Buffett Bids, Others Offer
Apathetic is perhaps the most appropriate adjective to describe the market's current state. But that much makes sense; after all, it's still August. Not even the revelation that the Oracle of Omaha had been sniffing around in equities was enough to pique the interest of buyers Wednesday. Yet volume remained terribly low, indicating a lack of conviction on the part of sellers. But the price action across the broad market averages indicated otherwise.
The lack of enthusiasm from Applied Materials' (NASDAQ:AMAT) and BEA Systems' (NASDAQ:BEAS) earnings reports Tuesday night resulted in weakness in the Semiconductor (SOX.X) and Software (GSO.X) sectors of the Nasdaq. (AMAT was one of only five Nasdaq-100 stocks that finished higher Wednesday.) These two sectors are the largest and most influential in the Nasdaq, and further weakness in these two will most certainly lead the Nasdaq lower.
The merger & acquisition news in the telecom space, which is of concern to the Nasdaq, failed to morph into bids for beleaguered carrier shares. Alltel (NYSE:AT) proposed to acquire CenturyTel (NYSE:CTL) late Tuesday evening. And although CenturyTel rejected the offer, its shares jumped $4, or about 13 percent on the news Wednesday. While this story is still unfolding and has already taken many twists and turns, it may lend to a coming wave of consolidation in the telecom business among carriers. Consolidation within the carrier group is welcomed by the tech/telecom companies such as Cisco (NASDAQ:CSCO), Nortel (NYSE:NT), PMC-Sierra (NASDAQ:PMCS), and hundreds of others. A wave of consolidation among carriers could result in a boost to margins and, in turn, an increase in capital expenditures.
One man who's been spending recently is Warren Buffett, according to an SEC filing released late Tuesday. Reportedly, Buffett and his empire known as Berkshire Hathaway (NYSE:BRK.A) bought a chunk of Office Depot (NYSE:ODP) and Honeywell (NYSE:HON) in the first- and second-quarter of this year. The former ended Wednesday lower on the news, while the latter edged higher.
I recall that a few months ago Buffett opined that the stock market, as a whole, remained grossly overvalued and that very few favorable opportunities were present at the time. As it turns out, as revealed by the SEC filings, Buffett acted on those "very few" opportunities. That tells me that Buffett is positioning for a bull market in select pockets of the market, or at the very least select shares of companies. Granted, Buffett's timeframe and discipline are unique, but his actions reinforce that money can be made buying stocks in good times or bad. That is, there's ALWAYS a bull market somewhere.
Recently, the bull market has been in shares of companies impacted by the U.S. dollar. The dollar has been in retreat recently, and its slide began accelerating following the Beige Book release last week. The greenback hit a five-month low versus the euro Wednesday and a two-month lower versus the yen. Without going into too much detail, the dollar's decline is a positive for the large, multi-national companies that export goods overseas, such as Merck (NYSE:MRK), Procter & Gamble (NYSE:PG), DuPont (NYSE:DD), Pepsi (NYSE:PEP), and the like.
However, the dollar's decline is a double-edged sword. While it's of benefit to the multi-nationals, it may also lead to inflation. And the U.S. economy doesn't need inflation. But, what asset does benefit from inflation? The answer is gold. And here's the kicker: Gold is a dollar denominated asset so it also benefits from the sliding greenback because central banks, especially European, buy gold in dollars.
I don't mean to focus too much on gold, but this story gets more interesting. Aside from the sliding dollar, what else contributes to inflation? The answer is rising energy prices. Enter The American Gas Association (AGA) report Wednesday afternoon. The AGA reported a far lower-than-expected rise in natural gas inventories for last week, which sent natural gas futures higher by 37 percent. The energy-related sectors of the market all advanced smartly: Oil Service (OSX.X), Oil Index (OIX.X), and the Natural Gas Index (XNG.X). Not by surprise, the Gold and Silver Index (XAU.X) was in rally mode, too.
There are several economic reports slated for release in the next two days that may sway the dollar one way or another. Of the reports, the market will probably give the most credence to Housing Starts slated for release Thursday morning. The housing market has been the one area of the economy that has held up during this downturn, and any signs of deterioration in that segment may embolden the sellers of stocks. Estimates are around 1.62 million. In addition to the Housing number, the CPI and Jobless numbers are set for release Thursday morning. Friday, Consumer sentiment and Q2 GDP revised numbers are slated for release.
In addition to the economic releases, there are several big earnings reports due out Thursday. CIENA (NASDAQ:CIEN) is slated to release numbers before the bell, while Dell (NASDAQ:DELL), Hewlett-Packard (NYSE:HWP), Analog Devices (NYSE:ADI), and Maxim (NASDAQ:MXIM) are set to release after the bell. Away from tech, The Gap (NYSE:GPS), Kohl's (NYSE:KSS), Tiffany (NYSE:TIF), and Nordstrom (NYSE:JWN) should make for interesting trading in the Retail sector (RLX.X).
In the after hours, Brocade (NASDAQ:BRCD) reported numbers that met previously lowered expectations. The company added that it expected a slight increase in sales during its next quarter. The stock initially traded higher on the report, but pulled back at the time of this writing. Futures were ever-so slightly higher, and it remains to be seen if the BRCD report will be met with buying Thursday morning, keeping in mind that CIEN reports between now and the open Thursday.
The psychology of the market seems to be somewhere north of fear, west of misery, and two clicks from apathy. Wednesday's 2.3 percent clip in the Nasdaq Composite (COMPX) felt like it took a little bit more out of the bulls. For the most part, the support levels across the broader market averages are intact, but they're just a few ticks away from breaking down. And the ole' Arms Index ($TRIN) 10-day moving average is hinting towards a near-term bottom. Whether or not the psychology has grown negative enough for a reversal remains to be seen Thursday. And the economic and earnings reports over the next two days factor into the psychological equation. But for a rebound to transpire, there needs to be a reason to buy.