The Good, The Bad, and The Ugly
Celera announces the completion of human genome sequencing; Philip Morris buys Nabisco; and First Union shutters its Money Store operation. To say this was a big news day would be an understatement. It is also an interesting study in price contradictions.
Celera's (CRA) joint announcement with American and British scientist is truly a milestone in human history and will find its place along with other landmark events like landing people on the Moon. In case you missed the news, in a much-anticipated event, Celera announced they had finished mapping the human genome with 3 bln different protein sequences. This data will now be available for commercial use (not for free) and Celera can now begin selling access to its research data base for other commercial applications. Immunex (IMNX) was the first to announce an inked deal with CLA. You'd think that biotech would have been on fire today as a result, and for the most part it was. However, the star of the show, CRA, got a black eye by the investment public, which handed it a $14 loss on volume about 3.5 times the ADV. As we noted last week in the Sector Trader section, this could be a case of buy the rumor, sell the news, and this morning, that's just what it shaped up to be. Note the bounce on both CRA and BBH at their moving averages today. By mid-afternoon, selling the news had run its course and investors hopped back aboard the biotech express.
Here's another contradiction in price movement. Philip Morris (MO) emerged victorious in its $19 bln bid for Nabisco Foods (NA). In acquisition cases, it's usually the acquired company whose price rises, while the acquiring company's price sinks. Not so today. MO rose $3.69 to close at $27.25 on almost twice the ADV. NA rose $1.13 to $52.50 while Nabisco Holdings (NGH), a related entity that owns 80% of NA gained $1.19 to $26.75, both on six times the ADV. In the case of MO, investors are generally pleased because there is minimal overlap of products. Better yet, it makes MO more of a food company with great dividends than a tobacco company with huge liability. Antitrust meddlers won't likely get involved with this merger as doing so may interfere with MO's ability to pay any tobacco liability settlements to the government in the future. In the eyes of Uncle Sam, MO just became a more stable creditor.
Finally, First Union (FTU +0.06, 27.44) announced this morning that it would take a $2.8 bln restructuring charge and close up shop on the Money Store, a purveyor of second mortgages to high risk borrowers, which they bought in 1998 for about $2.1 bln. They warned that earnings are expected to come in $0.11 to $0.13 under current estimates of $0.85 and cited increased interest rates, soft capital markets for its securities, and weakness in the healthcare markets. They now intend to focus on "businesses such as asset management, brokerage, wealth management, small business banking, e-commerce, and certain areas within capital markets" according to Patrick O'Hare at briefing.com. - probably because in the words of infamous bank robber, Willie Sutton, "that's where the money is".
That isn't all. They intend to sell their mortgage servicing and platform division, seek a buyer for their consumer and commercial credit divisions, sell off 90 branches where they are not the market leader, and sell off another $13 bln in investment securities. Talk about cleaning house! But did you catch that intent to sell $13 bln in investment securities? That's a whole lotta cash generation. What if Fidelity or Vanguard announced that? What would that say about their view of the market? Likely, not so hot. While FTU is motivated to dispose of under- performing assets in search of stronger future earnings, it also telegraphs their belief that keeping $13 bln in current asset form won't make them any money. Not that we're predicting economic meltdown, but the big reason for the shakeup in Charlotte (FTU's homebase) is a generally slowing economy. Tuck FTU's intent to sell in the back of your mind as a yellow caution flag thrown at the general market. FTU is not likely to be an isolated warning.
Here's something that slipped through investor's radar this morning. Existing home sales for May were up 4.3% over last month. Wait a minute. . .weren't previous interest rate hikes suppose to put on the inflation brakes? Yes, but actually these numbers could be just a reaction from rate hikes earlier this year that spurred buyers to action out of "better get it now before I can't afford it later" fear. You can bet however that Greenspan takes notice and has made the appropriate hash mark on his economic scorecard.
All this leads us to the start of tomorrow's FOMC meeting where we investors will finally discover if we get a final rate hike before the November election, or not. The announcement will occur on Wednesday. The general consensus is that Greenspan will leave rates alone, but will further caution that inflation is a real risk to economic prosperity and that they (the Fed) will remain vigilant in controlling the markets (err...inflation).
Accordingly, though the expected outcome is largely priced in, there will likely be some upside bias to stock prices mid-week as investors would view "no rate hike" as a turning point in the interest rate cycle. Even so, earnings warnings, oil price hikes, and the coursing of previous interest rate hikes in the nation's economic veins should serve to keep markets from developing another case of severely high blood pressure.
Great! But in light of Friday's close and today's recovery, what's next. Ahh, to be in possession of the perfect crystal ball. . .Let's take a look at today's markets for a clue.
Let's start with the NASDAQ, which moved up 66 points to close at 3912 on 1.3 bln shares. We'll take it! The good technical news is that 3850 held (actually 3852 during amateur hour) and continued to move up from there. Later in the day as the NASDAQ retested 3855, it held again and moved up nicely in the final hour to close over 3900 at 3912. That also happens to be a recovery right back to the 10-dma of 3911. That's a sign of strength in our book. 2122 advancers beat out 1880 decliners too - more strength! Finally, there was 65% more up volume than down volume. The only eyebrow raiser we can see here is 91 new lows compared to 64 new highs. That's a little steep. We haven't checked, but given the pain in the e-tailing and retail sectors lately, a few are probably on that list (AMZN, GPS). Optical companies remained hot with SDLI back in the saddle and up $26 for the day, while INKT got hammered by a nearly equal amount (- $25) on news that they lost the Yahoo! search engine account.
Anyway, look for support and resistance in a really narrow channel in front of the FOMC meeting. Support will likely be found at 3900, then 3850. After that, start looking at 3750. Meanwhile, 3950 and 4000 should cap it on the top. Unless you are already in a position, you may want to wait until a new direction becomes clear, and that may not be until Wednesday.
Similar for the Dow, only a nice recovery today off the 10,400 level. The Dow gained 138 points to close at 10,542 on volume of 890 mln shares - about average these days. Once again, the neutral wedge on the chart retained its shape telling us a breakout is coming. We just don't know which way. If the pattern continues to develop, we'll likely see 10,600 or 10,650 offer resistance. Again, the FOMC could be the catalyst for the breakout. But the real prize will be to get back over 10,900. Don't bet on it tomorrow. Support is holding nicely at 10,400 on a longer-term chart, while 10,515 worked well for us intraday. Just to finish off the statistics, 1482 advancers slipped by 1341 decliners while up volume was about even with down volume. 60 new lows (T was one of them) beat out 42 new highs. JNJ, MO, HWP, and IBM saved the day, while UK and T headed the loser list.
All that said, the next two days are going to be tricky to trade in front of the FOMC meeting. However, by no means are we saying to stay away from the markets. There are always trading opportunities - we just need to be vigilant in finding them. Remember to use support and resistance in finding your entries and exits, and in defining your stop losses. A breakout is coming. We just aren't sure if the break will be up on a favorable FOMC outcome, or down on renewed worries (after the FOMC announcement) that earnings will slow, thus reducing equity prices. I'm back with Jim this week. . .don't buy too soon.