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Market Matters A daily recap of all things financial Don Bravo Stocks Close Week with Impressive Gains - February 4, 2005
All major indices closed significantly higher on Friday as a disappointing January employment report fueled speculation that Alan Greenspan's Federal Reserve would not raise interest rates significantly due to a less-than-robust economy.
Non-farm payrolls increased by 146,000, which was less than the 200,000 economists had expected and well below the average gain of 177,000 from September through December of 2004.
According to Wall Street, even bad news is good news these days, and stocks jumped to their highest levels in over two weeks. The NASDAQ lurched ahead 29.02 to 2,086.66, while the NYSE Composite gained more than 69 points to close at 7,217.43, a new high for the year.
The rally was broad-based with winners outpacing losers by 3-1 on the NYSE and 2-1 on the NASDAQ.
Volume was moderate to heavy, with all sectors participating in the rally preceding the weekend of America's unofficial Super Bowl holiday.
It was the second consecutive week that the indices closed in the positive. With earnings season pretty well wrapped up for the quarter, investors will be looking ahead to Thursday when the Bureau of Economic Analysis releases the December Trade Balance figures. Analysts are expecting improvement to -$57.4B from November's record of -$60.3B.
The Day After: Markets Roiled by Productivity, Factory Orders Declines - February 3, 2005
A caveat: Since every day at roughly 3:30 pm, the DJIA shoots skyward anywhere fro 20 to 40 points, I will no longer be reporting its gains or losses because of this blatant manipulation. While I have no solid proof of such manipulation, the "spikes" have been occurring at various times since 2001 and have been noted by many. More information can be found HERE.
While it may be difficult to manipulate the massive markets of US stocks, toying with the 30 which comprise the Dow would be child's play for some and based on the evidence, there's little doubt that the markets are being "played" by some powerful players.
I should point out that while the Dow stocks can be manipulated quite readily, they are also components of the other major exchanges - the S & P 500, NASDAQ and obviously the NYSE Composite. The manipulation of the Dow distorts all indices to whatever end the perpetrators of this game may have in mind.
Today's installment of Market Matters was mostly written during the day, prior to the close, before the various spikes and runs - mainly on the Dow - which witnessed a turnabout, from down more than 46 points just before 1:00 pm to close with a mere 3.69 loss.
My analysis of the markets and the economy will stand the test of time and scrutiny, unlike many of the "wash" trades particularly on the Dow. -- Don
On the heels of president Bush's State of the Union speech, in which the he cited the economy as "healthy" and "growing," the markets offered another opinion with a fairly broad sell-off.
The president stated, "America's economy is the fastest growing of any major industrialized nation." Apparently, Mr. Bush doesn't want to include China or India on that list.
All major indices opened in the red and slumped along throughout the day. The sell-off was induced, in part, by a poor 4th quarter report by Amazon.com, which missed earnings estimates and plummeted more than 6 points, closing at 35.75, and by a decline in 4th quarter productivity, from 1.8% growth in the 3rd quarter to 0.8%. Analysts had expected the Labor Department to report another 1.8% gain.
Further exacerbating the dour mood were a pair of reports issued at 10:00 am. The Institute for Supply Management's (ISM) Services index came in at 59.2, below estimates of 61.0 and far behind last month's reading of 63.9.
At the same time, the US Census Bureau released it's monthly Factory Orders report, which showed a significant decline in December, from a 1.4% increase to a paltry 0.3%.
The fear is that in an environment in which the Fed is steadily tightening credit markets, declining productivity and sluggish output might send the economy into recession at some future point, especially after the 4th quarter's disappointing reading of 3.1% GDP growth.
The GDP figure is preliminary and many expect the number to be revised upward by as much as half a percent. That's a double-edged sword, however, as a revision will likely still be lower than the 3rd quarter and set the bar higher for the 1st quarter of '05.
A recession is broadly defined as two consecutive quarters of declining growth in the GDP, but the economy is far from that scenario.
The argument that the US economy is already slowing is given credence by the raw numbers provided by the Bureau of Economic Analysis, which shows the percent increase from the previous quarter, already declining through most of '04.
From the third quarter of '03 to the first quarter of '04 the increases were 7.2, 4.2 and 4.5%. The last three quarters of '04 came in at 3.3, 4.0 and 3.1%.
GDP report here: http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm
While the economy is still growing, it is arguably not sustainable. Large trade imbalances, government deficits and a weak dollar abroad are the main culprits and/or manifestations of underlying weakness.
The NYSE Composite closed lower by 21.07 at 7,148.32, while the NASDAQ lost 17.42, to 2057.64.
From a volume perspective the trading was largely on the downside as up volume was 39%, down 58% on the NYSE; on the NASDAQ, 26% and 72%, respectively.
Tomorrow's Labor Department Employment report for December will likely lay the groundwork for market direction, as it is due out at 8:30 am.
Dow, NASDAQ Up Three Straight - February 2, 2005
The NASDAQ, in similar rebound fashion, bottomed at 2,008.70 on the 24th, and closed today at 2,075.06, up 6.36 today and a solid 66 points over the same span.
Today's uptick marked the first time in 2005 that both the Dow and NASDAQ finished in positive territory 3 straight sessions. Bravo! and now, will we have an encore?
The widely-anticipated Fed hike of .25% in the benchmark rate passed without much fanfare and what amounted to sideways action on the markets.
Also goosing the indices was Google (GOOG), which reported record earnings - over $1 billion in revenues for the 4th quarter of 2004 - and kicked up over 14 points (7%) on the day to close a shade under 206.
The search engine stock opened near its all-time high of 216.80 (reached today), and a heavy sell-off after the Fed announcement pushed the stock down some 6-7 points into the close. More than 32 million shares changed hands, triple the normal volume.
The healthy gains over the past seven sessions is running contrary to early indications produced by the brisk early and mid-January selling, but speculators don't seem at all concerned. Economic data has been solid, with the exception of the 4Q GDP, which was below expectations, though likely it will be revised higher.
Earnings for the better part of the S&P 500 have been solid, though mostly unspectacular. The main concern is keeping pace with the high marks set in 2003 and 2004. Economists are calling for a slowdown in the latter part of 2005 or early 2006, but for now, the party rages on.
After the president's State of the Union speech tonight, most of the political wrestling will be forecast. The president's agenda calls for more spending in Iraq, making his tax cuts permanent (actually no such thing is possible, though it sounds nice), and reforming Social Security, which is shaping up to be a tough fight.
Thursday's economic calendar is very light, but Friday features the Labor Department's reading on employment for December, which should further clarify the overall health of the nation's economy.
What Are They Buying? - February 1, 2005
With today's rise in the markets, I thought it might be instructive to see just what investors are buying into. A look at the five most active issues (by volume) on the NASDAQ and NYSE. NASDAQ first:
Intel (INTC), share price: 22.63, trailing earnings: 1.16, p.e: 19.50. One of the high fliers of the internet boom, now their chips are under serious price pressure. A p/e of just under 20 indicates the company is growing. Last year at this time, the stock was trading at 30. PIPE DREAM.
JDS Uniphase (JDSU), share price 2.07, trailing earnings: -0.04, p/e: N/A. Certainly this stock is a bargain hunter's dream. At just over $2 per share, practically everybody in the world can own 100 shares or more. Of course, the company hasn't made a nickel in over a year. In fact, if it made a nickel, it would be a vast improvement, Last quarter they lost 2 cents per share. JUNK.
Microsoft (MSFT), share price: 26.39, trailing earnings: 1.28, p.e: 20.62. Trading in a range of 24-30 for the past year. Obviously, investors are buying it for their generous dividend of 0.32, a yield of a whopping 1.22%. Inflation puts you in the red here. Split adjusted high of 60 was in January of 2000. It's been deteriorating ever since. WISHFUL THINKING.
Sirius Satellite (SIRI), share price: 6.29, trailing earnings: -0.58, p.e: N/A. Losses into the foreseeable future. This year they only plan on losing 55 cents per share. The stock traded as high as 9 recently. MONEY PIT.
Cisco Systems (CSCO), share price: 18.13, trailing earnings: 0.79, p.e: 22.95. Cisco traded at 25 this time last year and hasn't grown earnings appreciably. The last four quarters were .18, .19, .21, .21. They, like most other tech companies will have to begin including stock options used as compensation in their earnings calculus. After June, you should be able to buy this stock for half what it is today. OVERPRICED HYPE.
ON THE NYSE:
Pfizer (PFE), share price: 23.86, trailing earnings: 2.12, p.e: 11.25. Less than a year ago, this pharma-darling was trading above 38. It's come down from there, but earnings are solid and the dividend of .76 yields 3.12%. This one is almost fairly priced and despite some earnings forecast revisions, they're still a fairly healthy (no pun intended) company. YOU COULD DO WORSE.
Sprint (FON), share price: 24.18, trailing earnings: 1.00, p.e: 24.18. Reports on Thursday for the 4th quarter and is expected to come in at .32, which would lower the trailing earnings to .95 and raise the p/e. That's not good news, but those wily Wall Street types pushed this up 35 cents today, within a buck of it's 52-week high (reached in December). With consolidation throughout the telecom sector, Sprint is a player. But, in a sector that is highly competitive (wireless), where's the growth? ALMOST A CERTAIN LOSER.
Tyco (TYC), share price: 34.51, trailing earnings: 1.64, p.e: 21.04. Why are people so insistent on buying this opaque company's shares? Most investors probably couldn't even name five of the businesses they operate (there are hundreds). Their former CEO was found guilty of fraud, yet the stock reached a new high yesterday. Still, the company just announced earnings and they were distressed, amid writing down debt and selling off assets. A DOG IS A DOG IS A DOG.
Lucent Technologies (LU), share price: 3.25, trailing earnings: 0.11, p.e: 29.55. Why is a $3 stock even on the most active list? Because it was $2.70 six months ago, or because it was $4.50 a year ago? The average daily volume on Lucent is 55 million shares. Why? Even if the company doubles revenues in '05 it will still be overpriced even if it doesn't go up a penny, which, by the way, is likely. BIGGER FOOL THEORY AT WORK.
American Express (AXP), share price: 56.75, trailing earnings: 2.74, p.e: 20.71. American Express is one of the largest credit/banking operations on the planet, but it is within shouting distance of its 52-week high. The yield on the 48 cent dividend is less than one percent. If there isn't a credit crunch - we're currently in a massive credit bubble - this could actually go higher, but who's willing to bet the ranch on that. BEST OF A BAD BUNCH.
So, there you have it. 10 stocks, and only two or three of them could be even considered reasonable investments. While the indices shot ahead for the second day in a row, one wonders if 20+ price/earnings ratios are a new paradigm or just a passing fancy. Stocks usually retreat to a norm of around 10 to 12, so this top ten list is, as a group, a touch on the high side.
There isn't a single stock listed here, besides Pfizer and Intel, with a P/E under 20, and two of them were losing money, so their P/E is actually infinity. If somebody held a gun to your head and said you had to buy one of these, would you? Or would you rather be dead?
For the record, the Dow gained 62 points to close well above the mythical and mystical 10,500 mark at 10,551.94. Bets are being placed that it won't be there long. The NASDAQ trailed the field, up only 6.29 for the day.
Monday's a Winner On Iraq, Merger News - January 31, 2005
Apparently, Wall Street took great delight not only in the Iraq election process, but in the merger of SBC Communications and its one-time parent company, AT&T.
The Dow Jones Industrials, up 62.74, were aided by a 3:30 rally (the third day in a row for such an occurrence) that took it off the lows of the day to within 12 points of the highs. A similar, albeit less-impressive move got the NASDAQ a healthy 26.58 gain for the day.
Also factoring into investor optimism was the relative stability in the price of oil which settled at $48.20, up $1.02 on the NY Merc. Apparently, the success of the Iraqi elections - at least in the minds of traders - portends stability in the region and a settling of prices, despite today's rise.
The enthusiasm was tempered a bit by anticipation of a Fed rate hike on Wednesday and the Labor Department's employment report for December, due out Friday morning. While the Fed is almost certain to raise their benchmark by a quarter point, there is still some uncertainty to the labor picture, which has been less than robust since mid-2001.
Still, investors were buoyed by record quarterly profits from the likes of Exxon Mobil, the world's largest oil company, which beat expectations of $1.07 per share by 23 cents. The company reported profits of $8.42 billion.
Market breadth was also impressive with winners beating losers by a 73-22% margin on the NYSE and 69-26% on the NASDAQ. 226 stocks reached new highs on the NYSE and 116 on NASDAQ. The new lows on both indices were insignificant.
The trend may not be friendly to the markets, however. Twice in this month, when stocks were higher on Monday, they were down for the week. Additionally, January sell-offs are a reliable indicator of how stocks will fare the rest of the year, and all major indices were lower for the month.
GDP Drags Stocks Lower - January 28, 2005
The Labor Dept. reported an increase of 3.1%, lower than consensus expectations of 3.5%. The disappointment was further exacerbated when compared to 3rd quarter figure of +4.0%, suggesting widespread weakness and little hope for meaningful expansion in months ahead.
Traders responded to the news by selling across the board. The Dow ended down 40.20 to close at 10427.20. The NASDAQ lost 11.32, finishing at 2,035.83.
Despite the sell-off, both indices ended marginally higher for the week, ending a three-week skid.
Analysts were pointing to the political scene heading into next week. How well the elections in Iraq are conducted - and the continued situation there - may have an impact on investment decisions in coming weeks.
The Iraq situation is important, but to investors, stability in the region - and the consequent price of oil - is the determining factor.
Perhaps politics will play a role, but earnings expectations as the reporting season winds down and risk perception are always at the forefront.
Earnings for the 4th quarter have been generally good, but a touch short of what would be considered stellar. There have been a share of disappointments, notably, EBAY and MERCK, both of whom have suffered severe declines.
At this point, with the indices teetering at levels just below multi-month highs reached in late December, the profit-taking seen during January may well extend and become outright risk aversion.
The impact of the GDP report cannot be underestimated. A slowing economy amid a climate of rising interest rates (the Fed meets this coming week and is widely expected to hike rates another quarter point to 2.5%) is anathema to investment strategists, especially when stocks are near nose-bleed levels with high p/e multiples.
So, for the next week and beyond, caution is advised.
50/50 Proves To Be 100% Right! - January 27, 2005
Yesterday I said that the markets have a 50-50 chance of turning in another positive close, which would mark the first 3-day winning streak in 2005.
Turns out that I was 100% right.
The NASDAQ, which spent the better part of the day in the red, ended positive by a slim 1.06 point. The Dow, not quite so fortunate, spent the entire day in the red and ended there, down 31.19 at the close.
What is remarkable about my prescience and the movement of the markets is that both indices could easily have ended down for the day had not somebody (apparently, everybody) suddenly got the urge to buy everything offered at about ten minutes after three.
It was right around that time that both indices were at or near their lows of the day. The Dow was off a resounding 68 points, the NASDAQ down somewhere in the neighborhood of 9.
Before the clock struck 3:30, the NASDAQ was in positive territory and the Dow had pared its losses by 45 points.
Impressive? Impossible? This sort of market action is what has been befuddling analysts and investors for more than four years and probably much longer for some. There was neither positive news nor any indication of a change in sentiment, but there it was - a chart line going extremely vertical.
Besides the wild spikes on the indices (some call this pumping, others say it has much to do with futures speculation), over the past two years all volatility has been wrung out of the markets. Take a look at a chart of the VIX (volatility index), and you'll see what I mean.
After the close, Microsoft announced its fiscal 2nd quarter results, ended December 31, 2004. The #1 software maker's profits more than doubled, earning $3.46 billion, up from $1.55 billion, a year ago. EPS was .32 vs .14 for the comparable period in 2003.
Analysts were looking for .33, but the stock was fractionally higher in after-hours trading.
Earnings and the government's 4th quarter GDP figures will likely drive the market tomorrow. 15 S & P components report. Three of them, McDonald's, Honeywell and Proctor & Gamble are also Dow components. The GDP report (consensus +3.5%) will be released prior to the opening of trading, at 8:30 am.
Earlier in the day, the govt. reported durable goods growth at 0.6%, below analyst estimates (0.7). Initial unemployment claims came in slightly below expectations at 325,000.
January 26, 2005 - Rally Broadens, Deepens
Yesterday, I pointed out that Tuesday's rally was not as impressive as it may have looked initially due to the lack of breadth and the early highs. After today, I realized that the rally was sufficient to inspire some level of confidence, ergo, the massive, broad and day-long rally which saw the NASDAQ climb 26.14 points and the Dow tack on 37.03.
While there is a level of underlying weakness in the overall market and the economy, traders are still very much emotional beings and prone to momentum swings. Today brought that fact to light in the strongest of terms as the broad averages exhibited more impressive gains than the narrow Dow and S&P.
The Dow once again closed below the psychological barrier of 10,500 for the fifth straight session, though it spent most of the day close to or above it, ending the day at 10, 498.59.
In percentage terms, the NASDAQ was clearly the belle of the ball, up 1.29%. The NYSE Composite next at .68%, the S & P 500 came in with a .62% gain, while the Dow lagged well behind, ringing up a respectable, but unispiring .35% boost.
As opposed to Tuesday, Wednesday's leap forward stayed on until the last dance. Gainers outnumbered losers 2348 to 946 on the NYSE, and 2126 to 973 on the NASDAQ. Roughly two out of every three stocks were on the upside.
Also, of positive note were the 98 new highs - against only 26 new lows - on the NYSE and 69 versus 43 on the NASDAQ.
What this will insipre for tomorrow is, as usual, anyone's guess, but after three weeks of losses, the past few days have been a welcome respite. Thus far, the Dow is up 105 points for the week, the NASDAQ, 11 and change.
Two day winning streaks are common, but including today, have occurred only twice in 2005. A three-bagger for the Bulls would be the first one this year, and I'd give it about a 50-50 chance of happening.
The 10,500 mark on the Dow continues to hang over the markets, and if the futures are lower going into the open, the averages could stay underwater all day. Mood is prone to change and the prevailing sentiment is still far from overwhelmingly positive.
Two key economic reports due out at 8:30 am may set the tone - Durable Goods Orders for December and Initial Jobless Claims for the prior week. Anything over .8% improvement in the durables would be seen as a positive, and the market expects 330,000 in initial claims. While that may seem a high number, retailers are still in the process of laying off temporary, seasonal help, so it may not be important, unless the number is far off in either direction or anecdotal evidence points to significant strength or weakness in the labor market.
The one-day boost given to stocks on Tuesday, January 25, was a rally without a future according to the data. At the end of the day, the Dow recorded a gain of 92.95 points, and the NASDAQ tacked on 11.25, but the close, as usual, only told part of the story.
The broader NYSE Composite was up as much as 45 points, but finished with a gain of only 4.61. Likewise, the more tightly wound S & P 500 was up a little more than 10 points early on, but closed with a paltry gain of only 4.66
What was disturbing about the rally, from a bull's perspective, was the limited follow-through and deterioration throughout the day. By 10:00 am, both averages were sporting healthy gains - close to the highs of the day - and market breadth was firmly to the positive, with roughly 75% of all stocks on the upside. By the close of trading, gainers outpaced losers on the NYSE 48-46%, while the NASDAQ weighed in with a 53-43 ratio.
Additionally, the highs were reached relatively early in the day - at 10:30 am on the NASDAQ and at just a minute after 10:00 am on the NYSE. The Dow peaked at about 1:20 in the afternoon, and thus held its gain more firmly.
Naturally, the bears have sharpened their claws for Wednesday and beyond. A sputtering rally is just the kind of environment they like to short. It sends a strong signal that there is a lack of confidence and that the short-term correction is likely to resume.
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