Fundamental DJI, Value or Water?

[ducati998]

Associated Press
Wall Street Eagerly Awaiting New Earnings
Sunday April 17, 7:20 pm ET
By Michael J. Martinez, AP Business Writer
Wall Street Can't Get New Batch of Earnings Reports Soon Enough After Last Week's Losses


NEW YORK (AP) -- First-quarter earnings season can't arrive soon enough for Wall Street. Besieged by disturbing data on the economy and inflation -- and hurt by disappointing earnings in the technology sector -- the markets saw their worst week since August, with Friday marking the Dow Jones industrial average's biggest drop since May 19, 2003.



As a result, investors are desperate for good news, and plenty of it. It will take a nearly unbroken string of positive earnings reports and forecasts to get the market out of last week's funk.

Even then, however, any move higher could be relatively short lived. The economy is still expected to slow considerably going into the summer, and it will be more difficult for corporate America to keep up earnings growth if people end up spending less due to oil, inflation or a combination of both.

Long-term, the solution may be to have the Federal Reserve unequivocally state that it is done raising interest rates, possibly as early as May's meeting. That's when the policy-making body is expected to hike the short-term rate to 3 percent, the eighth quarter percentage point raise since last summer.

"Earnings are only going to give us a short-term boost at best," said Joseph Keating, chief investment officer at AmSouth Asset Management. "If the Fed can get out of the way, or at least acknowledge that the economy is downshifting, that might generate enough buying interest to set the stage for a longer-term recovery."

There's a lot to recover from. The Dow tumbled 420 points last week as worries of an economic slowdown, higher interest rates and weak earnings to start the first-quarter earnings season prompted the heaviest selling of the year. For the week, the Dow lost 3.57 percent, the Standard & Poor's 500 was down 3.27 percent, and the Nasdaq composite index tumbled 4.56 percent.

ECONOMIC DATA

Concerns about inflation will be either assuaged or exacerbated in the week ahead as the Labor Department releases its two key pricing reports back to back.

Tuesday brings the Producer Price Index, which measures wholesale costs. The PPI expected to rise 0.6 percent in March after a 0.4 percent increase in February. With volatile food and energy costs excluded, so-called core PPI is expected to climb just 0.2 percent, up from 0.1 percent in February.

The Consumer Price Index, which measures the prices individuals pay on the retail level, follows on Wednesday. The CPI for March is expected to remain steady with a 0.4 percent increase, but core CPI is expect to climb just 0.2 percent, down from February's 0.3 percent.

Given Wall Street's focus on inflation and the Federal Reserve's likely response with interest rates, these two reports will be watched very closely, and the market's reaction is likely to be pronounced.

EARNINGS

First-quarter earnings season will flow in during the week ahead. A few companies will stand out as investors look to their earnings for clues about the course of the economy.

Caterpillar Inc. has been one of the Dow's strongest performers over the last year, but has fallen 16.5 percent since closing at its 52-week high on March 4 as investors worried that high raw material costs and climbing oil prices would eat into the heavy equipment maker's profits. The company is expected to post earnings of $1.39 per share, up from $1.16 per share a year ago, when it reports before Wednesday's trading session.

With IBM Corp. reporting disappointing earnings last Thursday, investors will turn to fellow Dow component Intel Corp. to see if IBM's woes are an isolated incident or symptomatic of techs as a whole. Intel is expected to post a profit of 30 cents per share, up from 28 cents per share a year ago, when it reports earnings Tuesday afternoon. Intel closed Friday at $22.12, 23.4 percent off its 52-week high of $29.01 set on June 8, 2004.

The healthcare sector was the only sector to post a modest gain Friday, thanks to enthusiasm over pharmaceutical companies' performance. The sector's biggest name, Johnson & Johnson, reports its earnings Tuesday morning and is expected to earn 91 cents per share, up from 83 cents a year ago. The stock reached an all-time high of $69.99 on Friday before closing at $69.40, up 36.6 percent from its 52-week low of $50.81 set on April 12, 2004.

Among other top companies releasing earnings reports this week, embattled General Motors Corp. is expected to post a steep loss on Tuesday, while rival Ford Motor Co. reports earnings on Wednesday and is expected to see a sharp decline in profits. Rival Internet companies Yahoo! Inc. and Google Inc., the Coca-Cola Co., JP Morgan Chase & Co. Inc., and eBay Inc. are also expected to issue their results.

 

[ducati998]

Associated Press
3M's 1Q Earnings Climb on Sales Growth
Monday April 18, 7:48 am ET
3M Posts Better-Than-Expected First-Quarter Profit on Sales Growth, Pricing Measures


ST. PAUL, Minn. (AP) -- 3M Co., the maker of Post-It notes and Scotch tape, said Monday that first-quarter earnings rose 12 percent year-over-year due to sales growth, pricing and improved operational efficiencies.



Net income grew to $809 million, or $1.03 per share, from $722 million, or 90 cents per share, a year ago. Worldwide sales rose 4.6 percent to $5.17 billion from $4.94 billion last year.

Analysts surveyed by Thomson Financial were looking for the company to post earnings of $1.01 per share on sales of $5.26 billion in the latest quarter.

"Broad-based productivity improvements achieved through our corporate initiatives and solid growth in key areas, like optical films and health care, helped us deliver over 14 percent earnings per share growth in the first quarter," said W. James McNerney, Jr., 3M chairman and CEO. "Improved operational efficiency, sales growth, and pricing were key to overcoming slow economic growth in Western Europe and Japan and continued raw material price pressure."

3M also reaffirmed earnings guidance for 2005, expecting profit to range between $4.15 and $4.25 per share. Second-quarter earnings are expected to be between $1.08 and $1.10 per share.

Analysts are forecasting profit of $1.08 and $4.22 per share for the second quarter and full year, respectively.

 

[ducati998]

Futures Trim Losses After 3M Earnings
April 18, 2005 07:50:00 AM ET



By Anupama Chandrasekaran

NEW YORK (Reuters) - U.S. stock futures trimmed losses and pointed to a flat open on Monday after 3M Co. (MMM) and Bank of America Corp. (BAC) posted quarterly results that soothed worries about weak earnings.

3M, the maker of Scotch tape and Post-It notes, posted a higher quarterly profit on growth in its optical films and health-care businesses. 3M is seen as a benchmark for the U.S. economy because of its broad array of businesses. (nWEN9008)

Bank of America Corp. (BAC), the No. 3 U.S. bank, reported sharply higher quarterly earnings, topping Wall Street expectations. (nN18641993)

S&P 500 futures (SPM5) fell 0.3 of a point, after being down 5.1 points earlier. The S&P futures were slightly below fair value accounting for interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures (DJM5) were down 5 points, while Nasdaq 100 (NDM5) futures fell 1 point.

© 2005 Reuters

 

[ducati998]

Associated Press
Despite Rally, Investors Lack Confidence
Sunday April 24, 3:42 pm ET
By Michael J. Martinez, AP Business Writer
Wall Street Enters the Week Jittery, Despite Last Thursday's Rally, Biggest in Two Years


NEW YORK (AP) -- While first-quarter earnings have been relatively strong so far, there are enough questions, especially regarding consumer spending, to make investors pause. Combine that with lingering inflation worries and another rise in oil prices, and you have a jittery Wall Street that seems to be ready to sell off at the slightest provocation.



That happened Friday, when geopolitical concerns resurfaced -- stocks slid on reports that North Korea might test a nuclear weapon.

The fact that stocks ended last week higher -- thanks to Thursday's rally, the best in two years -- shouldn't be taken as a sign that things are looking better. Investor sentiment remains mixed at best, and the most seemingly mild news has caused selloffs in individual stocks, entire sectors, and even the whole market.

Some strategists and analysts call such times "the wall of worry," and it's up to investors to gain enough confidence in the economy and corporate America to let their worries go. For that to happen, investors will need to see strong economic data and unreservedly positive earnings -- several hundred companies are reporting this week -- if the markets are going to rise to where they were just two weeks ago.

Despite the unrelenting uncertainty, Wall Street finished the week with modest gains, and bulls can point to a strong performance from the Nasdaq composite index, which has lagged the other indexes. For the week, the Dow Jones industrial average rose 0.7 percent following Thursday's 206-point gain, the Standard & Poor's 500 index was up 0.83 percent, and the Nasdaq climbed 1.26 percent.

ECONOMIC NEWS

Investors will have a chance to see how higher energy prices could affect the economy through the coming week's economic data.

On Monday, the Conference Board will release its consumer confidence index in April. With the stock market tumbling and oil prices rising last month, economists expect the index to fall to 98 from a February reading of 102.4.

The effect of higher energy prices could come through in the first reading on first-quarter gross domestic product, due Wednesday. The GDP is expected to grow at an annual rate of 3.5 percent, down from 3.8 percent in the fourth quarter of 2004 -- but some analysts believe GDP could even be lower.

EARNINGS

While the energy sector has been one of the best performers of 2005, most petroleum companies are off their early March highs as oil prices have gyrated. Exxon Mobil Corp., which reports earnings Thursday, has fallen 7.7 percent from its 52-week high of $64.37 on March 9, closing Friday at $59.42. The Dow component is expected to earn $1.18 per share, up from 83 cents in the first quarter of 2004.

Two major telecom companies are also reporting earnings in the week ahead. SBC Communications Inc., soon to merge with AT&T Corp., is expected to earn 33 cents per share, down from 37 cents a year ago, when it reports on Monday. SBC has slipped steadily since its 52-week high of $27.29 on Oct. 5, falling 15 percent to close Friday at $23.20. Much of those losses, however, can be attributed to the AT&T purchase, since traders often sell the buyer in hopes of picking it up again later at a cheaper price.

Verizon Communications Inc. is also going through a merger, though it remains uncertain if it will be able to land MCI Inc., which bailed out of its previous deal with Verizon over the weekend in favor of a much higher deal from Qwest Communications International Inc. Verizon's stock also has fallen from its late 2004 high, dropping 19.4 percent from its 52-week high of $42.27 on Nov. 12 to close Friday at $34.06. The company, reporting on Wednesday, is expected to earn 60 cents per share, up from 58 cents per share last year.

Other notable companies reporting this week, the busiest week of the earnings season, include the Boeing Co., Microsoft Corp. and Procter & Gamble Co.

 

[ducati998]

Currently there is no addition to the position of 200 shares @ $102.71
I was looking to add at around $90, or even better below in the $80's

Shall simply run this position for the time being.
Cheers d998

 

[ducati998]

Interesting to read a couple of the other threads, specifically, the JESSE LIVERMORE & DOW threads.

The Jesse thread would seem on balance to advocate that the big money in trading, investing, resides in the big moves........that is being long in a bull market, and short in a bear market.
As contrasted with the DOW thread, where the daily fluctuations are trying to be called.

So where is the US market?
Is it still a Bear, from the 2000 top?
Or, are we in the process of another Bull?

From a Fundamental perspective, the flattening of the Yield curve continued to be the big news in the Fixed Income markets during the Q1.
Since June 2004, the Fed has raised the benchmark Fed Funds Rate 6 times, from 1% to 2.5%
The media hype would have you believe that all interest rates have gone up.
This is not the case.

The Fed controls short-term rates, the market, the long term rates.
The greatest driver of the market is the expectation of inflation. Clearly, currently, the market is not concerned about inflation.

Is this optimism well founded?

If we look at the broader economic environment, we find a # of factors that may support the market view.

The economy is enjoying 3% - 4% annual growth, with good employment figures, wage growth has also been minimal ( anti-inflationary )

US Corporations have built up lots of cash, and excess capacity, but see limited opportunities to use either. The result, stronger Balance Sheets, higher dividends. ( inflationary )

Foreign banks continue to buy US Dollar denominated assets, especially long-term US Bonds
This protects foreign manufacturers' ability to sell in the most important market in the world.

Legislation looks likely to pass requiring pension funds to match long term liabilities with long term assets. The only way to do this is to buy long term Bonds.

The economic stimulus provided by last years tax cuts cannot be repeated, in fact the opposite is far more likely, to reduce CAD.

Stimulus provided by the mortgage refinance boom seems to be slowing.

$55 / barrel oil, can be viewed as inflationary, or as a spending tax.

Therefore the question remains, where would a businessman, looking for an investment opportunity find the best returns?
Currently stocks offer by far the better return, and therefore, at current levels the market is a BULL, just not a confident one.

Psychology always trips up the small, ignorant investor.
As the market is full of negative sentiment, the media has caught the bug, these boards relentlessly advocate the flavour of the moment, wildly bullish at the top, and now wildly bearish near the bottom?

If the purpose is to make money, then the evidence is pointing upwards.
You just have to overcome all the negativity and have courage against the herd, who are invariably wrong. The over-riding difficulty, is that it is not a screaming bottom, and thus it is far more difficult to assess in real time. My call for what it's worth, and backed by my trades is BULL baby!

cheers d998

 

[ducati998]

Growing hedge-fund woes result from the Fed pouring too much cheap money into the economy. Also: United Airlines' pension default proves again that, in Corporate America, no one's word is worth much.

By Bill Fleckenstein

In light of last week's troubling hedge-fund headlines, I'd like to weigh in on the subject, beginning with the following point: Most "hedge" funds do no hedging at all. They're nothing more than leveraged investment partnerships, bearing no relation to the original concept as started by A.W. Jones more than 55 years ago.

Grounds for hedge heartache
In any case, with so-called hedge funds numbering 8,000, plus or minus, you can be sure of a couple things:
There aren't that many smart operators.

Many of the people running those funds will have stretched too far to try to make the returns they've insinuated.
The amount of deleveraging that may be taking place is not quantifiable or knowable at this moment in time, but deleveraging is a decidedly bearish occurrence for financial markets. It would explain the undertow that's been at work lately. And it might also explain why the current "no-news-period rally" -- the interval between quarterly earnings reports when, in the absence of bad news, bullish fantasy often reigns supreme -- has been as lame as it's been.

In short, there is a lot of smoke and, in all likelihood, some fire. Folks can anticipate no shortage of stories, both true and apocryphal, about problems created by hedge funds.


The wellspring of financial woe
Of course, it's not the hedge funds that are the problem. They are only a consequence of the Fed's easy-money policies -- and its strategy of bailing out the financial distortions and accidents so engendered with even more easy money.

As I have stated before, the Fed is trapped. We've reached the stage where people are only beginning to awaken to that fact and its attendant ramifications, none of which will be pleasant. Therefore, every time you hear about these troubles and want to get upset at someone, my suggestion is: Think of Easy Al -- as all our financial problems can be traced back to him.

United Airlines dumps a payload
Turning to a depressing news item that's liable to become a trend: United Airlines has won the right to default on its pension plans. As the papers reported last Wednesday, the task of paying retirees their benefits will fall to the Pension Benefit Guaranty Corp. (PBGC).


In the future, I expect the PBGC to be overwhelmed with problems like this (for starters, think the rest of the airline industry and the auto industry). This means that taxpayers will ultimately be forced to foot the bill, because the PBGC's assets are nowhere near sufficient to fund all the liabilities foisted upon it (as in, it's short $23 billion and counting).

The plight that so many companies find themselves in has often been a consequence of shortsighted corporate management (i.e., playing beat the number). The little guy will be forced to pay for the mistakes of chieftains at the top, who have repeatedly skated away with zillions of dollars. (One could perhaps argue that some of these benefits were too rich to begin with, though I am not making that case.)

The flawed bankruptcy "system" is also part of the reason why many of these troubled industries continue to get more troubled, rather than healthier. The first one into bankruptcy gets a lower cost structure and ultimately starts a price war -- eventually dragging its competitors into bankruptcy as well. Given that all of this is occurring when times have been relatively good, one can only imagine the types of problems that will emerge when times get tough in the not-so-distant future.

United's pension default is a shocking reminder that in Corporate America, nobody's word is worth very much. A person can slave away his whole life for the company and then be informed: "We're not going to give you what we told you we would."

Faith-based insider buying
Finally, in the rarer-than-a-hybrid-solar-eclipse department, I note that an insider at a chip company has purchased stock in the open market. As I told Fred Hickey, editor of "The High-Tech Strategist," who brought this to my attention, I cannot remember that happening in the last five or 10 years in any of the big-chip names. Fred agreed.

Nonetheless, it happens to be true that about two weeks ago, Mort Topfer, former vice-chairman of Dell (DELL, news, msgs) and current board member of Advanced Micro Devices (AMD, news, msgs), bought 25,000 shares of AMD, adding to the 25,000 shares he previously purchased. I checked the insider filings, and he also has stock options to the tune of roughly 18,750 shares.

While 50,000 shares of a $14 stock isn't an immense amount of money, it's not chump change, either. More importantly, as I pointed out, it's a very rare occurrence for a chip insider to spend money on company stock. Obviously, as I've been saying all along in my daily column, Topfer didn't join AMD's board to watch it fail, and he's certainly not buying stock because he thinks the company's prospects are poor.

I continue to believe that AMD is going to be a real problem for Intel (INTC, news, msgs), and I recently added to my AMD position as well. Time will tell whether long AMD/short Intel is a winning strategy, but I am pretty excited about both sides of the transaction.

 

[ducati998]

Investors aren't getting paid much, if anything, in the long end of the Treasury market for taking bigger risks. Be careful out there.

By Jim Jubak

Why is the long end of the super-safe Treasury market so dangerous right now?

Any explanation has to start with what hasn't happened in the bond market.

On May 3, the Open Market Committee of the Federal Reserve raised its target for short-term interest rates (the federal funds rate) to 3%. That was the eighth interest-rate hike since the Federal Reserve began to ratchet up interest rates on June 30, 2004. The Fed's short-term target had hit a low of 1% in June 2003.

But after taking a steep jump from 3.33% in June 2003 to 4.73% in June 2004 (when the Fed raised its target to 1.25%), yields on 10-year notes have actually gone down. On Tuesday, May 10, the yield on a 10-year Treasury note was just 4.22%. That's a drop of about half a percentage point, 51 basis points to be exact, while the Fed was raising its target interest rate by 1.75 percentage points.

To see how extraordinary that is, look at what happened to the yield on the very short maturity three-month Treasury bill. Its yield went from 1.29% in June 2004 to 2.88% on May 10, 2005. That's an increase of about 1.5 percentage points, and it just about keeps pace with the Fed’s interest-rate hikes.

Not much payoff for the extra risk
Yields aren't supposed to behave like this. Investors are supposed to get a higher return for locking up their money for years as opposed to months. That stands to reason when you think of all the things that could go wrong -- higher inflation, a cheaper dollar, a big increase in the trade deficit -- over the life of a 10-year Treasury note. Yet in this case, exactly the opposite has happened since the Fed began raising interest rates.

Last June, an investor got paid almost 3.5 percentage points more in interest to take on the added risk of owning a 10-year note instead of a three-month Treasury bill. In May of this year, the risk premium of the 10-year over the three-month had shrunk to just about 1.3 percentage points.

That’s especially odd when you recall that the Fed is raising interest rates to head off the possibility of higher future inflation, which, if it appears, will diminish the value a 10-year note more than it will a three-month bill.

The core Producer Price Index (PPI), a measure of inflation at the wholesale level that excludes volatile energy and food prices, climbed at an annual rate of 2.6% in March. That was just slightly lower than the 2.8% annual rate of February, and that marked the fastest growth in this inflation measure since November 1995.

Meanwhile, the core Consumer Price Index climbed an annual rate of 2.3% in March, after hitting a two-and-a-half year high of 2.4% in February.

And it seems especially odd when you compare current yields -- and total returns -- to the historical record of the last 80 years. Over that period, real interest rates on short-term Treasury bills (that is, after you subtract inflation) have been about 0.5% on average. At 2.88% with 2.3% inflation, current short-term rates are slightly above that benchmark. (Since investors hold short-term Treasury bills to maturity, the total return is in effect equal to the yield.)

On the other hand, over that same period the total return on long Treasurys has been about 1.6 percentage points above the total return from the short end -- or in this case, 4.4%. At 4.22%, the current yield doesn't meet that benchmark. Investors at the long end of the market must be, therefore, expecting not only to collect their 4.22% yield, but some capital gains from the appreciation of their bonds. Since bonds bought now will only gain in price if interest rates go down, current investors at the long end of the bond market are counting on a drop in interest rates just to match the historical average total return.

Bond investors beware
These prices and yields make sense only if you're thinking about one of two possible scenarios: Either you're counting on the economy to slow further or, two, you think the financial markets are so risky that you're willing to buy safety at just about any price.

The potential trouble for bond investors is that both scenarios could well be wrong.

The recent report on first quarter U.S. economic growth gave a boost to the first scenario. GDP growth dropped to 3.1% in the first quarter of 2005 from 3.8% in the fourth quarter and 4% in the third quarter of 2004. You can see the trend, right?

But this 3.1% number is just the Advance GDP, the first of three often heavily revised measures of growth in the quarter that the government will release. The Preliminary GDP figures, which replace some projections with real data, will be released on May 26 and there are reasons to believe that the advance 3.1% reading will be revised upward. The March reading on the trade deficit, released May 11, came in below expectations and, in the complex model that produces the GDP number, a lower-than-expected trade deficit almost always leads to an upward revision in the GDP projections in the next round. Watch for the economy to look stronger than it does now after the numbers come out on May 26.

The second scenario is built on a long list of fears. The downgrades of General Motors (GM, news, msgs) and Ford Motor (F, news, msgs) bonds to junk status by Standard & Poor's caused some investors to sell those bonds and buy safer Treasury paper. The flight from corporate paper has been going on for weeks as investors, worried about a slowing economy, realized they weren't being sufficiently rewarded for owning riskier junk bonds. The continued news out of bankruptcy proceedings at companies such as UAL (UALAQ, news, msgs) and warnings of bankruptcy by companies such as Delta Air Lines (DAL, news, msgs) have kept bond investors on edge and wary of corporate bonds.

Given a choice between selling bonds on bad news of stronger growth -- such as the better-than-expected export numbers in the March trade figures -- and buying on fear, the Treasury market is choosing to buy right now. Rumors that a hedge fund might be in trouble sent bank stocks (banks are big lenders to hedge funds) tumbling and Treasury prices climbing on May 11, even though the trade deficit numbers were pushing bonds downward. It certainly didn't slow the flight to safety to have Standard & Poor's downgrade the credit ratings of several complex derivatives, called collateralized-debt-obligations (CDOs), sold by Deutsche Bank (DB, news, msgs). Suddenly the higher yields on the CDOs weren't as attractive as the safety of Treasuries.

Anyone with any experience of the bond market knows that this kind of nervousness is easily reversed. Bond investors have long shown an uncanny willingness to overlook credit problems if the yield is high enough. And as investors sell corporate bonds and derivatives, their prices will drop until one day the yields are attractive enough to produce credit-quality amnesia again.

The simple fact is that right now, investors aren't getting paid very much, if anything, in the long end of the Treasury market for the risks that they are taking. The economy could be stronger than expected (at least in the short run), inflation could indeed be under-reported, fears could give way to greed. All of those could take a big bite out of the capital of anyone at the long end of the Treasury market.

Be careful out there
I certainly understand the desire for safety -- I just don't think you should give up so much yield to get it. Or that you should take on one kind of risk in an effort to flee another.

If you're looking for yield and safety, you'll do much better in the intermediate maturities than in the longer end of the Treasury market. A five-year Treasury note currently yields 3.92%. That's only a tad below the 4.22% of the 10-year Treasury. The long-term historical record shows that five-year notes show almost exactly the same average annual return as long Treasurys. And with about half the volatility since the bond matures in half the time and so much less can go wrong in five years than in 10.

I never like to take on extra risk without getting paid for it. And given all the very real uncertainty in the financial markets, I certainly don't want to increase my chances of taking a loss in my search for safety. Be careful out there.

 

[ducati998]

Just a quick point from the "DOW" thread.
Lion63 made a comment,

Higher inflation means companies can raise prices and leads to higher profits which translate to higher share prices etc. As perverse as it may seem, it is certainly better than deflation.

This is what is commonly believed and even touted, it is however not a function of rising prices and increased profits....( for those companies that possess pricing power in the first instance )

Rather it is a function of RETAINED EARNINGS and earnings from new capital.
Inflation hurts Stocks as much as Bonds.

cheers d998

 

[ducati998]

Latest Market Update
May 18, 2005 -- 16:20 ET [BRIEFING.COM] Stocks closed near session highs, as tame inflation data, plummeting oil prices and a rally in bonds prompted broad-based buying efforts that resulted in the best three-day rally since last November...

CNBC Market Dispatches
Lower oil extends a rally that tech started
A big drop in crude oil prices and a good inflation report helped the Dow to its best 3-day performance since November. But behind the rally is a big rotation toward tech stocks.


Yes, we can say falling oil prices and a good inflation report pushed the stock market to a very fine day on Wednesday.

But the Market Dispatches team would argue the oil rally is coming on top of a big sector rotation that has seen money move toward -- don't laugh -- technology.

For the record, the Dow Jones Industrials were up 132 points, or 1.28%. The Standard & Poor's 500 Index was up nearly 12 points or 1%. And the Nasdaq Composite jumped more than 26 points or 1.3%. In short, the market had a big, broad rally with few sectors -- notably insurance and oil services -- losing ground. Only four of the 30 Dow stocks were lower.

The catalysts were:

The 3.5% drop in crude oil, to $47.25, all because a government report showed U.S. oil and gasoline inventories are in good shape.

A Consumer Price Index report that suggested that inflation pressures, outside energy costs, are pretty benign.

Falling interest rates. The 10-year Treasury note was yielding 4.07% this afternoon.
The Dow is up 319 points in the last three days. That's the best three-day performance since the three days that ended on Nov. 5 -- right after the presidential election. It’s also in the top 3% of three-day performances since 1995.

The best three-day stretch since 1995 came on March 17, 2000, when the Dow jumped 783 points over three days. The worst three days ended on Aug. 31, 1998 with a loss of more than 984 points.

Market Dispatches has been watching how technology stocks seem to be moving higher this month, and today really confirmed that fact. We track 41 sectors; take a look at the top 10 so far in May.

Top 10 Market Dispatches sectors
Index % chng. in May
Amex Interactive Week Interactive Index 9.24%
Philadelphia Semiconductor Index 8.73%
S&P Retail Index 8.62%
Morgan Stanley High Tech 35 8.23%
GSTI Software Index 7.46%
Amex Airline index 7.13%
Amex Networking Index 6.94%
Philadelphia Sig Casino Gaming Index 6.81%
Amex Biotechnology Index 6.78%
Nasdaq 100 6.31%


This is a decidedly tech-biased group with airlines rising because of oil prices and retailing and gambling benefiting from what seems to be an improving economy.

The losers so far this month (and they haven't lost a lot) are basically in metals, oil, energy and gold:

The bottom 10 Market Dispatches sector
Index % chng. in May
New York Stock Exchange Composite index 1.46%
Dow Jones U.S. Steel Index 1.41%
Amex Pharmaceutical Index 0.73%
Amex Natural Gas -0.27%
Morgan Stanley Commodity-related equity index -1.18%
Philadelphia Gold/Silver index -1.22%
Amex Goldbug Index -1.92%
Philadelphia Oil Services Index -2.21%
Dow Jones Utilities -2.51%
Amex Oil index -2.85%


Just to show how focused the tech rally has been, Intel (INTC, news, msgs), the oft-beaten up chip giant, is up 11.75% this quarter and 11% on the year; it's the Dow's leader for the quarter and is now in second place for the year. Exxon Mobil (XOM, news, msgs), up 16% in the first quarter, is now up just 4.6% on the year.

Why oil prices fell
Oil prices plunged after the government said crude and gasoline inventories rose much more than anticipated last week. U.S. crude inventories rose by 4.3 million barrels to their highest level since May 1999, the Energy Information Administration said. Gasoline inventories rose by 1.1 million barrels.

Analysts surveyed by Reuters expected to see crude and gasoline inventories rise by 800,000 barrels.

"What we're seeing now is that gasoline inventories are 7% higher than they were last year," Jacques Rousseau, oil analyst at Friedman, Billings, Ramsey told CNBC's "Morning Call."

But "while oil inventories are rising now, you really have to look one or two quarters ahead and we really need a lot of oil in the fourth quarter," Rousseau warned.

Retail prices in check
The consumer price index (CPI) rose 0.5% in April, compared to a 0.6% increase in March, the Labor Department said. The figure was higher than the 0.4% increase economists expected, but that was mainly because of high gasoline prices, which surged 6.4%.

Excluding volatile food and energy prices, the core CPI was unchanged in April, compared to a 0.4% rise the month before. Economists predicted a 0.2% increase in core consumer prices. Apparel prices fell 0.6% last month, while new vehicle prices dipped 0.1%.

"I think the important news here is the ongoing issue of how little seepage we've seen from higher oil prices to other kinds of inflation," Diane Swonk, chief economist at Mesirow Financial, told CNBC's "Squawk Box." "It was nice to see that knee-jerk reaction on apparel prices," she added. "We know that because of the early Easter many retailers pushed out the high-price goods in March, couldn't sell them, had to unload them with heavy discounting in April."

The economy doesn't have a labor market that is tight enough for inflation to take root, Swonk said.

Lowered guidance doesn't hurt H-P
Hewlett-Packard (HPQ, news, msgs) delivered what the analysts wanted with its fiscal second-quarter earnings report after the bell Tuesday. And Wall Street seemed comfortable that revenue for its fiscal third quarter will be lower than expected. The stock rose more than 5.4% in afternoon trading.

H-P said it earned 37 cents a share in the quarter, which ended April 30, a penny better than the Reuters Estimates consensus and an 8.8% gain from a year ago. Revenues of $21.6 billion also beat the consensus estimate slightly and were up 7.3% from a year ago.

But the computer and printer giant said fiscal third-quarter revenue will be $20.3 billion to $20.7 billion, with earnings excluding items of 29 to 31 cents per share. Analysts were expecting earnings of 32 cents a share on revenue of $20.4 billion.

New CEO Mark Hurd, who took over from Carly Fiorina in April, may be taking advantage of a "honeymoon period" to lump all the bad news together and lower expectations.

"You don't get any credit for meeting expectations and you get hammered if you miss it by just a little bit," Bill Fearnley, analyst at FTN Midwest Securities, told "Squawk Box." "The natural inclination is you can lower (expectations) because, in effect, you are inheriting somebody else's work."

"I think the most positive aspect of the call last night was that the PC and the enterprise business is improving better than we and others had expected," Fearnley added. The PC server and storage businesses have been lagging, but operating margins came in better than expected.

AMAT beats estimates but its outlook is uncertain
Applied Materials (AMAT, news, msgs) was off 1.43% this afternoon as the company said its new orders were down 30% from a year ago.

Applied Materials, which builds equipment to make semiconductors, said it earned 18 cents a share in its fiscal second quarter, which ended May 2, down from 22 cents a year ago but a penny better than the consensus estimate. Revenue was $1.86 billion, a touch better than expected but still off about 10% from a year ago.

The company said business conditions were mixed but offered no details in its statement.

This morning, Credit Suisse First Boston downgraded Applied Materials to "sector perform" from "outperform," saying that the company will likely lose market share in its core semiconductor market this year, Briefing.com reported.

Gramlich going; Greenspan not staying
Federal Reserve Governor Edward Gramlich will leave the central bank on Aug. 31 to return to the world of academia. Gramlich, a voting member on the Federal Reserve Open Market Committee, will attend the June and July meeting on interest rates. But he will skip the Aug. 9 meeting, following the tradition where departing Fed heads miss the last rate meeting before they resign, Reuters reported.

Gramlich was appointed by President Bill Clinton in 1997 and his term was scheduled to expire in 2008.

Separately, Fed Chairman Alan Greenspan will step down in January as planned, CNBC's Steve Liesman reported, citing a close associate of Greenspan. The Washington Post reported that the Bush administration is considering giving Greenspan another few months on the job while they search for a replacement.

-- Charley Blaine and Kim Khan

 

[ducati998]

Dare we believe in a chip rally?


As a general undercurrent of optimism surges, so does hope for a highly contagious chip rally that might spread to the broader market. Four experts weigh in.

By Jon D. Markman

An electrifying change has taken hold in the market in the past couple of weeks that goes well beyond the simple sense that stocks are behaving better. For the first time in more than 18 months, shares of the nation’s major utilities have definitively weakened, while the shares of the nation’s major technology companies have gathered strength.

The switch in market leadership from companies that are bought for dependable cash flows to companies that represent a speculative bet on the future says a lot about the potential for the strength of the recent rally. It says that investors are finally emerging from their defensive, woe-is-me stance toward equities and are instead staking their money on the potential for better times ahead.

This undercurrent of optimism is most clearly evident in the ratio between the Dow Jones Utility Index ($UTIL), which tracks the nation’s 15 largest electricity and natural gas distribution companies, and the Philadelphia Semiconductor Sector Index ($SOX.X).

The ratio between the utility and semiconductor indexes -- now trading at 364.89 and 425.23, respectively -- is currently at 0.86. To produce a more definitive signal of a growing taste for risk, the ratio would have to drop below 0.81. To do that, the utility index would need to sink to around 350, while the SOX would need to trade at around 435 -- both of which would be real trend-changing levels.

These kinds of shifts don’t occur very often, and they are typically persistent. The last time this change took place, it lasted six months -- from July 2003 to January 2004. Over that span, innovative chip maker Broadcom (BRCM, news, msgs) rose 60%, while chip-equipment maker Teradyne (TER, news, msgs) rose 55%. Before that, the change in the mood for risk aversion persisted much longer -- from August 1998 to March 2000. In that heyday for technology stocks, industry mainstays like Intel (INTC, news, msgs) rose over 500% in value.

A chip rally would be most welcome for the overall market, since success in these stocks tends to lead directly to success for the rest of the companies that trade on the Nasdaq -- and the Nasdaq, in turn, tends to lead the rest of the market. Dare we contemplate the possibility? Let’s listen in on four experts’ opinions.

Bullish ... but with a catch
Putting in a vote for continued strength for semis and the rest of their volatile crew is this column’s favorite market timer, Paul Desmond of Lowry’s Reports. Longtime readers will recall that Desmond uses proprietary measures of investor buying pressure and selling pressure to size up the strength and potential longevity of important intermediate-term market moves. Back on April 20, which turned out to be the actual bottom of the market so far this year, he said in my column (“Why market skeptics see a huge opportunity") that the Dow Jones industrials’ ($INDU) scary dip below 10,000 that week would be seen in coming months as a great buying opportunity.

Indeed, the Dow has rallied 5% since then, while Intel has jumped 17%.


Rather than rest on his chipper laurels, Desmond is now even more bullish -- observing that all the evidence in his database encompassing 70 years of market data suggests that the stage is now set for the final leg of the cyclical bull market that began in October 2002. In a note to clients last week, he said probabilities now favor a rally lasting five months from the April low that will result in a 22% gain in the Dow Jones industrials. That would take the Dow to 12,173 by September -- about 4% higher than its all-time peak of 11,658 in December 1999.

As you might expect, this outrageously sanguine view comes with a catch: Late-stage rallies are not broad-based, as investor appetites increasingly narrow to a select few successful sectors. As the move higher in the major indexes progresses, profit-taking in stocks left in the cold increases -- and investors should cull them out, rather than adding to them in anticipation of later participation. By the end of the move higher, Desmond forecasts, buying pressure should begin to measurably dry up and stocks will plateau. That will be a warning to shift back to defensive positions, he says, though at the time many will be anticipating that it would be just a pause in a larger advance.

The shadow of inflation
Ned Davis, whose quantified views on market timing (and the economy) are equally valued by the institutional community, is also on the recovery bandwagon -- though his catch is more immediate. He believes that the threat of inflation poses the greatest risk to the advance of the Nasdaq, as his studies show that when the year-to-year change in the Producer Price Index is greater than 3.3%, the tech-heavy index suffers disproportionately. At 4.8%, the PPI has exerted a negative effect on the Nasdaq so far this year.

While the Nasdaq’s relative strength in recent weeks has triggered a "buy" signal for the Nasdaq in his models, he said in a note to clients on Monday morning, he has yet to see confirmation of the signal from the index’s advance/decline line and relative volume measures, while the rising spread between the Moody Baa bond yield and the 10-year Treasury bond yield is definitively negative for the index. Furthermore, he notes that when a cyclical bull market is in its final third, the Dow Jones industrials tend to outperform the Nasdaq by more than 3.3%.

So while Davis sees the potential for continued Nasdaq strength, he would tend to side with the Dow Jones industrials over the summer if a definitive rally ensues.

Too little fear
Bank of America’s researchers were out with a note on Monday in concurrence with that view, stating that overcapacity and decelerating demand for hardware and software are real problems, and valuations are actually higher in many cases than before the Nasdaq’s tear higher in the late 1990s. Moreover, Bank of America’s analysts are worried about the lack of fear among technology investors as the Nasdaq Volatility Index ($VXN.X), which measures volatility for Nasdaq 100 options, hit an all-time low on Friday.

Analysts at the Canadian-based brokerage CIBC, meanwhile, added their own log to the fire on Monday, downgrading the chip sector to market weight from overweight as they see an “uneven bottom” for the fundamentals of the group through a “long, slow summer” -- and suggesting that the Street will end up shaving down second- and third-quarter estimates for the group. A full-fledged recovery for the group, they said, is a fourth-quarter event.

If we are to put all of these views into one package, we can see the potential for a decent boost in the Dow Jones industrials over the next three or four months that is not complemented by a somewhat-softer advance in the Nasdaq generally and tech stocks specifically. To take advantage with stocks that are neither mega caps nor small caps, here are 15 companies in the S&P 500 that have the best relative strength in the past three, six and 12 months, are rated 9 or 10 by StockScouter and have market caps between $1 billion and $20 billion. I will track them over the next six months and report back.

Strong stocks
Company name Market cap SS* Last price % Chg YTD Price/Sales
Genzyme (GENZ, news, msgs) 16.1 B 9 $64.03 9.9 6.9
J.C. Penney (JCP, news, msgs) 13.7 B 10 $50.93 22.4 0.7
Pulte Homes (PHM, news, msgs) 9.4 B 9 $75.00 15.3 0.8
CSX (CSX, news, msgs) 9.1 B 9 $42.04 5.0 1.1
Fiserv (FISV, news, msgs) 8.2 B 9 $43.05 7.3 2.2
Nordstrom (JWN, news, msgs) 8.1 B 9 $59.70 28.2 1.2
Autodesk (ADSK, news, msgs) 8.1 B 10 $36.65 -5.5 6.6
KB Home (KBH, news, msgs) 8.1 B 10 $65.30 21.1 1.1
ProLogis (PLD, news, msgs) 7.9 B 9 $42.14 -2.6 9.0
Express Scripts (ESRX, news, msgs) 6.9 B 10 $93.78 22.6 0.5
SAFECO (SAFC, news, msgs) 6.7 B 9 $53.17 1.6 1.1
Health Management (HMA, news, msgs) 6.1 B 9 $25.00 9.5 1.8
Hospira (HSP, news, msgs) 5.8 B 10 $37.04 10.0 2.2
Goodrich (GR, news, msgs) 4.9 B 9 $40.94 25.3 1.0
CMS Energy (CMS, news, msgs) 2.8 B 9 $13.04 25.3 0.5

*Stock

 

[roguetrader]

Hi d998, I observed this thread a few weeks back but it looked far too heavy going for the usual casual five minute glance. I felt givven the quality and often fundamental nature of your postings it deserved a little more time for absorption, and it seems I was correct.
An interesting and absorbing collection of articles, thanx for compiling and posting.

 

[SOCRATES]

Hi d998, I observed this thread a few weeks back but it looked far too heavy going for the usual casual five minute glance. I felt givven the quality and often fundamental nature of your postings it deserved a little more time for absorption, and it seems I was correct.
An interesting and absorbing collection of articles, thanx for compiling and posting.

I disagree with you.

You are winding him up surely ?

It is all drivel, endless boring drivel. There are 31 very long ramblilng senseless posts and only 3 replies. It is as if he has to get all this nonsense off his chest and continues to talk to himself, ad nauseam, and, furthermore, if no one on this website has spotted it or is going to say it, I will, because it is true and because I can. There you have it.

 

[counter_violent]

I think Soc is a Quantity Surveyor turned Contracts Manager, as he fits the mould perfectly. Continually arguing that black is white and vice versa, would'nt you know it ! shades of grey ! and there we have it ! Bored ! Good night.

 

[SOCRATES]

Yes, because nearly all of it is nonsense.

It is the moral duty of those able to recognise what is nonsense to point it out, fearlessly and without hesitation, and equally to recognise when sense is being presented.

I do not contradict for the sake of it, but I am obligated to intervene, more frequently than I would ordinarily choose, as most of it is nonsense, absolute and utter nonsense, and without an end in sight.

By the way, I have never had any connection with the building trade at all.

 

[ducati998]

Stocks quietly climb; excuse season near?
Investors were more concerned with their Memorial Day weekend plans than stocks. Some companies get creative in pinning the blame for weak results -- will May’s lousy weather provide an out for next earnings season?


Tumbleweeds blew through trading floors Friday as stocks finished little changed. Investors and traders not already enjoying their long weekend certainly weren't interested in making any big market moves.

The Dow, Nasdaq composite and S&P 500 index all finished a bit higher, keeping the recent rally alive. Volume, however, was predictably low.

Sentiment was caught between higher oil prices and a benign inflation measure. Dow component Pfizer (PFE, news, msgs) was the most actively traded stock on the New York Sock Exchange, falling about 2%. Regulators are looking into a possible link between blindness and use of Pfizer's blockbuster impotence drug Viagra.


Read more about the Viagra concerns.

Earnings season, excuse season
It has been a wet and unseasonably cold May in the Northeast. So you can't blame companies for anything bad that may have happened this month.

Weather is one of the most frequent excuses for disappointing company results, and this earnings season was no exception. The spin cycle was at full power for companies that missed Wall Street expectations, and along with high gasoline prices, adverse weather was up at the top of many press releases.




While some companies certainly do see a decline in sales if the sun doesn't shine, other companies are more, shall we say, creative. Here's a few of the best from this past earnings season:


Columbia Sportswear (COLM, news, msgs) said it saw a particular weakness in North American outwear orders for March. The reason was poor weather conditions last fall. Of course, nobody would want to buy outerwear when the weather is bad.


For its fiscal second-quarter Jacuzzi (JJZ, news, msgs) said spa sales were off because of an unusually wet winter. Are Jacuzzi users really that concerned about getting wet?


Medical device company Criticare (CMD, news, msgs) is happy to point the finger at acts of God. It blamed sluggish sales in the first fiscal quarter of 2005 on hurricanes, which canceled no less than three "major oral surgery sales conferences." Sounds like a vendetta.

Speaking of religion, it's not past companies to play that card in explaining a balance sheet shortfall.


In a conference call, Overstock.com's (OSTK, news, msgs) CEO said slow sales at the beginning of April may be attributed to the death of John Paul II. We doubt he meant to infer that His Holiness was such a big customer.

And sometimes Super Sunday is not so super.


Electronics retailer Tweeter (TWTR, news, msgs) somehow pinned weak first-quarter comparable sales on the Super Bowl shifting from February to January. They neglected to mention that the Super Bowl was also played in February last year, the comparable period.

But the king of spin crown has to go to Bob Evans (BOBE, news, msgs), which has been trying to explain poor restaurant sales for more than five months and now, quite frankly, seems to have given up. Check out this timeline of comparable store sales reports:

December 2004: Bob Evans blames "a shift in the timing of the Thanksgiving, Christmas and New Years." It's a real pain when Christmas falls in December.

January 2005: The company falls back on "severe winter weather" but apparently that "unfavorable shift in the timing of the year-end holiday period" messed up January as well.

February 2005: Things get a little better. The company cites its "value initiatives, including reduced prices on a number of Bob Evans' most popular breakfast and dinner items" that "appear to have been well-received by consumers."

March 2005: Maybe a little too well received. Bob Evans says "renewed softness appears to reflect the timing of our marketing programs as well as the significant increase in gasoline prices during the month."

April 2005: Let's see, they've used, weather, gas, the calendar and bad marketing timing. Anything left? "Same-store sales at Bob Evans Restaurants were again disappointing in April, and restaurant segment operating margins for the quarter continue to be depressed," CEO Stewart Owens said. Apparently not.


Oil up as drivers start their engines
After weeks of chatter about the pseudo-official summer driving season, it's finally upon us. And oil prices are rising, with motorists expected to jam the highways for the long weekend.

Crude oil for July delivery gained 84 cents to settle at $51.85 a barrel, Reuters reported. There were concerns refiners will be maxing out to meet increased driver demand for gasoline.

Travelers will pay an average of $2.10 per gallon for gas this weekend, up 5 cents per gallon from a year ago. But that's not deterring drivers. More than 31 million Americans will drive more than 50 miles this weekend, up 2.2% from last year, according to AAA.

Meantime, personal income rose 0.7% in April, compared to a 0.5% gain in March, the Commerce Department said. And personal spending climbed 0.6% last month, with March spending revised up to a 0.9% gain. Economists were expecting income to rise 0.7% and spending to increase 0.8%.

Perhaps more importantly, the core personal consumption expenditures price index for April, a favorite inflation measure of Federal Reserve Chairman Alan Greenspan, rose just 1.6% from the same month a year ago.

"As far as the inflation gauge of the Fed, inflation is under control, adding to a sense of some economists, inflation has peaked," CNBC's Steve Liesman said.

And the University of Michigan revised its measure of May consumer sentiment higher. The consumer sentiment index came in at 86.9 for the current month, up from a preliminary measure of 85.3, but down from 87.7 in April. Economists were expecting a smaller revision up to 86.

 

[ducati998]

AP
U.S. Growth Likely to Encourage Investors
Sunday May 29, 5:30 pm ET
By Michael J. Martinez, AP Business Writer
U.S. 'Goldilocks Economy,' Not Too Hot or Too Cold, Expected to Encourage Investment


NEW YORK (AP) -- The U.S. economy is growing at a moderate pace -- fast enough to encourage investment and create jobs, but slow enough that inflation isn't a major risk. It's what is know on Wall Street as a 'Goldilocks economy' -- not too hot and not too cold, the same way the fairy tale character preferred her porridge.


The question, however, is whether investors are ready to take advantage of these benign conditions.

Last week's reading of the nation's first-quarter gross domestic product gave credence to the Federal Reserve's policy of steady but modest interest rate hikes. Inflation remains in check, but rates are still relatively low, which means corporate America has inexpensive access to capital for expansion.

"I think the GDP numbers gave people more comfort that the growth path for the economy is reasonable," said Kurt Wolfgruber, chief investment officer at Oppenheimer Funds. "It gives me comfort that things are OK and the market can advance."

And investors seem to have responded with a second week of strong gains despite a resurgence in crude oil prices that approached $52 per barrel. With Wall Street no longer selling off at the first hint of bad news, as it had for much of March and April, analysts expect the market to continue to rally -- slowly and perhaps unevenly at times -- through the summer.

A key test for the market will come Friday with the Labor Department's monthly job creation report. If the labor market can continue to produce jobs at a consistent rate, that could remove another doubt for many investors. Stocks may lag slightly a few days ahead of the report as investors hedge against any negative surprises.

Last week, the GDP report helped Wall Street overcome worries about the strength of economic expansion and paved the way for Wall Street's second straight week of gains. For the week, the Dow Jones industrial average gained 0.67 percent, the Standard & Poor's 500 index added 0.80 percent and the Nasdaq composite index rose 1.43 percent.

ECONOMIC NEWS

Friday's job creation report will likely set the tone for much of the month's trading. Analysts expect the economy to have created 180,000 jobs in May -- a good showing, but less than the surprisingly strong 274,000 jobs reported in April. The previous month's report set off worries that strong job growth would lead to higher consumer demand and, in turn, inflation, and that riled the markets and left stocks mixed for the session. A middle-of-the-road report would likely garner the best reaction on Wall Street.

In other economic news, the Institute for Supply Management will release its manufacturing index before Wednesday's trading session. The index, which measures the strength of the industrial sector, was expected to fall to 52.2 in May, down from 53.3 in April, a reflection of higher raw material prices.

EARNINGS

Only a handful of companies are slated to report their quarterly results this week. Luxury retailer Neiman Marcus Group Inc., which is slated to issue its earnings after Wednesday's session, is expected to earn $1.52 per share for the quarter, up from $1.40 per share a year ago. The company, in the midst of a $5.1 billion buyout by a private investment group, has seen its stock rise almost 96 percent from its 52-week low of $49.52 on Aug. 12. The stock closed Friday at $96.95.

With just a month to go before the end of the second quarter, companies will begin to issue guidance on their upcoming earnings -- and the holiday-shortened week could see a number of companies warning that their numbers may fall below expectations.

EVENTS

The automotive industry will release its May sales figures on Wednesday, which could spark volatility among suppliers as well as the automakers themselves. Retailers will also begin tallying up their monthly results in the week ahead and the week after.

 

[ducati998]

AP
Euro at Seven-Month Low After French Vote
Monday May 30, 12:34 pm ET
By Laurence Frost, AP Business Writer
Euro at Seven-Month Low After France Shoots Down EU Constitution


PARIS (AP) -- France's resounding "no" vote to the EU constitution sent the euro currency to a seven-month low against the dollar Monday, but analysts said it could be months before investors get the full measure of the emotionally charged vote and its likely fallout.



Stock markets took the constitution's defeat in stride, and there were few signs of the economic cataclysm doomsayers had predicted would follow a referendum defeat for Europe's latest integration blueprint.

"It's business as usual in practical terms," said Lorenzo Codogno, co-head of European economics at Bank of America in London.

Investors will nevertheless be watching closely for any "change in direction in terms of the European integration project," Codogno said. "But it's not the kind of reaction you expect within two days -- it will take probably weeks or months to assess what are the implications of this vote from a political standpoint."

The euro fell as far as $1.2466 in afternoon European trading, its lowest level since mid-October and more than a cent below the $1.2575 it bought in New York late Friday.

France's benchmark CAC-40 share index dipped 0.8 percent in early Paris trading but eventually closed 0.1 percent higher at 4,135 points. Germany's DAX ended 0.8 percent higher at 4,480 points, while the Dutch AEX closed up 0.4 percent at 368.42 points.

Markets were closed in the United States for Memorial Day and the London Stock Exchange was closed for a banking holiday.

Shares listed in Poland and the Czech Republic also showed small overall gains, despite warnings that the countries' plans to adopt the euro could be affected by the referendum's defeat.

If sustained, the euro's decline will benefit the 12-nation euro zone, where the currency's recent strength has been sapping growth by reducing the competitiveness of European goods and services at home and abroad.

French Prime Minister Jean-Pierre Raffarin, who refused to say whether he had tendered his widely expected resignation Monday even as aides were packing up their offices, had forecast economic "stagnation" and a halt to investment if France rejected the constitution.

French banks and brokerages including Societe Generale and Exane BNP Paribas had also cautioned that a "no" would hit share prices as well as the euro.

Exane economist Jean-Pierre Petit said markets had already priced in France's rejection of the constitution in response to the string of negative opinion polls before the vote.

Now, Petit said, "the market doesn't know" what to expect. "It's waiting for the French and European political reactions."

Exane is advising clients to expect a "return of the country factor" as the vote -- and its possible echo in Wednesday's Dutch referendum -- strains euro-zone cohesion. Investors will have to take greater account of individual countries' performances and focus less on sector-wide comparisons, Petit said. But uncertainties remain.

"We don't know whether the treaty's done for," he said. "You just have to take a bet on that, and my bet is that it's finished, even if the Dutch vote yes -- which is unlikely anyway."

The jury is also still out on whether the EU setback will encourage or stifle free-market policies and antitrust enforcement in the bloc. Paris-based Petit saw a "victory for Tony Blair and the British conception of European construction" while, across the Rhine, HVB Group analyst Joerg Kraemer predicted less ambitious moves by the EU in pushing for market-oriented reforms.

French and German business leaders were in closer accord, with the main French employers' organization Medef warning that "heavy consequences" would follow the vote, which it said hurt Europe's ability to "defend its social and economic model" in the wider world.

Juergen Thumann, head of the Federation of German Industry, also called for action to "limit the damage" from France's "no."

"A Europe of varying speeds that leads to a fragmentation of the internal market would be counterproductive," Thumann said.

Associated Press Writers Geir Moulson in Berlin and Matt Moore in Frankfurt contributed to this report.

 

[ducati998]

All Financial Times NewsUS state pension funds are facing a shortfall of several hundred billion dollars and are in much worse shape than corporate pension funds, according to the head of one of the biggest state pension funds in the US.

Orin Kramer, chairman of the $70bn New Jersey pension fund, warned that the underfunding in the state funds which provide pensions for teachers, fire and police officers and other public employees would grow if no action were taken, jeopardising the entire pension system. He estimated that the shortfall for the New Jersey fund alone was more than $30bn.


The Pension Benefit Guaranty Fund, the government-sponsored corporate pensions safety net, announced big losses on Friday, saying it might need a taxpayer bail-out because companies were reneging on funding promises.

Mr Kramer said: "The public sector situation is even worse than the private one.

"Large numbers of people have an economic incentive to understand the magnitude of the private sector problem...exactly what the extent of the problem is for General Motors or United Airlines. But people don't get paid for doing that analysis about the public sector."

Mr Kramer, a money manager who became chairman of the New Jersey fund in 2003, said: "Basically, there is a wonderful social compact and there are liabilities attached to it, and the parties attached to it haven't done the math on the liabilities.

"Actuarial science [on which the pensions are based] involves accounting constructs which are economic fictions and don't mesh with reality. First, when they determine what the assets of the fund are, they look at the average over the past five years. As an investment manager, no investor has ever called me to ask me their average balance over the past five years. People want to know what their account is worth today. Second, the actuaries assume that as people retire they are not replaced in the work force." And third, Mr Kramer said, they used overly optimistic estimates for future returns.

Mr Kramer said he was working with others to study the shortfall in other states. However, "clearly the national shortfall is at least several hundred billion dollars. No matter which policy option you choose to address it higher taxes or renegotiating benefits it is a material number in terms of the effect on GDP growth."

For New Jersey, on current asset values, along with an assumption that wages would grow at 5.25 per cent a year and typical consultants' estimates of returns, the shortfall was more than $30bn. "The numbers are only going to grow over time, so inevitably people will have to deal with this, and there will be a lot of finger-pointing when they do," Mr Kramer said.

Copyright 2005 Financial Times

 

[ducati998]

Hedge funds and GM bonds
Hey Modelman: Your article on the hedge funds’ role in the erratic trading of General Motors (GM, news, msgs) bonds was the best thing I have read on the subject. Concise and explanatory at the same time. I would bet many of the people in the hedge-fund business could learn a lot from reading it.

Modelman: As it happens, there is still quite a lot that I need to learn about it. I received a lot of additional insight from readers who deal with exotic debt instruments, as well from capital structure research outfit CreditSights. They made me understand the layers of exposure that investors face because of the automakers’ bonds, how the growth of hedge funds and the attempt to safeguard iffy positions has led to instability and unexpected consequences, and how the fallout for this whole thing may ultimately hit the major banks and brokerages.

The first thing to grasp is that hedge funds are relative newcomers to the corporate bond world. In the past, they dealt mostly with highly leveraged positions in sovereign debt (like U.S. Treasurys or U.K. gilts), commodities or equities. But the development of a new range of products, known as collateralized debt obligations -- which bundled corporate debt of various maturities and risks into single instruments -- played into hedge fund managers’ interest in securities whose changing relationships could be arbitraged and leveraged to the hilt. In these "correlation trades," managers try to find closely related issues whose value relationships sometimes get out of whack. Then they borrow a lot of money to buy one and sell the other and make money with the relationships return to normal.

Normally, large funds prefer debt instruments with a lot of liquidity, or trading volume, but as interest rates declined, they had to move into less and less liquid products to find the kind of yields that made their strategies work. CreditSights says that shops that used to focus on investment-grade bonds moved into high-yield bonds; shops that once focused on high-yield moved into distressed debt and leveraged loans; shops focused on distressed debt moved down into private equity; and shops focused on emerging markets, such as Latin America, moved down into more low-grade “local” markets, like Peru. As they did so, they each have moved out of their safety and strong-knowledge zones.

In the case of collateralized debt obligations, you are talking about some pretty complex securities that are cut up into pieces, called tranches, for individual trading and hedging. CreditSights notes that a typical CDO consists of up to 0-5% equity, 5-7% “junior mezzanine,” or high risk; 7-10% “mezzanine,” or median risk; 10-13% “senior,” or modest risk; and 12-100% “super senior,” or lowest risk. The more senior debt gets, the most cash flow from the underlying bonds and suffer the fewest losses; the more junior or equity tranches get the least cash flows and are thus subject to the greatest losses. The pools of underlying bonds can either be static or fixed through the life of the CDO, or dynamic, which means that new bonds can be substituted for deteriorating ones.

At first, hedge funds mostly bought the equity and junior mezzanine tranches, while insurance companies bought the senior tranches. But the decline in rates led to a compression of yields, pushing each group into the others’ turf. In part as a result, banks began to create single-tranche CDOs that were highly illiquid contracts, essentially, between the fund manager and their brokerage. The risks were all hedged out through the purchase of those credit default swaps I mentioned earlier, which are essentially an insurance policy against the risk that any given tranche would blow up, leaving it worthless. These particular instruments have become so popular that the market for them actually dwarfs the underlying bond market; it’s estimated at $6 trillion in the United States, and an order of magnitude more than that in Europe and Asia.

Now, the trouble with the automakers’ bonds was that all these levels of tranches, and the default swaps written as insurance against them, were expected by everyone to work in a particular way, according to mathematical models that have become standard. But when Kirk Kerkorian announced his bid for the nation’s largest automaker’s equity earlier in the month, and the debt-rating agencies then downgraded the automaker’s debt, it led to a ripple effect among all the risk levels that few expected -- and has left many of the credit arbitrage funds, and the bankers that lend to them, at risk of a big blow-up.

Now that a month has gone by, it looks like no major funds are going to go under as a result of misbehaved credit arbitrage trading. And last week, several big broker dealers announced that they did not suffer major losses as counterparties to hedge funds that have been hurt in the trading of automaker bonds. But the situation has made one surprising thing clear: Hedge-fund trading has become a very large part of major brokerages’ commission revenue stream, with estimates now ranging into the 25%-plus range.

To the extent that credit arb funds, or big institutions with credit-arb arms, will find themselves trading less this quarter or next while they lick their wounds, estimated revenue will decline. And as a result, many analysts suspect that brokerages such as Goldman Sachs Group (GS, news, msgs), JPMorgan Chase (JPM, news, msgs) and Deutsche Bank (DB, news, msgs) could suffer a revenue shortfall. Look there for the next level of fallout.

One of my readers, who went by the initials R.B., said: “Don't blame the quants, the hedge funds or even the MBAs on the sell side for arb-ing the rating agencies and insurance companies. No one forced anyone to buy this crud. The CDO market would never have existed in any size had the rating agencies done a better job and had the insurance companies and dumb hedgies who bought all those BBB tranches had any clue what they were buying.”