Stronger-than-expected retail sales data and some hopeful comments from Applied Materials ( AMAT) had stock proxies in solidly positive territory at midday. Last night, Applied Materials reported earnings that -- excluding one-time charges -- slightly exceed expectations. More importantly, the chip equipment giant reported an increase in its monthly orders , which gave some investors hope the long-awaited, ever-elusive bottom for the chip sector was at hand. The Philadelphia Stock Exchange Semiconductor Index was up 3.1% at midday. Meanwhile, the government reported that retail sales declined 0.2% in January, as expected, but sales excluding autos rose by 1.2%, far in excess of the 0.3% gain predicted by economists. Additionally, December's retail sales were revised upward to a 0.2% gain from a 0.1% decline for overall sales and to a 0.7% gain from a 0.1% dip for sales excluding autos. The data helped reassure equity investors that the economy's recovery is continuing. But the report gave pause to bond market participants about the implications for future policy decisions, which is something equity participants ultimately must also consider. "The solid gain in core retail sales combined with sharp upward revisions to previous months clearly suggest that the economy is out of recession and that the economy might soon reach a point where its upward momentum becomes self-reinforcing," wrote Anthony Crescenzi, chief bond market strategist a Miller Tabak. "Today's report also suggests that the lagged effects of the Fed's interest-rate cuts are becoming increasingly visible and therefore increase the possibility that the Fed will need to raise interest rates this year." Peter E. Kretzmer, senior economist at Banc of America Securities, took a similar view, suggesting "market participants will begin to consider earlier and greater total tightening by the Fed this year, in light of the growing evidence of the effectiveness of the central bank's aggressive monetary easing." Wednesday morning, fed funds futures were pricing in approximately 70% odds the Fed will tighten at its meeting on May 7. The two-year Treasury note, which is most sensitive to Fed rate action, was down 3/32 to 99 28/32 at midday. The price of the benchmark 10-year note was down 9/32 to 90 30/32, its yield rising to 5.01%.
Meanwhile, accounting concerns seemed to be taking a reprieve, although Qwest Communications ( Q) was down 6.6% after The Wall Street Journal took a critical look at its accounting practices, which the company defended. Which brings us back to last night , when I mentioned that shares of Polycom ( PLCM) had fallen on some cautious comments posted on the Web site of SEC Insight. Morgan Stanley and Thomas Weisel Partners -- co-managers of Polycom's recent secondary offering -- both defended the stock yesterday, purportedly after receiving assurances from the company, which apparently has not made any public comments about the SEC Insight story. A company spokesman had yet to return my phone call seeking comment at deadline time. This morning, I received confirmation (i.e. a copy of the report) that SEC Insight did indeed reveal Polycom had received a letter from the Securities and Exchange Commission on July 5, 2001, which states: "The Division of Enforcement has commenced an investigation regarding certain matters that may be related to PictureTel." SEC Insight did caution its readers that "the document which makes reference to an investigation is from last summer and we cannot know what this is about or if it is still active." The newsletter also urged interested parties to contact the company and "inquire what this was or -- is -- about." Noting these caveats, John Gavin, president of SEC Insight, took exception to comments in my column by a Thomas Weisel Partner trader that SEC Insight was "fanning the flames" of rumor by dredging up "old news" about the company. "It's amazing ... but it seems every time we write something that upsets a banking client, all the analysts involved are suddenly SEC experts," Gavin wrote. "I'll pose this as a theoretical: To what extent, then, is the uncertainty caused by analysts conflicted by banking agendas or by analysts not doing the diligence to get their own facts straight fanning the flames?" That's something to ponder. So is this: Polycom has discussed the PictureTel investigation in various SEC filings, so maybe this really is "old news." Still, the stock's reaction yesterday suggests many Polycom's shareholders may not be of the "strong-hands" variety.