Monday proved to be a defeat for the bulls as stocks slid lower in a very widespread decline. Traders once again obsessed over concerns that the Federal Reserve may have to raise rates faster than previously expected. Through most of May the fed's mantra was one of a "measured" response suggesting they would only raise rates in small intervals so as not to disrupt the U.S. and global economies. Hawkish comments from a few fed governors late last week, including some comments made on Friday while the markets were closed, have suddenly thrown doubt over the Fed's next move.
Last Friday Jack Guynn and Sandra Pianalto, both Fed Presidents in their districts, issued specific comments suggesting that if inflation rises too fast the FOMC could be forced to react much more quickly to keep inflation under control. Normally the Fed tends to telegraph their next move and the next FOMC meeting is only two weeks away. After a month of hearing the "measured" response to questions on policy investors were not ready for these new comments.
This morning's economic reports didn't help matters. The Commerce Department released the import/export numbers and the trade gap jumped an unexpected 3.8% in April. Economists were expecting the gap to narrow to $45.1 billion but the trade deficit surged to $48.3 billion, the second record high in a row. March's trade gap was widened from $46.0 billion to $46.7 billion. Morgan Stanley chose to raise their Q2 GDP forecasts from 4% to 4.3% on the news. Echoing the strong demand numbers was the U.S. retail sales report for May. The Commerce Department said sales jumped 1.2% in May compared to a 0.6% drop in April. The good news here is that demand is up and it reflects the stronger economy. The bad news here is that demand is up and it is probably pushing inflation higher as well.
Bank of America and the Standard & Poor's Investment Policy Committee both issued comments out today suggesting that investors reduce their exposure to stocks. The S&P press release said, "Standard & Poor's recommends that investors take advantage of recent price strength by reducing their exposure to domestic and foreign equities and increasing their exposure to cash." Both advisory firms pointed to increased risk with a rising interest rate environment. It's easy to see why tomorrow's Consumer Price Index (CPI) is so important. The CPI is a key gauge of inflation and economists are expecting the sixth monthly gain in a row tomorrow with a 0.2% increase for May. Currently investor fears are projecting a 32% chance of a 50-point rate hike at the June FOMC meeting. Any tick higher in the CPI and that chance is bound to go up.
The markets have already baked in a 25-point hike. That's why a sudden shift in expectations that we could get a 50-point hike has investors hitting the sell button and hit the sell button they did. Stocks were down around the globe. The Japanese NIKKEI slipped 35 points to 11,491 but the Hang Seng index fell close to 320 points to end at 12,076. European exchanges saw some hefty declines with the English FTSE down almost 51 points to 4433. The French CAC was down 52 points to 3647 and the German DAX slid nearly 66 points to 3948.
Here at home in the U.S. selling was stronger in the interest rate sensitive issues. Homebuilders were an easy target but so were the growth-sensitive tech sectors. The SOX semiconductor index's 2.26% decline helped lead the NASDAQ lower after UBS lowered their outlook on the semiconductor industry. Intel happened to be the Dow's biggest decliner. Gold stocks were the worst performers with a 3.6% drop in the XAU gold and silver index. Gold futures fell $2.40 to $384.20 an ounce on concerns that the dollar will rise with interest rates. At the end of the day no one sector-specific index remained green.
The Dow Jones Industrials lost 75 points but managed a meager bounce from the 10,300 level to close at 10,334. The tech-rich NASDAQ lost 30 points (1.49%) to close right on its simple 200- dma and above its early June lows. Market internals were sharply bearish. Declining stocks outnumbered advancing stocks 23 to 5 on the NYSE and 23 to 8 on the NASDAQ. Down volume outpaced up volume by more than 5 to 1 on the NYSE and 3 to 1 on the NASDAQ. Overall volume remained exceptionally low.
Chart of the Dow Jones Industrials:
Chart of the NASDAQ Composite:
Pressuring the Dow and the retail sector were comments from retail giant Wal-Mart (WMT). The Bentonville, Arkansas-based company reaffirmed its June same-store sales forecast for 4% to 6% growth but warned that they would probably fall toward the low end of this range. Shares dropped 1.43% and closed under technical support at their simple 200-dma. Another retailer, this one in the dollar-store niche, sent investors running. An earnings warning sent shares of 99 Cent Only Stores (NDN) to a 31% loss and shares closed at $14.10. The stock gapped lower after the company lowered its profit forecast from 19-20 cents per share to 4-7 cents per share. A couple of Wall Street's biggest brokers downgraded NDN to a "sell" or "underweight". What could be worse than an earnings warning? Why an earnings warning and a management shake up. Shares of Drugstore.com (DSCM) tumbled more than 37% to $3.06 per share after warning of a wider than expected loss and the abrupt departure of its CEO last Friday.
Finish mobile phone maker Nokia (NOK) made headlines today after lowering its estimated first quarter market share forecast from 35% to 32%. Rivals like Motorola (MOT) have been catching up so NOK is introducing five new models while simultaneously slimming down its total product line from 40 to 35 models. NOK may have lowered its Q1 market share number but they are sticking to their 40% market share goal. NOK also raised its estimates on global mobile phone usage 27% to 600 million units. Long-term the company believes worldwide usage will hit 2 billion in 2007. Speaking of forecasts and milestones XM Satellite Radio (XMSR) announced this morning that it had reached its 2 millionth subscriber. The satellite radio provider forecasts it will have 20 million subscribers by 2010.
It wouldn't be a Monday without some merger news. The big news today came from the gambling/casino sector. MGM Mirage (MGG) has upped its bid for rival Mandalay Resort (MBG) from $68-per share ($7.6 billion) to $71-per share ($7.9 billion). MBG is considering the new offer but questions remain whether the deal would pass regulatory approval. The next largest deal announced today was in the drug sector. QLT Inc (QLTI) declared it would buy Atrix Laboratories (ATRX) for $855 million. The third deal announced today was a merger between HealthTronics Surgical (HTRN) and Prime Medical Services (PMSI) valued at $145.9 million.
There were a few noteworthy headlines after the closing bell. Aerospace giant, defense contractor and Dow-component Boeing (BA) beat out rival Lockheed Martin for a $3.9 billion deal with the U.S. Navy. BA will design a replacement for the Navy's submarine-hunting P3 aircraft. BA was not expected to win the contract so shares are likely to rise tomorrow. Meanwhile trucking company Yellow Roadway (YELL) surged in after hours trading after lifting its earnings forecast. YELL is raising its profit outlook from 70-75 cents per share to 85-90 cents per share. The consensus analyst estimate was 74 cents. In the company's press release Yellow's CEO said, "All our business units continue to perform very well," and "The improvement in our second quarter earnings outlook is being driven by excellent execution along with favorable economic conditions." Bulls should take notice. Dow Theory suggests that the transports need to rally in order to sustain any prolonged bull market. If YELL can do this well given the rise in fuel costs business must be good.
Tomorrow's market action will be driven by the economic data released. Wall Street will be focused on the CPI number, specifically if the core rate of inflation rises more than 0.2% in May. The CPI report comes out at 8:30 a.m. ET so we could see the markets gap open (up or down). Ninety minutes later will begin the Senate nomination hearings for Greenspan's next term of office. We might look for the trading to slow down as traders turn their ears to hear if Alan offers any more hints about the next interest rate decision. Tuesday will also unveil the University of Michigan's preliminary June consumer confidence numbers and the New York Empire State index for June.
Keep in mind that even if we have good news gains may be restrained. Terrorism concerns are heightened with the June 30th Iraq handover so close. This past Saturday Iraq's deputy foreign minister was killed in Baghdad and we'll likely to hear more stories about Americans and westerners being kidnapped in Iraq and Saudi Arabia. Many market pundits feel we'll be range bound until the June 29/30th FOMC finally alleviates the mystery of the Fed's next move and America takes one more step to getting out of Iraq.