Wednesday's market action can be summed up in one word: boring. The major averages traded sideways with the Dow Jones Industrials in a 40-point range, the NASDAQ in a 12-point range and the S&P 500 index in a 5-point range for the day. Some traders expressed frustration that today's economic reports, which showed the economy was improving, couldn't get a rally going. Others were surprised that sabotage in Iraq failed to spike oil prices. The overall feeling among professional investors is that there is little impetus for people to buy stocks ahead of the June 30th FOMC meeting and Iraq handover.
There were a handful of economic reports out today. Traders were looking for a lead on the interest-rate sensitive homebuilders when the housing starts and building permit data came out. The Commerce Department reported that May's housing starts slipped 0.7% to an adjusted rate of 1.97 million from April's 1.98 million. This was ahead of economists' forecasts. Meanwhile builder permits surged to new 31-year highs. Economists were expecting builder permits to slip due to higher interest rates but they came in up 3% at an adjusted rate of 2.077 million permits. Unfortunately, the DJUSHB home construction index closed lower by 1% despite the positive news for the sector.
The Federal Reserve was busy today with its report on May industrial output and capacity utilization. Economists were forecasting that output would rise 0.8%. U.S. factories and mines actually pushed out a 1.1% gain to 116.9 on the Fed's output index, which was the biggest one-month surge in six years. The capacity numbers were also a surprise. Economists were looking for capacity utilization to jump from 77.1% to 77.4% in May. The Fed reported that utilization hit 77.8%, the best number since May 2001.
This afternoon the Federal Reserve released its Beige book report, named for the color of its outside cover. The report unveiled that retail sales in most districts were "generally positive". The Beige book also confirmed that manufacturing activity rose across all twelve districts in April and May. The report stated that inflation was tame, business was up and the labor market was improving as business continued to hire at a stronger pace. For the full report click here:
Counteracting all this positive economic news has been a new wave of violence in Iraq. President Bush reiterated today that the next few weeks would be tough as our enemies in Iraq stepped up the intensity level ahead of the June 30th handover. Terrorists have been targeting Iraqi leaders in the new government as well as kidnapping Westerners. Last Saturday Iraq's Deputy Foreign Minister was gunned down in Baghdad. On Sunday one of Iraq's education ministers was shot dead. Today Iraq's security chief for its northern oil fields was murdered in the city of Kirkuk. Today also marked the second explosion on one of Iraq's major pipelines in its port city of Basra. The latest bomb is said to have caused a large amount of damage and will shut down all exports for the next seven to ten days. The shutdown is estimated to cost the Iraqi people $60 million a day in crude oil sales.
Most market pundits were surprised that the oil export shutdown in Iraq, which had grown to 1.6 million barrels a day, did not send oil futures higher. July contracts for crude actually slipped lower midday but rebounded to close up 23 cents to $37.65 a barrel. Saudi officials asked non-OPEC members to raise production to offset the Iraq closure but most experts believe it's just talk. The vast majority of oil producers, OPEC or not, are already pumping at or near maximum production levels. The situation was not lost on oil and oil service stocks. The OIX oil index rose 1.43% as it neared new three-year highs. The OSX oil services index soared 2.68% to become the best performing sector on the session. The XNG natural gas index also rose more than 1% to hit new three-year highs.
Oil stocks weren't the only ones moving higher. Defense stocks, represented by the DFX index hit new all-time highs. Plus, biotech stocks (BTK.X) gained 1.44%. The BTK broke through its simple 200-dma and closed above the psychological, round-number 500 level. Overall market internals were mixed to positive. Advancing stocks outnumbered decliners 3-to-2 on the NYSE and 8- to-7 on the NASDAQ. Up volume outweighed down volume on the NYSE but it was reversed on the NASDAQ. Overall volume was extremely low at less than 2.8 billion shares on both exchanges.
Chart of the Dow Industrials:
Chart of the NASDAQ Composite:
There were several high profile earnings announcements in the last 24 hours. At the top of the list was software giant Oracle (ORCL). ORCL reported last night and beat estimates by a penny while edging past revenue expectations. Wall Street's reaction was mostly positive with a handful of brokers reiterating their "buy" rating for the stock. Unfortunately, ORCL proved to be a drag on the NASDAQ and the GSO software index as the stock sunk more than 3% to close at $11.35. Comments out today reflected concerns over some of its licensing revenues, which were softer than expected.
Wall Street firm Bear Stearns (BSC) announced earnings this morning and beat analysts' estimates of $2.23 by 26 cents. Revenues jumped almost 18% from $1.5 billion to $1.72 billion, bypassing estimates at $1.57 billion. BSC said its fixed-income and bond trading business helped push results past the street's expectations. The company also announced that it has received a notice from the SEC that the regulators were considering action against BSC for its involvement in the mutual fund scandal. Shares of BSC gapped lower but managed to close positive by 72 cents at $80.15.
Consumer electronics retailer Best Buy Co (BBY) reported earnings of 34 cents per share, which bested estimates by a penny. Revenues climbed more than 17% to hit $5.47 billion, also above estimates. Overall the quarter reflected a 65% jump in earnings over the same period a year ago lead by strong sales of digital cameras and flat-panel TVs. Analysts raised concerns over BBY's "reward zone" plan for loyal customer discounts and this lead to BBY's 2% decline to $52.
Wednesday's big winner was Cyberonics (CYBX). The stock soared 78% to close at $34.81 after an FDA advisory panel voted 5-2 in favor of CYBX's VNS system as a treatment for depression. The VNS system, already in use for some epilepsy patients, is a medical device surgically implanted to send electrical current to the vagus nerve. The FDA normally follows decisions made by its advisory panels and Wall Street expects this to open up the massive depression market for CYBX. Contributing to the 78% jump in price was CYBX's small 16.6 million share float and the stocks high short interest, which was close to 20% of the float.
A few after hours headlines that traders will want to follow come from Ford and Jabil Circuit. Ford Motor Co (F) raised its Q2 earnings forecast to 45-50 cents per share based on strong growth in its financing arm. Consensus estimates were at 42 cents per share. Meanwhile Jabil Circuit (JBL) reported its Q3 earnings that were inline with estimates at 26 cents per share. Unfortunately, the company issued Q4 guidance that was below analysts' estimates and the stock sank 10% in after hours trading.
The late Wednesday news above might produce a bifurcated market tomorrow. Blue chips could creep higher on the Ford news while tech stocks are likely to sink on the JBL news. All the while Wall Street will be wading through more economic data. Thursday brings the weekly initial jobless claims, the leading economic indicators for May, the Philly fed survey and the Semi Book-to- Bill report. Yet overshadowing them all will be the delayed May Producer Price Index (PPI). If that's not enough we're also expected to hear from Federal Reserve governor Moskow as he speaks on the economy.
Hopefully the upward drift we saw in stocks Wednesday afternoon will blossom into a new surge higher tomorrow but don't bet on it. Friday is options expiration and stocks will probably gravitate to their nearest strike price. One thing that continues to concern us are the volatility indices. The lower they creep the closer we get to our next sell-off.