Singing The Monday Blues
The markets struggled to find direction on Monday for most of the session as investors peered through a post-jobs report hangover. Last Friday the major indices all performed relatively well despite the abysmal jobs number but now that Wall Street has had the weekend to think about it investors seem a little more apprehensive. What was a divided market this morning turned into a market-wide rout lead by steep losses in Dow components Intel, General Electric and Eastman Kodak.
Foreshadowing today's loss in the U.S. exchanges was a failed rally in the Japanese NIKKEI index. The NIKKEI rallied to a new high hitting levels not seen since the summer of 2002 before reversing sharply and closing down 34 points to 11,502 about 140 points off its highs for the session. In contrast the Chinese Hang Seng index added 118 points to close at 13,573.
European stocks were mostly higher as the dollar fell against the euro for the second session in a row. Boosting buying pressure in German stocks were rumors that J.P.Morgan (JPM) might be interested in buying Deutsche Bank. These rumors followed similar speculation last week that Citigroup may be interested in the German firm. Speaking of Deutsche Bank the firm upgraded their earnings outlook for mobile-phone maker Nokia (NOK). Both NOK and rival Ericsson (ERICY) had broken out to new two-year highs last week and despite the Deutsche news neither NOK or ERICY could build on last week's gains. The Gartner research group estimates that handset sales could surge to 560 million phones in 2004, a 10% increase above last year's record-setting 510 million units.
Today's losses in the Dow Industrials (-66 points) and the NASDAQ Composite (-38.8 points) do not bode well for the rest of the week. The Dow closed under its simple 50-dma, a level of technical and psychological support, for the first time since last November. For many traders this is a major test of confidence and if the Dow fails to rebound in the next couple of sessions it may be their signal to sell. Fortunately, the Dow has bounced from short-term support above 10,520 twice in the past couple of weeks and there is additional support in the 10,400-10,500 range. Too bad the short-term trend of lower highs doesn't inspire a lot of confidence.
Chart of the Dow Jones Industrials:
The pull back in the NASDAQ today had a lot more sting to it. The index lost 1.89% lead by heavy losses in semiconductors and the rest of the tech sector. Intel is the major villain in this story. The chip giant (INTC) broke through major technical and psychological support at its simple 200-dma today. Technicians will note that today's 4.45% drop was fueled by twice the average volume, which suggests the decline isn't over yet. A lot of traders forgot about Intel on Friday as the markets reacted to the jobs report but memories of last Thursday's disappointing mid-quarter update came flooding back as investors turned cautious ahead of Texas Instruments and TriQuint's updates after the bell this evening. Intel is a Dow component, a NASDAQ-100 component and a SOX component so its decline was a huge drag on the markets.
Chart of Intel:
Tomorrow will be a critical day for tech traders as the NASDAQ tests the 2000 level again and its simple 100-dma. Many investors were optimistic that the NASDAQ's gain last week, breaking a six-week losing streak, was the beginning of its next leg higher. Unfortunately, last week's failure at its simple 50- dma overhead looks pretty ominous and sets another lower high in its consolidation pattern. Even its MACD indicator, which had produced a new buy signal late last week has reversed again back into bearish territory.
Chart of NASDAQ:
Overall market internals were pretty negative but that's not a big surprise given the widespread declines. The advance-decline numbers were positive early on but by the closing bell losers outnumbered winners 17 to 11 on the NYSE and 2 to 1 on the NASDAQ. Down volume was more than double up volume on the NYSE and almost four times up volume on the NASDAQ. Total volume was light at 1.55 billion on the NYSE but over 2 billion on the NASDAQ.
Bullish broker calls for cyclical stocks and Dow components Caterpillar (CAT) and United Technologies (UTX) help boost both stocks to early gains and the two were some of the best performers in the Dow. Prudential upgraded CAT from "under weight" to "neutral weight" and raised its price target to $86 while upping their earnings estimates for 2004 and 2005. Meanwhile SG Cowen suggested that investors buy UTX ahead of its March 18th analyst meeting. Unfortunately, these gains faded by the close leaving both stocks with rather unappealing failed rally patterns. Contributing to the overall bearish tone were defensive comments from both Merrill Lynch and Smith Barney. The latter told clients that they expect the S&P 500 to close near 1,025 by the end of 2004 - an 11% drop from Friday. Merrill Lynch's defensive comments suggested investors turn toward more traditional safe haven stocks like health care and drugs.
Intel was not the only drag on the Dow Industrials. Hefty declines from General Electric and Eastman Kodak sapped the strength from any rebound attempts and the two look almost guaranteed to weigh on the index tomorrow. Driving the drop in shares of GE was the company's announcement to issue another 118 million shares of stock worth about $3.8 billion in order to pay for its deal to buy Vivendi's entertainment assets. GE already has 10.08 Billion shares outstanding so another 118 million isn't that big of an increase but investors still don't appreciate it when a corporation dilutes the value of their stock. Once the deal is complete GE's NBC television network will own the Bravo channel, CNBC, MSNBC, Telemundo, the Sci-Fi channel, and the USA channel in addition to Vivendi's Universal theme parks. The bad news for shareholders is that today's drop looks pretty damaging. The 2.86% decline was powered by 27.4 million shares, well above the norm, and the move broke through support at $32.00. If I had to speculate a test of the 200-dma near $30.00 would not be out of the question.
The drop in shares of Eastman Kodak is investor's response to EK lowering their 2004 earnings outlook after purchasing the digital print division of Heidelberger Druckmaschinen A.G. EK now expects to earn $2.05 to $2.35 a share in 2004, down from $2.25 to $2.55 per share even though the Heidelberg unit should boost revenues by $175 million for the year. EK tried to soften the news by reaffirming their earnings estimates of $3.00 a share for 2006 but traders weren't buying it and sent the stock lower by 3.45% on very strong volume to test its simple 200-dma.
One stock that hasn't seen its simple 200-dma in several months is Berkshire Hathaway (BRK.A and BRK.B). Berkshire and its widely admired CEO Warren Buffett were making headlines on Monday after the second richest man in the world (He's worth about $42 billion) released his annual letter to shareholders over the weekend. Berkshire profits almost doubled in 2003 but you would not have expected it if you read the Oracle of Omaha's letter last year. Summarizing last year's letter after Berkshire reported record earnings and revenues in 2002 Buffett said that it was a "banner year" but called the (2002) results abnormal and not to expect it next year. This year's letter is remarkably similar with Buffett still echoing his mantra that he can't find anything exciting to invest in (regarding stocks). Furthermore Buffett said that his stock's performance "will fall far short of what it has been in the past." It looks like investors are on to his ruse of under promising and over-delivering as shares of Berkshire's Class A stock rose $1,000 to $94,000 a share, just under its recent all-time highs last month near $96,000.
Medical device makers also made the headlines today after a federally sponsored study showed that ICD's were very successful in reducing the risk of death for a "wide range of heart failure patients". The National Institute of Health launched the study back in 1997 with more than 2500 patients. At $25,000 per device, ICD's are implantable cardiac defibrillators that zap the heart back to normal after detecting any irregular heartbeats that could prove fatal. The top three manufacturers of ICD's, Medtronic (MDT), Guidant (GDT) and St. Jude Medical (STJ), were all halted prior to the report and all three traded higher afterwards. The study's findings are likely to double the number of potential customers for ICD treatment.
It wouldn't be a Monday without some merger news and today is no different. The biggest deal today was BellSouth's (BLS) agreement to sell its stake in 10 Latin American mobile phone businesses to Spanish telecom Telefonica SA for $4.2 billion in cash and $1.5 billion in assume debt. A close second was Extended Stay America's (ESA) deal to be acquired by the Blackstone Group for $3.1 billion. Coming in third was J.M.Smucker's (SJM) announcement to buy International Multifoods (IMC) for $500 million plus $340 million in assumed debt. Last but not least is Corvis, an optical networking equipment producer, who announced plans to buy Focal Communications for $101 million in stock.
Overshadowing all the merger news were the after hours mid- quarter updates from Texas Instruments and TriQuint semiconductor. After last Thursday's bomb from Intel investors were leery that TXN and TQNT might disappoint. TXN had previously guided Q1 earnings to the 16 to 22 cent range on revenues of $2.72 to $2.95 billion. In tonight's conference call they tightened earnings to 19 to 22 cents, which is essentially above the 19-cent consensus reported by Thomson Financial. TXN also tightened their revenue guidance to $2.84-2.95 billion above average estimates at $2.85 billion. TQNT followed suit by raising their revenue guidance from $81-83 million to $85-87 million but reaffirmed their earnings guidance for a loss of 1- to-2 cents per share. Hopefully this is enough to stem the blood flowing from the SOX semiconductor sector, which many technicians believe tends to lead the NASDAQ.
Tomorrow will be all about testing support and whether or not the major indices can remain within their recent trading ranges or whether we see a new relative low. Hopefully the chain store sales numbers, the Redbook retail sales report and the Richmond Fed manufacturing index, all reporting tomorrow will do their share to boost investor morale and reverse today's losses.