Hey!! A post!

First things first, Bellz and I would like to formally apologize for the lack of posts recently. It's that time of the semester with finals and projects and whatnot so we'll do our best to get short posts up, almost everyday going forward with recaps.

The market drifted Monday. Most people are looking forward to the big news coming out later this week, which started with earnings after the bell yesterday and before the open this morning as well as the Fed meeting and their decision which will be announced Wednesday afternoon.

After the bell Visa came out with in-line earnings but said profit would grow at 20% for the next 3 yrs, the street was looking for 29% this year so it got hit a little bit. Before the open we're seeing great numbers from BP and Shell on the back of high oil prices. BP's earnings are up almost 70%. Also, a record report from Corning, which is the leading maker of the glass for flat screen TVs.

The Fed decision will get the hype it normally does, but some people are down playing it's actual impact. In a sort of role reversal, I think we'd alsmot get a bigger rally if they came out and said we're done cutting, we think enough's been done and it's only a matter of time. Do I think that's true? Well, no, but if their statement said that, it'd be awesome. What will they do? If you ask me, they're going to come out with a 25bps (that's 25 basis points or .25%) cut, signal the market that they're done cutting and say that their monitoring inflation very closely.

Time for a BA320 test, that's all I got for now.

Market Summary: Thurs. April 24, 2008

DJIA 12,848.95 +85.73 (+0.67%)
Nasdaq 2,428.92 +23.71 (+0.99%)
S&P 500 1,388.82 +8.89 (+0.64%)
NYSE Volume 4,420,967,000

2-Yr Bond 2.41% +0.19
10-Yr Bond 3.87% +0.10
30-Yr Bond 4.56% +0.07

Dollar Index 72.535 +0.716
Crude Oil (June) 116.06 -2.24
Nat Gas (May) 10.790 +0.009
Gold (June) 889.40 -19.60

Brock Jenkins on BUD

Well, I was wrong.

As Dlight predicted, Anheuser-Busch (BUD) reported a 1.3% lower profit in Q1 than in the same quarter of last year. Among some of the factors affecting the lower profit were higher expenses (grains, aluminum, etc.) and a slowdown in U.S. sales volume. Also, investments in foreign countries like China and Mexico fell 21%. Domestically, there has been a slowdown in Corona consumption, and A-B has added brands like, Monster Energy and Beck’s to its line-up in order to solidify and diversify the company.

What should we look for in the future from BUD? Expect the summer numbers to mean a lot. The heart of A-B is the Bud and Bud Light product, and without strong numbers from those two brands, the company will lose again. The company is creating new products like Landshark beer and Bud Light Lime, but most think that this strategy is too little too late with Miller Chill and Corona already out there.

My take? Well, BUD is hurting, but with the summer coming up and downturn in the economy, I expect to see beer numbers go up. If it is any indication, Natty and Busch sales were still strong (go college students!), and I believe that the summer months will see some profit as people trade down from pricier alcohol. Moral of the article…go to Clybourne and get some Landshark!

-Mudabrock

Sources:

Reuters

Market Summary: Wed. April 23, 2008

Today was moderately higher, led by some really nice earning reports. The Dow was up 42, the S&P was up 4 and the Nasdaq led the way up 28. As has been the case lately, the big tech names led the way higher. The Nasdaq has outperformed the other 2 indices by 2 full percentage points over the last 7 days.

Stocks would have been higher if it wasn’t for Ambac, which posted a huge loss. This reminded investors that, while things have quieted down recently, there are still major problems in the financial world.

An interesting sector today was the natural gas stocks which were down while natural gas itself was up. The obvious answer is people taking some profits off as these shares have rallied a ton lately.

We’re seeing a breakdown in a lot of the commodities that have rallied of late. Wheat’s run has broken down. Gold’s run is breaking down. And I think oil will pull back closer to 100 within a week. Make no mistake though, until the dollar starts to recover or the rest of the world's economies start looking like ours, the commodities will keep running.

On earnings: the companies that are beating, for the most part, have significant sales outside the US and/or sell to businesses, not directly to consumers. There are exceptions, i.e. Apple, but for the most part, I’ve noticed these characteristics. I will go bullet point format below with companies the reported today.

Before the open:

Boeing- beat strongly even with the Dreamliner production problems

EMC- Beat, kind of - they had a loss on an acquisition but beat without it. Big tech companies are working because companies are not slowing down their spending on IT

Delta- Posted a $6.4 BN loss on 2 factors: jet fuel is expensive and a $6.1BN writedown of goodwill. Northwest had a similar writedown. I’m not sure exactly what it is but I’m betting it’s them cleaning up their balance sheets before the merger so they start with a clean slate. I’ll try to figure it out and keep you posted.

Phillip Morris International- Beat and raised. People smoke no matter what and apparently people are buying higher quality cigarettes in other parts of the world.

Schering-Plough- Remember all the Vytorin controversy? It led to prescriptions falling less than 20% instead of the 100% people were fearing. SGP knocked it out of the park.

Chipotle- Despite my avid dining, Chipotle missed by a little. Rising costs of all the food will hurt

Freeport McMoran- Had great numbers but pulled back some with people taking some gains off the table. We’ve seen this in some other companies that have reported good numbers. If they’ve had a big run into earnings some may pullback no matter what they report.

After the close:

Apple- Beat on every metric. Had a down-beat conference call, but they are known for sandbagging expectations (under promise, over deliver)

Amazon- Posted solid earnings but gross margins are getting squeezed (as were Apple’s) and that is something that scares analysts. You may see a couple downgrades.

The dollar was mixed.

DJIA 12,763.22 +42.99 (+0.34%)
Nasdaq 2,405.21 +28.27 (+1.18%)
S&P 500 1,379.93 +3.99 (+0.29%)
NYSE Volume 4,077,188,000

2-Yr Bond 2.22% -0.02
10-Yr Bond 3.77% +0.03
30-Yr Bond 4.49% +0.03

Dollar Index 71.819 +0.490
Crude Oil (June) 118.30 +0.23
Nat Gas (May) 10.781 +0.174
Gold (June) 909.00 -16.20

Market Summary: Tues. April 22, 2008

DJIA 12,720.23 -104.79 (-0.82%)
Nasdaq 2,376.94 -31.10 (-1.31%)
S&P 500 1,375.94 -12.23 (-0.89%)
NYSE Volume 3,928,665,000

2-Yr Bond 2.24% +0.04
10-Yr Bond 3.74% -0.01
30-Yr Bond 4.46% -0.02

Dollar Index 71.329 -0.318
Crude Oil (June) 118.07 +1.44
Nat Gas (May) 10.607 -0.126
Gold (June) 925.20 +7.60

The Honor System and Being Cheap

What does it take for people to act honestly in business? As an accounting student, I learn a lot about how businesses try to optimize employee honesty in my controls class. Our school is working hard to implement ethical discussion in the classroom, and I will be teaching it, to some degree, to students come this fall.

I don't want to talk about a solution, as much as I want to talk about a cause: People are Cheap. (cheap like Marquis is cheap, or Koster)

The Freakonomics guys wrote about it extensively, when they discussed Paul Friedman's bagel sales. I know this article looks really long, but it is a pretty incredible socio-economic case, and well worth the read. Other cool examples is the Radiohead In Rainbows album experiment, where people paid whatever they wanted to download mp3s from the band. I blogged about this before. Nobody knows how much money Radiohead made, because they chose not to release that data, but when the album was finally sold in stores, it sold very well.

I'm amazed by how much time people in the open-source community invest in their work. Why would these people work so hard on something they aren't paid for?

Because they love it.

But money is starting to creep in to these circles. And it looks like the only viable way to make money is to use the popularity of open source, or other free programs, as platforms for advertising. I wonder how that will change the environment in the future - how will blogging change as more people make a career out of it?

Freakonomics just recently blogged about two more honors systems: New York State collecting sales tax from Internet sales, and rural Japanese farmers leaving produce stands unmanned. I like the New York example more, because there is more there to talk about. New York is now demanding the largest Internet retailers to add sales tax to all items shipped there. No doubt more states will follow, and no doubt a lot of business will go to smaller, under-the-radar online retailers.

Or will it? Are the big Internet retailer brands established enough to maintain their market share? Can the Internet come through on it's promise to offer the most efficient and effective information, therefore guiding consumers to cheaper, albeit less popular, retailers? I'd bank on he latter of the two, because god knows we're going to be as cheap as possible.

Market Summary: Mon. April 21, 2008

DJIA 12,825.02 -24.34 (-0.19%)
Nasdaq 2,408.04 +5.07 (+0.21%)
S&P 500 1,388.17 -2.16 (-0.16%)
NYSE Volume 3,395,348,000

2-Yr Bond 2.20% +0.01
10-Yr Bond 3.75% -0.02
30-Yr Bond 4.48% -0.03

Dollar Index 71.647 -0.365
Crude Oil (June) 116.63 +0.47
Nat Gas (May) 10.733 +0.146
Gold (June) 917.6 +2.40

Earnings This Week

Monday:
Bank of America, Eli Lilly, Halliburton, Merck, Texas Instruments

Tuesday:
AT&T, Baker Hughes, Coach, DuPont, Jet Blue, Lockheed Martin, McDonald's, National City, United Airlines, VMWare, Yahoo, Yum Brands

Wednesday:
Amazon.com, Ambac Financial, Apple, Boeing, Delta Airlines, EMC, Freeport-McMoRan, Northwest Airlines, Philip Morris International, Pulte Homes, Schering-Plough

Thursday:
3M, Altria, American Express, Amgen, Baidu, ConocoPhillips, Credit Suisse, Microsoft, Motorola, Northrop Grumman, PepsiCo, Potash, Union Pacific, US Airways, Whirlpool

Friday:
Wendy's

Market Summary: Fri. April 18, 2008

The day started off on a very positive tone thanks to Google’s better than expected earnings report after Thursday’s close. Shares of GOOG ended the day up 20% ($90). Google reported earnings of $4.84 per share which handily beat the analysts’ estimate of $4.52 per share. Sales were expected to be $3.61B, but Google reported sales of $3.7B. Paid clicks, the stat everyone was concerned about, was up 20% in Q1. Large-cap stocks and the NASDAQ were the relative winners on the day.

The other big news on the day came from Citigroup when it announced a $5.1B Q1 loss and 9,000 job cuts. Citi wrote down or adjusted about $16B worth of assets. The quarterly loss was not as bad as some analysts had predicted. The company’s CFO stated to CNBC that there is no need for Citi to raise more capital or cut its dividend. The financial sector was up big off of this news.

Off of this news, the dollar was very strong in the morning causing oil prices to slip, and gold was getting hit hard all day with selling pressures. However, everything began to reverse course around lunchtime. Oil rallied and hit another all-time high of $117, the dollar did not keep all of its gains, the VIX (volatility index) bottomed, and buyers of Treasuries came back. The 10-year was yielding 3.85% at lunchtime, but by the close it was only yielding 3.74%. I was a little skeptical of such a big rally off of the bad news from Citi, and I wasn’t surprised the market began to reverse. I actually shorted the heck out of Citi with an extremely short-term thesis (a few days) that the stock got too much of a pop and a pull back was necessary.

Strong earnings reports from Caterpillar and Honeywell also aided in the rally. CAT beat analysts’ estimates thanks to strong international sales. The company reported earnings of $1.45 per share compared with a consensus estimate of $1.33 per share. Shares were up 8.5% on the day. Honeywell beat analysts’ estimates and raised its sales guidance. HON reported earnings of 85 cents per share while analysts were only looking for 82 cents per share thanks to strong international, specialty materials, and aerospace-related sales. What’s the trend here? Lots of international exposure! The dollar has declined significantly since the beginning of the year and it looks as if analysts have not fully taken this into account when coming up with their estimates.

I’m looking for a weaker open Monday as investors take some profits and digest all of the new earnings data that will be reported.

DJIA 12,849.36 +228.87 (+1.81%)
Nasdaq 2,402.97 +61.14 (+2.61%)
S&P 500 1,390.33 +24.77 (+1.81%)
NYSE Volume 4,190,694,000

2-Yr Bond 2.19% +0.06
10-Yr Bond 3.77% +0.02
30-Yr Bond 4.51% -0.03

Dollar Index 72.012 +0.332
Crude Oil (May) 116.69 +1.83
Nat Gas (May) 10.587 +0.204
Gold (June) 915.20 -27.70

Market Summary: Thurs. April 17, 2008

Thursday was essentially a mixed day on all fronts and the major indexes ended the day flat. After the bell Wednesday, IBM reported great earnings and offered positive guidance for the second consecutive quarter. IBM is one of a few large-cap tech stocks to handily outperform the NASDAQ this year (+15% vs. -10%).

Shares of Nokia got slaughtered – down 14% – after the company missed analysts’ profit estimates and forecasted slower demand for handset devices this year. Nokia is based in Finland and the weaker dollar hurt the company’s currency translation. Remember, the weak dollar is good for U.S. exporters, but bad for foreign companies exporting goods to the U.S.

Merrill Lynch reported a $2B quarterly loss, steeper than analysts had predicted, but the stock finished the day up 4%. The company reported a loss of $2.19 per share vs. the consensus estimate of a $1.96 loss. Adding to Merrill’s troubles were a $6.5B write-down and an announcement of an additional 3000 job cuts. Investors were pleased to see Merrill coming clean and the stock rallied off this bad news. Also helping the financials was an announcement from JPMorgan that it plans to raise $6B of hybrid capital.

A poor earnings report from Pfizer was weighing down the market. The company earned 61 cents per share while analysts were looking for 66 cents. The big news was that sales of its biggest drug, Lipitor, declined 7%. Pfizer has already eliminated 10,000 jobs in a massive cost-cutting program and said it plans to lay off more workers. PFE has been struggling the past few years to come up with a new blockbuster drug and the only thing going right for the company is its robust 6% dividend yield.

In economic news, jobless claims last week rose by 17,000 to 372,000, but less than analysts predicted. Also, the “number of workers remaining on jobless benefits rose to 2.98M…which was the highest since June 2004.” The Philly Fed Index fell to -24.9, down from last month’s reading of -17.4. This reading marks the largest contraction since 2001.

Agriculture stocks were a relative laggard as most of these stocks pulled back after Wednesday’s monster rally. There was very little news to spark this selling, so the best bet is investors were taking some profits.

DJIA 12,620.49 +1.22 (+0.01%)
Nasdaq 2,341.83 -8.28 (-0.35%)
S&P 500 1,365.56 +0.85 (+0.06%)
NYSE Volume 3,688,557,000

2-Yr Bond 2.13% +0.15
10-Yr Bond 3.75% +0.03
30-Yr Bond 4.54% unch

Dollar Index 71.680 +0.272
Crude Oil (May) 114.86 -0.07
Nat Gas (May) 10.383 -0.050
Gold (June) 942.90 -5.40

Market Summary: Wed. April 16, 2008

Large-cap tech stocks finally got a much needed boost thanks to a positive earnings report from Intel after the bell yesterday. Although Intel only matched analysts’ estimates, the company offered very positive guidance that sent the stock up 6%. The entire market rallied off this news. All eyes will be on Google’s earnings report Thursday after the bell because last quarter the company disappointed with earnings and the stock went from $750 to $450. So far this year, the NASDAQ is down 14% while the S&P500 is only down 9% – large-cap tech stocks have been in the dog house this year.

Also, many investors’ fears were calmed when the CPI number was in-line at a 0.3% increase. The Core CPI showed a 0.2% increase. Yesterday, the PPI was much higher than expected and it was a relief to see the CPI creep up only moderately. Last month’s CPI readings were flat. This month’s increase was attributed to higher gas prices.

It seems like everyday oil hits a new high. Today, oil came within cents of hitting $115 after a bullish inventory report (unexpected drop in supplies). Off of this news, the alternative energy stocks and agriculture stocks were screaming higher. I had to sell some Mosaic and Potash today given their huge run-up lately. Their valuations are getting a little pricey. Since March 20^th these two stocks are up about 40%! Monsanto also announced an $800M stock repurchase program over the next three years and Goldman Sachs raised earnings estimates for the company.

The U.S. Dollar Index is quickly approaching its March 17^th low of $70.70 as it was down about 1% today to $71.41. The decline in the dollar is helping crude oil prices edge higher. Gold was up almost 2% on the day.

An assortment of positive earnings reports added fuel to the day’s rally. Wells Fargo reported a decrease in profit, but beat analysts’ expectations. “Net income dropped 11% to $2B, or 60 cents a share, from $2.24B, or 66 cents, a year earlier…analysts were estimating Wells Fargo would earn 57 cents a share.” The stock was up 4% on the day.

JPMorgan reported a 50% decrease in its Q1 profit because the company wrote-down $5.1B worth of assets. Net income was $2.37B, or 68 cents a share. This number matched analysts’ expectations. Shares were up almost 7% on the day. JPM also announced it will raise $6B worth of preferred stock to help fix its balance sheet.

Coca-Cola also reported better than expected earnings thanks to strong international sales. “Quarterly net income was $1.50B, or 64 cents per share…compared with $1.26B, or 54 cents per share a year ago.” A weak U.S. Dollar helped international revenues. “Net operating revenue for the quarter…rose 21% to $7.38B, above the Reuters Estimate forecast of $6.90B. But it would have risen only 12% if not for favorable translations of euros and other strong currencies into dollars.”

Don’t think there wasn’t any bad news today. Housing starts hit another new low and were below analysts’ expectations. “Work began on 947,000 homes at an annual rate, the fewest since March 1991.” Building permits also fell to 927,000 compared with 984,000 last month. Industrial production showed an increase of 0.3% last month compared with a decline of 0.7% last month.

Also, the Fed’s Beige Book described the real estate market as “anemic” and that “downside risks to growth are significant.” Significant is a pretty strong word that we haven’t heard the Fed use before.

After the bell, IBM gave a great earnings report. IBM earned $1.65 per share while analysts were only looking for $1.45 per share. The company also raised its EPS outlook for the year to $8.50 from $8.25. Shares are up 2.5% in after hours trading. Look for large-cap tech stocks to be the relative leaders tomorrow.

Tomorrow, we will get earnings reports from Advanced Micro Devices, Capital One Financial, Continental Airlines, E*TRADE Financial, Google, Merrill Lynch, Nokia, Pfizer, and Southwest Airlines.

DJIA 12,619.27 +256.80 (+2.08%)
Nasdaq 2,350.11 +64.07 (+2.73%)
S&P 500 1,364.71 +30.28 (+2.27%)
NYSE Volume 4,229,984,000

2-Yr Bond 1.98% +0.14
10-Yr Bond 3.72% +0.12
30-Yr Bond 4.54% +0.12

Dollar Index 71.408 -0.615
Crude Oil (May) 114.93 +1.14
Nat Gas (May) 10.433 +0.228
Gold (June) 948.30 +16.30

The Sweet World of Advertising

As most of you have noticed, we have a banner ad on the site, in a desperate attempt to scrape together a few (symbolically important) pennies from ad revenue.

But looking beyond our humble site, online ad revenue is a huge industry. I pulled this table from this New York Times article, which discusses the online advertising industry.

What is most interesting to me is that although the ad market is growing (expected to grow 23% this year), '... the big portals that dominated spending in the early part of the decade — AOL, Yahoo and Microsoft — are all losing share, even though all of them have been buying up advertising companies."

How does Google do it? We all know, it isn't a very interesting question to ask. What is more interesting is to look at the remaining 43% of the ad revenue market, and ask where that money is going. I tried to download the breakdown from emarketer.com, but their research costs too much. Either way, I see that portion growing in market share in the future, as our online advertising grows from predominantly search-based advertising to more focused advertising, where social networking sites lever the data they have from their to advertisers.

Another cool region for growth in online advertising is in the mobile phone industry. As more and more phones include GPS positioning, we're probably going to see targeted advertising to our phones, based on where we are (literally). How much money do you think Toyota would pay to advertise directly to you, if they found out that you were just at a Honda dealership? Why would you ever allow advertising on your phone? What if it meant your phone plan was cheaper, even free?

Here is a fantastic WSJ article about the state of the industry, very interesting. It discusses the more strategic side of the industry, mostly focusing on the predicted results of industry consolidation. I'd really suggest reading it, as it isn't very long.

An interesting note: The New York Times article is linked to a WSJ article that they cited. This i a poor business practice, even if it is good journalism, because it leads away from the NYT site. You'll notice that the Journal almost never does this. And obviously, the reason why is to maximize their ad revenue from site traffic...

Earnings This Week

Wednesday:
American Airlines (AMR), eBay, IBM, Wells Fargo (WFC), JPMorgan Chase (JPM), Coca-Cola (KO)

Thursday:
Advanced Micro Devices (AMD), Capital One Financial, Continental Airlines (CAL), E*TRADE Financial, Google, Merrill Lynch, Nokia, Pfizer, Southwest Airlines

Friday:
Caterpillar, Citigroup, Honeywell, Schlumberger (SLB)

Market Summary: Tues. April 15, 2008

The big news on the day was crude oil prices hit another new high. A barrel of crude oil almost hit $114 on what CNBC described as “supply disruptions.” A gallon of gasoline hit $2.88 -- another record level. As these two commodities, as well as natural gas and the agricultural products, continue their bull market trend, the Fed is going to be faced with an evermore difficult task to putting the breaks on inflation. Right now, I wouldn’t be a buyer of the agriculture and energy stocks seeing they’ve had a tremendous run-up lately, but the long-term thesis still holds true and no end is in sight just yet.

In economic news, the March PPI came in at 1.1%, much higher than economists had predicted. The market was only looking for a 0.4 – 0.6% increase. The Core PPI, which removes food and energy costs, only rose 0.2% (Source: Bloomberg.com). This news caused the market to sell-off a little bit, but not as much as I thought. Basically, traders were betting the Fed would cut by 25bp or 50bp, but after this news, it looks like 25bp (or maybe even no cut) is most likely. The Fed next meets April 30^th.

The rumors were true regarding the Delta / Northwest merger. Delta purchased Northwest for $3.63B in stock to create the world’s largest airline. However, shares of Delta declined 13% and Northwest declined 8%. Why? Investors were worried that this merger will not help cut costs and the airline will not be profitable. Also, with oil prices hitting a new high, profit margins for airlines are squeezed (Source: Bloomberg.com).

Today, we had another Wall Street big-wig come out and state his opinion on the credit crisis. Lehman’s CEO said “the worst is behind us” and the “current environment remains challenging” regarding the freeze up in the credit markets (Source: Bloomberg.com). The financial stocks got a little boost from this news, but I wouldn’t read into it too much.

Washington Mutual reported a $1.14B quarterly loss because of $3.51B worth of loan losses. The company’s CEO explained “This is the toughest credit cycle [he] has seen in [his] years in the industry” and that “Nothing of this scale has happened since the Great Depression.” WaMu plans to cut 3,000 jobs, cut its dividend by 93%, and raise $7B in capital (Source: CNBC.com).

Large-cap tech stocks were the relative laggard after EMC was downgraded to “hold” from “buy” by Citigroup. Intel will report earnings after the bell (Source: Briefing.com).

In earnings news, all the reports were quite positive. Johnson & Johnson beat estimates by six cents thanks to effective cost cuts. U.S. Bancorp and Northern Trust also reported good numbers.

The one-trick pony known as Crocs disappointed once again. The company lowered its Q1 earnings outlook to -$0.05 from a previous estimate of $0.46. Full-year guidance was also lowered. Shares of CROX were down about 40% on the day (Source: Briefing.com). Everyone should have seen this disaster coming…when you only have one product the robust growth can only last so long (also see Heeley’s).

Tomorrow is a big earnings day as Coca-Cola, JPMorgan Chase, and Wells Fargo will report quarterly results.

DJIA 12,362.47 +60.41 (+0.49%)
Nasdaq 2,286.04 +10.22 (+0.45%)
S&P 500 1,334.43 +6.11 (+0.46%)
NYSE Volume N/A

2-Yr Bond 1.84% +0.06
10-Yr Bond 3.60% +0.07
30-Yr Bond 4.42% +0.07

Dollar Index 72.023 +0.148
Crude Oil (May) 113.79 +2.03
Nat Gas (May) 10.205 +0.152
Gold (June) 932.00 +3.30

Market Summary: Mon. April 14, 2008

The thesis that has been working for the last year – long agriculture and energy, short financials – was working today. Oil closed at a new all-time high and all of the agriculture and energy names were up big, while much of the weakness in the financials was due to Wachovia’s poor earnings report. The oil services names, such as Hess, Transocean, Halliburton, and Slumberger, were all hitting new 52-week highs.

Wachovia reported a $393M loss last quarter, and announced it will cut its dividend by 41%, issue $7B worth of new stock and convertible bonds, and cut 500 investment banking jobs. For the same period last year, Wachovia reported a $2.3B profit (Source: Bloomberg.com, CNBC.com). Just last quarter, the company’s CEO said there would be no need to cut the dividend, but it looks as if he was wrong just like most of the other Walk Street CEOs. The stock was down 8% on the day.

The agriculture names were strong today thanks to a report from OAO Uralkali (Russian fertilizer producer) that said potash prices will be above $1000 per metric ton this year. Names like Agrium, Potash, and Mosaic were all up nicely. Agrium and Potash also got another boost after UBS upgraded the stocks’ prices targets due to higher fertilizer prices (Source: Bloomberg.com).

In a surprise move, Blockbuster offered $1.35B to buy troubled-retailer Circuit City. Both companies have been struggling mightily the last few years and most investors are confused about why these two companies are teaming up together. Carl Ichan, the billionaire activist investor, will be supporting the finances for this deal - Ichan is a Blockbuster shareholder (Source: Bloomberg.com).

In economic news, March retail sales rose 0.2%, compared with a 0.4% decline in February. Something to note, though, was that increased gasoline sales were the main cause for an increase in retail sales last month (Source: Bloomberg.com).

Tuesday, Wednesday, and Thursday are extremely busy days with earnings reports and the Fed policy announcement (Wed.). There are continued talks between Northwest and Delta that could create the largest domestic carrier. Rumors are circulating that a deal could be in place as early as tomorrow.

DJIA 12,302.26 -23.36 (-0.19%)
Nasdaq 2,275.82 -14.42 (-0.63%)
S&P 500 1,328.32 -4.51 (-0.34%)
NYSE Volume 3,553,981,000

2-Yr Bond 1.78% +0.02
10-Yr Bond 3.53% +0.04
30-Yr Bond 4.35% +0.05

Dollar Index 71.875 +0.067
Crude Oil (May) 111.76 +1.62
Nat Gas (May) 10.053 +0.152
Gold (June) 928.70 +1.70

Blockbuster's Big Bet

There's a lot of buzz coming from a move Blockbuster is making, trying to purchase Circuit City. Interestingly, Blockbuster's market cap is $630 million, while Circuit City's is $750. The smaller company is making an unsolicited offer at the larger company for $1.35 billion in cash.

Guess who is behind this deal? Carl Ichan, who owns 16% of Blockbuster's class A shares.

Circuit City doubts that Blockbuster and Ichan have the money to finance this kind of a deal, but there is a more interesting question to ask: Does this deal make any sense?

Why would a brick-and-mortar DVD and video game retailer combine with a big-box electronics retailer? Aside from some financial-specific quandaries, I don't like how WSJ has broken down issues about operations, as well as products and services. Its obvious that these companies offer services that would cannabalize each other. The Journal asks "...will consumers be as eager to rent for $5 a night what they can simply buy for $15 a few aisles away?" But is that even a questions worth asking? Blockbuster has responded to netflix by offering online rentals, but fails to respond to the true direction of the industry: streaming content.

At the heart of this matter is the same reasoning as to why the Blu-Ray/HD-DVD format war has no real winner. Apple and Netflix have started offering movies streaming over the internet - there is no DVD to buy/rent/wait for, just an online account. This will effectively render Blockbuster's brick-and-mortar PPE assets useless over the course of the next decade.

So is this a good buy for Blockbuster? Only if they want to become a different company...

Market Summary: Fri. April 11, 2008

We took a huge hit Friday thanks to General Electric (GE) and its poor earnings report. Not only is this company huge ($300B+) and stock market bell-weather, but it also consistently meets its earnings projections. However, when GE announced it missed EPS earnings by $0.07 and lowered its 2008 full-year guidance, stocks sold off huge. Not only was this a miss, but a huge miss and no one was expecting it. Shares of GE were off 13% on the day and over 366B shares changed hands (about 10x the normal volume).

This news from GE spooked many investors because the miss was caused by difficulties in the company’s commercial finance division. If GE is being squeezed by the credit crunch, how many other companies are also struggling? “GE Commercial Finance was hurt when…it marked the value of securities it held on its books. Three areas hurt profit: equities including the value of Chinese securities, specifically a wind energy company whose value fell 45 percent. Another $4 billion in loans GE originates to sell declined in value, as did about $1.5 billion in securitizations for retained interest.” After this news, analysts at Goldman Sachs, Deutsche Bank, and Credit Suisse lowered estimates for GE (Source: Bloomberg.com).

Economic news also weighed on stocks Friday when the consumer confidence report hit a 26-year low. “The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the weakest level since 1982, when the jobless rate approached 11 percent, the worst since the Great Depression. In other figures released today, the Labor Department reported that the cost of imported goods climbed 14.8 percent in March from a year ago, led by oil” (Source: Bloomberg.com). With a weaker dollar, we are importing inflation because we have to spend more dollars to get goods.

The other day, Goldman Sachs CEO came out and said we are “closer to the end than the beginning.” Friday, however, the Lehman Brothers CFO said the market recovery will take until 2009. He was quoted as saying, “I don’t see what the real catalyst for change would be over the next several months. We’ve got to look out to 2009 for where we’re going to change” (Source: Bloomberg.com). Everyone keeps trying to pick a bottom, but the market keeps going lower and more and more problems are arising in the financial system.

The other big story on the day was the airlines. Recently, airlines have been under pressure from rising crude oil prices. Also, there have been talks of mergers that would consolidate the industry and make companies profitable once again. And, in the past week the FCC has cracked down on its inspections and many airlines have ground hundreds of flights. Frontier Airlines led the headlines today when it announced it voluntarily filed for bankruptcy after an “unexpected attempt by its principal credit card processor to substantially increase a holdback of customer receipts’ threatened to severely impact liquidity” (CNNMoney.com). Frontier plans to continue operations as normal; the bankruptcy is simply a preventative measure. Shares slipped 73% off of this news.

DJIA 12,325.42 -256.56 (-2.04%)
Nasdaq 2,290.24 -61.46 (-2.61%)
S&P 500 1,332.83 -27.72 (-2.04%)
NYSE Volume 3,716,873,000

2-Yr Bond 1.76% -0.08
10-Yr Bond 3.49% -0.06
30-Yr Bond 4.30% -0.04

Dollar Index 71.808 -0.309
Crude Oil (May) 110.14 +0.03
Nat Gas (May) 9.901 -0.197
Gold (June) 927.00 -4.80

Bull Sectors

I am getting more and more excited about two intertwined sectors every day. They are infrastructure and steel. Infrastructure companies design and build the world’s biggest and most complicated projects: power plants, bridges, oil drilling, pumping and refining facilities, pharmaceutical research facilities. I posted some of my picks in this sector in a previous Bull Stocks post but feel it necessary to expand on it.

Infrastructure companies have many catalysts right now. The energy sector is expanding on multiple fronts. In the search for more oil, refiners are building more and more refineries that can handle heavier (dirtier) crudes than previously. This isn’t a simple upgrade, it involves building a whole new, more complicated, more expensive refinery. The price tag? Up around $7BN. We are going to see more of these refineries continue to go up because they improve the crack spread for oil refiners. The crack spread is the difference between what refiners pay for a barrel of oil and what they charge for the gasoline. Dirtier crude is a cheaper input. Infrastructure companies will see some big orders from this trend.

Additionally, the search for oil is taking us to increasingly difficult places to drill. The apparatuses with which drillers tackle these environments are often constructed by these infrastructure companies (MDR is very concentrated in this area).

Beyond oil, there are four very specific catalysts: Brazil, Russia, India, China. These, the “BRIC” countries, are building infrastructure to support their newfound place on the world economic stage. Think about how much power China and India require to get it to all their citizens. This mean infrastructure companies building nuclear, gas and coal power plants. Also, think about these countries building roads, large buildings, and how much companies there are expanding.

Beyond BRIC there is another geographic catalyst: Dubai. All the huge projects and big ambitions of Dubai rely on very heavy construction. The oil dependent countries are desperate to create economy outside of oil which results in fast expansion of infrastructure.

To back up the infrastructure thesis I reference GE’s earnings today. GE missed because of their financial sector. Their infrastructure revenues were up 23%. If you’re looking for ways to play infrastructure, my favorite is Foster Wheeler (FWLT). FWLT is down on missed earnings last quarter but remember, these companies do big projects of a wide variety, meaning different margins. Therefore, earnings are lumpy, so if a company has a good historyand good management, it’s generally a great opportunity to buy on the dips. Other major international infrastructure companies: ABB, MDR, JEC, SGR, URS, FLR. Another interesting play with a well run company: Manitowoc (MTW), 70% of their revenue comes from being one of the world’s biggest crane manufacturers.

The side effect: steel. Steel prices are going way up as a result of all the infrastructure reasons we just talked about. We’re a little late on this if you look at the chart of any major steel company but there still may be a decent way to go. Major Steel companies include: X, MT, AKS.

Steel companies are also facing a major problem in rising input costs. This makes vertically integrated MTL, a Cramer pick on Monday, very interesting. I have yet to have the time to do my full due diligence on this but it’s definitely an intriguing situation.

Market Summary: Thurs. April 10, 2008

Today’s session was filled with news. Before the bell, initial jobless claims were reported at 357K, better than the analysts’ estimates of 383K. Last week, we saw a huge spike in claims to 410K and everyone was scared out of their shoes. Today’s reading was a very positive sign that the economy is not spiraling out of control. Also, the trade deficit was wider than expected. The Bank of England lowered its target rate (fed funds equivalent) 25 bp to 5% and the European Central Bank kept its benchmark rate at 4%. Interest rate reductions on foreign currencies make the dollar relatively stronger; the dollar index finished up $0.28 (Source: Briefing.com).

The major retailers reported last month’s same-store sales (always second Thursday of the month). Wal-Mart and Costco were the big winners on the day. WMT only reported a 0.7% increase in its March same-store sales (analysts were looking for 0.9%), but the company raised its Q1 earnings guidance. “Wal-Mart now expects earnings per share…of 74 cents to 76 cents, up from a previous forecast of 70 cents to 74 cents per share” (Source: MSNMoney). Costco’s same-store sales rose 7%. Analysts were only looking for a 5.9% increase (Source: MarketWatch.com). Target disappointed the street the most. The company reported a same-store sales decline of 4.4%. The consensus estimate was for a 2.7% decline.

For the day, the NASDAQ and large-cap tech stocks were the relative winners. Cisco was strong because Morgan Stanley said the company might beat analysts’ estimates when it reports earnings. Intel was upgraded to “buy” from “neutral” by Bank of America and analysts predicted the company will raise its dividend. Bank of America also upgraded a few other semiconductor companies.

DuPont also raised its quarterly guidance to $1.29 per share. This is higher that the previous estimate of $1.14 to $1.19 estimate. I own shares of DuPont for my investopedia portfolio – this company is a great way to play the agriculture boom through its chemicals division.

There was also lots of financial news to digest today. Lehman Brothers announced it “liquidated three of its investment funds with assets totaling $1B because of ‘market disruptions’” (Source: Forbes.com). Deutsche Bank came out and said it expects Lehman to write-down $2B worth of assets in Q2.

Goldman Sachs’ CEO, Lloyd Blankfein, said “We’re closer to the end than the beginning” when referring to the credit crisis. He also said, “By the end of the year we think we will be on a growth curve again” (Source: Bloomberg.com).

The Fed announced the results of its Term Securities Lending Facility. The Fed offered $50B, but only $33.95B worth of bids was submitted. Investment banks last week tapped the discount window for $32.5B (average daily balance), down $5.6B from the previous week (Thurs-Wed). Commercial banks tapped the discount window for $7.3B, down $3B from the previous week (Source: CNBC TV). Banks seem to be doing a little better and the low demand might mean they are not in need of as much cash as people originally thought. We’ll have to wait and see until next week when most of the financial companies report earnings.

DJIA 12,581.98 +54.72 (+0.44%)
Nasdaq 2,351.70 +29.58 (+1.27%)
S&P 500 1,360.55 +6.06 (+0.45%)
NYSE Volume 3,664,750,000

2-Yr Bond 1.84% +0.07
10-Yr Bond 3.55% +0.06
30-Yr Bond 4.34% +0.03

Dollar Index 72.117 +0.284
Crude Oil (May) 110.11 -0.76
Nat Gas (May) 10.098 +0.042
Gold (June) 931.80 -5.70

Stat of the Year

What two things have really been driving the market down since last summer? The housing market and the inefficiencies in the debt markets. Where better to look and see exactly how bad things are then at the securitization of home loans. Securitization of home loans refers to the process of bundling mortgages and selling them to investors.

From today's Wall Street Journal: "Securitizations of home loans totaled $19 billion on March [2008], compared with $218.6 billion in March 2007, when the U.S. housing market began its sharp decline, according to data research firm Dealogic."

Why have home loan securitizations declined by 91% in a year? Well first, people are buying less homes. When banks make a loan now, they can't turn around and sell it as easily to get cash to make another loan, so when the next guy walks in to get a mortgagae, they may not have enough cash to lend him, so then he can't buy a home, so home prices go down, so more people default on their mortgages, and it becomes harder to sell CDOs (or securitized mortgages). That is the vicious cycle we're in right now.

Market Summary: Wed. April 9, 2008

It was a blah day with the averages all finishing lower on the street today. The Dow was down .4% to 12,527, the S&P was down .8% to 1355 and the NASDAQ led the way down 1.1% to 2322. A lot of the pressure on stocks came from a rally in oil.

Oil surged to a high above $112 on an inventory report that showed a draw (decrease) in inventories for the last week. Oil is now up 79% from this time a year ago. We also saw refinery usage kick up a notch, to 83% from 82.4%. When we hear about crude oil prices such as above, they refer to light sweet crude (west Texas to be particular). This is one of the easier kinds to refine, but harder to find. Most new refineries being built are being built to handle heavier, dirtier crudes that are more readily available. See my “bull sectors” post coming soon for a nice play on this and similar trends.

UPS came out and warned about profits. This was a shock given the rise in online shopping. This also should make us all skeptical of any retailer reporting this quarter, especially those that rely heavily on online shoppers. However, the primary cause of this miss was probably gas prices. Thus, FedEx, the rails and all transports saw a lot of downward pressure today.

American Airlines has major issues. The FAA said the wires by the landing gear are bundled wrong in American's MD-80s, which are the company's workhorses for short to mid range flights, including Chicago to NYC, which I’m flying tomorrow… fun! American’s MD-80s fly 1,000-1,200 flights a day - 850 were canceled today. Not only does this hurt revenue, but American has to pay to fix all the planes, rebook passengers (sometimes on different airlines), put passengers in hotels and more. AMR was down 11% today.

This morning Boeing came out with yet another delay in the production of its 787 Dreamliner. This, the third delay, actually resulted in a pop in the stock because the street was expecting a worse delay. With this announcement however, the pressure is squarely on Boeing to produce because the street now expects its planes on time.

Financials were laggards today. Merrill may post a loss of up to $6.5BN on further writedowns. On a better note, Citi showed signs of life, getting close to a deal to sell $12BN of its bad loans to hedge funds for about 90 cents on the dollar. This is a good step for Citi in purging their balance sheet of all the junk it is cluttered with. Even Goldman may be in trouble after announcing its percentage of hard-to-value assets jumped during the first quarter. Goldman also said on half the days of the first quarter they had trading gains or losses of more than $100million. As Mr. Koster said yesterday, traders love volatility.

Gold was up 2%. The dollar fell. Remember, when the dollar falls, commodities that trade in dollars (basically everything) go up.

DJIA 12,527.26 -49.18 (-0.39%)
Nasdaq 2,322.12 -26.64 (-1.13%)
S&P 500 1,354.49 -11.05 (-0.81%)
NYSE Volume 3,527,657,000

2-Yr Bond 1.77% -0.10
10-Yr Bond 3.49% -0.09
30-Yr Bond 4.31% -0.06

Dollar Index 71.833 -0.399
Crude Oil (May) 110.87 +2.37
Nat Gas (May) 10.056 +0.359
Gold (June) 937.50 +19.50

Market Summary: Tues. April 8, 2008

The markets opened lower because of Alcoa’s not-so-hot earnings report after yesterday’s close and we remained lower all day. Advanced Micro Devices (AMD) lowered its guidance below analysts’ expectations, February pending home sales declined 1.9% (the market was only looking for a 1.0% decline), and the FOMC minutes showed the Fed expects the economy to contract the first half of 2008.

Alcoa reported a 54% drop in profit compared to the same period last year and missed analysts’ EPS estimates by 4 cents. AMD fell 5% as the company’s Q1 revenue did not meet expectations and they announced plans to cut 10% of their work force” (Source: Bloomberg.com). The chip names, including Intel, were down big off the AMD news.

Yesterday, there was talk Washington Mutual was lining up $5B worth of financing from a private equity firm, and today a $7B deal was announced. WaMu announced it expects a $1.1B loss this quarter and plans to cut 3,000 jobs. The company also cut its dividend to 1 cent from 15 cents. Shares were down 10% on the day (Source: CNBC.com).

In the FOMC minutes, the Fed officials expect “a prolonged and severe economic downturn…Many participants thought some contraction in economic activity in the first half of 2008 appeared likely” (Source: Bloomberg.com). This news caused a small sell-off, but nothing too big. Everyone is pretty much expecting no growth for the first half of the year, so this news was pretty much already baked-in to stock prices.

The International Monetary Fund (IMF) made a statement today saying “total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945B…The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted” (Source: Bloomberg.com). This news also weighed on many of the financials names. So far, $232B of assets have been written-down to due losses stemming from mortgage-backed securities and bad loans.

- Goldman Sachs said to sell Fannie Mae and Freddie Mac

- Lehman Brothers said to buy Fannie Mae and Freddie Mac

- Apple was downgraded

- Proctor & Gamble raised its dividend, again

- Dell is in talks with Dubai about getting a large capital investment

DJIA 12,576.44 -35.99 (-0.29%)
Nasdaq 2,348.76 -16.07 (-0.68%)
S&P 500 1,365.54 -7.00 (-0.51%)
NYSE Volume 3,581,998,000

2-Yr Bond 1.87% -0.08
10-Yr Bond 3.58% +0.01
30-Yr Bond 4.37% +0.01

Dollar Index 72.232 +0.030
Crude Oil (May) 108.50 -0.59
Nat Gas (May) 9.697 -0.094
Gold (June) 918.00 -8.80

Market Summary: Mon. April 7, 2008

For the first half of the day, the market was trending higher thanks to strength in the energy and financial names. Oil was trading near $109 all day and gasoline hit another record high. The strength in financials came from talks that Washington Mutual (WM) was working on getting a $5B capital infusion. Shares of WM were up 30% on this news.

TPG Inc., a private equity firm, looks like it will be the main investor and the deal could be completed within a few days. “TPG would purchase both common and preferred shares…and TPG probably would get a seat on [WaMu’s] board” (Source: Bloomberg.com).

Also helping the financials was a UBS upgrade to “buy” from “neutral” at Merrill Lynch.

Apple continued its run higher after an upgrade by Thomas Weisel Partners. Shares were upgraded to “overweight” from “market perform” and the price target was raised to $195 from $188. The analyst said, “Over the next few years, we expect Aplle to maintain above-peer operating margins, preserve its fierce brand loyalty and set a foundation for accelerating market share gains” (Source: Forbes.com).

After some time on the sideline, the Yahoo! – Microsoft deal talks have resumed. After Friday’s close, Microsoft threatened to lower its $31 bid and gave Yahoo! three weeks to accept the offer or else a proxy fight will occur (Source: Bloomberg.com). On Monday, Yahoo! fired back, saying “We have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders. … We are open to all alternatives that maximize stockholder value. To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo! on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing” (Source: Businessweek.com). Basically, Yahoo! said they want more than $31/share.

Around noon, the market did a complete 180 and volatility came back. Arch Coal (ACI), an average-sized ($7.4B market cap) company, came out and re-affirmed its earnings forecast of $2-$2.50 for 2008. Shares dipped from $51.50 to $47 and the stock market followed suit by rolling over and erasing its 1% gain. This was a very positive report and reporters on CNBC made it out to be an earnings “warning.” I don’t believe that to be the case at all given that the company expects to double its 2007 profit (Source: Reuters.com).

The earnings season kicked off after the bell with Alcoa (AA), an aluminum producer. Reactions were mixed as AA lowered its forecast for worldwide aluminum consumption.

Alcoa’s profit fell short of analysts’ expectations because of higher energy costs, slowing demand, and a weakening dollar. Sales, however, surpassed analysts’ expectations (Source: CNBC.com). Alcoa is the first Dow component to report quarterly earnings and some look to this report to set the tone for the entire earnings season.

DJIA 12,612.43 +3.01 (+0.02%)
Nasdaq 2,364.83 -6.15 (-0.26%)
S&P 500 1,372.54 +2.14 (+0.16%)
NYSE Volume 3,718,560,000

2-Yr Bond 1.95% +0.12
10-Yr Bond 3.57% +0.07
30-Yr Bond 4.36% +0.04

Dollar Index 72.202 +0.181
Crude Oil (May) 109.09 +2.86
Nat Gas (May) 9.791 +0.469
Gold (June) 926.80 +13.60

Market Summary: Fri. April 4, 2008

The market has been extremely resilient lately. When bad news is reported, the market sells off slightly and then rebounds as investors buy up “bargain” stocks. These “bargain” stocks are attractive based on their fundamentals and past earnings performance. These companies have strong balance sheets with little debt and are not affected by the slowing U.S. economy. I believe the bad news is already priced into stocks and the $2 take-over bid for Bear Stearns on March 17^th signaled the market bottom (at least for a few weeks). The stock market is acting like a coiled spring and when the first piece of good news arrives, we’ll be in for a major rally.

Friday, the unemployment number came in much worse than expected, but the market rebounded quickly. March non-farm payrolls declined by 80,000. This marked the third consecutive monthly decrease. The unemployment rate hit 5.1%. Last month’s reading was only 4.8% and economists were only expecting a reading of 5.0% for March. February’s non-farm payrolls number was revised to 76,000 from 63,000 (Source: Bloomberg.com). Off of this news, bonds rallied (yields decreased) as investors expect the Fed to cut rates more aggressively at its next meeting.

The only major earnings report came from fertilizer company Mosaic. Q3 earnings were 99 cents per share while analysts were only looking for 95 cents. The stock was up about 10% all day. Mosaic has incredible pricing power. “Phosphate prices more than doubled from a year ago to $487 per ton. Potash went up $77 a ton to $221 a ton” (Source: CNNMoney.com). All the agriculture names were strong Friday.

The financial stocks were the laggards on the day thanks to another round of earnings estimate cuts. JPMorgan cut estimates at Citigroup, Bank of America, and Wachovia. Deutsche Bank added JPMorgan and Citigroup to their “sell” list (Source: Briefing.com).

MBIA Insurance Corporation had its credit rating cut by Fitch. “MBIA Insurance Corp, the insurance arm of the world's biggest bond insurer, saw its ratings fall to ‘AA,’ the third highest, from a top rating of ‘AAA.’ Fitch also cut the parent company (MBIA) by three notches to ‘A,’ the sixth highest, from ‘AA’” (Source: Reuters.com).

The price action this last week was very bullish. We were able to maintain all of Tuesday’s gains and in the face of very bad economic news, we did not see panic selling.

Lately, tech has been very strong thanks to Apple and Research in Motion. The financials were all up huge this week. I think this move is over-exaggerated given that many of these companies will report earnings in two weeks and no one really knows what to expect. Oil continues to trade above $100 per barrel and all the energy names remain strong because of this. Before the market can make its big move higher, we need to get better economic data and I don’t see that happening for some time. Volatility will remain and we will continue to trade sideways.

DJIA 12,609.42 -16.61 (-0.13%)
Nasdaq 2,370.98 +7.68 (+0.32%)
S&P 500 1,370.40 +1.09 (+0.08%)
NYSE Volume 3,672,712,000

2-Yr Bond 1.83% -0.08
10-Yr Bond 3.50% -0.11
30-Yr Bond 4.32% -0.08

Dollar Index 72.021 -0.196
Crude Oil (May) 106.23 +2.40
Nat Gas (May) 9.322 -0.095
Gold (June) 913.20 +3.60

Market Summary: Thurs. April 3, 2008

This was the second straight day of choppy trading and we ended slightly up on the major indexes. Strength in the financials and the agriculture names kept the markets in positive territory.

Economic news this morning was mixed. The initial jobless claims number came in at its highest level since September 2005 – 407K. Analysts were looking for only 365K. Last week’s reading was 369K. “The number of workers remaining on jobless benefits climbed 97,000 to 2.94 million in the week ending March 22…This compared with forecasts for 2.87 million so-called continued claims” (Source: CNBC.com). Tomorrow is the much more important unemployment number, and it looks like analysts are expecting the rate to increase to 5.0% from 4.8% last month. This piece of data will set the tone for the markets tomorrow.

Also, the Institute for Supply Management’s Service Index came in at 49.6, slightly better than expectations. Last month’s reading was 49.3. Any number below 50 indicates contraction.

According to the Federal Reserve, investment banks are taking full advantage of the Fed’s new lending facility. “Firms average $38.1B in daily borrowing over the past week…that compares with $32.9B in the previous week and $13.4B in the first week the lending facility opened…[commercial] banks also stepped up their borrowing from the Fed’s discount window. Banks averaged $7B in daily borrowing for the week ending April 2. That compared with $550M the previous week” (Source: CNBC.com). This data is a great sign that investment banks are utilizing the Fed’s new lending instrument to fix their balance sheets.

The financials continued their rally today, although I’m still not a buyer. Shares of Merrill Lynch spiked today after CEO John Thain said there is no need for the company to raise extra capital (Source: CNNMoney.com). The big news, however, came from testimony on Capitol Hill regarding the Bear Stearns bailout. Bear CEO Alan Schwartz explained that if the Fed acted earlier, the company may have survived. “Had the discount window been opened to investment banks for their high-quality collateral, I think it is highly, highly unlikely in my personal opinion that we would be in the situation we find ourselves today” (Source: Bloomberg.com).

The agriculture stocks rallied as corn surpassed $6 per bushel and profit estimates at Monsanto were raised. All the commodity names were strong on the day.

In other news…

- Cisco was downgraded to “neutral” by UBS

- MEMC Electronics (WFR) reported worse-than-expected results because of a maintenance delay at one of their plants and they lower their Q1 guidance

- Goldman Sachs, Morgan Stanley, and Merrill Lynch had their earnings estimates lowered by Lehman Brothers

- Lehman Brothers had its earnings estimates cut by Goldman Sachs

DJIA 12,626.03 +20.20 (+0.16%)
Nasdaq 2,363.30 +1.90 (+0.08%)
S&P 500 1,369.31 +1.78 (+0.13%)
NYSE Volume 3,889,506,000

2-Yr Bond 1.91% +0.03
10-Yr Bond 3.61% +0.01
30-Yr Bond 4.40% +0.02

Dollar Index 72.217 -0.042
Crude Oil (May) 103.83 -1.00
Nat Gas (May) 9.417 -0.415
Gold (June) 909.60 +9.40

Market Summary: Wed. April 2, 2008

We saw some weakness today after yesterday’s huge rally which was expected, though. Today’s trading was pretty choppy as news was mixed on all fronts.

In economic news, the ADP employment number (private employment) came in much better than expected. Companies added 8,000 jobs in March while analysts were looking for a 45,000 decrease (Bloomberg.com). The employment numbers are the best tools we have to measure the health of the economy and the consumer, and as the financial system has slowly deteriorated it is a very positive sign to see companies adding jobs.

The February Factory Orders number of -1.3% was weaker than expected. Analysts were only looking for a decrease of 0.8%. January’s reading was -2.3%. “Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 2.4 percent…Orders excluding defense equipment decreased 1.5 percent. Bookings for military gear fell 2.2 percent. Bookings for transportation equipment increased 1.8 percent as aircraft demand rose 5.1 percent. Demand for automobiles dropped 2 percent” (Bloomberg.com).

Best Buy reported earnings today that topped analysts’ expectations. Net earnings were $737M, or $1.71 per share. Analysts were looking for $1.65 per share. “Total sales rose 4% to $13.4B, better than the $13.17B analysts expected.” Same-store sales, however, declined 0.2% (Source: CNBC.com).

Monsanto also reported good earnings today. “Monsanto earned $1.13 billion, or $2.02 per share…from $543 million, or 98 cents per share, in the prior year. Its revenue jumped 45 percent to $3.8 billion from $2.6 billion in the prior-year period.” Analysts were looking for $1.72 per share. (Source: Yahoo! Finance, “Monsanto 2Q Profit Surges, Revenue Climb). Monsanto sold off on this news down to $106, but rallied to close the day at $112.

The big news on the day came from Ben Bernanke’s testimony to Congress. He said, “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.” Bernanke also testified that Bear Stearns was about to file for bankruptcy and the decision to bail out Bear Stearns was done “to ‘prevent a disorderly failure’ of the company and the ‘unpredictable but likely severe consequences of such a failure for market functioning and the broader economy’” (Source: Bloomberg.com). This statement from Bernanke is the most pessimistic we have received from him since problems began in July 2007.

Crude oil rallied almost $4 after a bearish inventory report showed “gasoline stockpiles declined 4.53 million barrels to 224.7 million barrels last week” (Source: Bloomberg.com). The entire energy complex rallied today off this news.

After hours, Research in Motion reported strong earnings that handily beat expectations. The company earned $412.5M, or 72 cents per share. This compares with $187.4M, or 33 cents per share from the same period a year earlier. Analysts were looking for 66-70 cents per share. “For the upcoming first quarter, the company said it expects revenue of $2.23 billion to $2.3 billion and a profit of 82 cents to 86 cents a share — better than the 77 cents expected by analysts, according to Reuters Estimates” (Source: CNBC.com). Look for strength in the tech names tomorrow.

In other news…

- According to Bloomberg.com, analysts expect the economy to grow at 0.1% in the first quarter of 2008

- The International Monetary Fund decreased its forecast for global growth because there is now a 25% chance of a world-wide recession.

DJIA 12,605.83 -48.53 (-0.38%)
Nasdaq 2,361.40 -1.35 (-0.06%)
S&P 500 1,367.53 -2.65 (-0.19%)
NYSE Volume 4,279,693,000

2-Yr Bond 1.88% +0.08
10-Yr Bond 3.60% +0.03
30-Yr Bond 4.38% -0.02

Dollar Index 72.259 -0.304
Crude Oil (May) 104.83 +3.85
Nat Gas (May) 9.832 +0.108
Gold (June) 900.20 +12.40

Sweet articles!

If you want to read a really good summarization of a phenomenal turnaround story read this article. It's about Nabeel Gareeb who runs WFR (previously mentioned in a "Bull Stocks" post). He took the company from worthless to $18BN in about 5 years. I am long WFR, partly because in addition to being a good company, Nabeel's my boy and gives one of the best conference calls out there cause he refuses to take crap from analysts and tells it straight.

The WSJ had a nice column here, very short, that talks about how bond and stock prices have handled the turmoil lately. It's a great article for those looking to gain a better basic understanding of what's going on. While it's a good article, remember that bonds are supposed to not get hammered in times like this. They generate lower returns then stocks over long periods of time because they're exposed to risk, meaning in very volatile times (eg the last 8 months) they should retain their value better. Also remember who gets paid first when a company goes bankrupt: bondholders then stockholders. If you want to get the one sentence summary from a guy with a sweet name, it's below:

"The debtholders have done extremely well because the company either sells itself (at the expense of shareholders) at a discount or issues enough equity to put off a bankruptcy," says Boaz Weinstein, co-head of global credit trading at Deutsche Bank.

Corporate Culture

I promise no more short articles after this.

Here's a great article discussing the corporate culture at Bear Sterns, comparing its more diverse, rags to riches history of its employees, in comparison to the more white-shoe firms full of old money yuppies, like Morgan Stanley. Sadly, it reads like something of an obituary.

Cool Numbers

So they're not cool numbers, more like depressing, but here is a link breaking down how much the big banks each have lost in Sub-prime default write-downs.

Another interesting, but only loosely correlated couple numbers: the best performing equity markets are currently in Pakistan, Peru, and Chile. Had you invested in the BRIC markets? Well, sorry (see the article).

Finally, a real bummer of a number: 13% of philanthropic giving is embezzled in fraud