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Isabel Swirls Closer

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      09-15-2003           High     Low     Volume   Adv/Dcl
DJIA     9448.81 - 22.74  9490.91  9436.60 1.91 bln 1414/1443
NASDAQ   1845.70 -  9.33  1861.81  1843.79 1.81 bln 1828/1256
S&P 100   509.96 -  2.34   512.81   509.49   Totals 3242/2699
S&P 500  1014.81 -  3.82  1019.79  1013.59 
W5000    9842.92 - 34.39  9891.25  9835.68
RUS 2000  507.64 -  1.42   511.95   507.47 
DJ TRANS 2735.60 -  2.62  2742.66  2729.23   
VIX        20.54 +  0.29    21.44    20.25   
VXN        32.93 +  0.25    34.01    32.90 
52wk Highs  286
52wk Lows    23
PUT/CALL   0.66

Isabel Swirls Closer
By James Brown

Stocks were weaker on Monday as Wall Street tried to anticipate Hurricane Isabel's arrival while dealing with fears that tech stocks may be overvalued. Combine the usual concern/excitement in front of the FOMC's meeting on interest rates tomorrow with Friday's triple-witching option expiration and the moves today were rather shallow. The lion's share of losses were in the tech sector despite a few key upgrades and positive comments for the semiconductor industry again.

Overseas exchanges were mostly positive. The English FTSE 100 and the German DAX both closed in the green. The Hong Kong Hang Seng exchange added 109 points to close at 10,992. The Japanese NIKKEI index jumped 166 points to 10,712. U.S. index losses were mild with the Dow Jones Industrials down 22.74 points to 9448; the NASAQ Composite lost just over 9 points to 1845 and the S&P 500 dropped just under 4 points to 1014. Market internals for U.S. exchanges were negative. Declining stocks beat advancers by 15 to 12 on the NYSE and 16 to 14 on the NASDAQ. Down volume also rushed past up volume by 859M to 500M on the NYSE and 863M to 562M on the NASDAQ.

Chart of the DJIA:

Chart of the NASDAQ:

Monday's Economic Reports

It was a busy day for economic reports which turned out generally positive but investors chose to ignore them for the most part. The Federal Reserve released the August Industrial Production numbers which showed a +0.1 percent increase in August but it was below consensus estimates for +0.3 percent. This was the first back-to-back gain since February for the industrial production numbers. The Fed's production report showed Manufacturing output slipped 0.1 percent in August after three months of gains. Utilities production rose 1.9 percent and mining output gained 0.2 percent. The overall capacity utilization numbers was virtually unchanged at 74.6 percent. Technology investors will find it interesting to note that the Fed's report showed high- tech production rising 2.3 percent. Inside the technology group's improvement was a 2.6 percent growth in semiconductors, a 2 percent growth for computers and a 1.9 percent jump in communication equipment. This was the biggest improvement for technology output since September 2000.

The second biggest report out today was produced by the Buffalo branch of the Federal Reserve Bank of New York. This was the New York Factory index. Values greater than zero for this localized index represent improving business conditions and economists were looking for a rise to 14. The September number was a blow out as it jumped to 18.4 from 9.98 in August. Today's report marked the fifth straight monthly gain for the New York area.

Hurricane Isabel

One of the big stories of the day and potentially the biggest story of the week is Hurricane Isabel, which is quickly approaching the east coast. Isabel's winds have slowed a bit but they are still pushing 140 miles an hour. That's just below what it needs to be a Category 5 storm, the highest classification for the most devastating storms. Isabel is expected to hit land between Wednesday morning and Thursday morning. Wall Street analysts were quickly trying to compute which insurers had the most exposure to this natural disaster.

Most were pointing fingers at AllState (ALL) as the insurance company with the most to lose should Isabel really hit the coast hard. Insurance stocks as a group lost ground ahead of the storm but most analyst believe that if the damages are high enough it will give the industry license to raise their premiums, which will translate into higher stock prices. Goldman Sachs estimated that if Isabel's damage rang in less than $5 billion then premiums would not likely rise. Should the damage fall between $5 and $10 billion then insurance companies would probably take advantage of the storm to raise premiums. Goldman said that if Isabel's fury creates more than $10 billion in damages then almost every insurer with exposure to the area would probably miss their Q3 estimates. As a comparison hurricane Hugo, a Category 4 storm, hit S. Carolina in 1989 and caused $7 billion in damages. It was only three years later, in 1992, that Category 5 storm Andrew became the most expensive natural disaster in U.S. history causing $25 billion in damages.

Believe it or not but Isabel actually helped lift the DJIA from falling even father as component Home Depot (HD) rose +3.76 percent. Rival homebuilding supplier Lowes Corp (LOW) also jumped +2.4% as investors bid up the two retailers as the east coast begins boarding up their windows and stocking up on batteries and flashlights.

Boston Scientific Soars

In a much anticipated industry conference in Washington, Boston Scientific reported on their latest findings regarding the Taxus drug-eluding stent with more than 1300 patients in the study. The results were extremely positive. Not only did BSX's Taxus stent significantly outperform the bare-metal stent's performance numbers but they beat rival Johnson-and-Johnson's (JNJ) Cypher stent. Shares of BSX and partner Angio Pharmaceuticals (ANPI) have risen sharply in the last several months on investors' expectation that the FDA would approve the Taxus stent for the U.S. markets. Currently, JNJ is the only company selling a drug eluding stent in the U.S. and BSX is going to be stiff competition. The BSX stent is already outselling the JNJ stents in overseas markets and BSX just recently got approval to market the Taxus stent in Canada.

Shares of BSX were halted for most of the session as the results of the study were not released to the public until 2:00 PM ET. Once BSX began trading shares vaulted $4.62 or +7.5% to $66.05 and drug partner ANPI jumped $5.85 or more than 13 percent to a new high $49.72. Shares of JNJ lost just 79 cents or 1.5% to $50.84. Today's news was a big event for the industry but BSX's path down the stent-paved yellow brick road is not without its struggles. Both BSX and JNJ are awaiting a Federal court's decision on JNJ's request to prevent BSX from marketing and developing its drug-eluding stent in the U.S. Wall Street doesn't expect JNJ to win the decision but both companies will be in patent-infringement litigation in a fight for the stent market. JNJ is already preparing for the competition by lowering the prices on its Cypher stents last week. The legal issues are not impeding BSX's enthusiasm and the company raised their Q3 guidance from $810-840 in sales and earnings of 24-28 cents to $855-865 million in sales and 28-30 cents per share.

Analyst Comments

Investors have grown accustomed to a parade of analyst comments on Monday mornings and today was no different. Some of the comments making headlines today were from Merrill Lynch. Merrill (MER) upgraded the semiconductor sector's growth figures for 2004 and upgraded shares of equipment makers Applied Materials (AMAT) and Kulicke and Soffa (KLIC) from "neutral" to "buy". Morgan Stanley (MWD) also chimed in with positive comments on the chip sector citing improved industry fundamentals and rising revenue expectations of 4-to-7 percent growth in Q3 and Q4. While this is obviously positive news for the chip sector, the SOX slipped 1.88 percent on the session. One has to wonder if there are any analysts out there who have not upgraded the chip sector on improving fundamentals?

Goldman Sachs was also making headlines with its latest IT spending survey. The most recent survey was taken mid to late August and the numbers were not encouraging. Information technology spending for 2003 is likely to come in at zero percent growth or worse despite the improvement in the U.S. economy. Goldman continues to see the recovery being postponed and expects growth to come in just under 4 percent for 2004.

Noteworthy calls were also made by UBS who upgraded IBM from "neutral" to "buy". UBS believes that IBM's chip business and server division will improve. Gosh, after the previous upgrades for IBM the last couple of months is there any business that analysts don't think will improve for IBM? Talk about high expectations. Slashing some expectations was Smith Barney who cut Apple Computer (AAPL) and Hewlett Packard (HPQ) with valuation downgrades. Smith was kinder to the homebuilders with an upgrade for Toll Brothers (TOL) and KB Home (KBH) to "buy" from "in-line". J.P. Morgan happens to agree on TOL and upgraded the stock from "neutral" to "overweight". Shares of TOL rose more than 3.6 percent and the DJUSHB homebuilders index was one of the few indices that closed in the green today.

Tomorrow

Tuesday's big event will be the FOMC meeting on interest rates. At the last meeting on August 12th the FOMC chose to keep interest rates at a 45-year low of 1 percent. No one is expecting them to make any changes but the focus will be on what they have to say about the economic recovery. Expect their statement to reflect on the incredible rate of productivity and the concerns over slow growth in the labor markets. Economists will also be waiting for the CPI and Core CPI numbers out tomorrow. Meanwhile Wednesday will have Housing starts, building permits and the semiconductor book-to-bill ratio on Wednesday night. Don't expect a lot of big moves in the market ahead of the Fed's decision on interest rates and watch those stop losses!



 
 



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