MarketView for May 6

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, May 6, 2008

 

 

 

 

Summary

 

Wall Street took to heart a cheerier than expected outlook on life, sending share prices higher during the latter half of the trading day. Leading to the unmistakably bullish outlook were Fannie Mae's reassuring comments about the credit and housing markets that buoyed financial shares, while record crude oil prices lifted shares of energy companies.

 

Add to that the speculation that Microsoft may at some point return to the table to continue its talks with Yahoo and suddenly you have a rebound in technology shares. Microsoft and Yahoo were both among the NASDAQ’s top five advancers as speculation continued that pressure from Yahoo's shareholders would revive takeover talks. Shares of Microsoft, which abandoned its bid for Yahoo, ended the day up 62 cents, or 2.13 percent, to close at $29.70, while Yahoo closed up $1.35, or 5.54 percent, at $25.72.

 

After an early retreat, the session turned positive when top executives of Fannie Mae said the worst of the credit market turmoil erupting from the real estate slowdown may have passed. That mitigated earlier concern about its huge quarterly loss, and propelled a broad rally in financial stocks. Fannie Mae ended the day up $2.52, or 8.91 percent, to close at $30.81, while Freddie Mac closed up $1.81, or 7.09 percent, at $27.33.

 

The optimism from Fannie Mae's comments also contributed to a rise in the shares of home builders, with the Dow Jones home construction index was up 2 percent for the day. Shares of D.R. Horton, the largest domestic home builder, rose 88 cents, or 5.51 percent, to close at $16.85, even as the company posted a quarterly loss of $1.3 billion and halved its dividend.

 

Oil rose above $122 per barrel for the first time, carrying energy shares higher and outweighing a retreat in sectors sensitive to high fuel costs, such as airlines and retailers. Energy shares rose after U.S. crude oil hit a record above $122 a barrel. A stronger-than-expected profit from independent oil and gas company Anadarko Petroleum also buoyed the energy sector.

 

Exxon Mobil ended the day up 56 cents, or 0.63 percent, to close at $90.07, while ConocoPhillips was up $1.56, or 1.79 percent, to close at $88.74 and Chevron was up $1.25, or 1.31 percent, to close at $96.87. Anadarko picked up a gain of $6.39, or 9.38 percent, to $74.53. Shares of Schlumberger rose $2.02, or 1.99 percent, to close at $103.58. The oil index was up 3.3 percent.

 

Goldman Sachs wrote in a research note that the price of oil could go as high as $200 per barrel within the next two years as part of a "super-spike" driven by poor growth in oil supplies.

 

Immediately after the closing bell, there was more encouraging news that could help stocks extend their advance on Wednesday as Disney posted a stronger-than-expected quarterly profit, sending its shares up more than 3 percent in after-hours trading from their regular trading close $33.73. Disney is seen as a bellwether of consumer spending.

 

However, higher energy costs threaten to crimp consumer spending. Wal-Mart Stores was the top drag on the Dow Jones industrial average. Wal-Mart' ended the day down 62 cents, or 1.09 percent, to close at $56.35.

 

Another Record For Crude

 

The price of crude oil hit another record price above $122 per barrel on Tuesday as supply worries and the weak dollar sent prices higher and had some experts forecasting a potential spike to $200. Domestic sweet crude settled up $1.87 per barrel at $121.84. London Brent crude settled up $2.32 at $120.31 per barrel, after hitting a record $120.99. Compared with a year ago, domestic crude is up almost 97 percent.

 

Rising tensions with Iran, after it refused to accept inspections of its nuclear program that the West fears could be linked to weapons, stirred supply concerns from the OPEC nation. At the same time, Nigerian disruptions from militant attacks and a strike have also underpinned prices since late April, adding to gains that have sent prices for oil up about six-fold since 2002 as part of a wider commodity surge.

 

Growing demand from emerging markets like China has supported the oil rally, as supplies struggle to keep pace, with further strength for dollar-denominated commodities coming from the slumping greenback.

 

High oil prices have hit domestic refiners' profit margins, prompting some to trim runs, but stoking supply concerns as the world's biggest oil consumer heads into the summer driving season. Speculators have also poured cash into commodities as a hedge against inflation since September.

 

The mounting supply problems and strong demand from emerging economies prompted Goldman Sachs to forecast oil could reach $200 a barrel within the next two years.

 

"We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent," Goldman wrote in a note to clients. "In our view, a gradual rally in prices is likely to be longer lasting than a sharp, sudden spike."

 

However, rising costs, as well as wider problems with the economy, have depressed domestic fuel demand, with the Energy Information Administration reducing its demand forecast by 90,000 barrels per day (bpd) in the second quarter and 100,000 bpd in the third quarter.

 

Cisco Still Doing Well

 

Cisco Systems offered a cautious outlook on the economy on Tuesday after posting quarterly earnings that beat expectations as rising Internet traffic fueled demand for network equipment.

 

According to Chief Executive John Chambers, Cisco is seeing some orders slide out. However, he said that's what normally occurs during a little bit more challenging economic times. "Overall I wouldn't say yet that there's a turn. I'd say it feels pretty steady in terms of the business momentum."

 

Chief Financial Officer Frank Calderoni also urged Wall Street to "model on the conservative side due to macro-economic challenges," after forecasting 9 percent to 10 percent revenue growth for the current quarter.

 

Cisco, a manufacturer of routers and switches that direct Web traffic, indicated that its quarterly earnings fell to $1.8 billion, or 29 cents per share, from $1.9 billion, or 30 cents per share a year-ago. That included an acquisition related charge of 4 cents per share.

 

Quarterly earnings, excluding items, came in at 38 cents per share, as compared to 34 cents a a year ago. Cisco said quarterly revenue rose 10.4 percent to $9.8 billion, compared to its previous forecast 10 percent growth. It said it was comfortable with its long-term revenue growth target of 12 percent to 17 percent.

 

According to the company, its domestic orders growth was in the mid single digit percent for the quarter, while European orders rose 14 percent and emerging markets orders grew around 10 percent. The largest manufacturer of telecommunications equipment, Cisco is a bellwether for the technology sector.

 

"We will continue to monitor closely any spread of the U.S. challenges to other geographies," Chambers said.

 

Can Sprint Pull It Off This Time

 

Sprint Nextel and Clearwire are close to announcing a $12 billion joint venture with major cable operators for high speed wireless Internet access for mobile phones and laptops, a source familiar with the talks said on Tuesday. An announcement is expected to come before the market opens on Wednesday morning, the source said. The Wall Street Journal first reported the news on its website.

 

Sprint, Clearwire and cable companies including Comcast and Time Warner Cable have been in talks about a joint venture using WiMax that would have investments of about $1.5 billion by the two largest U.S. cable companies, according to people familiar with the discussions.

 

Comcast is expected to contribute $1 billion, while Time Warner Cable will invest $550 million. In addition, Intel is expected to contribute $1 billion, and Google $500 million. Bright House Networks may contribute up to $200 million.

 

WiMax is a largely unproven technology that promises to support Internet access at speeds up to five times faster than traditional wireless networks, and can support a range of mobile and video applications.

 

The cable companies pulled out of a previous wireless phone joint venture with Sprint last month.

 

Disney Beats Expectations

 

Disney posted a better-than-expected 22 percent rise in earnings on Tuesday as its movie studio scored hits with "National Treasure: Book of Secrets" and "Enchanted" and a weak U.S. economy failed to dampen theme park attendance. Disney's media networks also saw a double-digit rise in second-quarter operating income due mainly to affiliate and ad rate increases and subscriber growth at sports channel ESPN.

 

Broadcasting shook off a Hollywood writers' strike that ended halfway through the quarter to post a 17 percent rise in operating income, propelled by international sales of ABC Studios scripted shows like "Lost" and "Gray's Anatomy." Disney joined other major U.S. media companies in outperforming expectations in the first quarter.

 

Net income in the fiscal second quarter ended March 29 was $1.1 billion, or 58 cents per share, as compared with $931 million, or 44 cents per share, in the same quarter last year.  Revenue rose nearly 10 percent to $8.7 billion.

 

Disney also cheered investors by predicting that its theme parks, seen by some as a bellwether of consumer spending because of the need to plan vacations, would stay "resilient" despite rising gasoline prices and air fares.

 

Domestic room reservations for the rest of fiscal 2008 were trending slightly ahead of last year, though the third quarter faces a tough comparison versus last year, which had included the Easter holiday, Chief Financial Officer Tom Staggs said.

 

"We believe we are much better positioned in a difficult economic cycle than we were in the past," Chief Executive Bob Iger said on a conference call with analysts. "We believe this segment can sustain success for many years to come."

 

Staggs said its ABC television network was seeing "healthy" double-digit growth in spot ad sales in the third quarter.

 

Staggs predicted, however, that ABC would have fewer scripted shows to sell into international markets in the third quarter as a result of the writers' strike.

 

At Disney Studios, the upcoming "Prince Caspian" and Disney-Pixar's "Wall-E" would be "swing factors" in the latter half of the year, Staggs said.

 

Disney Consumer Products, which saw second-quarter profit drop due to lower minimum guarantees from retailers, expects costs from video game development and its repurchase of 220 Disney retail stores from The Children's Place to cut in to profits for the rest of the fiscal year, Staggs said.

 

Hope for AMD

 

Advanced Micro Devices saw its share price rise more than 12 percent on Tuesday on optimism that the beleaguered chipmaker could soon announce its long-awaited strategy to revamp manufacturing to cut costs.

 

The stock's rise, which adds to a 6 percent gain on Monday, also comes after a new filing in AMD's 2005 antitrust lawsuit against Intel that added to AMD's list of allegations that Intel pressured and paid PC makers not to buy AMD chips.

 

It has been a little more than a year ago now that AMD Chief Executive Hector Ruiz announced that the company would be retooling its manufacturing strategy to cut costs and ease cash flow problems.

 

In its most recent earnings conference call with analysts, Ruiz hinted that a detailing of that strategy would come sooner rather than later. Options include separating AMD's chip manufacturing plants, or forging a joint venture or partnership with a contract chipmaker.

 

AMD also holds its annual stockholder meeting in Austin, Texas, on Thursday morning. Those events are often short on news, but Kumar said it was at least possible that AMD could detail specifics of its asset-light manufacturing strategy.

 

Shares of AMD are down some 40 percent in the last 12 months, compared with a 21 percent decline in the Philadelphia Stock Exchange Semiconductor Index in the same time period. Intel shares are up more than 7 percent in the last 12 months.