Merger mania fails to hold up the market
Interest rates and oil prices weighed heavy on the Dow but the Nasdaq shrugged them off and soared +66 points. The bonds sank again and yields hit 6.75% with only two weeks left before the Fed meeting. The 6.75% yield is the highest since summer of 1997 and shows no signs of easing. The oil prices hit new highs of $28.85 per bbl and the severe cold snap in the northeast is threatening to push them even higher. The difference between the Nasdaq and the Dow was as different as night and day.
The Dow suffered under the weight of the financial stocks and the interest rate drag. Financial stocks took a dive and the outlook for a direction change is slim. JPM -4.69, AXP -7.94, GE -3.00 all dropped with the bond market. Even the mega-merger of Glaxo and SmithKline could not prop up the sagging Dow.
The Nasdaq however caught fire on the news that JDSU was buying competitor ETEK for $15 bln in stock. Last week it was America Online (AOL) bringing media conglomerate Time Warner (TWX) into the fold. This week it's JDS Uniphase (JDSU) doing the same to E-Tek Dynamics (ETEK). In a deal valued at $15 billion, JDSU, the world's No. 1 maker of fiber-optic equipment parts will exchange 1.1 of its shares for each share of ETEK, another major player in the fiber optic world. The acquisition gives JDS Uniphase more of the capacity it needs to meet the insatiable demand for optical equipment. Based on Friday's closing prices, the deal amounts to a premium of more than 50 percent for ETEK shareholders. Market reaction was decidedly bullish for both stocks. JDSU finished the session up $3.50 at $195.69, while ETEK rocketed ahead $42.50 to close at $178.38. The tech sector was not up across the board but the gainers were enough to push the Nasdaq within .35 of a new record high.
Nasdaq leader MSFT gained +3.06 in regular trading before posting earnings after the close. MSFT beat the street with $.47 vs estimates of $.42 but the street was not happy due to a +$.04 gain on sale of investments included in this number. The revenue numbers came in on the low end of estimates at $6.1 bln and in keeping with tradition they warned about possible earnings challenges in the next two quarters. MSFT said there was softness in purchases by corporate customers in the fourth quarter and there was concern going forward.
Data communications chip-maker, Broadcom Corp. (BRCM) also blew ahead today in anticipation of waxing the analysts. The stock closed at $328.50, up $33.25 or 11.3 percent. BRCM reported after the bell that profits rose by 360 percent and sales more than doubled. The company reported net income of $36.9 million, or $0.31 cents a share, for the fourth quarter compared with profits of $8 million, or $0.07 cents, a year ago. The First Call consensus estimate was for $0.27.
Another stock making noise during the trading session was Network Solutions (NSOL). A courtroom victory was the catalyst for this stock moving forward. NSOL is a registrar of Internet addresses with the suffixes .com, .org, .net and .edu. As many Web-surfers know, these addresses make navigating the vast expanses of cyberspace a manageable affair. NSOL's exclusive registrar franchise was challenged in a 1997 lawsuit filed by people who had registered Internet domain names through the company. The suit claimed, among other things, that the registration fees were excessive and amounted to an unconstitutional tax. The U.S. Supreme Court rejected the challenge. In response to the positive ruling, NSOL advanced $42.56, or nearly 18%, to close at $280.31.
The Dow drop today was due even if the oil and interest rates were not higher. After several days of records and a +700 point gain since Jan-7th it was due for a pullback. The real test for both indexes will be tomorrow. Super Tuesday is now over and the earnings excitement is starting to wane. The major banks reported outstanding earnings this morning but it did not help their stock prices today. The tech biggies are almost done with reporting. INTC, MSFT, Nasdaq and Dow leaders, have announced and are likely to start giving back some of the recent gains. YHOO, the leading Internet stock, announced and the buzz is now gone for the Internet sector.
Volume was heavy in both the NYSE and NASDAQ markets. A total of 1.02 billion shares traded on the NYSE while 1.56 billion changed hands on the NASDAQ Stock Market. Losers edged ahead of winners by 18 to 13 on the Big Board, while winners bested losers on the NASDAQ 25 to 18.
The outlook for the the markets is cloudy. There are no economic reports of importance this week and with earnings rapidly losing the attention of traders there is a strong possibility the markets will flounder. The Nasdaq has had trouble penetrating the 4100 level and after sprinting ahead today it must hold those gains to protect the rally. The Dow dropped below the previous resistance at 10600. Both indexes are fighting an uphill battle. As I reported on Sunday, February 1st has proven to be a pivotal point in the past and the news coming out in advance of the Fed meeting is not helping.
After beating the street MSFT is trading down -$3.00 in after hours and BRCM who also beat estimates and announced a 2:1 split is trading down -$16 as well. DCLK beat estimates as well with a +150% increase in earnings but lost -$8.00 in after hours trading. When leaders are being beat up this bad after record results it shows how volatile the internals of the market really are. Traders do not want to hold for any length of time. They are afraid of the market strength.
S&P Futures are down -4.70 and Nasdaq futures are down -46.00. The Asian markets opened lower in response to the Dow drop and the rising interest rates. There is a lot of darkness left before morning but the prospects for Wednesday are not looking bright. Several online brokers are scheduled to report tomorrow and report larger losses than in the past. This is not the kind of news traders want to hear. IBM, AOL, APPL, AMD, EGRP, AMTD are all scheduled for Wednesday.
Good Luck, Sell too Soon