Good morning. Futures are higher this morning, and oil continues to drift lower. S&P futures are up 1.70, Nasdaq futures are up 3.00 and Dow futures are up 13 points. While higher, the futures are just pushing above fair value.
The budget will remain the economic focus today as Treasury Secretary Snow treks before the House Ways & Means Committee to discuss the president's budget proposal and other members of the administration's team also talk to members of Congress in various venues. Over the next several days -- as noted in my column yesterday -- the impact of the budget proposal will become more clear.
On the earnings front, expect results from Alcan (AL:NYSE), Ameren (AEE:NYSE), Arch Coal (ACI:NYSE), EarthLink (ALNK:Nasdaq), Elan (ELN:NYSE ADR), FMC Technologies (FTI:NYSE), Marriott (MAR:NYSE) and Taser (TASR:Nasdaq). After the close, Cisco Systems (CSCO:Nasdaq) reports.
Energy earnings continue to be strong with today's numbers coming from BP (BP:NYSE ADR), which posted a 26% increase in quarterly profits and also boosted its dividend. The company's oil and gas revenues continue to push higher, largely a result of more robust commodity prices. Also, FMC Technologies looks to have knocked the cover off the ball this quarter -- a lot of good subsea growth in the numbers.
The break in oil prices continues with the Saudis saying they will leave production alone ... for now. There's still a lot of uncertainty in Nigeria, Venezuela, Russia, etc. Yesterday I spent some time with Harvest (HNR:NYSE), a producer in Venezuela, and its contract issues with the government have not moved closer to resolution. While the issues could be economic, they also could be political, and that would not bode well for future U.S. corporate investment in Venezuela.
Have a great day.
While I correctly identified the likelihood of additional dollar gains in my column posted yesterday, I was wrong about the implication for yen strength on the crosses -- against the European currencies. Instead, we are seeing broad-based yen weakness. The dollar is trading at its best level against the yen since early December, just shy of JPY106.
Comments by Federal Reserve officials, including Alan Greenspan and Susan Bies, have played down the main dollar bear concern about the current account deficit and the financing of it. Indeed, Bies said last night that the U.S. was attracting a "tremendous amount" of investments.
The dollar has gained a little more than 3% against the yen thus far this year and 6.5% against the euro. There is a little catch-up being worked out here today. The dollar's strength against the yen is spilling over to lift the greenback against many of the regional Asian currencies.
Chain store retail sales rose a robust 2.2% in the week ended Feb. 5, according to the ICSC/UBS survey. This follows two consecutive weekly declines. But before getting too excited that consumers are feeling all flush again, it should be noted the report cited the Superbowl and New York State's tax-free week as catalysts for the increase in sales -- chips, team jerseys and items under $110; at least we know what moves us.
For February, ICSC expects same-store sales to increase by 2.5% to 3.0% percent, on a year-over-year basis. The relatively low gains come as the industry faces a difficult comparison with last year, when sales grew by 6.7% on a year-over-year basis.
Good Morning!!!
The Market is looking flatish this morning. I am seeing some gaps down, which indicate weakness, and some gaps up, which indicate strength.
I will be looking through the garbage can to see if I can ferret out some moola today -- Taser (TASR:Nasdaq), Sina (SINA:Nasdaq) (disappointing earnings) and Shanda Interactive (SNDA:Nasdaq) (after reporting decent earnings has been whacked badly). SNDA is gapping down almost 2 on the SINA bad earnings report and can bounce +2 in the early trading.
I will also be watching for early action with Martek Biosciences (MATK:Nasdaq), Air T (AIRT:Nasdaq), Orckit Communications (ORCT:Nasdaq) and Overstock.com (OSTK:Nasdaq).
A key negative indication to today's market will be Apple (AAPL:Nasdaq) diving under $78.40; if that occurs, I am going to expect another mildly down day. It looks like streetTracks Gold (GLD:NYSE) may continue the bounce it started yesterday off the low.
Good Trading!
The S&P Hedge fund index was down 0.47% last month. Not helping it was the Managed Futures Index, down more than 6%, and the Long/Short US index, down about 1.2%. Managed futures were hurt by all the trend followers who made a strong comeback last year. (John Henry, for instance, whose Original program was down 19% in January after a phenomenal comeback in 2004.)
I think hedge fund indices though are somewhat oxymoronic (not quite a word but I mean it in every sense). Hedge funds are almost like atoms in quantum mechanics -- you observe/index them and they change. With S&P Hedge Fund index now investable, more dollars than ever are being flung at the top hedge funds and performance is going down accordingly. Pension funds are upping allocations to hedge funds from 0% of assets to 5% of assets or even higher, and they are having a hard time avoiding the big guys and being creative. All they need is an annual 8% return to keep everyone happy, and this is spurring on the larger hedge fund players in a race towards mediocrity.
The percentage of assets in bullish funds versus bearish funds in the Rydex family of funds is approaching 60%; once again, these are not the levels of market participation from which emerges a sustainable move.
In the Oil Service Sector, the Rydex timers have piled into this sector fund; in general, at this level of assets (about $100 million), higher prices have been tough to come by.
As we all know, bonds have been moving higher and the Rydex Market timers have embraced this move as well; now the amount of assets in the bullish fund vs. the bearish bond fund is only a fraction, BUT the percentage of bull to bear is at a statistical extreme. Once again, this creates a mild headwind for higher bond prices.
With housing stocks and utility stocks riding the wave of lower long-term rates, this might be a juncture at which prices might stall in these sectors as bonds also stall.
Lastly, buying pressure on the Nasdaq has been anemic. Granted, this can be corrected in one day, but prices have been levitating higher without volume confirming.
Taser International (TASR:Nasdaq) missed street estimates but opened above $14.00, the stop-loss target I mentioned in a TV interview yesterday. If you wish to view this interview, please send me an email, richard.suttmeier@thestreet.com.
Over on Street Insight, Adam Warner discusses the behavior of option pricing following a blowup and highlights the somewhat unexpected occurrence of "seeing red across the board" when the price of stock, the calls and the puts are all down in price.
One might expect the price of options to increase following a steep decline, but today's price action illustrates what a large component implied volatility and its decline following an anticipated event such as an earnings report, has on an options price and the importance of not only being right in the underlying stock's movement but selecting the right strikes and strategy to yield a profit.
This morning we have such a case in Taser (TASR:Nasdaq), the stock is down some 11% to $15.20, but the February $15 puts are unchanged at 80 cents (ok, not technically "in the red," but I'm sure the faces of those who own them are boiling red with frustration). The implied volatility in the February options has dropped from about 125% yesterday to around 95% this morning. The February $17.50 straddle is now trading around $2.80, down 50 cents from yesterday's close. The February $15 straddle is trading $1.75, its value having been cut by $1.90 or more than half from yesterday's close. I expect the implied volatility will drop several percentage points more by tomorrow taking even more premium out of these options.
The March series has held its value slightly better as the implied volatility has dropped only a few percentage points from around 97% to 93% today. But being long March premium is still is not producing profits, as the $17.50 straddle's value is down about 35 cents to $4.25 this morning.
While the alternate strategy -- selling premium ahead of price moving events -- comes with an increase in risk: When the impact of a drop in implied volatility is calculated into the risk/reward of each position, the possibility of turning a profit becomes more favorable for net credit positions. For those long option premium, there is only one scenario that produces a profit; a move greater than what the options are already pricing into the options. (Remember the high implied volatility is pricing in the probability of a large percentage price change.) For positions with a negative vega, a profit can be realized not only if the resultant price change is smaller than expected but also if the underlying's price moves to the extent that is equal or slightly greater to what the options had "predicted."
"Long interest rates have to rise." Sorry, the market begs to disagree. We have another 5 basis points offo flattening from the 10-year to the Two-year Treasury yields. On no news.
I hate to say this, because I could be right or wrong again, but here goes. We are about 10-20 basis points away from the point at which mortgage refinancing begins to kick back in, say, around 3.85% on the 10-year. At levels like that, roughly 60% of the 30-year mortgage universe becomes refinancable. Financial institutions and mortgage originators would have to start buying long Treasuries, and purchase swaps to receive fixed and pay floating. All of these could make the rally in the long end temporarily self-reinforcing, causing long yields to overshoot, further flattening the curve.
We had such a self-reinforcing cycle back in 2003, when yields whipsawed between May and August. Two things were different then. Federal Open Markets Committee (FOMC) policy was highly stimulative, and there were a lot of mortgages to refinance. Mortgage refinancing was off the charts in that era, so we need even lower rates to get the same degree of refinancing activity; I can't vouch for this statistic, but supposedly 90% of all mortgages have been refinanced in the last three years. Also, 30% of the new mortgages are ARMs or hybrid ARMs. So, even though we would pick up even more of a bid on the long end if refinancing activity picks up, the effect should not be as dramatic as what happened in 2003.
So, keep smiling as you listen to the prevailing chorus of bearish bond pundits. I do not believe the flattening rally is done yet. Maybe the pundits will change their mind if the long bond takes out its all-time low yield of 4.17%, set back in June 2003. We are only 19 basis points away. Amazing.
As Dave notes below, the yield curve keeps flattening as demand for long-dated bonds has investors beginning to ask if the Treasury should begin re-issuing new 30-year bonds. The spread between the Two-year and 30-year has narrowed to 103 basis points, the narrowest in more than four years.
Despite yields on the three-year being at their highest levels in nearly three years, today's auction of $22 billion in three-year notes garnered a bid-to-cover ratio of just 2.01, down from 2.24 at the last auction and below the 2.17 average of the last six sales. The resulting yield was 3.47%, about two basis points higher than pre-auction trading or forecast.
Indirect bidders accounted for a healthy 44% of the notes purchased. While this is down from the record 53.6% of total taken in the November sale of three years, it is greater than the 35% bond traders had expected based on the fact that foreign participation in December's Two-year note sale was just 33%. But even as the higher yields on the short end might have drawn some overseas buyers back toward U.S. debt, there are still concerns that demand for the five- and 10-year sales, which have seen yields move lower over the last six weeks, will be slack.
Microsoft's Move Into Antivirus Could Impact Trend Micro
2/8/05 1:44 PM ET
There's been some discussion on Street Insight over Microsoft's (MSFT:Nasdaq) acquisition of antivirus company Sybari, which was due to go public shortly. While Microsoft's entrance into this market has the obvious security plays of McAfee (MFE:NYSE) and Symantic (SYMC:Nasdaq) down sharply today, the more thinly-traded Japanese firm Trend Micro (TMIC:Nasdaq) may be even more vulnerable.
In December, Trend Micro announced that Microsoft would use the company's antivirus software for Microsoft's Hotmail email service. Trend Micro expected this agreement to add around $50 million in sales, and the company's chairman, Steve Chang, said that it would help the brand become more widespread. To put that $50 million in perspective, the company's trailing 12-month revenue was around $580 million, so this would be about 8.6% of additional sales. Not huge, but certainly notable.
Today I'm wondering how Microsoft's buy of Sybari will impact Trend Micro. Will Microsoft back out of this agreement in order to use its internal antivirus software? I don't know the legal terms of its deal with Trend Micro, but if it can't go so far as to walk away, at the very least its relationship with the company will be short-lived.
Mr. Market is making it difficult for the traditional growth-stock sectors so far this year, as he did in all of 2004. So far this year, the best-performing sectors have been (in order): Energy, Utilities and Consumer Staples. The worst-performing sectors have been Telecommunications Services, Technology and Industrials.
The three best-performing sectors represent roughly 20% of the S&P 500 weight, while the three worst-performing sectors represent more than 30%.
If the market is going to have a good 2005 (as I expect), then there will need to be participation from the currently lagging groups. It would be quite difficult for the S&P to post a strong year if it has to "carry" 30% of dead weight.
Bulls like me had better hope we start seeing some better performance from Technology and Industrials, or we could be in for another frustrating year.
In response to Cody's missive, I felt an obligation to clarify the matter a bit -- set the record straight, so to speak. I would rather engage in intelligent discussion than allow this discussion to devolve further (J'accuse!). Since this is an investor site, rather than one dedicated to moral evaluations, let's explore some questions that are of great significance to investors in the Music/Technology/Radio complex of companies that are so affected by these
issues:
1. Sales in every type of "Old Media" have suffered as
consumers discovered newer forms of digital entertainment. Primetime television viewing is down, ratings for many sports events are significantly off, movie theater attendance is lower, newspaper circulation has declined, magazine sales have slowed, radio station listenership is way down, and of course, CD sales are lower.
On the other hand, DVD sales have been booming, video-game sales continue to set new records, the Internet keeps growing exponentially, blogs are stealing the thunder from print, radio execs are panicking -- not over satellite radio, but over Apple's (AAPL:Nasdaq) iPod, which has become the new radio.
2. The music industry fought against legal downloadable music for years. It eventually acquiesced to Apple's desire to make music easily downloadable in it iTunes Music Store, but this was only after years and years of ignoring obvious market demand. Those intervening years allowed a thriving P2P mindset to develop.
Question: Which rocket scientists were responsible for this grievous error in business judgment? Have they been fired yet? If not, why?
3. There was an opportunity to co-opt Napster (NAPS:Nasdaq) before it was litigated into non-existence, only to be subsequently purchased in bankruptcy for its brand name. That was a historic missed opportunity. Was this ever explored by industry execs? Shall we just instead chalk up yet another poor business decision to the same brain trust?
4. The music industry's love affair with insipid boy bands certainly hurt sales. A parade of mediocre talent -- some who can barely sing, others who can't even be bothered to fake it -- also led to weakened sales. I wonder: How much of the industry's problems merely reflect its poor judgment and inability to gauge what the public wants to hear?
5. The music industry has heavily lobbied Congress for favorable legislation. In addition to the RIAA, an umbrella organization representing the major labels, it also employs a variety of full-time lobbyists. What was their position on the 1996 Telecommunications Reform Act, which allowed the consolidation of radio station ownership? Do they lobby for or against it? Did they even know about it, or foresee the possible impact it might have?
Further, did anyone in the industry ever consider the impact of this consolidation on music sales? Have they investigated or commissioned any studies into what the impact of stations such as Clearchannel Communications (CCU:NYSE) or Infinity, [now part of Viacom (VIA:NYSE)] buying up lots of smaller chains had on sales, play-lists, etc.?
6. We have been seeing significant increase in DVD sales at the expense of CDs. How have the major labels moved to exploit this trend, and to what degree are they cannibalizing their own sales? Does the rise of new media provide an opportunity for management to throw the blame to a suitable scapegoat?
7. CD sales also fell when the economy went into a recession; they started to recover once the recession ended. Is there something I don't understand about the music industry -- namely, why they believe they are exempt from the business cycle?
8. When the industry cut its prices, it saw sales rise; yet we continue to see a reluctance to allow open competition in the market place. Suggested retail prices still thrives, the same few CDs seem to be on sale at different stores each week. That's something which at least implies some limited coordinated
discounting.
Question: Why won't the big music labels allow the market place to determine pricing?
9. Maybe its because they are unrepentant price-fixers. Let's not forget that nearly all of the big labels signed a consent decree (an admission of guilt and a big settlement) for illegal price-fixing.
To be blunt, I find it laughable that this group has claimed the moral high ground, when these habitual antitrust violators clearly have dirty hands.
10. Some studies have suggested that the Nielsen ratings on CD sales consistently undercount sales. Indeed, one wag went so far as to declare
that RIAA accounting practices a leading cause of declining music sales.
Are sales off as much as advertising, or are the labels pulling yet another fast one?
That's 10. I could go on and on with this, but I think by this point, you get the idea. The issues surrounding P2P and downloading are far more complex than the "Oh, woe is us" industry makes it appear. I cannot help but think that many of the music industry's problems are largely of its own making, as well as part of a larger trend away from older media.
A kind of insignificant day but that is what narrow-range bars or days usually are. A narrow-range day should lead to a large-range day as volatility returns to the market. Picking the direction is the hard part (obviously).
The lack of volume or umph continues to be a problem, but one day of strong volume can change that picture.
On the Nasdaq, the upside resistance is at 2102; the Nasdaq 100 Trust (QQQQ:Nasdaq) has filled the gap at $38.01.
I don't think this is an investor's market; it the most constructive thing I can say.
Cisco (CSCO:Nasdaq) slipped 3% late Tuesday after disappointing investors with a soft second quarter.
The company matched Wall Street's bottom-line estimates but came up a bit short with sales and gross margins.
For its second quarter ended last month, the San Jose, Calif., communications-gear maker earned $1.4 billion, or 21 cents a share, up from the year-ago $1.29 billion, or 18 cents a share, before the effect of an accounting change. On a pro forma basis and excluding certain costs, latest-quarter earnings were 22 cents a share, in line with the Wall Street estimate.
Revenue rose to $6.06 billion from $5.4 billion a year earlier. Wall Street analysts had been expecting sales of $6.13 billion, according to Thomson Financial.
The company posted a 66.8% gross margin for the quarter, a shade below the 67.3% target that some analysts were expecting.
"Gross margins were below guidance -- that's the story right there," said one analyst who rates the stock a neutral.
For more information, read TSC's full coverage.
Cisco's (CSCO:Nasdaq) DSOs were up a little bit. A questionable jump in allowance for doubtful accounts. On the call, the company said orders were strong, and the quarter started slow, which could (I stress could) bode well for guidance. We shall hear soon enough.
Cisco (CSCO:Nasdaq): Big growth in voice-over-Internet protocol (VoIP) and Linksys. That's got implications, in some ways, for Tekelec (TKLC:Nasdaq), Sonus Networks (SONS:Nasdaq) in VoIP and Netgear (NTGR:Nasdaq) in Linksys.
Guidance is about in line, but bulls and bears are going to argue over whether the analysts include an extra week from last year vs. this year. Sigh. Put simply -- this ain't no F5 Networks (FFIV:Nasdaq).
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