Lots of News for a Slow Day
The major averages closed in the red again for the third day in four sessions. It would appear to be plain old profit taking after yesterday's market-wide rally. Investors shrugged off negative housing data and focused on headlines in the technology and biotech sectors. The Dow Jones Industrials lost nearly 43 points to close at 10,671 as 23 of its 30 components turned lower. The NASDAQ dropped less than four points to 2076 and the S&P 500 dropped 5 to 1151.
The best performers today were the biotech stocks, semiconductors, hardware and software. Meanwhile selling was heaviest in gold stocks, natural gas and oil services. Influencing gold was the U.S. dollar, which hit a new all-time low against the euro in early trading before strongly rebounding. Sending the dollar higher were comments that the Bank of Japan would continue to intervene as the yen near a three-year high against the dollar and comments from French President Chirac that hinted at possible intervention or similar strategies to stem the rise of the euro against the dollar.
Overall stocks only posted mild losses but market internals were bearish. Declining stocks outpaced advancers 17 to 10 on the NYSE and 3 to 2 on the NASDAQ. Down volume surpassed up volume by 2 to 1 on the NYSE and 10 to 7 on the NASDAQ. The good news is probably the bullish pattern of higher lows on the major averages. The DJIA dropped toward the 10640 level and bounced. The S&P 500 followed suit with a bounce from its intraday low near 1149. The NASDAQ also managed a decent bounce in the last two hours of trading.
Chart of the DJIA:
Chart of the S&P 500:
Chart of the NASDAQ Composite:
Today's main economic data was the housing starts number. The Commerce Department reported an 8% drop to a seasonally adjusted rate of 1.9 million homes in January. Wall Street was expected a dip so the report was largely ignored. Granted this was the lowest level since August but the housing starts have been very strong and hit a 20-year high in December. Also noteworthy was the 4.9% jump in mortgage applications for last week. The Mortgage Bankers Association of America provided the breakdown with a 2.9% jump in applications for home purchases and a 6.4% jump in refinancings applications. Homebuilders initially traded lower on the news but eventually climbed higher throughout the day eliminating most of their losses.
While hardcore traders seem to feel the trading session turned out rather boring there were a number of stories making headlines. Grabbing the spotlight early on was Rambus (RMBS). Shares of RMBS added more than $9.00 to jump 35% near 3-year highs at $34.93 after an administrative law judge with the FTC dismissed an antitrust case against the company. The judge produced a 330-page decision on the case where prosecutors were trying to prove that RMBS violated antitrust laws by helping set industry standards for memory chips while simultaneously pursuing patents for their designs. One analyst estimated that this decision could help RMBS garner $3 billion a year in royalty payments.
Almost topping RMBS' gain was Irish drug company Elan (ELN). Shares of ELN rallied 34% and its marketing partner Biogen Idec (BIIB) added 20% after ELN announced that it would pursue FDA approval for its multiple sclerosis (MS) drug Antegren a year ahead of schedule. The two drug makers are halfway through a two-year clinical study of Antegren and based on the one-year results they decided to go ahead with the approval process. MS treatments are a multi-billion a year business and the handful of companies that compete in this niche traded lower.
Going the opposite direction was Dobson Communications (DCEL), a mobile phone service provider for rural areas. Shares of DCEL dropped 36.6% on 29 times its average volume after reporting fourth-quarter earnings that were much weaker than expected. The average analyst estimate was for a loss of 5 cents a share. DCEL turned in a loss of 53 cents a share compared to a profit of 28 cents a share last year.
The truly big surprise today was El Paso (EP), the largest U.S. natural gas pipeline operator. Shares of EP fell almost 18% after the company sliced its proven natural gas reserves estimate by more than 40%. Proven reserves are the estimated quantities that a company believes is recoverable from its current fields. Why they're called "proven reserves" when they're estimating the amount of fuel they can extract from the ground sounds like a mystery to me. EP said their earnings would be affected by a $1 billion pre-tax charge for its fourth quarter. If you recall it was just last month that Royal Dutch-Shell Group reduced its proven reserve estimates by 20 percent. Yup, you can almost hear the herd of lawyers stampeding towards El Paso's Houston headquarters with briefcases brimming with shareholder lawsuits.
Speaking of lawsuits IBM traded lower today (-0.95%) after a federal judge ruled against Big Blue in a pension lawsuit on behalf of 140,000 older employees. In the 1990's IBM moved to a "cash balance" pension plan; which the judge felt didn't accurately give older employees their share of benefits. The decision could cost IBM $6 billion in retroactive benefits but the company plans to appeal.
While we're on the topic of legal issues the SEC finally reached an agreement with Wall Street's top five specialist firms to fork over $240 million. Bear Wagner, which is part of Bear Stearns, FleetBoston Financial, La Branche, Speer Leeds Kellogg, which is part of Goldman Sachs, and Van de Moolen are the five firms which will divulge a total of $155 million in perceived ill-gotten gains and another $85 million in penalties to settle allegations that the firms jumped in ahead of its customers while processing their orders. As is typical with these types of SEC settlements none of the firms will either admit or deny any wrongdoing and hope this settlement will reduce the number of civil lawsuits from investors.
All of the above are certainly big stories but the ones investors were most eager to hear occurred after the closing bell. The semiconductor sector was able to maintain its gains today because traders were eager to hear from Applied Materials (AMAT) and Broadcom (BRCM). Last night BRCM announced that it would hold a conference call today after the closing bell to discuss their "stronger business outlook". This was highly unusual and shares of BRCM added 7.3% on the session in anticipation of the event. Even though the first quarter is only half over BRCM's CFO raised their first-quarter revenue forecasts from +10% to an estimated +16-18% as rising demand for broadband and wireless communication chips exceed previous estimates. BRCM wouldn't offer any guidance past the first quarter but did say that the second quarter should be strong.
BRCM's announcement is certainly bullish for the chip sector but the one-two punch that could really drive the SOX tomorrow is AMAT's earnings. The largest chip equipment maker on the planet announced net income, minus one-time charges, of 12 cents a share. This is 4 cents above the 8-cent analyst estimates and significantly better than its breakeven results from last year. New orders for the quarter rose 32%. Furthermore AMAT's CFO said new orders will likely rise 30% in the second quarter and they will probably beat analysts' estimates. This of course will force a round of upward revisions for the company as the analyst community readjusts their forecasts. The company expects Q2 earnings in the 17-19 cent range, which is well above current estimates at 11 cents a share and sales were likely to rise 20% from Q1 levels.
AMAT was trading higher after hours and it could lead the SOX to a new relative high, which in turn should lead the NASDAQ higher. Fortunately none of tomorrow's economic reports are expected to be a surprise and we only have a handful of earnings to worry about. So what's on our plate for Thursday? The Philly Fed manufacturing survey will probably be the big report tomorrow. Estimates are for a small dip from January's reading. The PPI was supposed to report tomorrow but a new industry classification system has caused a delay in the report. Thursday will also bring the Leading economic indicators index and the weekly jobless claims. After Thursday's close will be the semi book-to- bill report. Everything looks pretty good and as long a Wal-Mart doesn't surprise us with any negative comments in their earnings report before the open tomorrow I believe we'll challenge these short-term resistance levels.