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BusinessWeek.com
March 8, 2007
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Stocks Rise After Overseas Gains

Major indexes pushed higher amid strength in European and Asian bourses, ahead of Friday's closely watched payrolls report

by Marc Hogan

Stocks finished higher Thursday amid a global rally that began in Asia on upbeat economic sentiment. Major indexes pared gains in afternoon trading, however, amid concerns about subprime lender New Century Financial's (NEW). Analysts continued to debate whether the market has hit a short-term bottom, with some traders nervous ahead of Friday's employment report, says Standard & Poor's Equity Research.

On Thursday, the Dow Jones industrial average rose 68.57 points, or 0.56%, to 12,261.02, paced by AT&T (T) on an A.G. Edwards upgrade. The broader Standard & Poor's 500 index added 9.92 points, or 0.71%, to 1,401.89. The tech-heavy Nasdaq composite was up 13.09 points, or 0.55%, to 2,387.73.
NYSE breadth was decidedly positive, with 25 issues advancing for every 8 declining. Nasdaq breadth was 18-12 positive.

The market's latest rebound may not signal an end to its recent woes, some analysts say. "While most markets recently reversed their respective intermediate uptrends from last summer's lows, the larger bull market trends from the 2002-2003 low remains intact," says Walter Murphy, Jr., technical research analyst at Merrill Lynch, in a report. "Since medium term momentum is overbought and deteriorating, further weakness appears likely in the weeks ahead."

Others say worries about subprime loans shouldn't spread into a broader crisis. "Poor performance of recent subprime mortgages, ongoing distress among lenders, and the possibility of a broader credit crunch continue to worry market participants," says Goldman Sachs economist Andrew Tilton, in a note to clients. "But we emphasize we do not see this broad 'mortgage credit crunch' as the most likely outcome."

In economic news Thursday, weekly jobless claims fell 10,000 to 328,000 in the week ended Mar. 3, more than expected, following the previous week's 338,000 reading. Investors were awaiting Friday's report on February nonfarm payrolls, which Action Economic sees rising by 90,000.

Overseas, the European Central Bank raised its benchmark interest rate 25 basis points to 3.75%. ECB President Jean Trichet said rates were still on the "accommodative side," likely indicating more hikes to come.

Meanwhile, the Bank of England kept its key lending rate unchanged and signaled it will remain on the sidelines if inflation pressures ease.

The value of the Chinese yuan rose after U.S. Treasury Secretary Henry Paulson said Chinese officials should loosen controls on interest rates, accelerate sales of state-owned banks, and let the exchange rate move more freely.

Among Thursday's stocks in the news, retailers were posting lackluster February sales results. Wal-Mart (WMT), Costco (COST), Limited (LMT), and J.C. Penney (JCP) were among companies reporting lower monthly same-store sales than analysts expected.

On the upside, Target (TGT), Nordstrom (JWN) and Saks (SKS) beat Wall Street sales forecasts.
Chip equipment makers like Applied Materials (AMAT) helped lead the market higher after Morgan Stanley raised its recommendation on the sector from in-line to attractive.

However, New Century Financial was sharply lower amid speculation the subprime mortgage lender might file for bankruptcy, following the resignation of board member David Einhorn.

Elsewhere, Verizon (VZ) was higher after a federal judge ordered Internet phone carrier Vonage (VG) to the pay the company $58 million in a patent-infringement ruling.

Apple (AAPL) edged higher following an American Technology Research report the iPod maker might launch a new laptop this year that will save data on flash memory chips instead of a hard drive.


Shares of Ford (F) gained after Credit Suisse raised its recommendation on the automaker from underperform to neutral.

Monster Worldwide (MNST) was higher after Citigroup raised its recommendation on the staffing provider from hold to buy.

On the M&A front, Citigroup (C) was higher on a report the bank might buy Taiwan's Bank of Overseas Chinese for $425 million. Earlier this week, Citigroup bid $10.8 billion for control of Japan's Nikko Cordial.

CVS (CVS) raised its takeover bid for Caremark Rx (CMX), offering to pay $52.96 a share, plus a one-time dividend of $7.50 per share. The previous dividend offer was $6 per share. The bid follows a $26.84 billion, or $61.73 a share, offer from Express Scripts (ESRX).

In the energy markets, April West Texas Intermediate crude oil futures fell 18 cents to $61.64 a barrel, after running into technical resistance.

European markets finished higher. The FTSE-100 index in London rose 71.2 points, or 1.16%, to 6,227.7. Germany's DAX index added 95.48 points, or 1.44%, to 6,713.23. In Paris, the CAC 40 index was up 69.19 points, or 1.27%, to 5,524.26.

Asian markets ended solidly higher. In Japan, the Nikkei 225 index climbed 325.69 points, or 1.94%, to 17,090.31. In Hong Kong, the Hang Seng index gained 256.53 points, or 1.36%, to 19,175.17. Korea's Kospi index advanced 12.94 points, or 0.92%, to 1,423.89.

Treasury Market
 
Treasury yields rebounded modestly amid the drop in weekly jobless claims and speculation Friday's labor report may beat expectations. The 10-year note fell in price 05/32 to 100-30/32 for a yield of 4.51%, while 30-year bonds dropped 11/32 to 101-19/32 for a yield of 4.65%.

News Analysis
BusinessWeek.com
March 8, 2007
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Stock Signals You Can Use

Look past the red and green arrows. From volatility to odd-lot shorts, here are a few indicators pros watch to figure the market's direction

by Marc Hogan

"Sign, sign, everywhere a sign," as otherwise-forgotten '70s rockers Five Man Electrical Band sang in their only U.S. hit. Stocks' recent turbulence has brought another wave of predictions about where the market could be headed (see BusinessWeek, 3/12/07, "What the Market Is Telling Us"). Investors still focused on all the red and green arrows may find themselves feeling, well, a little lost.

Wall Street analysts (and financial journalists) routinely sift through a variety of indicators for hints about stocks' likely next move. Of course, no forecasting tool can be 100% reliable, as anyone who's ever gone outside without an umbrella after reading the weather report could tell you. Still, certain signals help prognosticators make educated guesses about the market—and, like the proverbial broken clock, sometimes even get it right (see BusinessWeek.com, 12/27/06, "Five for the Money's Best Stock Picks").

In an era of Google (GOOG) and other online tools, savvy investors increasingly have access to the same information the pros use. This Five for the Money finds a few indicators investors might want to check for signs of the market's possible direction. Some are commonsensical, others downright wonky, but all are part of the arsenal of Wall Street pros—and worth a look from ordinary investors.
 
1. The VIX


The Chicago Board Options Exchange Volatility Index (VIX.X) is commonly referred to as the "fear gauge." Some traders use the VIX to measure the implied volatility of Standard & Poor's 500 index options. A drop in the VIX can signal a rise in investors' risk tolerance, while a jump in the VIX could indicate that investor sentiment has grown more cautious.

The VIX moved to historically low levels in recent months, leading some analysts to worry that investors had grown complacent. The index tumbled to a 52-week low of 8.6 on Dec. 18, 2006, down 64% from its June peak. More recently, the market's latest slump has corresponded with a spike in the VIX. On Feb. 27, the index surged as much as 70%, its biggest single-day increase ever, prompting market observers to forecast a bumpy ride for investors (see BusinessWeek.com, 2/28/07, "Stocks' Great Wall of Worry").
 
2. The TRIN


If "the trend is your friend," as some traders like to say, perhaps the TRIN could be, too. The Arms Short-Term Trading Index, also known as the TRIN, tracks the relationship between the number of stocks increasing or decreasing in price and the volume associated with those stocks. Simply put, the TRIN shows whether volume is moving into advancing stocks or decliners.

If more volume is flowing into advancing stocks, the TRIN will be below 1.0. Conversely, if more volume flows into decliners, the TRIN will be above 1.0. How far the index moves below or above 1.0 dictates how overbought or oversold the market is seen to be. (Analysts use the terms "overbought" and "oversold" to describe when technical indicators suggest stocks are overvalued or undervalued, respectively.)

Amid last week's sell-off, the TRIN reached as high as 8.0 in intraday trading, well into oversold territory. Such a high reading could signal a short-term bottom for stocks, says Chris Johnson, CEO and chief investment strategist of Johnson Research Group. "If everybody's selling in an orderly fashion, it tells you we're probably going to see an extended period of selling," Johnson explains. "You want to see people running out of the theater after someone starts shouting 'fire,' rather than people coming out single-file."

 
3. Odd-lot shorts


Some market pros gauge investor sentiment by looking at the level of odd-lot short sales, or the amount of bets against the market made in batches of fewer than 100 shares. A spike in odd-lot short interest reputedly shows that average investors, not just the so-called "smart money," are taking a bearish position on the market. This information is released daily by the exchanges.

Because these investors are seen as less sophisticated, traders often use odd-lot short activity as a contrary indicator. Odd-lot short interest surged amid last week's market slide, possibly signaling the rally that followed on Mar. 6.
 
4. Moving averages


Technical analysts frequently monitor the relationship between major indexes and their moving averages for further indications about possible market direction. Moving averages are calculated by adding the current day's closing price of a security with the like figures for the rest of the days in the average period, and then dividing the total by the number of days in the period. This process is repeated or "moved" each day and a new average is developed.

Comparing the performance of the S&P 500 index against its 50-day exponential moving average may yield some clues for investors. "Almost every individual in the world can now go onto the Internet and pull up a chart and do this for free," says Mark Arbeter, chief technical analyst at S&P Equity Research.

When the S&P 500 is below its 50-day moving average, as it was in afternoon trading Mar. 6, that's typically perceived as a negative sign for the market. Not until the S&P 500 climbs above its 50-day average and the average itself starts to rise again would this indicator become positive for investors, Arbeter observes.
 
5. Relative strength


Investors who aren't afraid to delve into even more highly technical terrain may be interested in watching the relative strength index, or RSI. This measure is available from nearly any online stock-charting service and can indicate when stocks have touched bottom.

To show a market bottom, the 14-day RSI must fall below 30, which is considered oversold territory. Then, if the S&P 500 rebounds and subsequently suffers a pullback, the RSI must stay above its initial low. "Let's say the market rallies this week up to 1,410," Arbeter explains. "Then the S&P reverses and goes back and tests the low we saw [Mar. 5] and in fact closes below the low of 1,374. You want to see the [RSI] indicator be above yesterday's low."

Once again, none of these indicators can be used with certainty to predict upcoming market action. Still, investors who take them under consideration as one piece of a larger puzzle may find them a handy way of keeping up with the pros.

News Article
BusinessWeek.com
March 7, 2007
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Stocks Falter Despite Fed Report

Major indexes slipped following Tuesday's sharp gains, though the Fed's Beige Book report showed moderate growth in most regions

by Marc Hogan

 

Stocks finished modestly lower Wednesday, failing to build on Tuesday's bargain-hunting rally despite the Federal Reserve's moderately upbeat Beige Book report. Oil prices climbed on a bullish inventories report, while investors also looked ahead to Friday's payrolls report for further clues about the economy.

On Wednesday, the Dow Jones industrial average slipped 15.14 points, or 0.12%, to 12,192.45, despite a 1.9% gain by Hewlett-Packard (HPQ). The broader Standard & Poor's 500 index fell 3.44 points, or 0.26%, to 1,391.97. The tech-heavy Nasdaq composite shed 10.5 points, or 0.44%, to 2,374.64.
NYSE breadth was flat, with as many issues advancing as declining. Nasdaq breadth was 18-13 negative.

The market's recent turbulence could be more noise than substance, some analysts maintain. "The sharp decline in share prices has enhanced the already attractive valuation of the S&P 500, as has the decline in bond yields," says Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs, in a note to clients. "Commentators have provided long lists of possible catalysts, both domestic and global... but U.S. fundamentals have changed very little."

Other analysts remained skeptical despite Tuesday's rally, citing technical factors. "Enough damage has been done to the daily and weekly charts to cause us to be suspicious of Tuesday's move as being a one-day wonder," notes Roger Volz, chief technical analyst at Swiss American Securities.

In economic news Wednesday, the Fed's Beige Book report showed moderate growth in most districts, despite "some slowing" in about a third of regions. The report is consistent with the Fed keeping interest rates steady, says Action Economics.

Treasury Secretary Henry Paulson reiterated his forecast of stable growth for the U.S. economy during remarks in Seoul, South Korea, according to a Reuters report. Paulson added that world economic fundamentals were strong despite fluctuations in global equity and foreign exchange markets, South Korea's financial ministry said in a statement.

Former Fed Chairman Alan Greenspan was also back in the headlines. Greenspan suggested the U.S. housing market has experienced an "inventory recession" but that the home sales decline has reached bottom, according to wire reports.

Meanwhile, the ADP National Employment Report said U.S. private nonfarm employment grew 57,000 in February to 115,111, following a downwardly revised 121,000 gain in January. The numbers don't change an expectation Friday's nonfarm payrolls report will show an increase of 90,000, says Action Economics.

The economic calendar is light Thursday, highlighted by weekly jobless claims data ahead of the payrolls release on Friday.

Among Wednesday's stocks in the news, Toll Brothers (TOL) was higher after the homebuilder said it may "burn off" its inventory in four or five months in most of its markets.

Take-Two Interactive (TTWO) was higher on news investors who own 46% of the video-game maker are joining in an attempt to take over its board and ask for a new CEO.

Citigroup (C) was modestly lower after running into a hurdle in its bid for Japan's Nikko Cordial.

Harris Associates, which owns about 7.5% of the brokerage, said it won't accept Citigroup's bid.

Google (GOOG) was modestly lower even after UBS raised its recommendation on the Internet search company from neutral to buy.

Shares of Kellogg (K) gained after Goldman Sachs upgraded the the cereal maker from neutral to buy.
On the earnings front, American Eagle Outfitters (AEOS) was lower despite reporting a 40% jump in fourth-quarter net income.

Payless ShoeSource (PSS) was sharply higher after the discount shoe retailer said it swung to a fourth-quarter profit.

Shares of Saks (SKS) climbed after the department store operator posted a fourth-quarter profit, up from a year-ago loss, on a 17% increase in sales.

Companies set to report quarterly results after the closing bell Wednesday included TiVo (TIVO).
In the energy markets, April West Texas Intermediate crude oil futures rose $1.13 to $61.82 a barrel, after a weekly inventory report showed crude supplies unexpectedly fell.

European markets finished modestly higher. The FTSE-100 index in London rose 18 points, or 0.29%, to 6,156.5. Germany's DAX index added 22.75 points, or 0.34%, to 6,617.75. In Paris, the CAC 40 index was up 17.94 points, or 0.33%, to 5,455.07.

Asian markets ended mixed. In Japan, the Nikkei 225 index lost 79.88 points, or 0.47%, to 16,764.62. In Hong Kong, the Hang Seng index declined 139.92 points, or 0.73%, to 18,918.64. Korea's Kospi index gained 8.02 points, or 0.57%, to 1,410.95.

Treasury Market
 
Treasury prices moved higher late in the session, after the Fed's Beige Book indicated evidence of slowing economic growth in some districts. The 10-year note rose in price 08/32 to 101-00/32 for a yield of 4.5%, while 30-year bonds climbed 12/32 to 101-26/32 for a yield of 4.64%. Trading could be slow Thursday ahead of Friday's payrolls report, says S&P.

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BusinessWeek.com
March 6, 2007
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Stocks Rally Amid Overseas Gains

Major indexes built on the global equity rebound for their biggest one-day gain of 2007, despite weak productivity data and a plunge in factory orders

by Marc Hogan

 

A return to volatility was good news for Wall Street on Tuesday. Stocks finished broadly higher, bouncing back from a weeklong correction amid a rebound in global markets and a recovery in the dollar against the yen. Treasury Secretary Henry Paulson and Japanese officials declared the global economy solid, though investors were also digesting some disappointing economic reports. Investors were apparently hunting for bargains, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 157.18 points, or 1.3%, to 12,207.59. The broader Standard & Poor's 500 index added 21.29 points, or 1.55%, to 1,395.41. Both benchmarks posted their biggest one-day gain performance since July, 2006. The tech-heavy Nasdaq composite climbed 44.46 points, or 1.9%, to 2,385.14, its strongest day since October, 2006.

NYSE breadth was decidedly positive, with 28 issues advancing for every 6 declining. Nasdaq breadth was 25-6 positive.

The bull market may still have legs despite the recent slump, some analysts say. "There is insufficient evidence to declare the market has entered a bear phase," says Richard Dickson, senior market strategist at Lowry's Reports. "The best chance for a clarification of the market's status could be in a rebound rally and test of the current lows."

In economic news Tuesday, Treasury's Paulson said the global economy is as strong as he's ever seen it, according to the AP. Paulson, in Tokyo on the first leg of a three-nation Asian tour, reportedly said reforms in China would help reduce the the type of volatility that has recently shaken world markets.

Meanwhile, former Federal Reserve Chairman Alan Greenspan said there's a "one-third probability" of a U.S. recession this year, Bloomberg reports. "We are in the sixth year of a recovery," Greenspan reportedly said. "Imbalances can emerge as a result."

U.S. fourth-quarter nonfarm productivity was revised down to 1.6%, from a 3% rate in an earlier reading and -0.1% in the third quarter. Unit labor costs were revised up to a 6.6% rate, from an initial 1.7% print and a 3.2% pace in the third quarter.

Separately, U.S. factory orders fell 5.6% in January, more than expected after a revised 2.6% increase in December.

The National Association of Realtors' index of pending home sales fell 4.1% to 108.7 in January, after jumping to 113.3 in December.

However, focus this week will likely be on Friday's February nonfarm payrolls report, preceded by ADP's employment survey on Wednesday. The calendar Wendesday also holds data on January consumer credit.

Among Tuesday's stocks in the news, CBS (CBS) announced plans to buy back about 47 million shares of its Class B stock for $1.4 billion.

ADC Telecom (ADCT) was higher as the telecom equipment maker's fiscal first-quarter results topped analyst expectations.

Xilinx (XLNX) was higher after the chipmaker raised the bottom end of its forecast for fourth-quarter sales.

On the M&A front, Citigroup (C) announced a bid of up to $10.8 billion for full control of Japanese brokerage Nikko Cordial, of which the banking giant already holds a 4.9% stake.

K&F Industries (KFI) agreed to be acquired by a unit of London-based military aerospace company Meggitt for $1.1 billion in cash.

In analyst calls, Texas Instruments (TXN) was higher after Bear Stearns raised its rating on the chipmaker from peer perform to outperform.

Altria (MO) was higher after Deutsche Bank upgraded the cigarette maker from hold to buy.
In the energy markets, April West Texas Intermediate crude oil futures rose 62 cents to $60.69 a barrel amid cold weather in the Northeast, rebounding from their recent slide on worries about a slowing global economy.

European markets finished higher. The FTSE-100 index in London rose 79.8 points, or 1.32%, to 6,138.5. Germany's DAX index added 60.43 points, or 0.92%, to 6,595. In Paris, the CAC 40 index was up 52.1 points, or 0.97%, to 5,437.13.

Asian markets ended sharply higher. In Japan, the Nikkei 225 index rebounded 202.25 points, or 1.22%, to 16,844.5. In Hong Kong, the Hang Seng index climbed 393.68 points, or 2.11%, to 19,058.56. Korea's Kospi index advanced 26.78 points, or 1.95%, to 1,402.93.

Treasury Market
 
Treasury prices moved lower as assets flowed back into stocks. The 10-year note fell in price 09/32 to 100-25/32 for a yield of 4.52%, while 30-year bonds dropped 12/32 to 101-17/32 for a yield of 4.65%.

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BusinessWeek.com
March 5, 2007
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Profits: A Silver Lining for Stocks?

While major equity indexes have gone wobbly, corporate earnings have quietly posted another quarter of double-digit growth

by Marc Hogan

 

One modestly upbeat statistic went mostly unnoticed during the past week's global equity gyrations. The Standard & Poor's 500 index appears poised—albeit just barely—to record a 19th consecutive quarter of double-digit earnings growth, trumping many forecasts to the contrary (see BusinessWeek.com, 2/1/07, "Will Profits Snap Their Hot Streak?"). While corporate profits may post smaller gains going forward, the outlook isn't all gloomy for Wall Street.

Right now, investors will probably take all the good news they can get. On Mar. 2, the Dow Jones industrial average finished its worst week since March, 2003, while the S&P 500 capped off its biggest weekly decline since January, 2003. Downbeat economic reports, a plunge in Chinese equities, and concerns about a sharp rise in the Japanese yen all helped snap a market rally that had gone on nearly uninterrupted since mid-2006.

Fourth-quarter earnings, at least, may have defied skeptics. If the reporting season ended today, Corporate America squeaked out another quarter of double-digit earnings growth. With more than 92% of results in as of Mar. 2, S&P 500 companies have posted an average earnings increase of 10.05% for the period, according to S&P.

Down to Earth

The streak may be running down, but investors shouldn't necessarily worry. While analysts expect earnings growth to slow in the months ahead, a dramatic, 2001-style turnaround in U.S. corporations' bottom lines probably isn't in the cards. Stocks could still have upside surprises in store, providing opportunities for savvy investors, even in the current volatile market environment (see BusinessWeek.com, 3/12/07, "What the Market Is Telling Us").

Ashwani Kaul, chief market strategist at Reuters Estimates, sees earnings growth dropping off sharply in the first three quarters of 2007, then returning to double digits in the fourth quarter. "Corporate profits are still going to grow, but they can't just keep growing at the astronomical levels they have been," Kaul explains. Wall Street might not punish stocks too severely for the slowdown, he adds, because earnings should remain high in absolute terms following their 19-quarter run.

In fact, investors might keep stock prices afloat in anticipation of a potential rebound for profits in 2008. A couple of quarters of single-digit earnings growth won't necessarily pose a big hurdle for further S&P 500 gains, observes Goldman Sachs (GS) strategist David Kostin, who cites an expected 11% growth rate next year. "We believe the market in 2007 will focus on the prospect of accelerating earnings growth in 2008," Kostin says in a Feb. 20 note.

Further Volatility Ahead?

Meanwhile, the market may have already factored a slowing economy into stock prices. The long-term earnings growth expectations embedded in large-cap U.S. stocks imply potential GDP growth of just 2.25%, according to Citigroup (C) and S&P estimates. "We may be below that growth rate for a short time, but that doesn't represent a particularly difficult long-run valuation hurdle or growth requirement," notes Citigroup senior economist Steven Wieting in a Mar. 1 report.

That isn't to say economic concerns might not continue to create upheaval for the market. Further volatility could be in store in coming days, as investors assess data on employment, nonmanufacturing business activity, and January international trade, along with the Federal Reserve's Beige Book report. The Chicago Board Options Exchange Volatility Index (VIX.X), a measure of investors' risk tolerance often classified as a "fear gauge," rose 15.6% to 18.29 in afternoon trading Mar. 2, more than doubling its 52-week low of 8.6 set Dec. 18, 2006.

Counting on Corporate Profits

Former Fed Chief Alan Greenspan grabbed headlines this past week as he asserted a recession is "possible," but not "probable" in 2007 (see BusinessWeek.com, 3/1/07, "Greenspan vs. Bernanke: Hold Your Bets"). The Institute for Supply Management's strong manufacturing report Mar. 1 may have eased some economic fears, but the housing market remains a question mark for investors. "The market should be moving up again once it becomes clearer that the housing recession and the subprime mortgage credit crunch are not spreading," says Ed Yardeni, chief investment strategist at Oak Associates, in a Mar. 2 report.

Until then, risk aversion bodes well for defensive plays, some analysts say. Health care and consumer staples were the only sectors to receive net analyst upgrades in the most recent week, following several months of sharp downgrades for staples, says Merrill Lynch (MER) analyst Brian Belski in a Mar. 2 report. As a further-from-consensus play, Belski recommends the telecom sector.

Investors should likely brace themselves for continued turbulence in the weeks ahead. The market's eight-month run of low volatility and steady gains may be over, but investors would do well to remember that one pillar of the market's strength, corporate profits, probably isn't crumbling just yet.

News Article
BusinessWeek.com
March 5, 2007
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Stocks End Lower in Seesaw Session

Late selling tripped up the major indexes. Investors fretted about the global economy, subprime lenders, and stock losses overseas

by Marc Hogan

 

U.S. stocks finished lower Monday, giving up an early rebound attempt amid a global slump that began in Asia overnight on news China wants to slow economic growth. European stocks were down, as last week's yen "carry trade" position unwinding continued. Worries about the U.S. subprime mortgage industry also weighed on sentiment.

On Monday, the Dow Jones industrial average fell 63.69 points, or 0.53%, to 12,050.41, paced lower by Alcoa (AA). The broader Standard & Poor's 500 index dropped 13.05 points, or 0.94%, to 1,374.12. The tech-heavy Nasdaq composite slid 27.32 points, or 1.15%, to 2,340.68.

NYSE breadth was negative, with 28 issues declining for every 6 advancing. Nasdaq breadth was 25-6 negative.

Stocks' recent slide comes as investors have begun factoring in downside risks, some analysts say. "Having fully discounted a 'Goldilocks' global economic outlook over the course of an uninterrupted rally that began last July, markets were priced to perfection, leaving little room for further gains, by our analysis," says Alec Young, equity market strategist at Standard & Poor's Equity Research. "Concern regarding a potential global economic slowdown has taken hold amid weaker U.S. economic data and fears the Chinese government may succeed in slowing China's red-hot growth."

Chinese Premier Wen Jiabo said overnight Monday the government was working on the assumption that gross domestic product would grow by about 8% this year, the same target it set last year, when GDP actually climbed 10.7%, according to a Reuters report. Wen said the target had been set to remind local officials of the need "to avoid seeking only faster growth and competing for the fastest growth." He did not rule out raising interest rates.

After the close Friday, Federal Reserve Chairman Ben Bernanke indicated the Fed was keeping a close eye on global markets. Bernanke said the subprime mortgage industry's problems haven't spilled over to prime mortgages.
Treasury Secretary Henry Paulson, in a TV interview over the weeekend, said the economy is healthy. He downplayed the risk of a downturn.

In other economic news, the Institute for Supply Management's non-manufacturing business activity index fell more than expected to 54.3 in February, down from 59.0 in January.

Separately, St. Louis Fed President William Poole reiterated the importance of low inflation, while Fed Governor Kevin Warsh said financial markets have shown "extraordinary resilience." Fed Governor Randall Kroszner also said markets are working well.

The calendar Tuesday holds reports on January factory orders and fourth-quarter nonfarm productivity growth.

Among Monday's stocks in the news, New Century Financial (NEW) was down nearly 70% after the subprime lender said it faces a criminal investigation.

Fellow real estate lender Fremont General (FMT) was lower by about 32% after the company said it plans to exit the subprime home-loan business.

Meanwhile, Research in Motion (RIMM) was lower after the BlackBerry maker said it expects to record about $250 million of charges as it restates earnings following a review of its stock-options grants.

Advanced Micro Devices (AMD) was lower as the chipmaker said it probably won't meet its previous first-quarter revenue forecast of $1.6 billion and $1.7 billion.

On the M&A front, Pathmark Stores (PTMK) agreed to be acquired by rival grocer Great Atlantic & Pacific Tea (GAP) in a deal valued at about $1.3 billion in cash, stock, and debt assumption.

In analyst calls, Palm (PALM) was lower after the J.P. Morgan cut its recommendation on the company from neutral to underweight.

In the energy markets, April West Texas Intermediate crude oil futures fell $1.57 to $60.07 a barrel amid worries a slowing global economy would reduce demand.

European markets finished lower, but improved from their weakest levels. The FTSE-100 index in London dropped 42.6 points, or 0.7%, to 6,073.6. Germany's DAX index slid 81.07 points, or 1.23%, to 6,522.25. In Paris, the CAC 40 index was down 46.53 points, or 0.86%, to 5,378.17.

Asian markets ended sharply lower. In Japan, the Nikkei 225 index skidded 575.68 points, or 3.34%, to 16,642.26. In Hong Kong, the Hang Seng index tumbled 777.13 points, or 4%, to 18,664.88. Korea's Kospi index shed 38.32 points, or 2.71%, to 1,376.15.

Treasury Market
 
Treasury prices drifted lower after climbing overnight amid weakness in global equities. The 10-year note edged down in price 01/32 to 100-31/32 for a yield of 4.5%, while 30-year bonds slipped 03/32 to 101-24/32 for a yield of 4.64%. The decline in Treasury prices may reflect some profit-taking following last week's big gains, says S&P.

News Analysis
BusinessWeek.com
March 1, 2007
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Greenspan vs. Bernanke: Hold Your Bets

The former Fed chairman and the current central bank chief might not be as far apart on the state of the economy as investors imagine

by Marc Hogan 

It sounded like an economic clash of the titans. In one corner: Former Federal Reserve Chairman Alan "the Maestro" Greenspan, who warned on Feb. 26 that the U.S. economy could stumble into a recession by yearend. And in the other: current Fed chief Ben "the Professor" Bernanke, whose soothing words helped the markets rebound two days later.

Investors might have had ringside seats, but they were also the ones who took a beating. The day of Greenspan's bearish blow stocks couldn't hold their ground, despite the biggest leveraged buyout deal in history—a $31.8 billion bid for Texas power company TXU (TXU). Then on Feb. 27, a 9% plunge in China's stock markets combined with economic worries to deal a one-two punch that sent the Dow Jones industrial average to its biggest point drop since Sept. 17, 2001 (see BusinessWeek.com, 2/28/07, "Stocks' Great Wall of Worry").

Dig a little deeper, though, and there's a different story. While investors may have to get used to possible tension between the present Fed chief's statements and those of his legendary predecessor, they also need to read beyond the headlines. The opinions of Bernanke and Greenspan on the economy probably aren't as different as you think.

More Upbeat

First, Greenspan hasn't forecast a recession. What he did Feb. 26 was respond to a question by saying it was "possible" the U.S. economy would go into recession in the second half of 2007. The retired Fed boss also indicated it would be "very precarious" to try to predict so far into the future, and noted that most economists don't forecast a recession. Still, he declined to rule one out.

On March 1, Greenspan clarified his outlook further. "By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession," Greenspan told an audience in Tokyo, according to a Bloomberg report. This wasn’t exactly the gloom and doom implied by press reports earlier in the week.

Bernanke's statements don't necessarily contradict his predecessor's position. On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier. However the slump didn't change policymakers' overall view of an economy with "moderate growth going forward," the Fed chief said (see BusinessWeek.com, 3/1/07, "Testimony of Fed Chairman Ben S. Bernanke").

In other words, short-term traders probably took Greenspan's comments out of context. "I would be surprised if there was a significant difference in opinion on the likely path of the economy between Bernanke and Greenspan," says Conrad DeQuadros, senior economist at Bear Stearns (BSC), noting that Greenspan's other recent comments have actually been more upbeat, not less, than Bernanke's. "If you were to ask any economist if there was a possibility of recession, they're going to say yes."

Hogging the Spotlight?

That's because the probability of a recession is never zero. In other words, the market may have been reacting to Greenspan's comments in the manner of Jim Carrey's goofy protagonist in 1994 movie Dumb & Dumber. Told the odds he will end up with actress Lauren Holly's character are one-in-a-million, Carrey lights up: "So you're saying there's a chance!"

At the same time, Greenspan's outspokenness remains unusual for a former head of the world's top central bank. A year after erstwhile Fed chief Paul Volcker stepped down in 1987, he wasn't making similar market-moving statements. By contrast, Greenspan remains much in demand on the public speaking circuit and has seized the spotlight with other economic pronouncements since his retirement. The highly visible former chairman could prove a challenge for his successor even when their outlooks don't widely differ (see BusinessWeek.com, 2/14/07, "For Bernanke, Capitol Hill's No Easy Street").

"For the lifecycle of most people on the Street, Greenspan's words will always carry weight," says Peter Rodriguez, a Darden Graduate School of Business economist and one of Bernanke's former students. "If you're Bernanke, what you would hope is that you will grow to fill those shoes in such a way that investors begin to listen at least as much to you as to him."

Coincidence?

There's little else Bernanke can do about the other Fed eminence in his midst, some economists observe. "It's certainly the case that it's possible for people outside the central bank to make central bankers' jobs harder or easier," says Stephen Cecchetti, a professor at Brandeis International Business School. "That's life in the big city."

This time, any difference between Greenspan's remarks and Bernanke's doesn't seem to have left the market with too much lasting damage. "It just so happens that [Greenspan] made one comment that ends up being right in front of a big stock market move," says Charles Jones, a finance professor at Columbia Business School. "I think that's more coincidence than anything."

Stocks recovered modestly on Feb. 28. The Dow bounced 0.43% to 12,268.63, just 1.6% below where it ended in 2006 (see BusinessWeek.com, 2/28/07, "Stocks: A Half-Hearted Rebound"). Whether the market can make up more lost ground will depend more on corporate earnings and the extent of the housing market's weakness than on a war of words between two central bankers—no matter which one comes up with the snappier sound bite.

News Analysis
BusinessWeek.com
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

by Marc Hogan

 

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 BusinessWeek.com, 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 BusinessWeek.com, 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.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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 BusinessWeek.com, 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%.

News Article
BusinessWeek.com
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

by Marc Hogan

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 wsj.com.

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%.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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%.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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%.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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.

News Article
BusinessWeek.com
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

by Marc Hogan

 

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.