Stocks Suffer Monday Blues
Stocks edged lower on Monday after their bullish start faded quickly into a sluggish session. Sparking the early morning strength was big news in the biotech sector and a big contract win for Dow-component Boeing. Unfortunately, a red-hot new home sales number rekindled investors' inflation fears and caution overruled optimism. This is still a big earnings week for Wall Street but the next round of economic reports could hog the spotlight.
The Commerce Department released the new home sales numbers for March about 10 o'clock ET and the results were very strong. Sales rose nearly 9% to a seasonably adjusted rate of 1.23 million. This broke the previous record of 1.2 million from last June. Investors chose to interpret the news as yet another potential catalyst for the Federal Reserve to hike rates sooner than expected. I know this subject has been beaten to death so I won't belabor the issue but a 1/4-point or 1/2-point rise is not going to kill the economic rebound. However, with the next Fed meeting on Tuesday, May 4th this will remain a staple for analysts and media to discuss ad nauseam.
Investor sentiment also took a blow when UBS announced its monthly Index of Investor Optimism for April slipped 12 points from 85 to 73. This was the lowest level since October and continues a steep decline from its recent high in January at 108. Speaking of sentiment the volatility indices, usually seen as a measure of investor fear and confidence, shot higher today with the VIX adding 5.4%, the VXO adding 5% and the VXN jumping 5.5%. These may seem like big moves considering the generally mild losses in the major indices but all of them were near multi-year lows and remain so.
Global markets were mixed today. The Japanese NIKKEI added 43 points to close at 12,163 while its Chinese counterpart, the Hang Seng index, lost 251 points to close at 12,132. European stocks were also muddy. The English FTSE was virtually unchanged at 4571. The German DAX jumped 22 points to 4125 while the French CAC lost 25 to 3785. Here at home the Dow Industrials slipped 28 points to 10,444. The NASDAQ Composite fell 13 to 2036 and the S&P 500 index dropped 5 points to 1135.
The worst performers were semiconductors, homebuilders, healthcare stocks and tech-related issues. The best performers were biotechs, defense, energy and gold, although gold stocks retreated strongly from their highs of the session. Gold futures have rallied for three days in a row now but gold bugs appear to be struggling to get the precious metal back above the $400 an ounce level. Noteworthy has been the action in the U.S. dollar. The greenback hit a new relative high this morning and pierced its simple 200-dma before falling back into its recent trading range. If the dollar turns south then we should see the rise in gold continue. Likewise if the dollar breaks out then gold will most likely sink lower again. I also want to mention some of the energy stocks. Some of the larger players like CVX and COP closed at or near new highs. Fueling the move was a jump in crude prices that closed just under $37 a barrel. The suicide boat attacks in Iraq two days ago have renewed fears over supply disruptions and considering the growing global demand oil prices will probably remain relatively high.
Market internals ended the session with a bearish tone. Declining stocks out paced advancers 17 to 11 on the NYSE and almost 18 to 13 on the NASDAQ. Likewise down volume swamped up volume almost 2 to 1 on the NYSE and 5 to 3 on the NASDAQ.
Chart of the Dow Industrials:
Chart of the NASDAQ Composite:
Monday's big story was OSI Pharmaceuticals (OSIP) and its Tarceva treatment for lung cancer. OSIP has been co-developing Tarceva with Genentech (DNA) and Roche, a Swiss healthcare company. OSIP announced this morning before the opening bell that its Phase III trials for Tarceva had hits its primary and secondary "end points" for improving survival in non-small cell lung cancer patients. Investor reaction was overwhelming. OSIP closed at $38.14 on Friday and opened Monday morning at $84.60. Intraday the stock soared to $98.70 and closed up more than 140% at $91.10. OSIP's good fortune also boosted shares of DNA, which gapped higher and ended at $131.99, up 11.6%. What you may find interesting is that OSIP hasn't even released the clinical trial data yet. That's not expected to happen until the June meeting of American Society of Clinical Oncologists. A few analysts are skeptical and believe the reaction could be overdone. Merrill Lynch chose to downgrade the stock from "buy" to "neutral". If the drug is eventually approved it could launch in early 2005 and may hit sales of more than $900 million in the U.S. of which half go to Genentech. We are always super cautious about shorting biotech stocks for reactions like today's jump in OSIP can be extremely hazardous to your financial health.
Another big story today was a drug merger in France between Aventis (AVE) and French rival Sinofi-Synthelabo (SNY). The move was strongly encouraged by the French government who feared they would lose AVE to Swiss-based Novartis (NVS) when AVE rejected a hostile bid by SNY earlier this year in January. If AVE and SNY had failed to merge many believed that SNY would become a takeover candidate from drug giants Pfizer or GlaxoSmithKline. The new deal, announced on Sunday, was a larger all cash offer and would create the world's third-largest drug producer. SNY will pay close to $65 billion, which is a 14% increase from its previous offer. Unfortunately, it was only a 4% premium from AVE's close on Friday and both AVE and SNY traded down on the news.
Closer to home was news that Dow-component Boeing (BA) had secured its first contract for its new 7E7 airliner. And what a contract! Japan's All Nippon Airways ordered 50 of the new planes, the first new model from BA since 1990. The value of the deal is said to be worth $6 billion at the list price of $120 million per plane but it's widely known that major airliners tend to negotiate significant discounts. It's a major win for BA who has been fighting with archrival Airbus. BA hopes to win more deals from airliners seeking to cut costs since the E in the 7E7 stands for efficiency. The new passenger jet is said to have larger windows and wider aisles but will be made with lighter materials and use new, better fuel-efficient engines. Fuel is the second biggest expense next to labor for the airline industry so a projected 15% to 20% reduction in fuel is a huge cost savings. BA was the Dow's best performer up 1.86% to $43.24.
There were a handful of other Dow components making headlines. Wal-Mart (WMT) failed at its descending trendline of resistance and dropped 1.4% to $58.14 after announcing that its April same- store sales would be at the low end of its 4-6% forecasts. General Motors (GM) also failed at resistance at the $50.00 mark despite gapping higher on an upgrade and positive analyst comments from Lehman Brothers. LEH raised its outlook on GM, Ford and DaimlerChrysler. MSFT was also a drag on the Dow with a 1% decline. The move was probably just profit taking after Friday's huge rally. You may have heard that MSFT signed a multi-year deal with JDAS to develop the .Net platform but odds are this news was overshadowed by MSFT's investment in Google. Wall Street has gone Google-crazy and it doesn't matter where you look people are talking about when the search engine company will finally IPO.
Personally I'm getting tired of hearing about Google's potential IPO since regular every day investors will probably have little chance of securing any shares prior to its first trade. If you're curious why the financial media is buzzing over Google's IPO plans you'd have to turn to a decades-old regulation stating that privately held companies with more than 500 security holders and more than $10 million in assets have to open their books within 120 days of the end of their fiscal year when they surpass these thresholds (source: the Associated Press). Evidently Google has issued stock options to a large chunk of their 1,000- plus employees and the deadline to file their annual report is this Thursday. Of course the Wall Street Journal reported this afternoon that Google had chosen CSFB and Morgan Stanley to lead the underwriting for an IPO. While that settles the question of "if" they will IPO Wall Street is still salivating for the "when".
There was additional merger news after the closing bell, which could sent healthcare stocks higher Tuesday. UnitedHealth Group (UNH), a healthcare insurer, announced it would buy Oxford Health Plans (OHP) for close to $5 billion in cash and stock. The news leaked out within the last 30 minutes of trading and shares of OHP spiked higher on the news. Since we're talking about insurance stocks the group could also get a boost from Chubb's positive earnings report after the bell this evening. Estimates were for $1.42 a share and Chubb reported $1.61. The company said they were on their way to meeting or beating its full-year estimates but traders might not react well to its revenue numbers, which were just shy of expectations.
Tech investors will also be eager to note that chip stock Silicon Labs (SLAB) reported earnings after the bell that were 4 cents better than expectations. Revenues soared more than 78% to $113.6 million; which was also above estimates. The company followed up by guiding higher on its second quarter revenues. Hopefully this will be a positive catalyst for the SOX semiconductor sector tomorrow. The SOX was one of today's worst performers and broke down below its simple 200-dma while closing just above support near the 470 level.
Tomorrow will be pretty busy on the earnings front. A few of the larger companies that report before the opening bell tomorrow are: DuPont (DD), ImClone (IMCL), Level-3 Communications (LLL), PACCAR (PCAR), R.J.Reynolds (RJR) and Verizon (VZ). Wall Street will also digest the latest Consumer Confidence numbers for April and the Existing Home sales numbers.