Extra
Profits fattest in 3 years; growth strong
The verdict on 2004 rolls in -- and it's good. Corporate earnings and GDP finish the year with a bang.
The U.S. economy ended 2004 with brisk momentum on the strongest surge of corporate profits in three years, the government reported on Wednesday, though there were signs that price pressures might be picking up.
Gross domestic product, which measures total output within U.S. borders, expanded at a 3.8% annual pace in the fourth quarter, the same as estimated a month ago, the Commerce Department said in its third and final estimate of GDP performance.
That was slightly less than the 4% GDP pace that Wall Street analysts had forecast but still reflected healthy growth, only slightly less than the third quarter's 4% rate.
Most private-sector analysts anticipate steady expansion during 2005 but with some drag from rising oil prices as the year wears on.
The revisions in the final estimate of fourth-quarter GDP were minor, but they included a slight bump up in a key price measure, which set nerves on edge in financial markets.
The department noted that business inventories grew at a slightly smaller annual rate of $47.2 billion instead of $51 billion estimated a month earlier. But that was largely offset by upward revisions to exports and spending on costly durable goods, including new cars.
More profits -- and inflation
Corporate profits after taxes climbed 12.5% in the fourth quarter to a record seasonally adjusted annual rate of $973 billion -- the strongest increase since an 18.9% surge in the fourth quarter of 2001. Profits had fallen 4.2% in the third quarter after a series of hurricanes wreaked havoc in several southeastern states.
There was some evidence that inflation might be perking up. A price index favored by Federal Reserve Chairman Alan Greenspan -- personal consumption expenditures excluding food and energy -- gained at a 1.7% annual rate in the fourth quarter, up from a 1.6% estimate a month ago and nearly twice the 0.9% third-quarter rate of increase.
Inflation erodes the value of foreigners' assets in the United States at a time when America is heavily reliant on foreign investment to finance its huge deficits on trade and on the budget.
Economist Carl Tannenbaum of LaSalle Bank in Chicago said higher prices were bound to make markets sensitive to the possibility that the Federal Reserve might accelerate the interest rate-rise campaign it initiated in June, which so far has produced seven quarter-percentage point increases in the federal funds rate.
"I wouldn't expect a big reaction but as we accumulate evidence going into the next Fed deliberation, any sign of higher inflation pressures place a higher percentage on the potential remove of that word 'measured','' Tannenbaum said.
The Fed's use of the word measured has been linked to a policy of small rate rises, an association that would swiftly disappear if policy-makers' concerns about inflation increased.
U.S. Treasury securities prices were down slightly after the GDP data was issued as traders weighed whether the prices pickup might tip the scales toward faster or larger interest-rate rises. Stocks were up.
For all of 2004, GDP expanded 4.4%. That was the strongest growth in five years, since a 4.5% advance in 1999, and was well ahead of the 3% posted for 2003.
A recent survey by Blue Chip Economic Indicators, a consensus of leading economists, predicted GDP growth will ease to 3.7% this year and 3.4% in 2006 as the Fed extends a campaign to restrain price pressures by gradually ratcheting interest rates higher.
Profits fattest in 3 years; growth strong
The verdict on 2004 rolls in -- and it's good. Corporate earnings and GDP finish the year with a bang.
The U.S. economy ended 2004 with brisk momentum on the strongest surge of corporate profits in three years, the government reported on Wednesday, though there were signs that price pressures might be picking up.
Gross domestic product, which measures total output within U.S. borders, expanded at a 3.8% annual pace in the fourth quarter, the same as estimated a month ago, the Commerce Department said in its third and final estimate of GDP performance.
That was slightly less than the 4% GDP pace that Wall Street analysts had forecast but still reflected healthy growth, only slightly less than the third quarter's 4% rate.
Most private-sector analysts anticipate steady expansion during 2005 but with some drag from rising oil prices as the year wears on.
The revisions in the final estimate of fourth-quarter GDP were minor, but they included a slight bump up in a key price measure, which set nerves on edge in financial markets.
The department noted that business inventories grew at a slightly smaller annual rate of $47.2 billion instead of $51 billion estimated a month earlier. But that was largely offset by upward revisions to exports and spending on costly durable goods, including new cars.
More profits -- and inflation
Corporate profits after taxes climbed 12.5% in the fourth quarter to a record seasonally adjusted annual rate of $973 billion -- the strongest increase since an 18.9% surge in the fourth quarter of 2001. Profits had fallen 4.2% in the third quarter after a series of hurricanes wreaked havoc in several southeastern states.
There was some evidence that inflation might be perking up. A price index favored by Federal Reserve Chairman Alan Greenspan -- personal consumption expenditures excluding food and energy -- gained at a 1.7% annual rate in the fourth quarter, up from a 1.6% estimate a month ago and nearly twice the 0.9% third-quarter rate of increase.
Inflation erodes the value of foreigners' assets in the United States at a time when America is heavily reliant on foreign investment to finance its huge deficits on trade and on the budget.
Economist Carl Tannenbaum of LaSalle Bank in Chicago said higher prices were bound to make markets sensitive to the possibility that the Federal Reserve might accelerate the interest rate-rise campaign it initiated in June, which so far has produced seven quarter-percentage point increases in the federal funds rate.
"I wouldn't expect a big reaction but as we accumulate evidence going into the next Fed deliberation, any sign of higher inflation pressures place a higher percentage on the potential remove of that word 'measured','' Tannenbaum said.
The Fed's use of the word measured has been linked to a policy of small rate rises, an association that would swiftly disappear if policy-makers' concerns about inflation increased.
U.S. Treasury securities prices were down slightly after the GDP data was issued as traders weighed whether the prices pickup might tip the scales toward faster or larger interest-rate rises. Stocks were up.
For all of 2004, GDP expanded 4.4%. That was the strongest growth in five years, since a 4.5% advance in 1999, and was well ahead of the 3% posted for 2003.
A recent survey by Blue Chip Economic Indicators, a consensus of leading economists, predicted GDP growth will ease to 3.7% this year and 3.4% in 2006 as the Fed extends a campaign to restrain price pressures by gradually ratcheting interest rates higher.
Jubak's Journal
Prepare for the global money crunch
Today's most-tempting investment opportunities await in India and China. But the end of the cheap-money era also puts both at serious risk of a crash.
By Jim Jubak
As the days of low interest rates and a liberal money supply slowly fade, there's no denying the fact that cheap money in the U.S. has had a tremendous global impact.
For example, cheap money here has led to the rising home prices and household wealth that have kept U.S. consumers spending. That has supported a global economic boom that has produced 8% or better annual growth in the economies of India and China -- at the cost of a U.S. trade deficit in goods and services that hit $620 billion in 2004.
Low U.S. interest rates touched off capital-spending booms across Asia. With the effective cost of capital close to zero after you've factored in government subsidies, hordes rushed to build new semiconductor plants and car factories. Those facilities quickly saturated the market with new, cheaper products, which in turn led to lackluster stock performance in both the automobile and semiconductor sectors. (And that has, not so incidentally, damped global and U.S. inflation.)
U.S. consumers snapped up these inexpensive goods at an incredible clip, and this resulted in dollars pouring over foreign borders. In an effort to keep those dollars from producing runaway growth, China sopped up the dollars by selling yuan-denominated bonds. Other countries did the same using their own currencies.
Currency explosion
In China, this move led to an explosion of Chinese hard-currency assets: Reserves grew by $210 billion in 2004 to $610 billion, giving the country the world's second-largest foreign currency reserve after Japan. But that still hasn't kept China's money supply from growing by 14% in the 12 months ending February 2005. That's an improvement from the 18.4% in the 12 months ended in February 2004.
Nor is China an isolated case. In India, money supply grew at an annualized rate of 12.8% in the period that ended on March 4.
The cheap-money cycle has had powerful positive effects on global economies. For example, India's GDP grew by 7% in the fiscal year that ended in March 2005, after recording 8.5% growth in fiscal 2004. China's State Information Center projects that its economy will grow at an annualized 8.8% in the first quarter of 2005, after growing by 9.5% in the fourth quarter of 2004. By comparison, the U.S. economy grew at an annualized 3.8% in the fourth quarter of 2004.
Hard to pay the bills
Cheap money fueled an investment boom in everything from factories to telecommunications systems to make that growth possible. In China, the State Information Center projects, investment in fixed assets such as factories will grow by 24% in the first quarter of 2005 compared to the first quarter of 2004.
So what's the problem? Well, companies and individuals loaded up on goods because money was so cheap, and they will be hard-pressed to make payments when interest rates climb. The less developed a country's financial markets are, the larger the damage is likely to be in any shift from a cheap-money cycle to a less-cheap-money cycle.
In the U.S., where credit-card companies, banks and credit bureaus run sophisticated data collection and crunching operations, the turn is likely to produce a bump up in consumer defaults that will catch some badly run financial institutions by surprise. If the transition from one cycle to the other is abrupt enough, the result can even be the kind of massive default among financial institutions that characterized the savings-and-loan crisis of the late 1980s and early 1990s. That debacle cost U.S. taxpayers somewhere north of $300 billion.
Nor are corporate giants immune. When interest rates began to climb in 1993, companies as sophisticated as Procter & Gamble (PG, news, msgs) wound up losing millions on derivatives designed to offer financial insurance. (And don't forget the $1.5 billion in losses suffered by Orange County, Calif., at about the same time on its portfolio due to a derivatives package designed by Merrill Lynch (MER, news, msgs).)
China's debt crunch
The damage has the potential to be much worse in a country such as China, where the financial markets are still very much works in progress. Consider this example: According to the official Xinhua News Agency, China's local governments owe $50 billion (at official exchange rates), or about 15% of the country's total fiscal revenue in 2004. That figure is likely to be low, an official audit has concluded, but even that total exceeds the repayment capabilities of China's local governments. How did local governments get in such a fix when Chinese law prevents local governments from borrowing from banks? They evaded the law by borrowing from intermediaries set up specifically to secure bank loans for investments in local infrastructure.
Or this: China has put state-owned businesses on notice that within the next four years the central government will stop the practice of bailing out bankrupt companies, and companies that are technically bankrupt will actually have to file for bankruptcy. The government has closed some 3,400 state-owned businesses under existing transitional rules and estimates that an additional 1,800 state-owned businesses are now technically bankrupt and need to be closed. Most of these bankrupt businesses are owned by local and provincial governments that are already in hock, and they were financed by loans from state-owned banks run by local governments.
Nobody knows exactly how big the bad loan problem is. Nonperforming loans (a very subjective category in China) at Chinese banks total at least $200 billion. I say "at least" because a company owned by the People's Bank of China, the Chinese central bank, has injected $45 billion in capital into just two of the country's biggest banks, China Construction Bank and Bank of China, to clean up bad loans in preparation for an initial public offering and overseas stock-market listing for the two banks.
Hey, sign me up for those two deals.
And finally this: Despite sometimes rudimentary risk-control systems, China's financial institutions are up to date in one area -- they're willing to play in the derivatives market with the big boys of Wall Street. Last November, China Aviation Oil, a jet-fuel importer listed on the Singapore market but backed by the Chinese government, sought protection from creditors after it ran up $500 million in losses in derivatives after betting that oil prices would fall. In China, just as in the U.S., nobody really knows the details of any financial institution's exposure to the derivatives market. In China, however, due to the immaturity of the financial system, it is much more difficult than in the U.S. to figure out where the risk in any derivative trade will actually come home to roost.
Fastest growth, biggest risks
All this creates a conundrum, to use Alan Greenspan's word de jour, for investors. The fastest economic growth in the global economy over the next decade -- possibly the only growth in the world economy outside the U.S. -- will take place in China and India.
At the same time, the biggest risks of either a major institutional crash or a financial- system crisis are to be found in the relatively underdeveloped financial markets of those countries.
The more abrupt the transition from a cheap-money to a less-cheap-money cycle -- and the faster interest rates rise -- the slower global economic growth in general. And, also, the higher the risk of a country-specific financial crisis in the financial markets of these key countries in the developing world.
Overseas investing strategy
I think there's a way around this problem that maximizes any investor's potential return from growth in these developing markets and minimizes that investor's potential exposure to a market-specific financial crisis. The key is to own the shares of companies that do business in China and India and that derive a substantial portion of their current revenues and future growth from those markets, but that are listed on financial markets that require reasonably transparent public financial reporting and that derive their capital from relatively mature capital markets. In other words, I think you get the most bang and the least bust by investing in China and India through stocks traded on the U.S. financial markets.
In my last two columns, I think I've put together two basic rules for finding s
Prepare for the global money crunch
Today's most-tempting investment opportunities await in India and China. But the end of the cheap-money era also puts both at serious risk of a crash.
By Jim Jubak
As the days of low interest rates and a liberal money supply slowly fade, there's no denying the fact that cheap money in the U.S. has had a tremendous global impact.
For example, cheap money here has led to the rising home prices and household wealth that have kept U.S. consumers spending. That has supported a global economic boom that has produced 8% or better annual growth in the economies of India and China -- at the cost of a U.S. trade deficit in goods and services that hit $620 billion in 2004.
Low U.S. interest rates touched off capital-spending booms across Asia. With the effective cost of capital close to zero after you've factored in government subsidies, hordes rushed to build new semiconductor plants and car factories. Those facilities quickly saturated the market with new, cheaper products, which in turn led to lackluster stock performance in both the automobile and semiconductor sectors. (And that has, not so incidentally, damped global and U.S. inflation.)
U.S. consumers snapped up these inexpensive goods at an incredible clip, and this resulted in dollars pouring over foreign borders. In an effort to keep those dollars from producing runaway growth, China sopped up the dollars by selling yuan-denominated bonds. Other countries did the same using their own currencies.
Currency explosion
In China, this move led to an explosion of Chinese hard-currency assets: Reserves grew by $210 billion in 2004 to $610 billion, giving the country the world's second-largest foreign currency reserve after Japan. But that still hasn't kept China's money supply from growing by 14% in the 12 months ending February 2005. That's an improvement from the 18.4% in the 12 months ended in February 2004.
Nor is China an isolated case. In India, money supply grew at an annualized rate of 12.8% in the period that ended on March 4.
The cheap-money cycle has had powerful positive effects on global economies. For example, India's GDP grew by 7% in the fiscal year that ended in March 2005, after recording 8.5% growth in fiscal 2004. China's State Information Center projects that its economy will grow at an annualized 8.8% in the first quarter of 2005, after growing by 9.5% in the fourth quarter of 2004. By comparison, the U.S. economy grew at an annualized 3.8% in the fourth quarter of 2004.
Hard to pay the bills
Cheap money fueled an investment boom in everything from factories to telecommunications systems to make that growth possible. In China, the State Information Center projects, investment in fixed assets such as factories will grow by 24% in the first quarter of 2005 compared to the first quarter of 2004.
So what's the problem? Well, companies and individuals loaded up on goods because money was so cheap, and they will be hard-pressed to make payments when interest rates climb. The less developed a country's financial markets are, the larger the damage is likely to be in any shift from a cheap-money cycle to a less-cheap-money cycle.
In the U.S., where credit-card companies, banks and credit bureaus run sophisticated data collection and crunching operations, the turn is likely to produce a bump up in consumer defaults that will catch some badly run financial institutions by surprise. If the transition from one cycle to the other is abrupt enough, the result can even be the kind of massive default among financial institutions that characterized the savings-and-loan crisis of the late 1980s and early 1990s. That debacle cost U.S. taxpayers somewhere north of $300 billion.
Nor are corporate giants immune. When interest rates began to climb in 1993, companies as sophisticated as Procter & Gamble (PG, news, msgs) wound up losing millions on derivatives designed to offer financial insurance. (And don't forget the $1.5 billion in losses suffered by Orange County, Calif., at about the same time on its portfolio due to a derivatives package designed by Merrill Lynch (MER, news, msgs).)
China's debt crunch
The damage has the potential to be much worse in a country such as China, where the financial markets are still very much works in progress. Consider this example: According to the official Xinhua News Agency, China's local governments owe $50 billion (at official exchange rates), or about 15% of the country's total fiscal revenue in 2004. That figure is likely to be low, an official audit has concluded, but even that total exceeds the repayment capabilities of China's local governments. How did local governments get in such a fix when Chinese law prevents local governments from borrowing from banks? They evaded the law by borrowing from intermediaries set up specifically to secure bank loans for investments in local infrastructure.
Or this: China has put state-owned businesses on notice that within the next four years the central government will stop the practice of bailing out bankrupt companies, and companies that are technically bankrupt will actually have to file for bankruptcy. The government has closed some 3,400 state-owned businesses under existing transitional rules and estimates that an additional 1,800 state-owned businesses are now technically bankrupt and need to be closed. Most of these bankrupt businesses are owned by local and provincial governments that are already in hock, and they were financed by loans from state-owned banks run by local governments.
Nobody knows exactly how big the bad loan problem is. Nonperforming loans (a very subjective category in China) at Chinese banks total at least $200 billion. I say "at least" because a company owned by the People's Bank of China, the Chinese central bank, has injected $45 billion in capital into just two of the country's biggest banks, China Construction Bank and Bank of China, to clean up bad loans in preparation for an initial public offering and overseas stock-market listing for the two banks.
Hey, sign me up for those two deals.
And finally this: Despite sometimes rudimentary risk-control systems, China's financial institutions are up to date in one area -- they're willing to play in the derivatives market with the big boys of Wall Street. Last November, China Aviation Oil, a jet-fuel importer listed on the Singapore market but backed by the Chinese government, sought protection from creditors after it ran up $500 million in losses in derivatives after betting that oil prices would fall. In China, just as in the U.S., nobody really knows the details of any financial institution's exposure to the derivatives market. In China, however, due to the immaturity of the financial system, it is much more difficult than in the U.S. to figure out where the risk in any derivative trade will actually come home to roost.
Fastest growth, biggest risks
All this creates a conundrum, to use Alan Greenspan's word de jour, for investors. The fastest economic growth in the global economy over the next decade -- possibly the only growth in the world economy outside the U.S. -- will take place in China and India.
At the same time, the biggest risks of either a major institutional crash or a financial- system crisis are to be found in the relatively underdeveloped financial markets of those countries.
The more abrupt the transition from a cheap-money to a less-cheap-money cycle -- and the faster interest rates rise -- the slower global economic growth in general. And, also, the higher the risk of a country-specific financial crisis in the financial markets of these key countries in the developing world.
Overseas investing strategy
I think there's a way around this problem that maximizes any investor's potential return from growth in these developing markets and minimizes that investor's potential exposure to a market-specific financial crisis. The key is to own the shares of companies that do business in China and India and that derive a substantial portion of their current revenues and future growth from those markets, but that are listed on financial markets that require reasonably transparent public financial reporting and that derive their capital from relatively mature capital markets. In other words, I think you get the most bang and the least bust by investing in China and India through stocks traded on the U.S. financial markets.
In my last two columns, I think I've put together two basic rules for finding s
Everyone knows the market's headed for a drubbing, right? Here's why it might not happen -- and why one savvy pro will likely be buying if it does.
By Jon D. Markman
As the first quarter of 2005 fades into investors’ rearview mirrors, the financial media has been quick to recap its results with a jaundiced eye. 'Twas bad, to be sure, for all indexes and sectors not related to energy, utilities or basic materials, and it seems that everyone knows now that the bad tidings will continue as the feds bear down on a new round of villainous CEOs.
But will the past quarter’s travails really continue in a straight line right through into the new quarter, or is a confounding reversal on the horizon?
It’s tempting to see the world of finance as if it were on rails, advancing from point A to point B without a squiggle along the route. But unfortunately, it does not work out that way. Bad quarters sometimes lead to good ones, just as one-time heroes like Maurice Greenberg, former head of American International Group (AIG, news, msgs), can morph enigmatically into goats.
There’s little doubt at present that a combination of higher interest rates, higher energy prices, weaker domestic employment and softening global demand will ultimately pummel the market this year. How could it not? Yet before the drubbing begins in earnest, there could be some remarkable trading opportunities in the opposite direction, and soon. And there’s always the possibility, remote as it may be, that the recent decline has sufficed to discount market participants’ expectations of rough stuff ahead.
Is he crazy?
Robert Drach, a cynical but deadly accurate veteran of the investment advisory business, has kept his clients primarily in cash during the past year. But last week, he began a process that took his accounts from 2% in stocks to 26% invested and now 50% invested. Drach revels in market declines, as he crows that they afford him an opportunity to exploit less experienced players’ negative emotions to his advantage. "At this juncture we prefer the market splat so we can move to full investment without interruption," he said on April 3, recommending the purchase of beaten-up stalwarts such as Doral Financial (DRL, news, msgs) and Citigroup (C, news, msgs). "The process of profit extraction requires taking advantage of fellow market participants. Almost every position we purchase is directly against prevailing sentiment."
Drach went on to repeat two themes he has successfully articulated for 30 years: That successful investors buy wholesale (when stocks are cheap) and sell retail (when they’re back to full price), and that the media stampedes otherwise intelligent people into making loss-inducing emotional decisions based on " after-the-fact" price change.
Is he crazy? Maybe not. The Nasdaq Composite ($COMPX) is down 9% from New Year’s Day, which sounds pretty bad. By no means is this sort of slough uncommon, however. Even in a raging bull market, stocks can tumble dramatically for multimonth periods.
In 1995, the Nasdaq Composite was up 39% overall. Yet there was an 8% decline from September through October -- 1,069 to 982.
In 1996, the Nasdaq Composite was up 22.6% overall. Yet there was a 19% decline from May to July -- 1,251 to 1,017.
In 1997, the Nasdaq was up 21.6% overall. Yet there was a 13% decline from January to April -- 1,381 to 1,206.
In 1998, the Nasdaq was up 38% overall. Yet there was a 34% decline from July to October -- 2,028 to 1,343.
In 1999, the Nasdaq was up 86% overall. Yet there was a 14% decline from July through August -- 2,840 to 2,442.
In 1993, the last time that the University of North Carolina won the NCAA basketball championship, the Nasdaq 100 ($NDX.X) was off 9% through the third week of April as investors reacted to the World Trade Center car-bomb attack and the clumsy start of the first Clinton administration. But the index, a proxy for the shares of big tech companies, went on to rally 16% through the end of the year even as investors were later forced to absorb the country’s tragic loss of pride and military personnel in Somalia.
Watch for dark clouds to lift
Rather than blindly extrapolating the first quarter into the future, therefore, it might be best to stay flexible and prepare mentally for the possibility that the dark mood might lift, at least temporarily. Let’s catalog what we think we know for sure:
The China economic boom is for real, sort of. The big Asian country is using 55% of the world’s cement as it barrels toward its plan to triple its network of highways by 2008. Despite having four times more people than the United States, China currently has a third as many railways and one-fifteenth as many airports, according to researcher Jim William of Williams Inference Center. This sounds like a recipe for a continuation of the first quarter’s rise in the shares of companies that produce commodities such as steel, coal and concrete -- and thus higher raw materials prices and inflation for everyone else. Yet you still have to wonder why, if China is so hot, its stock market is sitting at six-year lows.
Energy prices are skyrocketing, maybe. The price of crude oil is up more than 60% in the past year as investors come to grips with an issue that I pointed out a year ago: That OPEC’s ability to pump out excess high-quality petroleum to meet the rising needs of India and China -- not to mention the desire on the part of Japan and the United States to boost stockpiles for a rainy day -- is suspect. Oil prices dampen the world economy on a one-year lag as cheaper inventories are gradually drawn down and replaced by the more expensive stuff, so it’s about time for the drag line to hit if it’s going to. Yet it’s also well-documented that higher prices encourage conservation and sap demand. If oil buyers get a strong whiff of any slackening in end markets, they will almost certainly back away. One experienced oil trader who has made a ton of money long this year told me that he’ll sell heavily if crude fails to move through $58. He expects to see it in the mid-$40s by summer.
Interest rates are bound to move higher, perhaps. The conventional wisdom believes that the Federal Reserve will push short-term interest rates a quarter of a percentage point higher at every Federal Open Market Committee meeting from now until Chairman Alan Greenspan presumably leaves his post early next year. That would put the federal funds rate at 4.25%, a level that the central bank has deemed pleasantly "neutral" -- which is to say, neither stimulative to the economy, nor a drain. Yet the Fed has proven itself flexible, if nothing else, and last week at a major economic conference at Princeton University, Fed governors reportedly acknowledged that they are sensitive to short-term economic data and could hold fire if presented with persuasive evidence that tight-money policies were leading to a U.S. slowdown. With companies clearly so fretful about the future that hiring is at an astonishing multiyear low, analysts say another weak employment report could stay the Fed’s hand -- a move that could cheer investors.
In sum, while there is plenty to fret about in the long term, in the short term there are some potential mood-lifters on the horizon that could bring brave bargain-hunters back into stocks. For some ideas, we can turn, as always, to StockScouter. The 50 picks in our January benchmark portfolio are up 5.4% as a group so far this year, or more than five times better than the market, on the back of successful recommendations of Hawaii-based oil and land conglomerate Barnwell Industries (BRN, news, msgs), up 49%; energy services provider Todco (THE, news, msgs), up 45%; and Gulf of Mexico oil and gas explorer Energy Partners (EPL, news, msgs), up 34%.
The latest benchmark portfolio continues to highlight energy names, but also mixes in some retailers. Some of the top recommendations for the next six months are pipeline provider Holly Energy Partners (HEP, news, msgs), LL&E Royalty Trust (LRT, news, msgs), driller Rowan (RDC, news, msgs), retailer American Eagle Outfitters (AEOS, news, msgs), children’s clothing maker Oshkosh B’Gosh (GOSHA, news, msgs) and chemical maker American Vanguard (AVD, news, msgs).
Fine Print
Robert Drach does not have a Web site of his own, but maintains a slimmed-down version of his strategy at the site of public television’s National Business Report. He is a frequent guest of host Paul Kangas. Click here for his model portfolio, the list of high-quality stocks he regularly trades in and out of. . . . The last time I featured Drach in my column was just before the Iraq war in February 2003, when he was cheerfully buying as prices plummeted. . . . One of the better places to keep up on energy and oil-shipping news is at the Web site of Tankerworld. The reporters at the site seem to break quite a bit of news. A recent report noted that 100 single-hull ships must be scrapped this month due to international requirements that tankers be doubled-hulled. Their insight was that the massive "ship-breaking" operation, as the process is termed, will flood the world market with scrap steel, probably depressing prices. . . . On Jan. 19, I explained that asbestos legislation was bogging down in Congress, and that companies facing class-action suits would probably not get relief this year. One highlighted company, Owens Corning (OWENQ, news, msgs), got good news and bad news on Friday. A judge decided it likely owed $7 billion in damages. Litigants wanted the number set at around $11 billion, while company creditors had argued for $2 billion to $3 billion. (For further details, read a Miami Herald article here. Registration required.)
By Jon D. Markman
As the first quarter of 2005 fades into investors’ rearview mirrors, the financial media has been quick to recap its results with a jaundiced eye. 'Twas bad, to be sure, for all indexes and sectors not related to energy, utilities or basic materials, and it seems that everyone knows now that the bad tidings will continue as the feds bear down on a new round of villainous CEOs.
But will the past quarter’s travails really continue in a straight line right through into the new quarter, or is a confounding reversal on the horizon?
It’s tempting to see the world of finance as if it were on rails, advancing from point A to point B without a squiggle along the route. But unfortunately, it does not work out that way. Bad quarters sometimes lead to good ones, just as one-time heroes like Maurice Greenberg, former head of American International Group (AIG, news, msgs), can morph enigmatically into goats.
There’s little doubt at present that a combination of higher interest rates, higher energy prices, weaker domestic employment and softening global demand will ultimately pummel the market this year. How could it not? Yet before the drubbing begins in earnest, there could be some remarkable trading opportunities in the opposite direction, and soon. And there’s always the possibility, remote as it may be, that the recent decline has sufficed to discount market participants’ expectations of rough stuff ahead.
Is he crazy?
Robert Drach, a cynical but deadly accurate veteran of the investment advisory business, has kept his clients primarily in cash during the past year. But last week, he began a process that took his accounts from 2% in stocks to 26% invested and now 50% invested. Drach revels in market declines, as he crows that they afford him an opportunity to exploit less experienced players’ negative emotions to his advantage. "At this juncture we prefer the market splat so we can move to full investment without interruption," he said on April 3, recommending the purchase of beaten-up stalwarts such as Doral Financial (DRL, news, msgs) and Citigroup (C, news, msgs). "The process of profit extraction requires taking advantage of fellow market participants. Almost every position we purchase is directly against prevailing sentiment."
Drach went on to repeat two themes he has successfully articulated for 30 years: That successful investors buy wholesale (when stocks are cheap) and sell retail (when they’re back to full price), and that the media stampedes otherwise intelligent people into making loss-inducing emotional decisions based on " after-the-fact" price change.
Is he crazy? Maybe not. The Nasdaq Composite ($COMPX) is down 9% from New Year’s Day, which sounds pretty bad. By no means is this sort of slough uncommon, however. Even in a raging bull market, stocks can tumble dramatically for multimonth periods.
In 1995, the Nasdaq Composite was up 39% overall. Yet there was an 8% decline from September through October -- 1,069 to 982.
In 1996, the Nasdaq Composite was up 22.6% overall. Yet there was a 19% decline from May to July -- 1,251 to 1,017.
In 1997, the Nasdaq was up 21.6% overall. Yet there was a 13% decline from January to April -- 1,381 to 1,206.
In 1998, the Nasdaq was up 38% overall. Yet there was a 34% decline from July to October -- 2,028 to 1,343.
In 1999, the Nasdaq was up 86% overall. Yet there was a 14% decline from July through August -- 2,840 to 2,442.
In 1993, the last time that the University of North Carolina won the NCAA basketball championship, the Nasdaq 100 ($NDX.X) was off 9% through the third week of April as investors reacted to the World Trade Center car-bomb attack and the clumsy start of the first Clinton administration. But the index, a proxy for the shares of big tech companies, went on to rally 16% through the end of the year even as investors were later forced to absorb the country’s tragic loss of pride and military personnel in Somalia.
Watch for dark clouds to lift
Rather than blindly extrapolating the first quarter into the future, therefore, it might be best to stay flexible and prepare mentally for the possibility that the dark mood might lift, at least temporarily. Let’s catalog what we think we know for sure:
The China economic boom is for real, sort of. The big Asian country is using 55% of the world’s cement as it barrels toward its plan to triple its network of highways by 2008. Despite having four times more people than the United States, China currently has a third as many railways and one-fifteenth as many airports, according to researcher Jim William of Williams Inference Center. This sounds like a recipe for a continuation of the first quarter’s rise in the shares of companies that produce commodities such as steel, coal and concrete -- and thus higher raw materials prices and inflation for everyone else. Yet you still have to wonder why, if China is so hot, its stock market is sitting at six-year lows.
Energy prices are skyrocketing, maybe. The price of crude oil is up more than 60% in the past year as investors come to grips with an issue that I pointed out a year ago: That OPEC’s ability to pump out excess high-quality petroleum to meet the rising needs of India and China -- not to mention the desire on the part of Japan and the United States to boost stockpiles for a rainy day -- is suspect. Oil prices dampen the world economy on a one-year lag as cheaper inventories are gradually drawn down and replaced by the more expensive stuff, so it’s about time for the drag line to hit if it’s going to. Yet it’s also well-documented that higher prices encourage conservation and sap demand. If oil buyers get a strong whiff of any slackening in end markets, they will almost certainly back away. One experienced oil trader who has made a ton of money long this year told me that he’ll sell heavily if crude fails to move through $58. He expects to see it in the mid-$40s by summer.
Interest rates are bound to move higher, perhaps. The conventional wisdom believes that the Federal Reserve will push short-term interest rates a quarter of a percentage point higher at every Federal Open Market Committee meeting from now until Chairman Alan Greenspan presumably leaves his post early next year. That would put the federal funds rate at 4.25%, a level that the central bank has deemed pleasantly "neutral" -- which is to say, neither stimulative to the economy, nor a drain. Yet the Fed has proven itself flexible, if nothing else, and last week at a major economic conference at Princeton University, Fed governors reportedly acknowledged that they are sensitive to short-term economic data and could hold fire if presented with persuasive evidence that tight-money policies were leading to a U.S. slowdown. With companies clearly so fretful about the future that hiring is at an astonishing multiyear low, analysts say another weak employment report could stay the Fed’s hand -- a move that could cheer investors.
In sum, while there is plenty to fret about in the long term, in the short term there are some potential mood-lifters on the horizon that could bring brave bargain-hunters back into stocks. For some ideas, we can turn, as always, to StockScouter. The 50 picks in our January benchmark portfolio are up 5.4% as a group so far this year, or more than five times better than the market, on the back of successful recommendations of Hawaii-based oil and land conglomerate Barnwell Industries (BRN, news, msgs), up 49%; energy services provider Todco (THE, news, msgs), up 45%; and Gulf of Mexico oil and gas explorer Energy Partners (EPL, news, msgs), up 34%.
The latest benchmark portfolio continues to highlight energy names, but also mixes in some retailers. Some of the top recommendations for the next six months are pipeline provider Holly Energy Partners (HEP, news, msgs), LL&E Royalty Trust (LRT, news, msgs), driller Rowan (RDC, news, msgs), retailer American Eagle Outfitters (AEOS, news, msgs), children’s clothing maker Oshkosh B’Gosh (GOSHA, news, msgs) and chemical maker American Vanguard (AVD, news, msgs).
Fine Print
Robert Drach does not have a Web site of his own, but maintains a slimmed-down version of his strategy at the site of public television’s National Business Report. He is a frequent guest of host Paul Kangas. Click here for his model portfolio, the list of high-quality stocks he regularly trades in and out of. . . . The last time I featured Drach in my column was just before the Iraq war in February 2003, when he was cheerfully buying as prices plummeted. . . . One of the better places to keep up on energy and oil-shipping news is at the Web site of Tankerworld. The reporters at the site seem to break quite a bit of news. A recent report noted that 100 single-hull ships must be scrapped this month due to international requirements that tankers be doubled-hulled. Their insight was that the massive "ship-breaking" operation, as the process is termed, will flood the world market with scrap steel, probably depressing prices. . . . On Jan. 19, I explained that asbestos legislation was bogging down in Congress, and that companies facing class-action suits would probably not get relief this year. One highlighted company, Owens Corning (OWENQ, news, msgs), got good news and bad news on Friday. A judge decided it likely owed $7 billion in damages. Litigants wanted the number set at around $11 billion, while company creditors had argued for $2 billion to $3 billion. (For further details, read a Miami Herald article here. Registration required.)
World Bank Warns U.S. to Cut Deficits
April 06, 2005 3:00:00 PM ET
PARIS (Reuters) - Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published on Thursday.
Francois Bourguignon told the Les Echos newspaper it was too early to talk of a speculative bubble but that the United States had to cut its deficits to head off a crisis. The paper released the text of the interview ahead of publication.
``For the moment I would not speak of a speculative bubble but of the danger of a systemic crisis linked to the accumulation of foreign exchange reserves,'' Bourguignon told the paper.
``Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.
``Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move toward the yen and the euro. That would confront us with a real systemic risk.''
Cutting the U.S. deficit was key, Bourguignon said. The World Bank foresaw an orderly adjustment with the United States announcing a progressive reduction in its budget deficit accompanied by interest rate rises.
``Too drastic a program would plunge the United States into recession,'' he said.
Recent pronouncements by Alan Greenspan, chairman of the U.S. Federal Reserve, suggested things were changing, he said, but ``we are at the mercy of the nervousness of market dealers.
``Today, no catastrophe is anticipated in the coming six to nine months. So I am not yet totally pessimistic,'' Bourguignon added.
© 2005 Reuters
April 06, 2005 3:00:00 PM ET
PARIS (Reuters) - Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published on Thursday.
Francois Bourguignon told the Les Echos newspaper it was too early to talk of a speculative bubble but that the United States had to cut its deficits to head off a crisis. The paper released the text of the interview ahead of publication.
``For the moment I would not speak of a speculative bubble but of the danger of a systemic crisis linked to the accumulation of foreign exchange reserves,'' Bourguignon told the paper.
``Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.
``Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move toward the yen and the euro. That would confront us with a real systemic risk.''
Cutting the U.S. deficit was key, Bourguignon said. The World Bank foresaw an orderly adjustment with the United States announcing a progressive reduction in its budget deficit accompanied by interest rate rises.
``Too drastic a program would plunge the United States into recession,'' he said.
Recent pronouncements by Alan Greenspan, chairman of the U.S. Federal Reserve, suggested things were changing, he said, but ``we are at the mercy of the nervousness of market dealers.
``Today, no catastrophe is anticipated in the coming six to nine months. So I am not yet totally pessimistic,'' Bourguignon added.
© 2005 Reuters
Pat494
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Auckland
Hi Ducatti,
My 2 brain cells are still reeling with all that interesting and erudite stuff you have posted above.
Could'nt help noticing that you hail from Auckland. I was a student of the Uni there many moons ago whose only claim to fame was getting around all 32 pubs in Queen St area or so they said. My recollections rather faded after 20 something bars and a brawl. Guess things are more civilised these days ??
good luck
Hi Ducatti,
My 2 brain cells are still reeling with all that interesting and erudite stuff you have posted above.
Could'nt help noticing that you hail from Auckland. I was a student of the Uni there many moons ago whose only claim to fame was getting around all 32 pubs in Queen St area or so they said. My recollections rather faded after 20 something bars and a brawl. Guess things are more civilised these days ??
good luck
Associated Press
Earnings Season Gets Under Way This Week
Sunday April 10, 5:29 pm ET
By Michael J. Martinez, AP Business Writer
Wall Street to Eye Earnings to See if Soaring Energy Prices Sap Strength From Corporate America
NEW YORK (AP) -- Although oil prices dropped sharply last week, Wall Street will be eyeing the first wave of corporate earnings reports to see whether climbing energy prices are sapping strength from corporate America.
While oil prices last week posted their biggest weekly loss since December, oil remains above $53 per barrel, and those prices could translate into higher transportation and energy costs for many companies, especially retailers and industrials.
In addition to eroding the bottom line, Wall Street fears those higher costs could be passed onto consumers. Should that happen, one of two things could result -- either consumers spend less, curbing the economy, or those higher prices could trigger inflation.
After a month in which even uttering the word inflation in earshot of investors seemed to push stocks lower, that's the last thing Wall Street wants to see.
That's also why the markets rallied last week as crude oil futures fell for five consecutive sessions, dropping from an intraday record of $58.28 on Monday to settle Friday at $53.32. For the week, the Dow Jones industrial average rose 0.55 percent, the Standard & Poor's 500 index was up 0.71 percent, and the Nasdaq composite index gained 0.73 percent.
ECONOMIC DATA
The government will give investors a reading on the economy this week, including the latest on the nation's trade deficit, retail sales strength and industrial production.
On Tuesday, the Department of Commerce is expected to report another increase in America's trade deficit. Economists predict the deficit will have climbed to $59 billion in February, up slightly from $58.3 billion in January.
Retail sales will be in focus Wednesday. For March, the Commerce Department is expected to report a 0.7 percent increase in sales, up from a 0.5 percent hike in February. Without the surprisingly healthy automotive sector, retail sales were expected to rise 0.6 percent for March from a 0.4 percent increase in February.
On Friday, the Federal Reserve will report on the nation's industrial sector. Industrial production is expected to rise 0.3 percent, the same rate as reported for February.
EARNINGS
First-quarter earnings season begins in earnest this week, with a number of notable companies releasing their quarterly results and giving forecasts for current and future quarters.
General Electric Co. is considered a significant barometer for earnings, given the conglomerate's varied holdings in media, financing and manufacturing. The Dow industrial is expected to earn 37 cents per share when it reports Friday morning, up from 32 cents per share in the first quarter a year ago. The stock has climbed 21 percent from its 52-week low of $29.55 on May 10, 2004, closing Friday at $35.74.
Fellow Dow industrial Citigroup Inc. has seen its stock fall sharply since early February, a victim of the stock market's distaste for the financial sector as interest rates rise and inflation becomes an issue. Citigroup has fallen 8.8 percent since closing at $49.78 on Feb. 8, finishing Friday at $45.40. The company is expected to post profits of $1.02 per share, up from 98 cents a year ago, when it reports earnings before Friday's session.
On Wednesday, chip maker Advanced Micro Devices Inc. is expected to report earnings of 3 cents per share, down sharply from a profit of 12 cents per share a year ago. Following the trend of the tech sector as a whole, AMD has fallen off sharply since reaching its 52-week high of $24.95 on Dec. 6, closing 31.5 percent lower at $17.09 on Friday.
EVENTS
On Tuesday afternoon, the Federal Reserve will release the minutes from the Open Market Committee's March 22 meeting, at which it raised interest rates by a quarter percentage point to 2.75 percent and warned that inflation may become an issue. The Fed minutes have given investors hints on the thinking of committee members, and in the past have triggered inflation concerns and pushed stocks lower.
Earnings Season Gets Under Way This Week
Sunday April 10, 5:29 pm ET
By Michael J. Martinez, AP Business Writer
Wall Street to Eye Earnings to See if Soaring Energy Prices Sap Strength From Corporate America
NEW YORK (AP) -- Although oil prices dropped sharply last week, Wall Street will be eyeing the first wave of corporate earnings reports to see whether climbing energy prices are sapping strength from corporate America.
While oil prices last week posted their biggest weekly loss since December, oil remains above $53 per barrel, and those prices could translate into higher transportation and energy costs for many companies, especially retailers and industrials.
In addition to eroding the bottom line, Wall Street fears those higher costs could be passed onto consumers. Should that happen, one of two things could result -- either consumers spend less, curbing the economy, or those higher prices could trigger inflation.
After a month in which even uttering the word inflation in earshot of investors seemed to push stocks lower, that's the last thing Wall Street wants to see.
That's also why the markets rallied last week as crude oil futures fell for five consecutive sessions, dropping from an intraday record of $58.28 on Monday to settle Friday at $53.32. For the week, the Dow Jones industrial average rose 0.55 percent, the Standard & Poor's 500 index was up 0.71 percent, and the Nasdaq composite index gained 0.73 percent.
ECONOMIC DATA
The government will give investors a reading on the economy this week, including the latest on the nation's trade deficit, retail sales strength and industrial production.
On Tuesday, the Department of Commerce is expected to report another increase in America's trade deficit. Economists predict the deficit will have climbed to $59 billion in February, up slightly from $58.3 billion in January.
Retail sales will be in focus Wednesday. For March, the Commerce Department is expected to report a 0.7 percent increase in sales, up from a 0.5 percent hike in February. Without the surprisingly healthy automotive sector, retail sales were expected to rise 0.6 percent for March from a 0.4 percent increase in February.
On Friday, the Federal Reserve will report on the nation's industrial sector. Industrial production is expected to rise 0.3 percent, the same rate as reported for February.
EARNINGS
First-quarter earnings season begins in earnest this week, with a number of notable companies releasing their quarterly results and giving forecasts for current and future quarters.
General Electric Co. is considered a significant barometer for earnings, given the conglomerate's varied holdings in media, financing and manufacturing. The Dow industrial is expected to earn 37 cents per share when it reports Friday morning, up from 32 cents per share in the first quarter a year ago. The stock has climbed 21 percent from its 52-week low of $29.55 on May 10, 2004, closing Friday at $35.74.
Fellow Dow industrial Citigroup Inc. has seen its stock fall sharply since early February, a victim of the stock market's distaste for the financial sector as interest rates rise and inflation becomes an issue. Citigroup has fallen 8.8 percent since closing at $49.78 on Feb. 8, finishing Friday at $45.40. The company is expected to post profits of $1.02 per share, up from 98 cents a year ago, when it reports earnings before Friday's session.
On Wednesday, chip maker Advanced Micro Devices Inc. is expected to report earnings of 3 cents per share, down sharply from a profit of 12 cents per share a year ago. Following the trend of the tech sector as a whole, AMD has fallen off sharply since reaching its 52-week high of $24.95 on Dec. 6, closing 31.5 percent lower at $17.09 on Friday.
EVENTS
On Tuesday afternoon, the Federal Reserve will release the minutes from the Open Market Committee's March 22 meeting, at which it raised interest rates by a quarter percentage point to 2.75 percent and warned that inflation may become an issue. The Fed minutes have given investors hints on the thinking of committee members, and in the past have triggered inflation concerns and pushed stocks lower.
As usual SOC,
Way behind in understanding. This brings to the fore an interesting disconnect.
You have listed in your personal information that you are a ................
Occupation:
TRADER
Country:
United Kingdom
Location:
sussex
Biography:
VETERAN TRADER
Interests:
VINTAGE AIRCRAFT
Trading Style:
long term investor
List of Markets Traded:
US STOCKS, FUTURES
What method do you use to Trade?:
POSITIONAL
Long term investor.
Now I classify myself also as an Investor, I do not however place any "timeframe" upon it.
Method, sees you write "POSITIONAL" which implies, and is consistent with your P&V postings on trading,.........that you in point of fact move in and out of positions.
Why the contradiction?
Why, if in point of fact you are a "Long term investor" would you not be interested, even if you did not directly trade the "News" or underlying economic or business cycle fundamentals, in having an understanding of them.
The answer, is of course that you are no more an investor, than are my 3 cats.
You have not the faintest idea of fundamentals, and as many with no knowledge, they bore you, hence the "yawn"
It is quite obvious from your comment................
That you have not read the article, or even worse, read it, but not understood what you have read, that there are positives and negatives.
The role of an investor, through analysis, is to assess whether the underlying factors bode well or ill for their methodology.
That you are clueless becomes ever more apparent with every post of yours that I read.
That you keep popping up on threads that are out of your depth.........pointless
That you make no reasoned, logical, or calculative analysis.......illuminating.
That you endlessly repeat the same repetitive claims in every post.......interesting.
That you never produce anything even approaching "real time".....predictable
cheers d998
Way behind in understanding. This brings to the fore an interesting disconnect.
You have listed in your personal information that you are a ................
Occupation:
TRADER
Country:
United Kingdom
Location:
sussex
Biography:
VETERAN TRADER
Interests:
VINTAGE AIRCRAFT
Trading Style:
long term investor
List of Markets Traded:
US STOCKS, FUTURES
What method do you use to Trade?:
POSITIONAL
Long term investor.
Now I classify myself also as an Investor, I do not however place any "timeframe" upon it.
Method, sees you write "POSITIONAL" which implies, and is consistent with your P&V postings on trading,.........that you in point of fact move in and out of positions.
Why the contradiction?
Why, if in point of fact you are a "Long term investor" would you not be interested, even if you did not directly trade the "News" or underlying economic or business cycle fundamentals, in having an understanding of them.
The answer, is of course that you are no more an investor, than are my 3 cats.
You have not the faintest idea of fundamentals, and as many with no knowledge, they bore you, hence the "yawn"
It is quite obvious from your comment................
That you have not read the article, or even worse, read it, but not understood what you have read, that there are positives and negatives.
The role of an investor, through analysis, is to assess whether the underlying factors bode well or ill for their methodology.
That you are clueless becomes ever more apparent with every post of yours that I read.
That you keep popping up on threads that are out of your depth.........pointless
That you make no reasoned, logical, or calculative analysis.......illuminating.
That you endlessly repeat the same repetitive claims in every post.......interesting.
That you never produce anything even approaching "real time".....predictable
cheers d998
Just as a practical example, as there would seem to be some value available, and the DJI is a diversified list, I shall run a position in DIAMONDS.
So, buy 200 shares @ the OPEN
Entry Price @ OPEN
Stoploss......No stoploss
Exit @ 12000
cheers d998
So, buy 200 shares @ the OPEN
Entry Price @ OPEN
Stoploss......No stoploss
Exit @ 12000
cheers d998
MarketWatch
2 of 3 Dow Theory letters still bullish after Thursday
Friday April 15, 12:01 am ET
By Mark Hulbert
Not necessarily, say editors
ANNANDALE, Va. (MarketWatch) -- "Hey, a-----," a reader e-mailed me Thursday.
He was pointing out -- in a helpful way, of course -- that a column in early March in which I reported a Dow Theory buy signal came at what has turned out to be the exact top. (Read that column.)
With both the Dow Jones Industrials (^DJI - News) and Dow Jones Transports (^TRAN - News) closing Thursday below their January lows, it certainly looks as though this buy signal was a big failure.
Maybe this oldest of market timing systems should be called the Dumb Theory, another reader wrote.
This barrage of e-mails prompted me to check in with the editors of the three newsletters I monitor who base their market timing on the Dow Theory. As my e-mailers expected, one of them did interpret Thursday's action as confirming a Dow Theory sell signal. However, the other two did not.
Richard Russell, editor of Dow Theory Letters, is the lone bear of these three. After Thursday's trading session, he wrote: "Today the Dow [Industrials] and the [Dow] Transports both closed below their January lows. Now we have what I would call a Dow Theory bear signal in that both Averages have etched out definite downward zig-zag formations."
Why don't the other two Dow Theorists I monitor agree with Russell's interpretation? A little background is helpful to understand their position.
In very general terms, here are the three preconditions that must be met in order for a Dow Theory sell signal to be generated:
First: From joint new highs in both the industrials and transports averages, the market must experience a significant correction.
Second: In the subsequent rally off of the lows set in that correction, either one or both of these two averages must fail to surpass their previous highs.
Third: Following this failure, both averages must proceed to break below the lows set in the first step's correction.
According to Richard Moroney, editor of Dow Theory Forecasts, we have yet to make it beyond the first of these three steps. After all, we don't yet know whether the correction that began following the averages' early March highs is over. Only when it has, according to Moroney, will we be able to proceed to the next step and focus on the averages' rallies off those lows.
So reports of a Dow Theory sell signal are premature at best, according to Moroney. It will be several more months at a minimum before such a sell signal would become even possible.
In the meantime, Moroney remains bullish, since that the last signal generated by the system was a "buy."
Jack Schannep, editor of TheDowTheory.com, agrees with Moroney's interpretation. In order for a sell signal to be generated, Schannep wrote after Thursday's close, "it would require a 'failed' bounce after this pullback and then new lows."
Until and unless that happens, he also believes that the Dow Theory is bullish.
Unfortunately, the Hulbert Financial Digest's track records for these three newsletters provide little assistance in deciding which of them are more worthy of our attention. Though the HFD has been tracking Schannep's record for just a couple of years, it has performance data for the other two Dow Theory services dating back to 1980, some 25 years ago -- and their records are broadly similar.
Consider first a portfolio that used Dow Theory Forecasts' timing advice to invest either in the Wilshire 5000 index or 90-day T-Bills. From mid-1980 through this past March 31, this portfolio produced a 12.1 percent annualized return, according to the Hulbert Financial Digest.
To be sure, that's 1.7 percentage points per year ahead of the return of a portfolio that instead relied on Dow Theory Letters' timing advice over this period.
However, because the Dow Theory Letter's portfolio was significantly less risky than Dow Theory Forecasts', its performance on a risk-adjusted basis is just as good (and, in fact, is slightly better).
All in all, therefore, a momentous showdown among the Dow Theorists is shaping up.
Bear facts: The best performing newsletters right now are significantly more bullish than the laggards.
Performance scoreboards, most/least popular stocks and funds, market exposure among timers
Profiles: Bob Brinker's Marketimer, Dow Theory Forecasts, The No-Load Fund Investor and OTC Insight
2 of 3 Dow Theory letters still bullish after Thursday
Friday April 15, 12:01 am ET
By Mark Hulbert
Not necessarily, say editors
ANNANDALE, Va. (MarketWatch) -- "Hey, a-----," a reader e-mailed me Thursday.
He was pointing out -- in a helpful way, of course -- that a column in early March in which I reported a Dow Theory buy signal came at what has turned out to be the exact top. (Read that column.)
With both the Dow Jones Industrials (^DJI - News) and Dow Jones Transports (^TRAN - News) closing Thursday below their January lows, it certainly looks as though this buy signal was a big failure.
Maybe this oldest of market timing systems should be called the Dumb Theory, another reader wrote.
This barrage of e-mails prompted me to check in with the editors of the three newsletters I monitor who base their market timing on the Dow Theory. As my e-mailers expected, one of them did interpret Thursday's action as confirming a Dow Theory sell signal. However, the other two did not.
Richard Russell, editor of Dow Theory Letters, is the lone bear of these three. After Thursday's trading session, he wrote: "Today the Dow [Industrials] and the [Dow] Transports both closed below their January lows. Now we have what I would call a Dow Theory bear signal in that both Averages have etched out definite downward zig-zag formations."
Why don't the other two Dow Theorists I monitor agree with Russell's interpretation? A little background is helpful to understand their position.
In very general terms, here are the three preconditions that must be met in order for a Dow Theory sell signal to be generated:
First: From joint new highs in both the industrials and transports averages, the market must experience a significant correction.
Second: In the subsequent rally off of the lows set in that correction, either one or both of these two averages must fail to surpass their previous highs.
Third: Following this failure, both averages must proceed to break below the lows set in the first step's correction.
According to Richard Moroney, editor of Dow Theory Forecasts, we have yet to make it beyond the first of these three steps. After all, we don't yet know whether the correction that began following the averages' early March highs is over. Only when it has, according to Moroney, will we be able to proceed to the next step and focus on the averages' rallies off those lows.
So reports of a Dow Theory sell signal are premature at best, according to Moroney. It will be several more months at a minimum before such a sell signal would become even possible.
In the meantime, Moroney remains bullish, since that the last signal generated by the system was a "buy."
Jack Schannep, editor of TheDowTheory.com, agrees with Moroney's interpretation. In order for a sell signal to be generated, Schannep wrote after Thursday's close, "it would require a 'failed' bounce after this pullback and then new lows."
Until and unless that happens, he also believes that the Dow Theory is bullish.
Unfortunately, the Hulbert Financial Digest's track records for these three newsletters provide little assistance in deciding which of them are more worthy of our attention. Though the HFD has been tracking Schannep's record for just a couple of years, it has performance data for the other two Dow Theory services dating back to 1980, some 25 years ago -- and their records are broadly similar.
Consider first a portfolio that used Dow Theory Forecasts' timing advice to invest either in the Wilshire 5000 index or 90-day T-Bills. From mid-1980 through this past March 31, this portfolio produced a 12.1 percent annualized return, according to the Hulbert Financial Digest.
To be sure, that's 1.7 percentage points per year ahead of the return of a portfolio that instead relied on Dow Theory Letters' timing advice over this period.
However, because the Dow Theory Letter's portfolio was significantly less risky than Dow Theory Forecasts', its performance on a risk-adjusted basis is just as good (and, in fact, is slightly better).
All in all, therefore, a momentous showdown among the Dow Theorists is shaping up.
Bear facts: The best performing newsletters right now are significantly more bullish than the laggards.
Performance scoreboards, most/least popular stocks and funds, market exposure among timers
Profiles: Bob Brinker's Marketimer, Dow Theory Forecasts, The No-Load Fund Investor and OTC Insight
Associated Press
GE's 1Q Profit Surges on Global Sales
Friday April 15, 2:41 pm ET
By John Christoffersen, AP Business Writer
General Electric's 1Q Profit Rises 25 Percent on Growing Global Sales, Acquisition
STAMFORD, Conn. (AP) -- General Electric Co. said Friday that first-quarter profit rose 25 percent from a year ago, powered by recently acquired health care and entertainment businesses, growing global sales and renewed strength across most of its businesses.
Net income grew to $4.04 billion, or 38 cents per share, for the three months ended March 31 from $3.24 billion, or 32 cents per share, a year ago. Revenue increased 19 percent to $39.8 billion from $33.4 billion last year.
The Fairfield-based industrial, financial and media powerhouse said nine of its 11 businesses delivered at least double-digit earnings growth.
"We're seeing broad-based strength for the company," Jeff Immelt, GE's chief executive, said during a conference call with analysts. "We think we have really strong momentum for the rest of this year and into the future."
Analysts surveyed by Thomson Financial were looking for the company to report earnings of 37 cents per share on sales of $38.02 billion in the latest quarter.
GE had a gain of about $86 million by reducing its stake in an insurance business.
Looking ahead, GE now expects full-year earnings of $1.78 to $1.83 per share, the high end of its target range. Analysts are predicting profit of $1.81 per share, on average.
GE's global revenues increased 33 percent as the company continued to step up its sales in China, the Middle East and Eastern Europe with water projects, power turbines and financial products such as credit cards and commercial loans.
"We are positive about what they've done globally," said Bob Schenosky, industrial analyst with Jefferies & Co. in New York. "It's great to see they have growing confidence in the expectations."
But Schenosky said he was looking for an increase at the higher end of the forecast as further evidence the company can outperform the market in the coming years. He also said GE should consider selling more slower-growth businesses, such as lighting and appliances.
After sluggish earnings in recent years, GE has embarked on a strategy of returning to double-digit profit growth by shedding less profitable businesses such as insurance and making major acquisitions in health care, entertainment and other faster growth areas such as water and security.
The new businesses, which include British medical products company Amersham PLC and the NBC merger with Universal, helped fuel the latest earnings growth.
Profits jumped 80 percent to $709 million at NBC Universal on strong sales from movies such as "Meet the Fockers" and "Ray." Health care profits increased 21 percent on strong demand for medical imaging products.
"They just put a good portfolio of businesses together and they are performing very well," said Lawrence J. Horan, research director at Parker Hunter in Pittsburgh.
The acquisition of Universal was timely because it came amid concerns about loss of ratings at NBC due to the end of popular programs such as Friends, Horan said.
While welcoming the overall results, a few analysts expressed concerns that margins in the health care business were lower than expected. GE said margins were affected by a charge, but should expand with new high-margin products this year.
Industrial sales increased 25 percent to $20.8 billion, reflecting the impact of acquisitions and solid growth of existing businesses. Financial services revenue rose 13 percent over last year to $19.1 billion.
The company said it received engine, locomotive and services orders in the quarter totaling $4.1 billion, up $600 million over the first quarter of last year.
The energy and insurance segments were the only businesses to experience a drop in profits. GE said it expects energy, a key segment that includes sales of power turbines, to return to profit growth this year as orders pick up after more than two years of declines and its wind power business continues to grow fast.
General Electric shares rose 90 cents, or 2.5 percent, to $36.40 in trading Friday afternoon on the New York Stock Exchange.The stock has traded at a 52-week range of $29.55 to $37.75.
GE's 1Q Profit Surges on Global Sales
Friday April 15, 2:41 pm ET
By John Christoffersen, AP Business Writer
General Electric's 1Q Profit Rises 25 Percent on Growing Global Sales, Acquisition
STAMFORD, Conn. (AP) -- General Electric Co. said Friday that first-quarter profit rose 25 percent from a year ago, powered by recently acquired health care and entertainment businesses, growing global sales and renewed strength across most of its businesses.
Net income grew to $4.04 billion, or 38 cents per share, for the three months ended March 31 from $3.24 billion, or 32 cents per share, a year ago. Revenue increased 19 percent to $39.8 billion from $33.4 billion last year.
The Fairfield-based industrial, financial and media powerhouse said nine of its 11 businesses delivered at least double-digit earnings growth.
"We're seeing broad-based strength for the company," Jeff Immelt, GE's chief executive, said during a conference call with analysts. "We think we have really strong momentum for the rest of this year and into the future."
Analysts surveyed by Thomson Financial were looking for the company to report earnings of 37 cents per share on sales of $38.02 billion in the latest quarter.
GE had a gain of about $86 million by reducing its stake in an insurance business.
Looking ahead, GE now expects full-year earnings of $1.78 to $1.83 per share, the high end of its target range. Analysts are predicting profit of $1.81 per share, on average.
GE's global revenues increased 33 percent as the company continued to step up its sales in China, the Middle East and Eastern Europe with water projects, power turbines and financial products such as credit cards and commercial loans.
"We are positive about what they've done globally," said Bob Schenosky, industrial analyst with Jefferies & Co. in New York. "It's great to see they have growing confidence in the expectations."
But Schenosky said he was looking for an increase at the higher end of the forecast as further evidence the company can outperform the market in the coming years. He also said GE should consider selling more slower-growth businesses, such as lighting and appliances.
After sluggish earnings in recent years, GE has embarked on a strategy of returning to double-digit profit growth by shedding less profitable businesses such as insurance and making major acquisitions in health care, entertainment and other faster growth areas such as water and security.
The new businesses, which include British medical products company Amersham PLC and the NBC merger with Universal, helped fuel the latest earnings growth.
Profits jumped 80 percent to $709 million at NBC Universal on strong sales from movies such as "Meet the Fockers" and "Ray." Health care profits increased 21 percent on strong demand for medical imaging products.
"They just put a good portfolio of businesses together and they are performing very well," said Lawrence J. Horan, research director at Parker Hunter in Pittsburgh.
The acquisition of Universal was timely because it came amid concerns about loss of ratings at NBC due to the end of popular programs such as Friends, Horan said.
While welcoming the overall results, a few analysts expressed concerns that margins in the health care business were lower than expected. GE said margins were affected by a charge, but should expand with new high-margin products this year.
Industrial sales increased 25 percent to $20.8 billion, reflecting the impact of acquisitions and solid growth of existing businesses. Financial services revenue rose 13 percent over last year to $19.1 billion.
The company said it received engine, locomotive and services orders in the quarter totaling $4.1 billion, up $600 million over the first quarter of last year.
The energy and insurance segments were the only businesses to experience a drop in profits. GE said it expects energy, a key segment that includes sales of power turbines, to return to profit growth this year as orders pick up after more than two years of declines and its wind power business continues to grow fast.
General Electric shares rose 90 cents, or 2.5 percent, to $36.40 in trading Friday afternoon on the New York Stock Exchange.The stock has traded at a 52-week range of $29.55 to $37.75.
Associated Press
Citigroup, Wachovia Report Strong Profits
Friday April 15, 1:57 pm ET
By Eileen Alt Powell, AP Business Writer
Citigroup, Wachovia Report Strong First-Quarter Earnings, Beating Projections
NEW YORK (AP) -- Citigroup Inc., the nation's largest financial institution, and Wachovia Corp., a fast-growing regional bank based in Charlotte, N.C., reported strong first-quarter earnings on Friday, soundly beating analysts' projections.
KeyCorp, which is based in Cleveland, also came in with earnings above estimates.
All of the banks benefited from improved consumer credit performance, which lowered delinquencies and defaults on outstanding loans. Citigroup, which is headquartered in New York, said revenues for corporate and investment banking also were strong.
But the nation's banks could face challenges in coming months as consumer deposit growth slows, said James Schmidt, head of the financial institutions investment team at John Hancock Funds in Boston.
"As money market yields get better and the stock market becomes attractive, you can figure that people won't put all their money in the banks," Schmidt said. That will reduce the banks' access to low-cost funds "and could mean less fee income," he said.
On the positive side, "we're starting to see good commercial loan growth" to balance out the softness in retail banking.
Citigroup said its profits rose to a record $5.44 billion, or $1.04 per share, in the January-March period, up from $5.27 billion, or $1.01 per share, a year earlier. Analysts surveyed by research firm Thomson Financial forecast profit of $1.02 per share.
Revenue climbed 6 percent to $21.5 billion in the first quarter, driven by retail banking, fixed income markets and transaction services.
Citigroup also announced the board authorized up to $15 billion in additional share repurchases, boosting the company's total authorization to $16.3 billion.
Citigroup shares rose 89 cents, or 2 percent, to $46.29 in afternoon trading on the New York Stock Exchange.
Mark Batty, an equity analyst with PNC Advisors in Philadelphia, said Citigroup's decision to buy back stock "is a really positive statement by the board of directors" about the bank's future performance. Such a buyback reduces the number of shares outstanding, giving the remaining shareholders larger percentage ownership of the company.
Chief Executive Charles Prince said in a statement accompanying the report that the quarterly results reflected "strong growth in customer balances, which helped to offset the impact of spread compression from rising short-term rates." He added that fixed income and transactions services businesses "performed exceptionally."
Wachovia, meanwhile, posted record first-quarter profits of $1.62 billion, or $1.01 a share, up from $1.25 billion, or 94 cents, a year earlier. The bank attributed the strong results to gains by all its major businesses.
Excluding merger expenses, the Charlotte-based bank would have earned $1.65 billion, or $1.03 a share. That beat by two cents the $1.01 expected by analysts surveyed by research firm Thomson Financial.
Revenues for the quarter were $6.47 billion, up from $5.69 billion a year earlier.
Wachovia shares fell 11 cents to $50 on the NYSE.
"Credit quality continued to be stellar across the board," Ken Thompson, chairman and chief executive, told a conference call with bank analysts.
The only earnings trouble spot was Wachovia Securities, the retail brokerage operation, which saw business decline in the quarter in what the company described as a difficult market.
Thompson was asked if he thought the bank's stock price was affected by a Wall Street Journal report Friday that investment bank Morgan Stanley had considered merging with several banks, including Wachovia.
"I was as surprised as you to see our name in that article," Thompson said. "We are not contemplating anything like that."
In Cleveland, KeyCorp said first-quarter earnings rose 5.6 percent from a year ago, reflecting stronger demand for commercial loans and growth in fee income.
Net income increased to $264 million, or 64 cents per share, in the January-March period from $250 million, or 59 cents per share, a year earlier. Revenue rose to $1.18 billion from $1.12 billion last year.
Analysts surveyed by Thomson Financial expected earnings of 61 cents per share on sales of $1.15 billion in the latest quarter.
KeyCorp shares rose $1.07, or 3.4 percent, to $32.59 on the NYSE.
KeyCorp's chairman and chief executive, Henry L. Meyer III, said the bank's nonperforming loans decreased for the 10th consecutive quarter to the lowest level in a decade.
"While a stronger economy contributed to these positive changes, they also reflect strategic business mix changes we've made to improve Key's risk profile," he said.
Looking ahead, the company said it expects second-quarter earnings to range from 62 cents to 66 cents per share, and predicts full-year income will range between $2.55 and $2.65 per share.
"We're cautiously optimistic, and maybe that is an overused term," Meyer said. "But this is a fragile marketplace."
Eds: AP Business Writer Paul Nowell contributed to this story.
Citigroup, Wachovia Report Strong Profits
Friday April 15, 1:57 pm ET
By Eileen Alt Powell, AP Business Writer
Citigroup, Wachovia Report Strong First-Quarter Earnings, Beating Projections
NEW YORK (AP) -- Citigroup Inc., the nation's largest financial institution, and Wachovia Corp., a fast-growing regional bank based in Charlotte, N.C., reported strong first-quarter earnings on Friday, soundly beating analysts' projections.
KeyCorp, which is based in Cleveland, also came in with earnings above estimates.
All of the banks benefited from improved consumer credit performance, which lowered delinquencies and defaults on outstanding loans. Citigroup, which is headquartered in New York, said revenues for corporate and investment banking also were strong.
But the nation's banks could face challenges in coming months as consumer deposit growth slows, said James Schmidt, head of the financial institutions investment team at John Hancock Funds in Boston.
"As money market yields get better and the stock market becomes attractive, you can figure that people won't put all their money in the banks," Schmidt said. That will reduce the banks' access to low-cost funds "and could mean less fee income," he said.
On the positive side, "we're starting to see good commercial loan growth" to balance out the softness in retail banking.
Citigroup said its profits rose to a record $5.44 billion, or $1.04 per share, in the January-March period, up from $5.27 billion, or $1.01 per share, a year earlier. Analysts surveyed by research firm Thomson Financial forecast profit of $1.02 per share.
Revenue climbed 6 percent to $21.5 billion in the first quarter, driven by retail banking, fixed income markets and transaction services.
Citigroup also announced the board authorized up to $15 billion in additional share repurchases, boosting the company's total authorization to $16.3 billion.
Citigroup shares rose 89 cents, or 2 percent, to $46.29 in afternoon trading on the New York Stock Exchange.
Mark Batty, an equity analyst with PNC Advisors in Philadelphia, said Citigroup's decision to buy back stock "is a really positive statement by the board of directors" about the bank's future performance. Such a buyback reduces the number of shares outstanding, giving the remaining shareholders larger percentage ownership of the company.
Chief Executive Charles Prince said in a statement accompanying the report that the quarterly results reflected "strong growth in customer balances, which helped to offset the impact of spread compression from rising short-term rates." He added that fixed income and transactions services businesses "performed exceptionally."
Wachovia, meanwhile, posted record first-quarter profits of $1.62 billion, or $1.01 a share, up from $1.25 billion, or 94 cents, a year earlier. The bank attributed the strong results to gains by all its major businesses.
Excluding merger expenses, the Charlotte-based bank would have earned $1.65 billion, or $1.03 a share. That beat by two cents the $1.01 expected by analysts surveyed by research firm Thomson Financial.
Revenues for the quarter were $6.47 billion, up from $5.69 billion a year earlier.
Wachovia shares fell 11 cents to $50 on the NYSE.
"Credit quality continued to be stellar across the board," Ken Thompson, chairman and chief executive, told a conference call with bank analysts.
The only earnings trouble spot was Wachovia Securities, the retail brokerage operation, which saw business decline in the quarter in what the company described as a difficult market.
Thompson was asked if he thought the bank's stock price was affected by a Wall Street Journal report Friday that investment bank Morgan Stanley had considered merging with several banks, including Wachovia.
"I was as surprised as you to see our name in that article," Thompson said. "We are not contemplating anything like that."
In Cleveland, KeyCorp said first-quarter earnings rose 5.6 percent from a year ago, reflecting stronger demand for commercial loans and growth in fee income.
Net income increased to $264 million, or 64 cents per share, in the January-March period from $250 million, or 59 cents per share, a year earlier. Revenue rose to $1.18 billion from $1.12 billion last year.
Analysts surveyed by Thomson Financial expected earnings of 61 cents per share on sales of $1.15 billion in the latest quarter.
KeyCorp shares rose $1.07, or 3.4 percent, to $32.59 on the NYSE.
KeyCorp's chairman and chief executive, Henry L. Meyer III, said the bank's nonperforming loans decreased for the 10th consecutive quarter to the lowest level in a decade.
"While a stronger economy contributed to these positive changes, they also reflect strategic business mix changes we've made to improve Key's risk profile," he said.
Looking ahead, the company said it expects second-quarter earnings to range from 62 cents to 66 cents per share, and predicts full-year income will range between $2.55 and $2.65 per share.
"We're cautiously optimistic, and maybe that is an overused term," Meyer said. "But this is a fragile marketplace."
Eds: AP Business Writer Paul Nowell contributed to this story.
Associated Press
Stocks Plunge on Inflation Worries, IBM
Friday April 15, 3:24 pm ET
By Michael J. Martinez, AP Business Writer
Stocks Plunge on Inflation Worries, Disappointing IBM Earnings; Dow Falls More Than 100 Points
NEW YORK (AP) -- Wall Street extended its selloff Friday after industrial production figures pointed to a slowing economy and higher prices on imports fed investors' inflation worries. Disappointing earnings from IBM Corp. exacerbated the selling, with the Dow Jones industrials down more than 100 points for the third day in row.
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In midafternoon trading, the Dow fell 113.50, or 1.1 percent, to 10,165.25, after falling 125 points on Thursday and 104 points on Wednesday. Broader stock indicators also lost considerable ground. The Standard & Poor's 500 index was down 10.41, or 0.9 percent, at 1,151.64, and the Nasdaq composite index dropped 25.79, or 1.3 percent, to 1,920.92.
An already uneasy market was disappointed as Federal Reserve reported drops in manufacturing and other industrial production. A Labor Department report also showed higher oil costs driving up import prices and worsening Wall Street's chronic inflation worries.
The negative impact of the economic data on stocks was bolstered by lower-than-expected profits from IBM. Strong earnings from General Electric Co. and Citigroup Inc. were overlooked, but analysts said earnings would nonetheless be a key factor in overcoming the recent selloff.
"Earnings are really the only hope for this market," said Brian Pears, head equity trader at Victory Capital Management in Cleveland. "If, on the whole, earnings can go up, then we might be able to overcome oil and inflation and all the other things. If they go down, we'll sell off further."
All three indexes fell to five-month lows on Thursday, prompted by disappointing earnings forecasts from Apple Computer Inc. and worries about the prospects for steady economic growth. Should the Dow close 100 points lower, it would be the first time since January 2003 that the index posted three straight 100-point losses.
Bonds continued to rally, with the yield on the 10-year Treasury note falling to 4.27 percent from 4.34 percent late Thursday. The dollar was mixed against other major currencies, while gold prices moved higher.
Crude oil prices were lower after Thursday's rally, with a barrel of light crude quoted at $50.55, down 58 cents, on the New York Mercantile Exchange.
The sharp rise in oil prices so far this year is to blame for the jump in import prices, the Labor Department said. Import costs rose 1.8 percent in March, but even without oil, prices rose 0.3 percent, which is still more than the 0.2 percent rise economists had expected.
"There's a lot of evidence that when we have oil averaging $53 or $54 per barrel, that's inflationary, and we got a whiff of that today in the import prices," said Peter Cardillo, chief strategist and senior vice president with S.W. Bach & Co. "It doesn't help that we're starting to see the economy enter a slowing mode heading into the second quarter here."
Investors looking at the Fed's industrial output report also questioned whether higher energy and materials costs were affecting manufacturing growth as well. Overall industrial production rose 0.3 percent in March, up from 0.2 percent in February, but the increase came only from utility production due to a colder-than-average month, and manufacturing and other industrial sectors showed losses for the first time in six months.
IBM said an inability to close deals before the end of the quarter, combined with higher pension costs, dragged on its earnings. The technology company, which missed Wall Street forecasts by 6 cents per share, hinted at a major restructuring this year. IBM tumbled $6.51, or 7.8 percent to $77.13.
General Electric rose 76 cents to $36.26 after the industrial and media conglomerate reported a 25 percent jump in first-quarter profits, with nine of the company's 11 disparate divisions reporting double-digit growth. The company's forecasts for the second quarter and full year were in line with Wall Street's estimates.
Citigroup beat Wall Street's expectations for its quarterly profits by 2 cents per share, with profits rising a modest 3 percent year-over-year. The financial company also said its board had authorized the repurchase of an additional $15 billion in stock. Citigroup added 79 cents to $46.19.
The lagging pharmaceutical sector saw new life after Genentech Inc. reported strong results from trials of its Avastin drug in breast cancer patients, and Ely Lilly & Co. received a favorable patent ruling on its best-selling anti-psychotic drug Zyprexa. Genentech surged $11.26, or 19.2 percent, to $69.89, while Lilly climbed $3.75 to $58.91.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.63 billion shares, compared with 1.45 billion at the same point on Thursday.
The Russell 2000 index of smaller companies was down 7.40, or 1.2 percent, at 584.54.
Thursday's losses in U.S. markets had a ripple effect overseas, as the Nikkei stock average fell 1.66 percent. In Europe, Britain's FTSE 100 closed down 1.09 percent, France's CAC-40 lost 1.92 percent for the session, and Germany's DAX index tumbled 2.04 percent in late trading.
New York Stock Exchange: http://www
Stocks Plunge on Inflation Worries, IBM
Friday April 15, 3:24 pm ET
By Michael J. Martinez, AP Business Writer
Stocks Plunge on Inflation Worries, Disappointing IBM Earnings; Dow Falls More Than 100 Points
NEW YORK (AP) -- Wall Street extended its selloff Friday after industrial production figures pointed to a slowing economy and higher prices on imports fed investors' inflation worries. Disappointing earnings from IBM Corp. exacerbated the selling, with the Dow Jones industrials down more than 100 points for the third day in row.
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In midafternoon trading, the Dow fell 113.50, or 1.1 percent, to 10,165.25, after falling 125 points on Thursday and 104 points on Wednesday. Broader stock indicators also lost considerable ground. The Standard & Poor's 500 index was down 10.41, or 0.9 percent, at 1,151.64, and the Nasdaq composite index dropped 25.79, or 1.3 percent, to 1,920.92.
An already uneasy market was disappointed as Federal Reserve reported drops in manufacturing and other industrial production. A Labor Department report also showed higher oil costs driving up import prices and worsening Wall Street's chronic inflation worries.
The negative impact of the economic data on stocks was bolstered by lower-than-expected profits from IBM. Strong earnings from General Electric Co. and Citigroup Inc. were overlooked, but analysts said earnings would nonetheless be a key factor in overcoming the recent selloff.
"Earnings are really the only hope for this market," said Brian Pears, head equity trader at Victory Capital Management in Cleveland. "If, on the whole, earnings can go up, then we might be able to overcome oil and inflation and all the other things. If they go down, we'll sell off further."
All three indexes fell to five-month lows on Thursday, prompted by disappointing earnings forecasts from Apple Computer Inc. and worries about the prospects for steady economic growth. Should the Dow close 100 points lower, it would be the first time since January 2003 that the index posted three straight 100-point losses.
Bonds continued to rally, with the yield on the 10-year Treasury note falling to 4.27 percent from 4.34 percent late Thursday. The dollar was mixed against other major currencies, while gold prices moved higher.
Crude oil prices were lower after Thursday's rally, with a barrel of light crude quoted at $50.55, down 58 cents, on the New York Mercantile Exchange.
The sharp rise in oil prices so far this year is to blame for the jump in import prices, the Labor Department said. Import costs rose 1.8 percent in March, but even without oil, prices rose 0.3 percent, which is still more than the 0.2 percent rise economists had expected.
"There's a lot of evidence that when we have oil averaging $53 or $54 per barrel, that's inflationary, and we got a whiff of that today in the import prices," said Peter Cardillo, chief strategist and senior vice president with S.W. Bach & Co. "It doesn't help that we're starting to see the economy enter a slowing mode heading into the second quarter here."
Investors looking at the Fed's industrial output report also questioned whether higher energy and materials costs were affecting manufacturing growth as well. Overall industrial production rose 0.3 percent in March, up from 0.2 percent in February, but the increase came only from utility production due to a colder-than-average month, and manufacturing and other industrial sectors showed losses for the first time in six months.
IBM said an inability to close deals before the end of the quarter, combined with higher pension costs, dragged on its earnings. The technology company, which missed Wall Street forecasts by 6 cents per share, hinted at a major restructuring this year. IBM tumbled $6.51, or 7.8 percent to $77.13.
General Electric rose 76 cents to $36.26 after the industrial and media conglomerate reported a 25 percent jump in first-quarter profits, with nine of the company's 11 disparate divisions reporting double-digit growth. The company's forecasts for the second quarter and full year were in line with Wall Street's estimates.
Citigroup beat Wall Street's expectations for its quarterly profits by 2 cents per share, with profits rising a modest 3 percent year-over-year. The financial company also said its board had authorized the repurchase of an additional $15 billion in stock. Citigroup added 79 cents to $46.19.
The lagging pharmaceutical sector saw new life after Genentech Inc. reported strong results from trials of its Avastin drug in breast cancer patients, and Ely Lilly & Co. received a favorable patent ruling on its best-selling anti-psychotic drug Zyprexa. Genentech surged $11.26, or 19.2 percent, to $69.89, while Lilly climbed $3.75 to $58.91.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.63 billion shares, compared with 1.45 billion at the same point on Thursday.
The Russell 2000 index of smaller companies was down 7.40, or 1.2 percent, at 584.54.
Thursday's losses in U.S. markets had a ripple effect overseas, as the Nikkei stock average fell 1.66 percent. In Europe, Britain's FTSE 100 closed down 1.09 percent, France's CAC-40 lost 1.92 percent for the session, and Germany's DAX index tumbled 2.04 percent in late trading.
New York Stock Exchange: http://www
Reuters
Treasuries Slip, Inflation Data Watch
Friday April 15, 2:20 pm ET
By Ros Krasny
CHICAGO (Reuters) - U.S. Treasury debt prices reversed course to move lower on Friday after jumping earlier on the latest in a string of data to stir doubts about the economic outlook.
Dealers trimmed positions before the weekend and especially ahead of the one-two punch of two crucial inflation reports due next week.
The benchmark 10-year Treasury note (US10YT=RR) was down 1/32 in price for a yield of 4.32 percent, up from 4.31 percent on Thursday. That yield briefly dipped to 4.28 percent on the morning's reports, the lowest since late February. The next technical barrier is at 4.25 percent.
Five-year Treasury notes (US5YT=RR) were down 1/32 at a yield of 3.95 percent, up from 3.94 percent. The 30-year bond (US30YT=RR) was up 7/32 at 4.66 percent, down from 4.67 percent. Two-year notes (US2YT=RR) were at 3.56 percent, unchanged from Thursday.
The producer price index report will be released on Tuesday and its consumer counterpart on Wednesday.
Inflation jitters have been pushed into the wings over the past few days but higher than expected readings on prices could put inflation back on center stage.
"Although the economic numbers are coming out weak, the inflation numbers are coming out persistently strong," said a trader at a U.S. primary dealer.
"The Federal Reserve has basically gone out and said: 'We are more concerned about inflation,' and if inflation is not going to slow down then the Fed is not going to slow down," the trader said.
This week's series of weak data was capped by the University of Michigan's April sentiment report, which fell to 88.7 from 92.6 in March, its fourth consecutive decline.
Still, whisper numbers on the consumer comfort index early on Friday had been as low as 85, triggering "buy the rumor, selling the fact" action.
The Michigan expectations index fell to a two-year low of 79.0 from 82.8 in March.
"Clearly this is not good news -- at its new level the expectations index is consistent with real consumption growth of about 2 1/2 percent," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Earlier, the New York Fed's survey of the state's factory sector nosedived in April to 3.12 from 19.6.
"Growth in the manufacturing sector of the New York region continues, but just barely," said Drew Matus, financial markets economist at Lehman Bros.
March industrial production rose 0.3 percent as expected, but capacity utilization, at 79.4 percent, was not as strong as analysts had forecast.
Despite Friday's mild setback bond prices have found an underlying bid from this week's heavy stock market decline and from a flight-to-quality bias as corporate bonds spreads continue to widen.
A jump in rate futures on Friday indicate a small chance that the Fed will pause its rate hikes as soon as June.
Futures now show a year-end Fed funds rate of under 3.75 percent, but some think that the central bank has no plans to stall its program of removing policy accommodation in bite-sized steps.
"As long as the inflation numbers stay strong and as long as there is still some growth we think they are going to stay on their moderate tightening course," said the trader at the primary dealer.
(Additional reporting by Chris Reese in New York)
Treasuries Slip, Inflation Data Watch
Friday April 15, 2:20 pm ET
By Ros Krasny
CHICAGO (Reuters) - U.S. Treasury debt prices reversed course to move lower on Friday after jumping earlier on the latest in a string of data to stir doubts about the economic outlook.
Dealers trimmed positions before the weekend and especially ahead of the one-two punch of two crucial inflation reports due next week.
The benchmark 10-year Treasury note (US10YT=RR) was down 1/32 in price for a yield of 4.32 percent, up from 4.31 percent on Thursday. That yield briefly dipped to 4.28 percent on the morning's reports, the lowest since late February. The next technical barrier is at 4.25 percent.
Five-year Treasury notes (US5YT=RR) were down 1/32 at a yield of 3.95 percent, up from 3.94 percent. The 30-year bond (US30YT=RR) was up 7/32 at 4.66 percent, down from 4.67 percent. Two-year notes (US2YT=RR) were at 3.56 percent, unchanged from Thursday.
The producer price index report will be released on Tuesday and its consumer counterpart on Wednesday.
Inflation jitters have been pushed into the wings over the past few days but higher than expected readings on prices could put inflation back on center stage.
"Although the economic numbers are coming out weak, the inflation numbers are coming out persistently strong," said a trader at a U.S. primary dealer.
"The Federal Reserve has basically gone out and said: 'We are more concerned about inflation,' and if inflation is not going to slow down then the Fed is not going to slow down," the trader said.
This week's series of weak data was capped by the University of Michigan's April sentiment report, which fell to 88.7 from 92.6 in March, its fourth consecutive decline.
Still, whisper numbers on the consumer comfort index early on Friday had been as low as 85, triggering "buy the rumor, selling the fact" action.
The Michigan expectations index fell to a two-year low of 79.0 from 82.8 in March.
"Clearly this is not good news -- at its new level the expectations index is consistent with real consumption growth of about 2 1/2 percent," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Earlier, the New York Fed's survey of the state's factory sector nosedived in April to 3.12 from 19.6.
"Growth in the manufacturing sector of the New York region continues, but just barely," said Drew Matus, financial markets economist at Lehman Bros.
March industrial production rose 0.3 percent as expected, but capacity utilization, at 79.4 percent, was not as strong as analysts had forecast.
Despite Friday's mild setback bond prices have found an underlying bid from this week's heavy stock market decline and from a flight-to-quality bias as corporate bonds spreads continue to widen.
A jump in rate futures on Friday indicate a small chance that the Fed will pause its rate hikes as soon as June.
Futures now show a year-end Fed funds rate of under 3.75 percent, but some think that the central bank has no plans to stall its program of removing policy accommodation in bite-sized steps.
"As long as the inflation numbers stay strong and as long as there is still some growth we think they are going to stay on their moderate tightening course," said the trader at the primary dealer.
(Additional reporting by Chris Reese in New York)
Reuters
Citigroup Sets $15 Billion Buyback
Friday April 15, 4:13 pm ET
By Jonathan Stempel
NEW YORK (Reuters) - Citigroup Inc. (NYSE:C - News), the world's largest financial services company, on Friday authorized the buyback of $15 billion of stock, and said growth in retail banking, credit cards and international operations helped quarterly profit rise 3 percent to a record.
The 18-month buyback program was announced one month after the Federal Reserve told New York-based Citigroup to delay big takeovers until it tightens internal controls, improves ethics and addresses a slew of regulatory problems.
The program increases Citigroup's total repurchase authorization to $16.3 billion. It would permit Citigroup to buy back roughly an additional 6.3 percent of its shares, based on Friday's closing price. The shares rose 35 cents to $45.75 on the New York Stock Exchange.
Chief executive Charles Prince on a conference call said the program allows Citigroup to efficiently return capital to shareholders, rather than "sit on it." Citigroup said it ended the quarter with more than $25 billion of cash.
The Fed order didn't set a cap on potential acquisitions, but Prince said: "I would be surprised if (my) team brought me something which is significant, in the short-term."
Citigroup's first-quarter net income increased to $5.44 billion, or $1.04 per share, from $5.27 billion, or $1.01 per share, a year earlier.
Profit from continuing operations was $5.17 billion, or 99 cents per share. This excludes both the Travelers Life & Annuity unit being sold to insurer MetLife Inc. (NYSE:MET - News) and an Argentine pension business.
Analysts polled by Reuters Estimates on average forecast profit of $1.02 per share.
Revenue rose 6 percent to $21.53 billion, below analysts' forecast for $22.56 billion. It increased twice as fast internationally as it did in North America excluding Mexico.
Operating expenses rose 12 percent to $11.66 billion, but were little changed from the fourth quarter.
Though revenue growth failed to outpace cost increases, "they are moving in that direction and it should benefit them," said Mark Batty, an analyst for PNC Advisors in Philadelphia, whose $50 billion of assets include Citigroup shares. He estimated profit excluding items at $1.03 per share.
CONSUMER BUSINESS GROWS
Citigroup, which is cutting 1,400 investment banking jobs, took $272 million of charges to streamline operations. It also took a $109 million loss on housing loan sales, and reported $183 million of one-time gains.
Consumer profit rose 9 percent to $2.82 billion, including the loan loss. Profit increased 13 percent in retail banking and 11 percent each in credit cards and consumer finance.
Consumer revenue rose 4 percent to $12.05 billion, with international operations faring better than North America in the three segments.
"I feel very, very good about the international business as it relates to (the) consumer." Prince said.
Corporate and investment banking profit fell 2 percent to $1.68 billion. Capital markets and banking income fell 3 percent to $1.44 billion, and transaction services income rose 5 percent to $245 million.
Profit from alternative investments including private equity soared to $368 million from $26 million. Wealth management profit fell 23 percent to $317 million, and asset management profit fell 25 percent to $79 million.
Profit rose 14 percent in Asia excluding Japan and 10 percent in Mexico, and fell 19 percent in Japan and 36 percent in Europe, the Middle East and Africa.
Citigroup set aside $1.81 billion for credit losses, down 19 percent. Assets rose 13 percent to $1.49 trillion.
Citigroup shares are down 5 percent this year, while the Philadelphia KBW Bank Index (AMEX:^BKX - News) has fallen 9 percent.
Citigroup Sets $15 Billion Buyback
Friday April 15, 4:13 pm ET
By Jonathan Stempel
NEW YORK (Reuters) - Citigroup Inc. (NYSE:C - News), the world's largest financial services company, on Friday authorized the buyback of $15 billion of stock, and said growth in retail banking, credit cards and international operations helped quarterly profit rise 3 percent to a record.
The 18-month buyback program was announced one month after the Federal Reserve told New York-based Citigroup to delay big takeovers until it tightens internal controls, improves ethics and addresses a slew of regulatory problems.
The program increases Citigroup's total repurchase authorization to $16.3 billion. It would permit Citigroup to buy back roughly an additional 6.3 percent of its shares, based on Friday's closing price. The shares rose 35 cents to $45.75 on the New York Stock Exchange.
Chief executive Charles Prince on a conference call said the program allows Citigroup to efficiently return capital to shareholders, rather than "sit on it." Citigroup said it ended the quarter with more than $25 billion of cash.
The Fed order didn't set a cap on potential acquisitions, but Prince said: "I would be surprised if (my) team brought me something which is significant, in the short-term."
Citigroup's first-quarter net income increased to $5.44 billion, or $1.04 per share, from $5.27 billion, or $1.01 per share, a year earlier.
Profit from continuing operations was $5.17 billion, or 99 cents per share. This excludes both the Travelers Life & Annuity unit being sold to insurer MetLife Inc. (NYSE:MET - News) and an Argentine pension business.
Analysts polled by Reuters Estimates on average forecast profit of $1.02 per share.
Revenue rose 6 percent to $21.53 billion, below analysts' forecast for $22.56 billion. It increased twice as fast internationally as it did in North America excluding Mexico.
Operating expenses rose 12 percent to $11.66 billion, but were little changed from the fourth quarter.
Though revenue growth failed to outpace cost increases, "they are moving in that direction and it should benefit them," said Mark Batty, an analyst for PNC Advisors in Philadelphia, whose $50 billion of assets include Citigroup shares. He estimated profit excluding items at $1.03 per share.
CONSUMER BUSINESS GROWS
Citigroup, which is cutting 1,400 investment banking jobs, took $272 million of charges to streamline operations. It also took a $109 million loss on housing loan sales, and reported $183 million of one-time gains.
Consumer profit rose 9 percent to $2.82 billion, including the loan loss. Profit increased 13 percent in retail banking and 11 percent each in credit cards and consumer finance.
Consumer revenue rose 4 percent to $12.05 billion, with international operations faring better than North America in the three segments.
"I feel very, very good about the international business as it relates to (the) consumer." Prince said.
Corporate and investment banking profit fell 2 percent to $1.68 billion. Capital markets and banking income fell 3 percent to $1.44 billion, and transaction services income rose 5 percent to $245 million.
Profit from alternative investments including private equity soared to $368 million from $26 million. Wealth management profit fell 23 percent to $317 million, and asset management profit fell 25 percent to $79 million.
Profit rose 14 percent in Asia excluding Japan and 10 percent in Mexico, and fell 19 percent in Japan and 36 percent in Europe, the Middle East and Africa.
Citigroup set aside $1.81 billion for credit losses, down 19 percent. Assets rose 13 percent to $1.49 trillion.
Citigroup shares are down 5 percent this year, while the Philadelphia KBW Bank Index (AMEX:^BKX - News) has fallen 9 percent.
