Wall Street Greek
|Editor's Picks | Energy | Market Outlook | Gold | Real Estate | Stocks | Politics|
The Wall Street Greek blog is the sexy & syndicated financial securities markets publication of former Senior Equity Analyst Markos N. Kaminis. Our stock market blog reaches reputable publishers & private networks and is an unbiased, independent Wall Street research resource on the economy, stocks, gold & currency, energy & oil, real estate and more. Wall Street & Greece should be as honest, dependable and passionate as The Greek.
Tuesday, October 31, 2006
Saturday, October 28, 2006
The Greek's Week Ahead - Oct 30
We believe an economic term will be reintroduced into the lexicon of investors this week. Stagflation! And welcome, just in time for Halloween, appropriately dressed to scare investors out of stocks. Ah yes, the dreaded combination of economic stagnation and inflation; perhaps the Fed's worst fear, as it could handcuff their ability to maintain economic stability. And worst of all, it might make the economy vulnerable to the worst case scenario, depression.
Fear not trick or treaters, as this is not yet a significant risk. The Fed believes the economy will pick up steam soon, while inflation will weaken. Still, economic indicators of consumer strength this week will perhaps give investors some reason to imply whether the weakness in the housing market has spread enough to impact the consumer's ability to spend, a truly terrifying consequence. If the consumer tightens his belt, the American economy and the earnings of corporate America will be damaged, and that means stock prices too would be at risk.
On Monday, some very important economic data will help the markets decide which direction to head. The September readings on personal income and spending will be released. August data showed personal income rose by 0.3%, and Bloomberg's survey of economists shows consensus expectations for September at 0.3% growth as well. August personal consumption data showed a 0.1% increase, and September is forecast at 0.2%. If personal spending is below consensus, stocks could take a dive, in our opinion, as the market would relate housing weakness to personal spending, and fear degradation.
Fresh from last week's FOMC meeting, two Fed Presidents will be let loose to horrify the masses. Jekyll like perhaps, Dallas Fed Chief Richard Fisher, will give an address entitled "An Update on the Status of the Economy" to the New York Association for Business Economics. Mr. Hyde, or let's call him Jeffrey Lacker, Richmond Fed Chief and lone dissenter against a rate pause and supporter of a quarter point increase, will howl in the night or day on Monday as well.
Reporting earnings on Monday, Verizon Communications, Metlife Inc., Simon Property Group, Sysco Corporation, FPL Group Inc. and Clear Channel Communications.
Tuesday officially ushers in the gouls of Halloween. While candy sales may peak, the Conference Board's release of the consumer-confidence index for October will show just how afraid the consumer has become. Economists surveyed by Bloomberg expect the reading to measure 108.0. The reading for September was 104.5. On the same day, the Labor Department will release the employment-cost index for the third quarter. A reading we view less important, the Chicago purchasing managers will issue their report on U.S. manufacturing in October. Economist consensus expects a reading of 58.0, while September measured at 62.1.
Scheduled to report earnings on Tuesday are Procter & Gamble, Valero Energy, Marathon Oil, Automatic Data Processing, Archer Daniels Midland, Loews Corp., PNC Financial Services Group, Entergy Corp., EOG Resources, Vornado Realty Trust, Qwest Communications and American Electric.
Wednesday welcomes in the month of November and the celebration of the fall harvest. We might get a sign of whether it will be a season of Thanksgiving or not with the Institute of Supply Management's release of its manufacturing index for October. Economists are looking for a reading of 53.0, compared to September's reading of 52.9. Also, September construction spending will be released on Wednesday. Economists expect the data to show no growth, versus an increase of 0.3% growth in August.
In Singapore, EMTA, a trade association hosts a forum on recent economic and political developments in emerging markets. Finally, Fed Chairman Ben Bernanke will keynote the Opportunity Finance Network conference in Washington, D.C.
Reporting earnings on Wednesday are Time Warner, Prudential Financial, Devon Energy, Dominion Resources, Newmont Mining, Allergan Inc., and Marsh & Mclennan.
Thursday, Challenger, Gray & Christmas, the global outplacement consultancy, will release its monthly report on planned job cuts announced in October. September cuts climbed 54%. Also, September factory orders will be announced and Q3 productivity change.
Reporting earnings on Thursday are Qualcomm, CVS Corp., Transocean Inc., Caremark Rx Inc., CBS Corp., Becton Dickinson, Electronic Arts, and International Paper.
On Friday, the unemployment rate for October will be announced and is expected to measure 4.6%, as it was in September. October non-farm payroll is expected to grow by 125,000 jobs, versus 51,000 in September. Also, the Institute for Supply Management will release its non-manufacturing index, a better barometer of the health of the American economy than manufacturing.
Reporting earnings on Friday are Duke Energy and Medco Health Solutions. We hope this helps you better prepare for the week ahead. Look for "Today's Morning Coffee" on Tuesday, for your pre-market warm up of the day.
Labels: Week Ahead
Friday, October 27, 2006
Friday's Brew - Oct 27
Thursday, October 26, 2006
Speculative Trade - Intuitive Surgical (ISRG)
Last quarter, high flying Intuitive told the market that it could expect its expense structure to once again be heavy this quarter, and it did not provide a stellar report like in prior quarters. The shares subsequently fell sharply. This is a fast growing medical instruments company that makes the da Vinci Robotic Surgery System. It is gaining in usage because it is minimally invasive and requires less recovery time and less hospital stay, and has proven effective, something insurance companies like. It's gaining strong penetration in prostatectomy, hysterectomy and bariatric surgery. It's uses are in no way limited to those areas. It has a significant first-mover advantage in robotic surgery.
The company applies the Gillette razor/blade model, so to speak, with the system requiring parts and maintenance. We believe that due to last quarter's relatively weak result (only exceeding estimates by $0.04), the shares are poised to exceed expectations this time around. The shares trade at 46X the consensus EPS estimate for 2007 of $2.42. EPS growth is estimated at 42%, so the PEG is 1.1 based on those numbers. Long term growth is projected at a conservative 35%. Again, this is a case where past performance indicates that estimates are likely understated, so it appears to be an attractively valued high growth stock.
We invested approximately 80% of our capital long and 20% short, with the hope that if we are wrong, we can recover some capital. The options are priced for their extreme volatility, so a significant move is necessary to make money. However, ISRG seems to be capable of those kinds of moves around earnings time. We took interest in the Nov 120 Calls and Nov 90 Puts. Our strategic goal would make the Puts worthless, while returning significant gain from the Call options, if all goes to plan. Last quarter, the stock moved dramatically lower, ahead of the EPS report, so we are enthused to see the shares moving higher ahead of today's report. Volume picked up sharply after midday. Read into that as you like, but we view it positively. (disclosure)
Note: VCA Antech (WOOF) - Buy
Thursday's Brew - Oct 26
Speculative Trade - VCA Antech (WOOF) - Update
Unfortunately, we believe the guidance is being misunderstood by the market, which is mostly made up of investors who are not closely familiar with WOOF. This is not the first time this has happened, so it's particularly frustrating that the market does not get it. WOOF is a perennial UPOD or master of "Under Promising, Over Delivering", to quote Cramer. Unfortunately, in raising its guidance by 2 cents, WOOF presented guidance that is 1 cent below consensus of $1.15 for the year, and implies a weak Q4. Q4 is apparently not running any differently than the stellar trend that has persisted through the years, and we strongly believe WOOF will earn $1.16 to $1.17 for the year. Unfortunately, it was completely misunderstood after hours.
Hopefully some analysts will get on the horn and point this out, but if they have "hold" or lower recommendations on the stock, you should not expect them to. Those guys are waiting for the stock to get cheaper to upgrade it. Analysts with "buys" on the stock should be pounding the table this morning!
On the conference call, I brought it up to bring attention to it, decipher it for the confused market and clear up the confusion and concern of the market. This is an attractive stock relative to quality, growth and valuation. Hopefully, by sometime this morning the market will get that the guidance is actually positive news, as was the performance this quarter. If the stock opens lower, it presents a wonderful arbitrage buying opportunity, as you can benefit from the difference created by this guidance, which we believe will prove conservative as usual. This is a lesson that no matter how confident you are in a company, it doesn't hurt to hedge a little. This is one of my favorite stocks to own over the next 3 to 5 years. My best to you WOOF owners. (disclosure)
Wednesday, October 25, 2006
Speculative Trade - VCA Antech (WOOF)
We waited on the Fed today and an anticipated decline in the shares heading into the report, due to valuation, lack of analyst support and the stock's rise within the last five days. We took half of our position in the Nov 35 Calls at $1.20 (down from the $1.25 close of Tuesday) and the other half at $1.20, just before close. I had some left over cash and applied that to some Dec 40 Calls at $0.35. Buying the November options is extremely risky, because if things go in the other direction than your bet, you have very little time before expiration to make up the loss. It can get bloody! Therefore, I must remind you to read my disclosure.
VCA Antech is a name I once followed as an analyst, and represents my favorite kind of name. It's the good company that is also a good stock; believe it or not, this is not always the case. WOOF has a business model I seek out and have benefited from on several occasions. It is a gnategory killer! It's competition is fragmented and consists mostly of small veterinary hospitals owning one or two locations.
Peter Lynch wrote, and I paid close attention, when you compete against mom and pops, you can grow. It's the Home Depot and WalMart story all over again, just in a smaller market. However, it's still a viable market. As home ownership has increased, pet ownership has benefited as well. Over 63% of American households have a pet, most of which are dogs and cats. Approximately $18 billion is spent yearly on animal healthcare services.
As these companies grow by acquiring small shops and through de novo means, they gain economies of scale. They become the most important purchaser to their suppliers. They write the biggest check to suppliers, and advantage from that. WOOF does not just have leverage with suppliers, but with customers also. It is capable of building brand awareness. It can advertise and bring clients to its hospitals, where the competition is only known by the very local community. It can offer greater breadth and quality of service, and we believe WOOF is doing so. In fact, WOOF has the largest lab network for pets in the country, and this business is benefiting from increasing testing, and will eventually benefit from more complicated tests. People spend money on their pets, a member of the American family. Also, WOOF's business does not get complicated by third-party payers like the human health care market.
WOOF does not appear cheap at first glance. It trades at 25.6X the 2007 EPS consensus estimate of $1.33. But look closer! WOOF has a track record of beating estimates, so that number is likely understated. Meanwhile, this year's likely understated growth is seen at 22%. Recent growth has been strong, so the PEG ratio is not as scary to us as it appears to wary analysts. We have not run a DCF model on it for awhile, but it always projected well, even after delevering the company a bit. So, there it is, WOOF WOOF!
Wednesday's Brew - Oct 25
OVERSEAS MARKETS & NEWS
Tuesday, October 24, 2006
Speculative Buy - Websense (WBSN)
We took our short position yesterday, as we anticipated WBSN's run since its last report, along with the FOMC meeting and lack of analyst support for the shares, would send them lower heading into the report. We invested 1/3 of our long position in Nov 20 Puts at a price of $0.15. These are very illiquid securities, and that could hurt our ability to protect ourselves. The price increased 30% today, to $0.20, but we would likely not have been able to sell at that price. Today we took a long position in WBSN, buying Nov 25 Calls at $0.50, down from $0.65 or the closing price of yesterday. The Nov 25s touched a low of $0.40 today.
WBSN is due to report earnings within minutes and the conference call is at 4:30. The company has been going through an operational turnaround, and has lost the support of analysts, who point toward competition threatening the company. However, we note that the shares trade at 21X '07 consensus estimate of $1.10, while growth this year is seen at 23%. Growth is forecast to decrease significantly next year, but the company has managed to beat estimates quarter after quarter. We think this is a case where analysts are underestimating a market leader's ability to transition and to compete. We were right last quarter, but the shares are a bit more expensive this time around, so we hedged ourselves a bit. (See our disclosure at the Wall Street Greek website.)
Tuesday's Brew - Oct 24
On the earnings front, Altria Group Inc. and Bellsouth Corp. are scheduled to report. DuPont (DD) reported today and looks set to open higher after posting EPS before one-time items, of $0.49 versus $0.33, $0.04 ahead of analyst consensus (by Thompson Financial). Results were impressive as they occurred despite higher raw material costs. DD was up about 1.8% in pre-market activity. Lockheed Martin (LMT) earned $1.46 a share, handily beating consensus of $1.24, and raised guidance this morning to $5.60-$5.80 for fiscal 2007. Analyst consensus measured $5.66. LMT shares were up about 1.9% in the pre-market. We hope you enjoyed your "Morning Coffee", and wish you a good day trading. Keep your eye out again today for a potential "Speculative Trade" idea, similar to our post on Friday.
Monday, October 23, 2006
Speculative Buy - PETS (Update)
Regarding the EPS report itself, it was not all that good. Revenues were impacted for the second quarter in a row by the strategic decision of management to reduce less profitable sales to wholesale clients. Wholesale revenues were down approximately $1 million from the prior year period result. We view this as a long-term value added decision, allowing the company to apply capital toward more profitable investment opportunity in the retail market. New customer additions were relatively weak for the second quarter in a row, when compared to the prior year period. Reorder growth rate was down on a sequential quarter basis. We really could not find a lot of positives in the report, and we even felt like we could manage PETS better than its current management seems to be doing. That's besides the point.
So, why did PETS rise today? Reuters called us and asked the same question, and here's what we told them. Heading into the report, the stock had been beaten down partly on a Barron's article about one of the early participants in the company, his lawsuit against PetMed Express, and his personal background. These are all non-operating issues and should not hold weight over time, as long as there are good people managing the company now. However, investors do not like risk, and a new one had appeared. So, when the company reported no new surprisingly bad news today, we believe the stock was poised to benefit from that alone. No news was in fact good news. The value of PETS going into the report was about 19X FY 07 (Mar) consensus estimates and 15X FY 08. This contrasted with 21.5% anticipated long-term growth, referring to Yahoo's & Thompson Financial's work on analysts' consensus estimates. We view that PEG ratio or P/E to growth comparison attractive for investment. PETS also beat estimates by a penny a share, but that estimate had decreased by a penny over the 7 days prior to the report, according to Yahoo! and ThompsonFN again.
The good news for long-term investors is that after March, wholesale revenue impact should be gone from the comparable numbers, and revenue growth will rely more on reorder sales and new client sales. Also, as the mid-term elections pass, the cost of advertising should decrease, benefiting PETS' margins. PetMed is building a cash store and we would like to see it use it to acquire a smaller competitor at the right price or to repurchase shares and invest in advertising and customer retention. However, that is a question shareholders should pose. We are cashed out.
We hope to provide you some more "Speculative Buys" later this week, so stay tuned.(disclosure)
Sunday, October 22, 2006
The Greek's Week Ahead - Oct 23
Labels: Week Ahead
Friday, October 20, 2006
Speculative Buy - PetMed Express Inc. (PETS)
That said, we have been following this company for a while and like its position heading into its EPS report this Monday morning. The company is the largest player in the pet pharmaceutical retail sales market. It competes mainly with veterinarians, and we believe has about half of the online business of pet pharmaceuticals, which make up approximately 9% of the overall market.
Revenue growth has been strong over its short life, and margins have been expanding. We are not going to get into the validity of the business here in too much detail, but perhaps another time. The market closes in a half hour, and we want to provide you with our thoughts on the trade. Investing in the stock over the long term, we view as a good idea, but we are talking about the short short trade now.
There are some red flags to consider. The consensus estimate came down a penny this past week, and one analyst downgraded the stock to market outperform from buy in September. However, the analyst does not seem to have a good bead on the stock, having initiated his buy recommendation not far from the peak. We believe he has become nervous or is being pressured by a superior. We have seen this in our own experience, and it is truly a shame for investors.
Another red flag was exposed last quarter. The cost of acquiring new clients through advertising increased last quarter, and new customer additions did not grow over the prior year period. It's possible that rising ad costs due to the coming elections could draw some narrow-minded analyst focus on Monday, and they could miss the big picture. However, the company is generating strong repeat business with a focus there. Also, the company has made the strategic decision to stop sales to wholesale customers, and margins have improved as a result. Economic value is likely being added through investment in generating new retail business, and removing focus from the less profitable wholesale opportunity.
Why we like it going into the EPS report. Valuation and a solid EPS history. The stock was recently beaten down on a Barron's article concerning a lawsuit and the personal history of one of the company's founders who is no longer involved with the company. This is a nonoperating issue and should hold no weight. We like the stock's price movement since the end of the quarter, and we suspect the more recent price movement downward is reflective of concern going into the report. Our bet and risk is that it is unwarranted and we are looking for a positive report.
Let's talk valuation. Currently, at $11.36, the stock trades at a P/E multiple of 19X its $0.60 fiscal 2007 (Mar) estimate. EPS growth is estimated at 20% in FY 07 and 23% for FY 08. EPS growth for this quarter is seen at 18%, to reach $0.13. Keep in mind, it was $0.14 just a week ago, and we believe the decrease is the result of a nervous analyst, and not whispers from the company down to analysts. Only five analysts are listed as following the stock, but its rise to the $20 area in recent times was supported by increasing institutional ownership. That has steadied now. The stock trades at 15X FY 08 (Mar). According to Yahoo's compilation, the stock has a history of meeting or exceeding estimates. We view it as a sweet stock at a sweet time in terms of valuation. The catalyst is the earnings report, and owners are highly levered to it over the short term. The November $12.50 Call recently rose due to demand and weak open interest, from $0.35 to $0.50 in two days prior to the report, so on neutral news, there is some premium that could be lost. However, we believe that a positive report, perhaps a $0.02 to $0.05 beating of the consensus estimate, could recharge lift in this stock and bring attractive returns to shareholders and call option contract holders. Our best to you!
Friday's Brew - Oct 20
Thursday, October 19, 2006
Thursday's Brew - Oct 19
On tap for Thursday, the Labor Department released its recent data on weekly U.S. jobless claims. Claims were 10,000 lower than expectations, coming in at 299,000, providing more positive news for the market heading into next week's Fed meeting. The number of Americans filing first-time claims for unemployment benefits was the lowest level in almost three months.
Wednesday, October 18, 2006
Wednesday's Brew - Oct 18
Britain's FTSE 100 index was up 0.3 percent by midday on Wednesday, headed by commodity-dependent stocks as the market recovered from yesterday's biggest one-day fall in 17 trading sessions. Bank of England minutes seemed to indicate another UK rate rise was probable for November. The Nikkei average ended 0.25 percent higher on Wednesday after a pause in U.S. market rising trend led the Nikkei average down to start the day.
The government released its Consumer Price Index, providing relief to concerned equity markets. Yesterday's PPI data indicated the core PPI, excluding volatile food and energy prices, rose 0.6%, higher than the expected 0.2%. Though Core CPI should lag PPI movement, but also could benefit from lower energy prices, it was in line with consensus, indicating a rise of 0.2%. In August, both overall and core CPI rose 0.2 percent.
On Wednesday, the Mortgage Bankers Association will report on its most recent refinancing index. Its previous report showed strong refinancing activity that we speculated was driven by mortgage bankers pushing variable rate loan holders into fixed rate mortgages. Also, the National Association of Home Builders released its index for sales of new, single-family homes for October. Bloomberg's poll saw consensus at 1.64 million, down from 1.67 million in August. Actual housing starts surpassed expectations, reaching 1.77 million. However, markets this morning look focused on new permits data. The pace of building permits fell, measuring at an annual pace of 1.62 million in September, compared to the 1.73 million rate in August. Economists expected this sign of builder confidence in the market to slow to only a 1.72 million rate. It's possible that the housing construction sector may begin to influence employment in a more meaningful way if housing firms reduce the rate of construction to meet market demand reduction.
A day ahead of the emergency meeting of OPEC in Qatar, with inventory data on tap for today, oil started lower. The Energy Department will provide its weekly update on U.S. crude-oil, distillate and gasoline stocks at 10:30 AM. Today, the market is focused on recently strong inventory data, indicating supply levels are adequate. As the news passes, the market is likely to look toward tomorrow's beginning of the emergency OPEC meeting. We expect oil to trade in a tight range near-term. Over the medium term, Iran should again take the spotlight, as the U.N. moves towards sanctions. Iran's response is likely to be more refined than Korea. However, rhetoric from Israel should begin to take the spotlight, as it appears to be preparing for an attack on Iran's facilities. (see geopolitical discussion below)
Korea appears poised to follow up its recent fizzle of a nuclear test with a bigger and better bomb. Japanese and South Korean intelligence indicates similar preparations to the first test now taking place in the North. Yesterday, North Korea held a large torch lit rally of defiance. The true test here will be the first time a North Korean vessel is intercepted at sea, and North Korea's response to this "act of war."
Above we mentioned Israel's preparations for action against Iran. Though our associate's site www.ERISfile.com goes into more detail about this topic, we have paid attention to it here as well as it poses threat to equities. We theorize that Israel's invasion of Lebanon was more likely an effort to weaken and test Hezbollah's abilities than an effort to rescue a kidnapped soldier. Israel is currently preparing a large scale effort into Gaza that it states would be to "combat missile capabilities" within the occupied territory. Clearly, an attack on Iran could spur the Iranian backed fronts led by Hamas and Hezbollah into action, and one might theorize that Israel's attack on Iran has already begun through its actions on Hezbollah and Hamas. Assuming this is in fact reality, then an Israeli attack on Iran seems more likely than unlikely, and equity and commodity markets are not pricing it as such.
The earnings scene remains hot on Wednesday, with reports from Abbott Laboratories, Aztar, eBay, JP Morgan Chase, Apple Computer and AMR Corp. SIGA Technologies (SIGA) announced that its SIGA-246 is the first drug ever to demonstrate 100% protection against human smallpox virus in a primate trial. It was effective in monkeys treated both before infection and 24 hours after infection. SIGA shares were up approximately 155% in early trading. IBM posted Q3 EPS of $1.45, compared to prior year period results of $0.94, exceeding consensus estimates of $1.35. IBM shares were up about 5% in early trading. JP Morgan Chase & Co. posted Q4 EPS of $0.92, beating prior year results and analyst expectations for $0.86 a share. However, JPM shares were down roughly 2% in early trading, as it warned that Q4 investment banking did not appear to be as strong as Q3. Although we exited our short-term investment in Yamana Gold (AUY) this morning, we continue to favor gold shares and AUY over the medium and long-term horizons. We hope you enjoyed "Today's Morning Coffee" and wish you a good day trading. (disclosure)
Tuesday, October 17, 2006
Tuesday's Brew - Oct 17
Britain's FTSE 100 index slipped as well, ending a six-day rising trend. The index was impacted by banks, down on concern about the growing likelihood of higher interest rates and lack of foreign bidders, whose interest has recently supported the sector.
Oil is rising, topping the $60 a barrel mark as tensions intensify in North Korea, and the EU appears prepared to sanction Iran. OPEC is scheduled to have an emergency meeting in Qatar on October 19th, where it is expected to nail down the details of its 1 million barrel per day production cut. The 8:30 AM released Producer Price Index also raised a red flag that inflation remains a concern (see below for further economic details). In this kind of environment, precious metals remain a solid investment. We continue to favor gold shares.
As we expected, North Korea has responded to sanctions in a less than favorable manner, raising the possibility of armed conflict in the Korean Peninsula. China's fears are being highlighted by the North, as it threatens merciless response to attacks on its sovereignty. We assume that this means that any boarding of North Korean vessels at sea by Japanese or American warships will lead to military conflict. We fully expect North Korean vessels to prove the aggressor versus Japanese fishing ships and other commercial ships, once Korean vessels are "threatened". Tensions appear set to rise, not decline, as a result of the sanctions. North Korea is in fact becoming a cornered dog with quite a bite. We expect a second nuclear test before year end, and we expect the North to expedite its nuclear weapons production effort as well as its covert sales through Chinese black market routes.
ECONOMIC & OTHER MARKET MOVING NEWS
The government reported the producer-price index for September this morning, a key measure of inflation. The overall PPI fell 1.3%. Economists polled by Reuters forecast that the overall PPI would fall 0.6 percent in September (a Bloomberg poll showed consensus at 0.7% decline). At first brush, this data looks like a positive for the market and indicative of light inflation, however, it is reflective of decreases in energy prices.
Later Tuesday, The Johnson Redbook retail sales index will help the market gauge consumer spending strength. Likely less important, the government will release its latest data on U.S. industrial production and capacity utilization. Bloomberg consensus shows expectations for a 0.1% drop for industrial production and a 82.2% measure for capacity utilization. This measure's importance is diminished because of service sector dominance in the U.S. economy.
The Treasury will report foreign purchases and sales of U.S. assets in August. This measure may increasingly be valuable in measuring the world's confidence in the future of America. Heading the Fed's tour, Governor Susan Bies will be participating in the Economic Outlook strategy session before the American Bankers Association's Forum.
On the earnings front, Intel, Johnson & Johnson, Office Depot, IBM, Motorola and Yahoo! are scheduled to report. Yahoo! shares have not kept up pace with other large-cap Internet shares of late, and have an opportunity to make up the lost ground if they can report a positive outlook. At $24.42 YHOO shares are well off their 52 week high of $43.66, but recently weak revenue guidance raise the red flag.
Merrill Lynch (MER) reported results of $2 a share Tuesday, destroying estimates, as the company benefited from the closing of its merger between Merrill Lynch Investment Managers and BlackRock. Merrill shares were down slightly, versus a larger decline for the market, due to inflation concerns.
We believe markets had previously been inflated by the news of August inflation weakness, and now that September is showing a returning inflation threat, with the Core PPI posting the highest rise since January 2005, the market could be threatened. If CPI numbers also show inflation hanging around, we expect major deflation to stocks' P/E multiples and price collapse. In turn, the dollar should weaken and gold should rise.
Monday, October 16, 2006
Monday's Brew - Oct 16
European shares reached a five-year peak on Monday, while the yen rose after Russia said it had started buying the Japanese currency for its foreign reserves. The Nikkei average rose almost 1 percent to a five-month closing high. Russian confidence in the Japanese currency could imply a comfort level that the North Korean nuclear crisis is not a mushrooming concern. China has already begun inspecting trucks crossing its border, supporting the new U.N. resolution. However, the markets will likely closely watch North Korea's response to the new choking measures. We suspect it may respond harshly to the boarding of its ships, especially by the Japanese or Americans. It has already issued hard-line rhetoric, threatening physical response and announcing that the sanctions were effectively a declaration of war. Control of the situation rests in the hands of China and Russia.
ECONOMIC & OTHER MARKET MOVING NEWS
A Federal Reserve report today showed manufacturing in New York state unexpectedly accelerated this month, as costs of energy and raw materials eased and shipments increased. The Fed Bank of New York's general economic index rose to 22.9, from 13.8 in September. The New York Fed's index was expected to fall to 11.2, according to the median forecast of economists surveyed by Bloomberg News. The shipments index increased to 22.5 from 20.6. Inventories increased to 2.5 from minus 4. Manufacturing costs declined as the index of prices paid for raw materials decreased to 30.8, the lowest since March 2005, from 41 in September. An index of manufacturing employment rose to 19.4, from 12.5 in September. The New York Fed's gauge of new orders declined to 11.8 this month from 14 in September. However, the index measuring the outlook for six months from now fell to 30.2 from 35.2.
Oshkosh Truck (OSK) said it will acquire JLG Industries (JLG) for about $3 billion in cash, a 34 percent premium for the company based on Friday's closing price. Wachovia Corp. (WB), the fourth largest U.S. bank, said on Monday that third-quarter profit rose 13 percent on stronger loan demand, but revenue fell short of forecasts as lending margins declined. Wachovia shares were down about 2%. Commerce Bancorp (CBH) reported EPS fell to 41 cents from 45 cents, in line with estimates. Commerce shares were down roughly 1.2% in early trading.
We again refer you to "The Greek's Week Ahead" for the information you need to know for today's trade. We hope you enjoyed "Today's Morning Coffee" and wish you a great day trading.
Sunday, October 15, 2006
The Greek's Week Ahead (Oct 16 06)
The week starts off quiet on Monday, with the brightest lights on the radar screen coming from speeches of several Fed representatives. Fed Chairman Ben Bernanke will address the American Bankers' Association Forum in Phoenix, via satellite from Washington. Fed Presidents William Poole and Janet Yellen will deliver speeches as well. On the earnings front, Mattel, Eaton and Marshall & Ilsley will report. The most powerful impact to the market is more likely to be delivered by the news from OPEC, which has scheduled an emergency meeting for October 19th in Qatar. Venezuela and Iran are playing the devil's advocate, as they both would like to see prices higher, adding pressure to the U.S., but they are skeptical of losing market share to countries like Saudi Arabia, which is believed to be producing above formal quota. The 11 members will meet to work out the details of a planned 1 million barrel per day cut in order to provide clarity to the market. We suspect that the reduction will not impact prices on a "news basis" alone, as it is well understood at this point. OPEC would do well by surprising the market with a greater than expected production cut, but that seems unlikely. Even so, a floor may be supported by the reduction and clarity provided. Crude prices touched a new low at $57 and change last week before rallying on Friday.
On Tuesday, the news flow will kick it up a notch. First and foremost, on the economic front, the government reports the producer-price index for September, a key measure of inflation, at 8:30 EDT. Economists polled by Reuters forecast that the overall PPI fell 0.6 percent in September (a Bloomberg poll showed consensus at 0.7% decline), while they see the core PPI, excluding volatile food and energy prices, up 0.2 percent. In August, overall PPI rose 0.1 percent and core PPI fell 0.4 percent. Also on Tuesday, The Johnson Redbook retail sales index will help the market gauge consumer spending strength. Likely less important, the government will release its latest data on U.S. industrial production and capacity utilization. Bloomberg consensus shows expectations for a 0.1% drop for industrial production and a 82.2% measure for capacity utilization. This measure's importance is diminished because of service sector dominance in the U.S. economy. The Treasury reports foreign purchases and sales of U.S. assets in August. This measure may increasingly be valuable in measuring the world's confidence in the future of America. Heading the Fed's tour, Governor Susan Bies will be participating in the Economic Outlook strategy session before the American Bankers Association's Forum.
On the earnings front, Intel, Johnson & Johnson, Office Depot, IBM, Motorola and Yahoo! are scheduled to report. Yahoo! shares have not kept up pace with other large-cap Internet shares of late, and have an opportunity to make up the lost ground if they can report a positive outlook. At $24.42 YHOO shares are well off their 52 week high of $43.66.
On Wednesday, the Mortgage Bankers Association will report on its most recent refinancing index. Its previous report showed strong refinancing activity that we speculated was driven by mortgage bankers pushing variable rate loan holders into fixed rate mortgages. Also, the National Association of Home Builders will release its index for sales of new, single-family homes for October. Bloomberg's poll finds consensus at 1.64 million, down from 1.67 million in August. The Consumer Price Index for September will be reported at 8:30 AM. According to Reuters and Bloomberg polls, economists forecast the overall CPI fell 0.3 percent in September, while core CPI, which excludes volatile food and energy prices, is seen up 0.2 percent by Reuters. In August, both overall and core CPI rose 0.2 percent. The Energy Department will provide its weekly update on U.S. crude-oil, distillate and gasoline stocks. The earnings scene remains hot on Wednesday, with reports from Abbott Laboratories, Aztar, eBay, JP Morgan Chase, Apple Computer and AMR Corp.
On tap for Thursday, the Labor Department will release its recent data on weekly U.S. jobless claims. The Conference Board, a private research group, will post its composite index of leading indicators for September. The index represents a gauge of future economic activity, and is expected to measure 0.3%. With all the information becoming available this week, the market will weigh one against another in an attempt to gauge what the Fed will do with rates the following week, but more importantly, it will feel out the depth of economic slowdown and date of arrival of recovery. Also on Thursday, The Federal Reserve Bank of Philadelphia will report on its business-conditions index for October, a measure of the region's manufacturing sector's health. In September, an unexpected contraction of 0.4 sparked rallies in stocks and bonds. An expansion of 7.0 points is expected this period, according to Bloomberg. Reporting earnings, Google, Coca Cola and Baxter International highlight the schedule.
Friday, American behemoths Caterpillar, Merck and Schlumberger report earnings. On the international front, Vladimir Putin meets in Finland with European Union member nations, with energy expect to headline the schedule. North Korea's response to newly imposted sanctions will be telling for markets as well, as it will act as a gauge of the North's bite versus a loud bark. If North Korean ships are boarded, the actions of the Stalinist state will decide how the market discounts related risk. If North Korea starts sinking Japanese fishing vessels, markets are likely to tank, but if it responds with words alone, the markets should recover any lost confidence.
We hope this information proves useful to your weekly strategy and trading efforts, and helps improve your sense of preparedness. (disclosure)
Labels: Week Ahead
Friday, October 13, 2006
Friday's Brew - Oct 13
Gold is up $9 in early trading, as inflationary concerns, weaker retail sales data and a sanctioned and illogical North Korea threaten world stability. Gold has been tracking energy prices in its recent trend downward, and inversely tracking the dollar. It has recently benefited from renewed inflationary concerns and from safe-haven seekers, with the rise of intensity regarding the Korean and Iranian issues on the global plate.
ECONOMIC & OTHER MARKET MOVING NEWS
Last night, Chicago Fed Chief Mike Moskow indicated that further rate hikes might be necessary to curb inflation. He is now the fifth Fed representative on record downplaying the likelihood of a near-term Fed rate cut.
Thursday, October 12, 2006
Thursday's Brew - Oct 12
MSCI's index of stocks in Asia outside of Japan, moved 0.2 percent higher, while Tokyo shares slipped slightly. Japan moved ahead of the U.N. with a plan to impose new sanctions on North Korea that are expected to impact the North. Seafood shipments into Japan are expected to be turned away, as is all sea traffic. North Korea is dependent upon its neighbors for the well-being of its weak economy. The Stalinist nation has already responded with hard-line rhetoric, recalling Japan's annexing of Korea early this century. Korea announced that its response to Japan's sanctions would be enhanced by its actions of the past, and failure to make up for them. That potential retribution should continue to spook Asian markets. Just what will Korea do? If it were to sink a Japanese vessel, this would undoubtedly spark war. Less sensitive to these concerns, the FTSEurofirst 300 index edged up as much as 0.4 percent to 1,431 points, its highest since June 2001. M&A activity within Europe continues at a rapid pace, raising interest in the continent's shares.
Oil continues weak, as OPEC slowly progresses toward a production cut that appears to be useless in stemming the price decline. Today, natural gas inventory data will be released as usual, and we suspect the numbers will continue bearish for investors in the commodity, but we see near-term opportunity in natural gas shares as a cold wave sweeps across America. Trading in the commodity is typically sensitive to weather, but a recent report noted expectations of a warm winter and stemmed the commodity's advance earlier this week.
ECONOMIC & OTHER MARKET MOVING NEWS
The release of the September Meeting minutes from the Fed met investors with a slap in the face, as the information proved hawkish on inflation. The Fed remains hopeful that a downturn in housing and a slowing economy could help restrain inflation, but it is far from certain that this will occur. The words of Fed VP Donald Kohn earlier this month were telling as well. "Don't sell the Fed's concern about inflation short,'' Kohn told his audience. "Further upward movements in inflation would be very adverse to the economy and would, I think, require policy actions.'' The take away from traders surveyed was that the likelihood of a Fed rate cut by March 2007 has decreased. This was deflating to equity markets, and should continue to drive sideways trading, as we have mentioned previously. Until it becomes clear to the market that the Fed rate direction is headed lower, and the economy is not recession bound, stocks cannot rise with conviction. If lower energy prices hold, this could help to ease inflation.
The U.S. trade deficit unexpectedly widened to a record $69.9 billion in August as energy prices rose and the shortfall with China reached an all-time high. Initial jobless claims increased by 4,000 to 308,000 in the week that ended Oct. 7, the Labor Department said today in Washington. The rise was off of a two month low in the prior week, but still presents a resilient job market. Today the Fed's Beige Book is due out, measuring business conditions compiled from the 12 regional Fed banks. Traders will look for any indicators on how the U.S. economy is reacting to lower energy prices and for possible signs of recovery in the housing market.
Pepsi, Costco, McDonald's and Yum! Brands all exceeded or raised estimates last night and this morning, providing a positive tone for stocks this morning. We should get a better feel for how the quarter's earnings season is trending from today's data. We continue to favor investment in gold and energy shares, and see near-term rebound for each as uncertainty reenters the economic and geopolitical picture. We hope you enjoyed Today's Morning Coffee, and we wish you a good day trading. (disclosure)