Nasdaq composite climbed 19.01 points, or 0.77%, to 2,490.5.

NYSE breadth was positive, with 19 issues advancing for every 13 declining. Nasdaq breadth was 19-12 positive.

The recent sideways market could be good for stocks, some analysts say. "The market at present appears to have little impetus to either the upside or downside," says Richard Dickson, senior market strategist at Lowry's Reports. "On a longer term basis, this should be a positive for the market, as the ability to correct an overbought condition by trading sideways or though a shallow correction is considered to be a sign of strength."

In economic news, U.S. nonfarm productivity climbed 3% in the fourth quarter, following a modest 0.1% decline in the third quarter. Unit labor costs moderated to a 1.7% pace, from an upwardly revised 3.2% in the third quarter. "This is great news for the Fed," says Action Economics.

Meanwhile, Philadelphia Federal Reserve President Charles Plosser said the central bank may need to take further actions to reduce inflation. He also said the housing market may be stabilizing.

Treasury Secretary Henry Paulson told the House Budget Committee he supports a tougher regulator for mortgage companies Fannie Mae (FNM) and Freddie Mac (FRE).

Thursday's economic docket brings data on wholesale trade, consumer credit, and weekly jobless claims.

Oil prices dropped, weighing on corresponding shares. In the energy markets, March West Texas Intermediate crude oil futures fell $1.17 to $57.71 a barrel, giving up early gains despite a weekly inventory report revealing an unexpected decline in crude supplies. Crude futures failed for a third straight day to crack the $60 barrier.

Among Wednesday's stocks in the news, Cisco (CSCO) was higher after the networking equipment maker reported higher fourth-quarter earnings and forecast sales that would exceed analysts' estimates.

News Corp. (NWS) was higher after the media conglomerate logged a decline in earnings for its fiscal second quarter, but still topped Wall Street expectations.

Cigna (CI) was higher after the health insurer posted an 11% rise in fourth-quarter profit.

DirecTV (DTV) was higher after the satellite TV provider said its fourth-quarter earnings more than doubled.

Oil and natural gas producer Devon Energy (DVN) was lower after the company said fourth-quarter net income fell 40%.

Companies set to report earnings later Wednesday include Disney (DIS). The company was expected to report earnings of 39 cents per share on $9.5 billion in revenue, up from 35 cents per share on $8.9 billion a year earlier, says Reuters Estimates.

Among companies due to announce quarterly results Thursday are PepsiCo (PEP) and Qwest (Q).

Elsewhere, Nike (NKE) was higher after executives said they will add 100 new company stores in an effort to reach $23 billion in sales by 2011.

Equity Office Properties (EOP) was lower after Vornado Realty Trust said it was withdrawing its $23.2 billion buyout bid for the real estate company. Equity Office shareholders approved a $23 billion buyout offer from Blackstone Group.

In analyst calls, Tyco (TYC) was lower after Deutsche Bank lowered its recommendation on the company from buy to hold following Tuesday's disappointing earnings news.

European markets finished higher. The FTSE-100 index in London rose 23.2 points, or 0.37%, to 6,369.5. Germany's DAX index added 39.86 points, or 0.58%, to 6,915.56. In Paris, the CAC 40 index was up 26.22 points, or 0.46%, to 5,703.

Asian markets ended mixed. In Japan, the Nikkei 225 index lost 114.54 points, or 0.66%, to 17,292.32. In Hong Kong, the Hang Seng index gained 24.49 points, or 0.12%, to 20,679.69. Korea's Kospi index slipped 2.29 points, or 0.16%, to 1,426.29.

Treasury Market
 
Treasury yields dipped as strong demand for the Treasury Department's 10-year note auction countered the strong fourth-quarter productivity report. The 10-year note rose modestly in price to 99-02/32 for a yield of 4.74%, while the 30-year bond advanced to 94-17/32 for a yield of 4.85%.

News Analysis
BusinessWeek.com
February 5, 2007
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Health-Care Stocks: Advantage Medicare?

Growth in private, government-sponsored health plans could be a boon for some players in the managed-care industry

by Marc Hogan

 

On Feb. 5, Humana (HUM) is slated to report fourth-quarter results. Analysts expect the health insurer to post earnings of 88 cents per share on $5.7 billion in revenue, up from 46 cents a share on $3.7 billion a year earlier, according to Reuters Estimates. The Louisville (Ky.) company will also likely be one of several outfits in the managed-care sector benefiting from recent growth in private Medicare plans.

Medicare beneficiaries have been able to receive their benefits through private plans since President Clinton signed the Balanced Budget Act of 1997. In 2003, Congress passed the Medicare Prescription Drug, Improvement & Modernization Act, which overhauled the rules for these programs and gave them the name Medicare Advantage (see BusinessWeek, 10/25/06, "Medicare's Big Experiment"). Now some analysts see signs Medicare Advantage programs could be a boon for investors seeking growth in the health-care market.

Rising Enrollment

More and more seniors are signing up for Medicare Advantage, recent reports indicate. As of the latest data, 19% of eligible Americans are enrolled in a private Medicare plan from Humana, UnitedHealth (UNH), or another provider, according to Citigroup (C). That's an increase from 11% in mid-2004. Citigroup projects 25% of seniors will have signed up for Medicare Advantage by the end of 2009.
Private Medicare plans offer opportunities for expansion in an industry where growth typically comes from market share gains, rather than new customers, analysts say. "Enormous growth prospects remain," says Citigroup analyst Charles Boorady in a Feb. 1 report.

He adds that the program's potential success may pressure other insurers like Aetna (AET) and Cigna (CI) to step up their efforts to grab a piece of the Medicare market. (Citigroup has investment banking relationships with Aetna, Cigna, Coventry, Humana, and UnitedHealth.)

Recent data could brighten the outlook for Humana when the U.S. Centers for Medicare & Medicaid Services (CMS) reports results this week. CMS issued figures on Jan. 31 indicating a hefty increase in Medicare Advantage enrollment. "We suspect that Humana may see earnings upside between a nickel and a dime during 2007 as a result of this increase in participation," says Prudential (PRU) analyst David Shove in a Jan. 31 report.

Smaller Players Also Benefit

The news for Humana improved a day later, when CMS clarified that the bulk of Medicare Advantage gains came in more comprehensive plans that include a prescription drug component. "The clarification from CMS should bode well for Humana's [Medicare Advantage] enrollment outlook," says Goldman Sachs (GS) analyst Matthew Borsch in a Feb. 1 report. (Goldman has an investment banking relationship with Humana.)

Big players like Humana and UnitedHealth aren't the only ones that might benefit from projected growth in private Medicare programs. Medicare Advantage makes up a more sizable portion of business for smaller players like Coventry Health Care (CVH) or WellCare Health Plans (WCG), so the impact on the those companies' bottom lines could be particularly notable.

Standard & Poor's equity analyst Phillip Seligman has a strong buy recommendation on Coventry, noting the Bethesda (Md.) company's emphasis on cost control (see BusinessWeek.com, 12/4/06, "Coventry Health Care: Managing Very Well"). Seligman looks for revenues to increase to roughly $8.4 billion in 2007, from an expected $7.8 billion in 2006, helped by 5% to 10% higher Medicare Advantage enrollment.

Seligman has a hold recommendation on WellCare, but he projects even more dramatic private Medicare gains. He sees premium revenues rising about 33%, to $4.8 billion in 2007, after an estimated 97% surge to $3.7 billion in 2006. An expected 30% jump in Medicare Advantage enrollment could be a key driver of this revenue growth, Seligman says in a recent research report.

Dems May Change the Rx

Meanwhile, the latest data from CMS also include modestly encouraging signs for some drugstore chains. CVS (CVS) and Longs Drug Store (LDG) realized the highest organic percentage growth in prescription-drug plan enrollment among the top 15 plans, according to Bear Stearns (BSC). "While we believe profitability of the plans will be lower in 2006 than 2007 due to more competitive pricing, the enrollment gains represent a modest positive to partially offset," says Bear Stearns analyst Robert Summers in a Feb. 1 report.

To be sure, the long-term viability of Medicare Advantage business depends on the political environment. Leading up to last November's elections, some analysts expected the Democrats to push Medicare changes that might hamper stocks in the managed-care sector (see BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock"). "The government hasn't historically been a good long-term partner to managed-care companies," Morningstar (MORN) analyst Brandon Troegle notes in a Jan. 29 report.

In the meantime, though, Medicare Advantage plans might be the right prescription for growth.

News Article
BusinessWeek.com
February 2, 2007
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Stocks End Mixed After Tepid Jobs Data

January payrolls rose less than expected, from upwardly revised December and November numbers. Also in focus: Chevron, Amazon earnings

by Marc Hogan

 

Stocks finished mixed Friday, as the Dow slipped following a second straight all-time closing high. Investors were digesting somewhat conflicting economic reports, another batch of earnings news, and rising oil prices.

On Friday, the Dow Jones industrial average fell 20.19 points, or 0.16%, to 12,653.49, below Thursday's closing record. The broader Standard & Poor's 500 index rose 2.45 points, or 0.17%, to 1,448.39. The tech-heavy Nasdaq composite added 7.5 points, or 0.3%, to 2,475.88.

NYSE breadth was positive, with 19 issues rising for every 14 declining. Nasdaq breadth was 16-14 positive.

In economic news Friday, U.S. nonfarm payrolls rose 111,000 in January, softer than expected, from an upwardly revised 206,000 in December. The unemployment rate rose to 4.6% from 4.5%. Big upward revisions for December and November make the modest January increase look stronger, says Action Economics.

The jobs report shouldn't shift the outlook for the economy or interest rates, some analysts say. "It confirms right now that the Fed's been doing a good job balancing the risks of growth and inflation," says Andy Richman, fixed income strategist for SunTrust's Personal Asset Management group. "I don't think this changes anything the Fed would say or do. They're going to wait and see."

U.S. consumer sentiment eased to 96.9, below expectations, for the final January reading of the University of Michigan's index, following a big jump to 98.0 for the preliminary print. That's still up from December's 91.7 reading.

In addition, U.S. factory orders rose 2.4% in December, following an upwardly revised 1.2% increase in November.

Looking ahead, Monday's economic docket holds the release of the Institute for Supply Management's non-manufacturing "business activity" index. The index is seen slipping to 55.5 from December's revised level of 56.7, says Action Economics.

Among Friday's stocks in the news, Chevron (CVX) was modestly lower after the oil giant reported a 9% drop in earnings for the fourth quarter, still enough for a third consecutive year of record earnings.
Amazon (AMZN) was lower after the Internet retailer said profit margins fell as the company lowered shipping fees and cut prices to sell more digital cameras and Mattel's (MAT) Barbie dolls.

Shares of Electronic Arts (ERTS) gained as the video game publisher beat Wall Street targets despite a posting a 38% decline for its fiscal third quarter.

Companies set to announce quarterly results next week include Cisco (CSCO), Disney (DIS), Pepsi (PEP), and Qwest (Q).

Outside of earnings, Gap (GPS) named Banana Republic executive Marka Hansen to replace Cynthia Harriss as head of its Gap North America operations.

In the energy markets, March West Texas Intermediate crude oil futures rose $1.72 to $59.02 a barrel amid forecasts for persistent colder weather in the Northeast and a potential worker strike in Nigeria.
European markets finished higher. The FTSE-100 index in London rose 28.7 points, or 0.46%, to 6,310.9. Germany's DAX index added 34.48 points, or 0.5%, to 6,885.76. In Paris, the CAC 40 index was up 15.05 points, or 0.27%, to 5,677.3.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 27.61 points, or 0.16%, to 17,547.11. In Hong Kong, the Hang Seng index advanced 133.52 points, or 0.65%, to 20,563.68. Korea's Kospi index rallied 30.24 points, or 2.19%, to 1,413.14.

Treasury Market
 
Treasury yields drifted modestly lower, but recovered from early lows, following the smaller-than-expected increase in January payrolls, dip in consumer sentiment, and gain in factory orders. The 10-year note edged up in price to 98-14/32 for a yield of 4.83%, while the 30-year bond nudged higher to 93-14/32 for a yield of 4.93%. "Payrolls Friday was a relatively muted affair," says Action Economics.

News Analysis
BusinessWeek.com
February 1, 2007
Link

Will Profits Snap Their Hot Streak?

S&P 500 companies have posted 18 consecutive quarters of double-digit earnings growth. But the string might end this quarter, some analysts say

by Marc Hogan

 

Corporate profits are coming off a tremendous run. Since 2002, the Standard & Poor's 500-stock index has chalked up 18 consecutive quarters of double-digit earnings growth (see BusinessWeek.com, 10/23/06, "So Far, So Good for Earnings"). With companies so far reporting a lackluster fourth quarter, the current earnings period could spell an end to profits' impressive streak.

If December-quarter earnings season ended today, the double-digit tear would already be over. As of Jan. 31, with 57% of results in, S&P 500 companies have posted slightly lower-than-expected earnings growth of 8.1%, according to S&P. "There would need to be several major surprises to put it over 10%," says Howard Silverblatt, S&P's senior index analyst.

Meanwhile, stocks have nudged higher amid lower profit forecasts and economic data suggesting the Federal Reserve won't change interest rates any time soon. Since Alcoa (AA) unofficially kicked off earnings season after the Jan. 9 closing bell, the Dow Jones industrial average has risen 1.7%, to post a new all-time closing high of 12,621.69 on Jan. 31. Over the same time, the S&P 500 has added 1.9%, to 1,438.24, while the tech-heavy Nasdaq composite is up 0.8%, to 2,463.93.

"Very Ho-Hum"

Wall Street still awaits earnings reports from bellwethers such as Exxon Mobil (XOM), Wal-Mart (WMT), and Cisco (CSCO). Some market pros worry that a number of companies have issued weaker forecasts for the quarter and year ahead. Whether the S&P 500 snaps its streak this earnings season or in a later quarter, profit growth is widely projected to fall from its recent heights in 2007.

Companies are also losing their edge when it comes to expectations. While fourth-quarter earnings are positive, with 63.5% of the S&P 500 beating analyst estimates so far, that percentage is below historical levels, according to Silverblatt. Prominent downside surprises have included Advanced Micro Devices (AMD) and Alcatel-Lucent (ALU).

"I would characterize this earnings season as very ho-hum," says Ashwani Kaul, chief market strategist at Reuters Estimates. "Right now, I think it's 50-50 whether we will hit double digits for the quarter."

Strength in Finance

The streak could hinge on the energy sector, Kaul says. ExxonMobil announces quarterly results Feb. 1, with rival Chevron (CVX) issuing its earnings report the next day. The sector's earnings growth has slowed from record highs amid lower oil prices, but energy shares are still on track to account for 13.2% of the S&P 500's earnings, despite representing just 9.6% of the index's market value, according to S&P.

One source of strength has been the financial sector (see BusinessWeek.com, 1/22/07, "2007's Top Picks: Financial Services"). The mergers-and-acquisitions boom has boosted brokerages and banks such as Goldman Sachs (GS) and Merrill Lynch (MER) despite an inverted yield curve—the condition when short-term rates are higher than long-term rates that's thought by some observers to prefigure recession. Asset managers such as Franklin Resources (BEN) have benefited from inflows (see BusinessWeek.com, 1/31/07, "Asset Management: Not Tapped Out Yet").


The financial sector's share of S&P 500 earnings is 26.7%, the highest of any sector, notes Ed Yardeni, chief investment strategist at Oak Associates. Financial issues account for 22.2% of the index's market capitalization. "While investors have been getting whiplashed in energy, financials have been steady winners," Yardeni said in a Jan. 31 note to clients. "Financials have always sold at a discount to the market because they've tended to blow up every four years or so. They aren't blowing up anymore," he added.

Tech Warnings

Technology, however, has been more of a mixed bag (see BusinessWeek.com, 1/16/07, "Tech Earnings: The Highs and the Lows"). About 72% of the S&P 500's information-technology companies have beaten analyst estimates, according to S&P. Among them is Wall Street darling Apple (AAPL), along with IBM (IBM), Intel (INTC), Microsoft (MSFT), Google (GOOG), Sun Microsystems (SUNW), and Yahoo! (YHOO). AMD, SanDisk (SNDK), and others have disappointed the Street.

However, tech companies and others have been issuing weaker outlooks for 2007, which could signal trouble ahead. The proportion of companies guiding higher has fallen to 7%, below recent levels, while the proportion of those guiding lower has climbed to 10% after trending downward in previous quarters, according to Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.

"There's not a lot of bad news in the earnings reports," Ritholtz says. "The only thing we've seen that's just a little disappointing has been that the guidance is weaker than you would've hoped for."

Some market pros expect slimmer profit increases this year to weigh on the stock market. Joe Battipaglia, chief investment officer at Ryan Beck, predicts full-year earnings growth of 8%, which he says could lead to a market correction of 5% to 10%. "The profit picture is more muted than it had been," Battipaglia explains. "The market will have to adjust to that, which means it probably won't have the same get-up-and-go that it had last year in the second half."

Looking Ahead

However, others say fears of earnings slowdowns causing a pullback may be overdone, noting that moderating growth in corporate profits has been widely anticipated. "We would take advantage of current earnings misperceptions and buy into the integrated energy and chip stocks, which have been weak of late, while maintaining some caution still on the banks and materials names," wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup (C), in a Jan. 26 report.

Of course, the current earnings season is a long way from over, and some big upside surprises may yet put profit growth back on the double-digit track. Either way, investors will soon consider the fourth quarter ancient history—and turn their attention to the quarters to come.

Dow Climbs to Another New Record

News Article
BusinessWeek.com
February 1, 2007
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Dow Climbs to Another New Record

Wall Street extended Wednesday's Fed-inspired rally, as consumer spending rose and Exxon Mobil posted record profits

by Marc Hogan

Stocks finished higher Thursday, and the Dow hit a second straight all-time closing high, as mostly solid economic and earnings news helped counter disappointment over Google's (GOOG) quarterly results. The market also likely benefited from carry-over buying after Wednesday's rally, says Standard & Poor's Equity Research.

On Thursday, the Dow Jones industrial average rose 51.99 points, or 0.41%, to 12,673.68, above the previous closing record set Wednesday. The broader Standard & Poor's 500 index added 7.7 points, or 0.54%, to 1,445.94. The tech-heavy Nasdaq composite was up 4.45 points, or 0.18%, to 2,468.38.
NYSE breadth was decidedly positive, with 25 issues advancing for every 9 declining. Nasdaq breadth was 20-11 positive.

The upbeat Federal Reserve statement Wednesday cheered investors' spirits, but earnings trends and technical indicators continue to indicate possible trouble for the S&P 500 and Nasdaq, some analysts say. "Yesterday's Fed news certainly got everyone in a buying mood, but when you look at the fundamentals of what's been going on in the market, I'm kind of disappointed in the rally that we've had," says Chris Johnson, CEO and chief investment strategist of Johnson Research Group. "I don't think we're out of the woods yet."

In economic news Thursday, U.S. personal income rose 0.5% and spending added 0.7% in December, after an unrevised 0.3% income gain and 0.5% spending rise in November. The core PCE deflator, a key inflation gauge, rose 0.1%, from a flat reading in November.

"These numbers are somewhat anticlimactic after yesterday's quarterly data, but are also more of the same Goldilocks scenario, with solid economic growth and tame inflation," says Action Economics.

Looking ahead, a report on January nonfarm payrolls highlights the docket Friday. Investors will also be assessing data on factory orders and consumer sentiment.

In other economic releases Thursday, the Institute for Supply Management's index of manufacturing activity fell to 49.3 in January, much weaker than expected, from 51.4 in December.

The National Assn. of Realtors' pending home sales index climbed 4.9% to 112.4 in December, above expectations.

U.S. jobless claims fell 20,000 to 307,000 in the week ended Jan. 27, after jumping to an upwardly revised 327,000 the previous week.

Among stocks in the news, Dell (DELL) was lower after the computer maker said founder Michael Dell was replacing Kevin Rollins as chief executive officer.

On the earnings front, Internet search company Google was lower despite topping analyst estimates with fourth-quarter earnings of $1.03 billion.

Exxon Mobil (XOM) was higher after the oil giant reported a 4% decline in fourth-quarter net income amid a record $39.5 billion annual profit. Rival Chevron (CVX) was slated to post earnings Friday.

Starbucks (SBUX) was down after the coffee seller posted an 18% jump in profit for its fiscal first quarter.

Corn-processor Archer Daniels Midland (ADM) was sharply higher on a 20% gain in earnings for its fiscal second quarter.

On the downside, shares of Comcast (CMCSA) dipped as the cable operator's fourth-quarter profit fell short of analyst estimates.

Boston Scientific (BSX) was lower after the medical device maker said its fourth-quarter earnings fell 17%.

Companies set to announce quarterly results later Thursday include Amazon (AMZN) and Electronic Arts (ERTS).

Elsewhere Thursday, automakers were reporting January unit vehicle sales. General Motors (GM) logged a much weaker than expected 17% decline from a year earlier, while Ford's (F) 20% drop in sales was line with expectations. DaimlerChrysler (DCX) posted a 3% gain from a year earlier, stronger than expected.

In addition, Toyota (TM) narrowly missed expectations with a 10% year-over-year sales increase. Honda (HMC) posted a stronger-than-forecast 2% uptick. Overall January auto sales are pegged at 16.5 million, says Action Economics.

In M&A news, insurer Marsh McLennan (MMC) said it was selling Putnam Investments to Great-West Lifeco for $3.9 billion in cash.

Bank of America (BAC) CEO Kenneth Lewis said it's unlikely the banking giant will pursue an acquisition of a smaller rival in 2007, scuttling rumors the company was in buyout talks with Countrywide Financial (CFC).

In the energy markets, March West Texas Intermediate crude oil futures fell 84 cents to $57.30 a barrel in a see-saw session following Wednesday's surge.

European markets finished higher. The FTSE-100 index in London rose 79.1 points, or 1.28%, to 6,282.2. Germany's DAX index added 62.17 points, or 0.92%, to 6,851.28. In Paris, the CAC 40 index was up 53.94 points, or 0.96%, to 5,662.25.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 136.08 points, or 0.78%, to 17,519.5. In Hong Kong, the Hang Seng index climbed 323.74 points, or 1.61%, to 20,430.16. Korea's Kospi index advanced 22.67 points, or 1.67%, to 1,382.9.

Treasury Market
 
Treasury yields ticked higher as the jump in pending home sales offset the mild PCE increase, soft ISM reading, and sharp drop in jobless claims. The 10-year note fell in price to 98-12/32 for a yield of 4.83%, while the 30-year bond dropped to 93-13/32 for a yield of 4.93%.