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Level 3 Communications sees bonds and stock jump

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Telecom and information services provider Level 3 Communications (NASDAQ:LVLT) $4.46 +54% saw its stock and bonds recover after the company received an injection of funds from Longleaf Partner's Funds ($300 million), Berkshire Hathaway ($100 million) and Legg Mason ($100 million). While Level 3's (LVLT) stock rose, its 9.125% bonds due in 2008 were bid as high as 43 cents on the dollar versus the 32 to 33 cents from Friday.

The gain in the bonds, which are secured by the underlying assets equates to about a 34% pop, and this has today's gains in the common stock of Level 3 (LVLT) looking a little overdone and vulnerable to a pullback. In today's Market Monitor at OptionInvestor.com, I thought shares of LVLT looked short/put with some downside to the $3.50 level near-term. On Friday, shares of Level 3 (LVLT) finished the session at $2.89.

This "good news" found some telecom and telecom equipment stocks finding some early bids on the hopes that some renewed interest and willingness of larger institutions to inject some cash into the troubled telecom sector from value-based investors might hint that the group could see some consolidation from merger activity or offer some type of perceived value in the beaten down group.

The Combinded Telecom Index (IXTCX) 102.01 -1.27% and North American Telecom Index (XTC.X) 394 -0.53% are edging lower with the broader-market action, despite Dow Component AT&T (NYSE:T) $10.33 +1.47% holding gains the entire session.

The US Dollar Index (dx00y) 106.45 -1.13% remains near its session low and unable to put together a session recovery from its recent June 27th low of 105.85, most likely due to some lack of confidence not only in the US$, but accounting concerns regarding this morning's news out of US-based drug giant Merck (NYSE:MRK) $47.37 -3.04% recording $12.4 billion in revenue from its Medco pharmacy-benefits unit over the past 3 years that the subsidiary never collected. Between 1999 and 2001, co-payments comprised nearly 10% of Merck's overall reported revenue. In April, Merck first disclosed the accounting treatment in an SEC filing, but didn't disclose the amount of revenue involved until late Friday. Merck says the accounting treatment has no effect on its net income because it subtracts the same amount as an expense.

While the US Dollar's weakness against the major foreign currencies hints of some distrust or uncertainty about U.S. accounting standards, investors haven't been as defensive by rushing back to Treasury bonds. The benchmark 10-year YILED ($TNX.X) 4.84% traded a low session YIELD of 4.815%, but has seen some marginal selling since earlier this morning.

That has stocks firming just above their morning lows with the Dow Industrials trading off just 85 points (-0.8%), the S&P 500 down 9.8 points (-0.88%) and NASDAQ Composite down 29 (-2%).

Intra-day breadth has seen little change since the 11:00 Update, but there has been some improvement in the new highs and new lows on both the NYSE and NASDAQ. At the 01:00 EST hour, NYSE shows 53 stocks now at new highs (38 at 11:00 EST) and 35 new lows (27 at 11:00 EST), while the NASDAQ deteriorates somewhat with just 46 new highs (35 at 11:00 EST) and 82 stocks hitting new lows (53 at 11:00 EST).

The Semiconductor Index (SOX.X) 378 -3.6% continues to exhibit sector weakness today, as traders most likely keep a close eye on sector bellwether Intel (NASDAQ:INTC) $18.38 -5.93% as it attempts to fill Friday's gap higher from $17.78 to $18.70. Intel (INTC) came close to filling this gap at $18.07 earlier this morning. What sector bulls want to look for is an Intel (INTC) rebound back above Friday's high of $19.61 to spark a sector move higher. On Friday, INTC's point and figure chart did generate a "buy signal" that now has the bullish vertical count hinting at $26. Look for bears to be lining up stop stops at the $20 level and bulls to start nipping away at a bottom at current levels.

According to Dorsey/Wright and Associates, the semiconductor bullish % is still "bear confirmed" at 16.27%, but trying to turn "bull alert" with a reading at 18%. Last week, the semiconductor bullish percent fell to as low as 12%, but we've noted that Micron Technology (NYSE:MU) $21.70 +2.73% and Intel (INTC) have recently generated some "buy signals" on their point and figure charts. This hints that a bottom may indeed be forming in the group.

Key driver near-term for any prolonged bullishness looks to have traders looking to the US$. Bulls aren't getting the rebound I think they needed today in the U.S. dollar, but something to keep a close eye on as a potential catalyst.

Jeff Bailey
Senior Market Technician
Option Investor

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