Thursday, August 21st
Today's market summary comes from Rob Black's MarketWrap
Evidence of an improving labor market and manufacturing activity spurred investors and drove the Nasdaq to a 16-month high today. The Nasdaq closed at the highest since April 19, 2002. The S&P 500 climbed 3 points (+0.3%) to 1,003.. The DJIA advanced 26 points (+0.3%) to 9,423 and the Nasdaq Composite rose 17 points (+1.0%) to 1,777. Gains have accelerated as investors become more convinced corporate profits will grow with the economy. Positive comments from Intel CEO Craig Barrett as well as the capture of the notorious "Chemical Ali" boosted stocks. More data suggesting stabilization in the job market and recovery came in, as jobless claims again were under the critical 400K level, the Conference Board's index of economic indicators expanded for the fourth straight month, and the Philadelphia Fed Index rose for a third straight month. Bonds were lower after the economic reports. On the earnings front, growth for the companies in the S&P 500 is forecast to accelerate to 14.1 percent in the third quarter and 21 percent in the fourth from 9.5 percent in the three months through June, according to analysts surveyed by Thomson Financial.
Strong Sectors: chemical, storage, semiconductor, home furnishing, auto, hospital, utility, homebuilding, paper, aluminum
Weak Sectors: gold, drug, wireless
Top Stories . . . The number of Americans filing for jobless benefits fell to the lowest level since February, suggesting companies have slowed the pace of firing as the U.S. economy gains strength.
The index of leading U.S. economic indicators gained 0.4 percent in July, the fourth straight increase, reflecting a decline in jobless claims and a rise in money supply.
U.S. Treasuries fell in New York trading as the number of Americans filing for jobless benefits fell more than forecast to the lowest level since February, bolstering evidence of faster economic growth.
The euro tumbled to a four-month low against the dollar and yen amid evidence the U.S. and Japanese economies are accelerating as the 12-nation euro region heads toward recession.
Ripplewood Holdings, a New York- based fund, agreed to buy Vodafone Group Plc's Japanese fixed- line phone business for 261 billion yen ($2.2 billion), doubling its investment in Japan in the nation's biggest leveraged buyout.
Quotes of Note . . . ``You have to give the benefit of the doubt to the economy; the data has improved,'' said Kevin Cleere, who manages $550 million of U.S. stocks at Hibernian Investment Managers in Dublin.
``The information people are getting, whether explicit or between the lines, is that things are getting better. In general, earnings have been good.'' said Matthew Finn, who manages a $1 billion large-cap fund at US Bancorp Asset Management in Minneapolis.
``A lot of the movement in the 10-year that we've seen in the last month is not so much driven by economic factors as it's a pure need by mortgage investors to hedge their positions,'' Cloherty said. ``As rates start to rise the duration of a mortgage portfolio starts to extend, and so people need to offset that extension by selling Treasuries.''
``Bond yields are likely to be encouraged higher by market expectations of quickening economic activity,'' said Jan Lee, who oversees the equivalent of $21.6 billion for Geneva-based European Financial Group in Singapore. ``Inflation is nowhere to be seen, but it is becoming a figment of the market's imagination.''
Gurus . . . Smith Barney economist Steven Wieting raised his 2003 operating earnings-per-share estimate on the S&P 500 to $54 from $53 and his 2004 estimate to $59.75 from $58.40. The economist expects operating S&P 500 earnings to grow 12.6 percent in 2003 and 10.6 percent in 2004. Wieting also hoisted his U.S. gross domestic product forecast to 2.5 percent from 2.3 percent for 2003 and to 4.3 percent from 4.2 percent for 2004. Smith Barney said overall financial conditions still appear to be "quite stimulative," though he concedes that higher interest rates and a stronger U.S. dollar might assist in dampening the nascent economic uptrend.
Goldman Sachs is raising its 2003 and 2004 S&P 500 earnings estimates in light of: (1) the strong results of the first half of 2003, which benefited from a declining US dollar, cost containment and improved economic activity in the US, and (2) expectations of further profit gains in the second half. Its US GAAP consistent operating EPS estimates go to $49 for 2003 and $53 for 2004 from $46 and $51, respectively.
Eco Speak . . . The number of workers filing for state unemployment benefits remained under the key 400,000 level again last week, a strong indication that layoffs have slowed, the Labor Department reported Thursday. The four-week average of weekly filings fell from a revised 395,500 to 394,250, the lowest since Feb. 15. It's the third straight week under 400,000 for the four-week average. The average number of initial claims had been above 400,000 for 22 weeks in a row. The weekly number of new claims fell 17,000 to 386,000 in the week ending Aug. 16, the lowest level of new claims since February 8.
Manufacturing activity increased in August in the Philadelphia region. The bank's business index rose to 22.1 in August from 8.3 in July. Readings above zero indicate that most firms say business is getting better or no worse. New orders rose to 14.6 in August from 10.4 in July and have now jumped 15 points in the past two months. Shipments also improved, but employment dipped below zero again, indicating little hiring in the region. The six-month expectations index rose to 62 in August, the highest in 10 years.
The Conference Board's index of leading economic indicators rose 0.4 percent in July, its fourth consecutive rise. The coincident index and the lagging index each increased 0.1 percent in July. The rise in the overall index was in line with expectations, but an upward revision in the June numbers from a 0.2 percent to a 0.3 percent increase meant the net rise was slightly stronger than expected, said Ian Shepherdson, an economist with High Frequency Economics. The rise in the leading index was fueled by positive readings on the interest rate spread, real money supply growth, lower weekly initial unemployment claims, improved vendor performance and stock prices, the Conference Board said. Negative factors were weekly manufacturing hours, consumer expectations, building permits, new factory orders for nondefense goods and consumer goods. The Conference Board said the overall trend in the indicators was consistent with an improvement in business investment in the second quarter that could be continuing into the present quarter.
Credit Of Note . . . A new report from Fitch Ratings said "faint signs" of improvement in global credit quality emerged in the second quarter of the year as credit rating downgrades slowed and upgrades made a positive showing. While Fitch noted that the number of downgrades continued to top upgrades in the second quarter, the margin contracted to a ratio of roughly 2:1 from the 8:1 margin witnessed in the first quarter of the year. The rating agency said defaults continued their descent in the second quarter, boosting credit quality as a result. "The verdict is out whether the dramatic spike in interest rates beginning in mid-July reverses the positive capital markets developments in the second quarter, or confirms those developments to be a harbinger of economic growth and better times ahead," said Glen Grabelsky, managing director at Fitch.
Mutual Fund Flow . . . Lipper estimates that $21 billion flowed into stock funds during July, while $8.5 billion flowed out of bond funds. Moreover, the action in individual industry groups presents an almost textbook example of what happens when an economic recovery is underway. Industry groups such as retailing, hotels and leisure, capital goods, raw materials, and autos have topped the broader market. Meanwhile, defensive stocks such as drug and household goods are struggling as investors become more aggressive. Of course, technology has led the pack, and John Calamos, who runs the $4 billion Calamos Fund, says there is more to come. Tech stocks became so distressed, that there is running room on the upside. He has been buying Amazon, e-Bay, and Cisco, and has been adding Symantec.
Of Note . . . Investor's Business Daily notes that the S&P 600 and 400 have been outperforming the big-caps. The Small Cap S&P 600 is up almost 8% in ten straight days, while the Mid-Cap S&P 400 registered its ninth advance in ten days.
3rd Quarter . . . First Call is out with their latest third-quarter projections, envisioning the S&P 500 will show a 14% rise in the quarter, followed by gains of 21% in the fourth-quarter. The recently completed second-quarter was up 9.5%.
Housing of note . . . Money manager and research firm Bridgewater Associates believes the housing market has reached its top, as it estimates that the payments on a typical new home are now 14 percent higher than they were 3 months ago amid a rise in long-term interest rates. "For most people interested in buying a new home, the price of the house is largely irrelevant; the important question is whether they can afford the payments," Bridgewater said. The yield on the 10-year Treasury note was last up 0.043 percentage points at 4.484 percent, up from 3.35 percent at the end of May, and up from the five-decade low of 3.074 percent hit on June 16. The firm estimates that the drop in home affordability will translate roughly into a 10 percent decline in nominal housing activity, with volumes and prices both falling.
Virus hitting Transports . . . The Wall Street Journal reports an onslaught of rogue computer programs continue to disrupt computer networks including important commercial infrastructure. The serious incident highlighted was CSX, which had to temporarily halt service Wednesday due to a variant of the Blaster virus interfering with its train and operations and dispatching system. In addition, Air Canada encountered delays on Tue because a "worm" program infected the airline's reservation system.
Japan . . . Analysts are becoming more optimistic that reflation is taking hold in Japan, aided by the accelerating U.S. reflation process. The value of the yen – the key Japan variable – has stopped strengthening, allowing Japan’s deflation spiral to subside. Analysts are encouraged by Japan’s apparent soft-pedaling of its complaints about China’s currency stability, a shift which may indicate a firmer resolve in Japan to keep the yen from appreciating against the dollar. Without much global notice, the pace of Japanese economic activity is clearly accelerating. Second quarter GDP data, released on August 11, was well above the consensus expectation, increasing 2.3% quarter-over-quarter at a seasonally adjusted annual rate (SAAR). The second quarter was the sixth consecutive quarter in which real GDP increased. First quarter GDP was revised up to 1.3% SAAR from the 0.4% SAAR increase initially reported. Nominal GDP rose 0.6% SAAR in the second quarter, its first increase in three quarters. Faster nominal GDP growth will be a key part of a successful Japanese reflation. Over the first half of 2003, Japanese GDP growth well outpaced that in the U.K. and the Eurozone, and was only slightly slower than that in the U.S.
Pension Funds . . . The combination of interest rate stability and improving equity market returns in 2003 will help reduce pension plan funding gaps. For the 100 companies in the S&P 500 Index with the largest employee benefit obligations, estimate that by year-end 2003 they will be underfunded in the aggregate by 13% compared to 18% at year-end 2002. By year-end 2004, expect them to be underfunded by only 6% in the aggregate. Due to the smoothing mechanisms of GAAP, we expect pension cost to increase significantly in 2003 despite the improvement in the funded status. Estimate an aggregate net pension cost of $11.9 billion in 2003 compared to aggregate net pension income of $3.3 billion in 2002 for the 100 companies in sample. These estimates are highly dependent on assumptions about year-end discount rates, annual market performance and contribution levels. For example, if you assume 2003 contributions at 2001 levels rather than 2002 levels, estimate these 100 companies would be underfunded by 16% in the aggregate in 2003.
Today's market summary comes from Rob Black's MarketWrap
Evidence of an improving labor market and manufacturing activity spurred investors and drove the Nasdaq to a 16-month high today. The Nasdaq closed at the highest since April 19, 2002. The S&P 500 climbed 3 points (+0.3%) to 1,003.. The DJIA advanced 26 points (+0.3%) to 9,423 and the Nasdaq Composite rose 17 points (+1.0%) to 1,777. Gains have accelerated as investors become more convinced corporate profits will grow with the economy. Positive comments from Intel CEO Craig Barrett as well as the capture of the notorious "Chemical Ali" boosted stocks. More data suggesting stabilization in the job market and recovery came in, as jobless claims again were under the critical 400K level, the Conference Board's index of economic indicators expanded for the fourth straight month, and the Philadelphia Fed Index rose for a third straight month. Bonds were lower after the economic reports. On the earnings front, growth for the companies in the S&P 500 is forecast to accelerate to 14.1 percent in the third quarter and 21 percent in the fourth from 9.5 percent in the three months through June, according to analysts surveyed by Thomson Financial.
Strong Sectors: chemical, storage, semiconductor, home furnishing, auto, hospital, utility, homebuilding, paper, aluminum
Weak Sectors: gold, drug, wireless
Top Stories . . . The number of Americans filing for jobless benefits fell to the lowest level since February, suggesting companies have slowed the pace of firing as the U.S. economy gains strength.
The index of leading U.S. economic indicators gained 0.4 percent in July, the fourth straight increase, reflecting a decline in jobless claims and a rise in money supply.
U.S. Treasuries fell in New York trading as the number of Americans filing for jobless benefits fell more than forecast to the lowest level since February, bolstering evidence of faster economic growth.
The euro tumbled to a four-month low against the dollar and yen amid evidence the U.S. and Japanese economies are accelerating as the 12-nation euro region heads toward recession.
Ripplewood Holdings, a New York- based fund, agreed to buy Vodafone Group Plc's Japanese fixed- line phone business for 261 billion yen ($2.2 billion), doubling its investment in Japan in the nation's biggest leveraged buyout.
Quotes of Note . . . ``You have to give the benefit of the doubt to the economy; the data has improved,'' said Kevin Cleere, who manages $550 million of U.S. stocks at Hibernian Investment Managers in Dublin.
``The information people are getting, whether explicit or between the lines, is that things are getting better. In general, earnings have been good.'' said Matthew Finn, who manages a $1 billion large-cap fund at US Bancorp Asset Management in Minneapolis.
``A lot of the movement in the 10-year that we've seen in the last month is not so much driven by economic factors as it's a pure need by mortgage investors to hedge their positions,'' Cloherty said. ``As rates start to rise the duration of a mortgage portfolio starts to extend, and so people need to offset that extension by selling Treasuries.''
``Bond yields are likely to be encouraged higher by market expectations of quickening economic activity,'' said Jan Lee, who oversees the equivalent of $21.6 billion for Geneva-based European Financial Group in Singapore. ``Inflation is nowhere to be seen, but it is becoming a figment of the market's imagination.''
Gurus . . . Smith Barney economist Steven Wieting raised his 2003 operating earnings-per-share estimate on the S&P 500 to $54 from $53 and his 2004 estimate to $59.75 from $58.40. The economist expects operating S&P 500 earnings to grow 12.6 percent in 2003 and 10.6 percent in 2004. Wieting also hoisted his U.S. gross domestic product forecast to 2.5 percent from 2.3 percent for 2003 and to 4.3 percent from 4.2 percent for 2004. Smith Barney said overall financial conditions still appear to be "quite stimulative," though he concedes that higher interest rates and a stronger U.S. dollar might assist in dampening the nascent economic uptrend.
Goldman Sachs is raising its 2003 and 2004 S&P 500 earnings estimates in light of: (1) the strong results of the first half of 2003, which benefited from a declining US dollar, cost containment and improved economic activity in the US, and (2) expectations of further profit gains in the second half. Its US GAAP consistent operating EPS estimates go to $49 for 2003 and $53 for 2004 from $46 and $51, respectively.
Eco Speak . . . The number of workers filing for state unemployment benefits remained under the key 400,000 level again last week, a strong indication that layoffs have slowed, the Labor Department reported Thursday. The four-week average of weekly filings fell from a revised 395,500 to 394,250, the lowest since Feb. 15. It's the third straight week under 400,000 for the four-week average. The average number of initial claims had been above 400,000 for 22 weeks in a row. The weekly number of new claims fell 17,000 to 386,000 in the week ending Aug. 16, the lowest level of new claims since February 8.
Manufacturing activity increased in August in the Philadelphia region. The bank's business index rose to 22.1 in August from 8.3 in July. Readings above zero indicate that most firms say business is getting better or no worse. New orders rose to 14.6 in August from 10.4 in July and have now jumped 15 points in the past two months. Shipments also improved, but employment dipped below zero again, indicating little hiring in the region. The six-month expectations index rose to 62 in August, the highest in 10 years.
The Conference Board's index of leading economic indicators rose 0.4 percent in July, its fourth consecutive rise. The coincident index and the lagging index each increased 0.1 percent in July. The rise in the overall index was in line with expectations, but an upward revision in the June numbers from a 0.2 percent to a 0.3 percent increase meant the net rise was slightly stronger than expected, said Ian Shepherdson, an economist with High Frequency Economics. The rise in the leading index was fueled by positive readings on the interest rate spread, real money supply growth, lower weekly initial unemployment claims, improved vendor performance and stock prices, the Conference Board said. Negative factors were weekly manufacturing hours, consumer expectations, building permits, new factory orders for nondefense goods and consumer goods. The Conference Board said the overall trend in the indicators was consistent with an improvement in business investment in the second quarter that could be continuing into the present quarter.
Credit Of Note . . . A new report from Fitch Ratings said "faint signs" of improvement in global credit quality emerged in the second quarter of the year as credit rating downgrades slowed and upgrades made a positive showing. While Fitch noted that the number of downgrades continued to top upgrades in the second quarter, the margin contracted to a ratio of roughly 2:1 from the 8:1 margin witnessed in the first quarter of the year. The rating agency said defaults continued their descent in the second quarter, boosting credit quality as a result. "The verdict is out whether the dramatic spike in interest rates beginning in mid-July reverses the positive capital markets developments in the second quarter, or confirms those developments to be a harbinger of economic growth and better times ahead," said Glen Grabelsky, managing director at Fitch.
Mutual Fund Flow . . . Lipper estimates that $21 billion flowed into stock funds during July, while $8.5 billion flowed out of bond funds. Moreover, the action in individual industry groups presents an almost textbook example of what happens when an economic recovery is underway. Industry groups such as retailing, hotels and leisure, capital goods, raw materials, and autos have topped the broader market. Meanwhile, defensive stocks such as drug and household goods are struggling as investors become more aggressive. Of course, technology has led the pack, and John Calamos, who runs the $4 billion Calamos Fund, says there is more to come. Tech stocks became so distressed, that there is running room on the upside. He has been buying Amazon, e-Bay, and Cisco, and has been adding Symantec.
Of Note . . . Investor's Business Daily notes that the S&P 600 and 400 have been outperforming the big-caps. The Small Cap S&P 600 is up almost 8% in ten straight days, while the Mid-Cap S&P 400 registered its ninth advance in ten days.
3rd Quarter . . . First Call is out with their latest third-quarter projections, envisioning the S&P 500 will show a 14% rise in the quarter, followed by gains of 21% in the fourth-quarter. The recently completed second-quarter was up 9.5%.
Housing of note . . . Money manager and research firm Bridgewater Associates believes the housing market has reached its top, as it estimates that the payments on a typical new home are now 14 percent higher than they were 3 months ago amid a rise in long-term interest rates. "For most people interested in buying a new home, the price of the house is largely irrelevant; the important question is whether they can afford the payments," Bridgewater said. The yield on the 10-year Treasury note was last up 0.043 percentage points at 4.484 percent, up from 3.35 percent at the end of May, and up from the five-decade low of 3.074 percent hit on June 16. The firm estimates that the drop in home affordability will translate roughly into a 10 percent decline in nominal housing activity, with volumes and prices both falling.
Virus hitting Transports . . . The Wall Street Journal reports an onslaught of rogue computer programs continue to disrupt computer networks including important commercial infrastructure. The serious incident highlighted was CSX, which had to temporarily halt service Wednesday due to a variant of the Blaster virus interfering with its train and operations and dispatching system. In addition, Air Canada encountered delays on Tue because a "worm" program infected the airline's reservation system.
Japan . . . Analysts are becoming more optimistic that reflation is taking hold in Japan, aided by the accelerating U.S. reflation process. The value of the yen – the key Japan variable – has stopped strengthening, allowing Japan’s deflation spiral to subside. Analysts are encouraged by Japan’s apparent soft-pedaling of its complaints about China’s currency stability, a shift which may indicate a firmer resolve in Japan to keep the yen from appreciating against the dollar. Without much global notice, the pace of Japanese economic activity is clearly accelerating. Second quarter GDP data, released on August 11, was well above the consensus expectation, increasing 2.3% quarter-over-quarter at a seasonally adjusted annual rate (SAAR). The second quarter was the sixth consecutive quarter in which real GDP increased. First quarter GDP was revised up to 1.3% SAAR from the 0.4% SAAR increase initially reported. Nominal GDP rose 0.6% SAAR in the second quarter, its first increase in three quarters. Faster nominal GDP growth will be a key part of a successful Japanese reflation. Over the first half of 2003, Japanese GDP growth well outpaced that in the U.K. and the Eurozone, and was only slightly slower than that in the U.S.
Pension Funds . . . The combination of interest rate stability and improving equity market returns in 2003 will help reduce pension plan funding gaps. For the 100 companies in the S&P 500 Index with the largest employee benefit obligations, estimate that by year-end 2003 they will be underfunded in the aggregate by 13% compared to 18% at year-end 2002. By year-end 2004, expect them to be underfunded by only 6% in the aggregate. Due to the smoothing mechanisms of GAAP, we expect pension cost to increase significantly in 2003 despite the improvement in the funded status. Estimate an aggregate net pension cost of $11.9 billion in 2003 compared to aggregate net pension income of $3.3 billion in 2002 for the 100 companies in sample. These estimates are highly dependent on assumptions about year-end discount rates, annual market performance and contribution levels. For example, if you assume 2003 contributions at 2001 levels rather than 2002 levels, estimate these 100 companies would be underfunded by 16% in the aggregate in 2003.
