Email Version, Section 2, Sunday 04/29/2001
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In This Newsletter:
Market Commentary - No More Chicken Little
Definition of the Day
Friday's Split Announcements - None
Event Calendar - Next Week's Economic reports
Upcoming Splits for next two weeks
Successful Announcements - Last Week
New Candidates List
Expected/Likely Announcements for the Coming Week
Market Stats For the Week
Index Close Change Support Resistance
DJIA (INDU) 10,810.05 +230.20 10,300 10,900
Nasdaq (COMPX) 2,075.82 - 87.34 1,850 2,250
S&P 500 (SPX) 1,253.07 + 10.12 1,180 1,275
Russell 2000 (RUT) 483.97 + 17.25 450 485
PHLX Semi (SOX) 642.74 - 26.85 575 725
No More Chicken Little
Maybe things really are not that bad after all, at least if you
trust last week's slate of economic data sets. On Wednesday, a
couple of reports were released that proved the housing market is
as strong as ever. Then on Friday, another report was released
that proved the rest of the economy isn't doing too badly either.
According to the Bureau of Economic Analysis, Gross Domestic
Product (GDP) for the first quarter of 2001 rose 2.0 percent,
which was double the 1.0 percent estimate forwarded by those
erudite types who eke out a living forecasting such things.
What's more, consumer spending, which accounts for two-thirds of
GDP, remained healthy in the quarter, rising 3.1 percent after
rising 2.8 percent in the fourth quarter of 2000.
On the business end, the news was equally as bullish. Business
investment also exceeded expectations, rising 1.1 percent for the
first quarter after declining 0.1 percent in the fourth. More
importantly, the inventory correction appears to be further along
than previously believed. Inventories dropped by $7.1 billion
after rising $55.7 billion in the fourth quarter of 2000. The
drop in inventories was the first in 10 years and the largest
since the third quarter of 1991, which is when the bull market
kicked into gear.
All in all, these reports were taken as an indication that the
economy has indeed bottomed. Arguably, the data support the view
that the Fed's rate cuts are working and that growth will improve
in the second half of the year.
Of course, there is a dark side to a recovering economy and
that's a possible reduction in interest rate cuts. The strength
of these reports has some market watchers lowering their
expectations for the size of the Fed's next rate cut, which
currently is expected to be 50 basis points, though many market
participants are beginning to think 25 basis points may be in
Despite the strong economic reports, consumer optimism remains
tepid. According to the University of Michigan's final index,
consumer sentiment fell to 88.4 in April from 91.5 in March.
Since November, the index has fallen 19.2 points, the biggest
drop since July to October 1990. The resent rash of corporate
layoffs must be taking a toll on consumer psyche.
Fortunately, though, these layoffs are not taking a toll on
trader psyche, particularly traders who ply their trade in those
New Economy issues that were thought immune to such pedestrian
business issues as layoff. Once again, the Nasdaq Composite
Index (COMPX) was the percentage leader on Friday. The index
closed the day up 40.82 points, or 2.01 percent, to 2,075.70.
Much of these gains came courtesy of its chip issues. Intel
(Nasdaq:INTC) gained $1.54 to $30.18 after reiterating its recent
outlook on capital spending and industry growth for the year.
The company also said that communications growth will return in
the next six to 12 months.
Moving in tandem with Intel were those companies that supply the
chip making giant with the gear necessary to make its products.
Altera (Nasdaq:ALTR), KLA-Tencor (Nasdaq:KLAC) and Applied
Materials (Nasdaq:AMAT). Taken together, these issues helped
lift the PHLX Semiconductor Index over 5 percent on Friday.
As for the Old Economy barometer, it also put in a decent
showing. The Dow Jones Industrial Average (INDU) gained 117.70
points, or 1.10 percent, to 10,810.05. Of the 30 INDU stocks, 24
posted gains. Alcoa (NYSE:AA) and Caterpillar (NYSE:CAT), both
cyclicals, reached fresh 52-week highs.
In the broader market, the S&P 500 Index (SPX) added 18.53
points, or 1.50 percent, to finish at 1,253.05. This oft-quoted
arbiter of bull and bear markets is trading at a 17.9 percent
discount to its March 2000 closing high of 1,527. Three weeks
ago it was trading at a 27.8 percent discount.
Speaking of the SPX, there are five companies in the index set to
be acquired by midyear: Honeywell (NYSE:HON), Quaker Oats
(NYSE:OAT), Harcourt General (NYSE:H), GPU (NYSE:GPU) and
Willamette Industres (NYSE:WLL). According to Barron's, Salomon
Brothers figures the likeliest replacements are Juniper Networks
(Nasdaq:JNPR), Bea Systems (Nasdaq:BEAS), eBay (Nasdaq:EBAY),
United Parcel Service (NYSE:UPS), John Hancock (NYSE:JHF) and
If the market believes Salomon's assessment is correct, there is
a good chance these stocks will have strong underlying support
for the next couple of months. Moreover, of these six SPX
candidates, I think UPS is the most intriguing because it's also
a candidate to replace Honeywell on the INDU.
In Splittrader stock news, our Current Play list put in another
stout performance last week. We posted a 7 percent gain in
Jacobs Engineering (NYSE:JEC) and a 6 percent gain in SouthTrust
Our big winner, though, was lottery systems provider GTECH
Holdings (NYSE:GTK), which finished up over 8 percent for the
week. On Friday, the company announced that Louisiana Lottery
extended it contract with GTECH for another five years. GTECH
estimates revenues will be approximately $40 million over the
five-year contract extension period.
We did have one notable loser, Union Pacific (NYSE:UNP), which
hit us with a 7 percent loss. We were expecting the stock to run
into its earnings report on Thursday, which it did, but not
before touching our stop loss at $54.50.
In the Treasury arena, bond prices fell Friday, sending yields
up, as traders bet the good ole days of free-falling interest
rates are just about over. The 10-year Treasury note yield surged
to 5.32 percent compared with 5.17 percent late Thursday. The
30-year bond's yield leapt to 5.80 percent vs. 5.70 percent.
The good news is the yield spread between the 2-year note and 30-
year bond swelled to 174 basis points, the widest it's been in
nearly seven years.
On the economic front, there wasn't much worth noting on Friday
aside from the GDP report. As for the coming week, personal
income and consumption spending for March kick things off on
Monday. Personal incomes are expected to have increased 0.5
percent, up from a 0.4 percent increase in February. Personal
spending is expected to have risen 0.2 percent in March, off from
a 0.3 percent gain in the previous month.
On Tuesday, construction spending, and the National Association
of Purchasing Management's (NAPM) index of manufacturing activity
will be released. Construction spending is forecasted to have
increased 0.3 percent in March, off from 0.6 percent gain the
prior month. The NAPM index is expected to post at 43.6 for
April, up from 43.1 in March. A NAPM index reading of below 50
indicates contracting business conditions within the sector.
The week's most awaited economic data sets will be released on
Friday. The unemployment rate, average hourly earnings, change
in non-farm payrolls, change in manufacturing payrolls, and
average weekly hours are due. The unemployment rate is expected
to rise to 4.4 percent for April, up from 4.3 percent in March,
average hourly earnings are expected to have increased 0.3
percent in April, off from March's 0.4 percent gain. The economy
is forecasted to have added 20,000 non-farm jobs in April
compared to a 86,000 non-farm jobs in March. Average weekly
hours are expected to post little changed at 34.2 in April, from
34.3 in March.
As for earnings, this week marks the end of the busiest period
for corporations posting first-quarter results. Notables
reporting include Hewlett-Packard (NYSE:HWP), Proctor & Gamble
(NYSE:PG), Loews (NYSE:LTR), Tricon Global (NYSE:YUM),
Priceline.com (Nasdaq:PCLN), and Royal Dutch Petroleum (NYSE:RD).
About four-fifths of the companies in the S&P 500 have issued
earnings so far and profits have fallen 5.2 percent from a year
ago, according to First Call. The drop in earnings is projected
to hit 7 percent for the S&P 500, compared to strong growth of
23.6 percent a year ago. While many companies have beaten
lowered forecasts, the first quarter is expected to be the worst
quarter for profits in a decade.
With earnings concerns still weighing on traders' minds, I think
the upside in both major market barometers will again be limited
this week. Last Sunday I said the market would likely be flat
for the week. I was close; the INDU finished up 2 percent while
the COMPX finished down 4 percent.
This week I again expect little movement one way or the other,
particularly on the COMPX, which is in a near-term trading range
between 1950-2,200. Based on Friday's close of 2,075, we are
smack-dab in the middle of this range, so I think the risk/reward
scenario on the COMPX is a wash.
With that said, I think that the COMPX may have a chance to
challenge 2,200 later in the week if it can hold its 50-dma at
2,020 through the first few sessions. It's also important to
note that the 10-dma, currently at 2,050, also provided the COMPX
with some support last week. However, I don't think this level
is nearly as important as the 50-dma, which is contrary to what
some technicians have been saying.
Chart of the NASDAQ Composite:
As for the INDU, it's fast approaching 10,864, which marked the
beginning of the March free-fall, so I think that the average
could meet some resistance at that level. Still, I wouldn't
discount the INDU's ability to blow through this level. After
all, it handled resistance at 10,700 with relative ease.
The key for the INDU will be its ability to hold its steep April
trendline. If it can do that, I think it has a shot at 11,000.
However, given that the INDU has run nearly 15 percent this
month, I think that's going to be difficult to do. So with
potential upside of 200 points and potential downside of 400
points, I think the risk definitely outweighs the reward at this
Chart of the Dow Jones Industrial:
Should we get a decent rally early in the week, I doubt that it
will be long-lived, so keep those stops tight to lock in your
profits. As a guide, keep stops no more than 10 percent below
the stock current price and look for natural levels of support
like moving averages (the 10-dma is often a natural support
level) and most recent consolidation ranges.
Definition of the Day
This is an offer to purchase shares of a corporation, usually at
a price higher than the current market price of the shares, with
cash, securities or both.
For the complete definition, please go to:
Friday's Split Announcements
Monday's Expirations by Payable Date
Performance Food Group (PFGC) splits 2:1
For the week of April 30th, 2001
Personal Income Mar Forecast: 0.50% Previous: 0.40%
PCE Mar Forecast: 0.20% Previous: 0.30%
Chicago PMI Apr Forecast: 40 Previous: 35
Agricultural Prices Apr Forecast: NA Previous: 4.00%
Auto Sales Apr Forecast: 6.5M Previous: 6.4M
Truck Sales Apr Forecast: 7.5M Previous: 7.7M
Construction Spending Mar Forecast: 0.30% Previous: 0.60%
NAPM Index Apr Forecast: 43.3 Previous: 43.1
Factory Orders Mar Forecast: 0.6% Previous: -0.40%
Beige Book Forecast: NA Previous: NA
Oil & Gas Inventory 27-Mar Forecast: NA Previous:311.9MB
Chicago Fed Idx Mar Forecast: NA Previous: -0.81%
Initial Claims 28-Apr Forecast: NA Previous: NA
NAPM Services Apr Forecast: NA Previous: 50.3
Vehicle Sales Apr Forecast: 14.0 Previous: -0.4%
Nonfarm Payrolls Apr Forecast: 30K Previous: -86K
Unemployment Rate Apr Forecast: 4.40% Previous: 4.30%
Hourly Earnings Apr Forecast: 0.30% Previous: 0.40%
Average Workweek Apr Forecast: 34.2 Previous: 34.3
ECRI Future Inflation Apr Forecast: NA Previous: 111.0
ECRI Wkly Leading Idx 27-Apr Forecast: NA Previous: -5.1%
Week of May 7th
May 07 Consumer Credit
May 08 Productivity-Prel
May 08 Wholesale Inventories
May 10 Initial Claims
May 10 Export Prices ex-ag.
May 10 Import Prices ex-oil
May 11 PPI
May 11 Core PPI
May 11 Retail Sales
May 11 Retail Sales ex-auto
Symbol Company Name Splits Payable Executable
SBUX - Starbucks Corp. 2:1 04/27/2001 04/30/2001
PFGC - Performance Food Group 2:1 04/30/2001 05/01/2001
PPDI - Pharmaceutical Product 2:1 05/11/2001 05/14/2001
MKT - Advanced Marketing Service 3:2 05/11/2001 05/14/2001
SOTR - SouthTrust Corp. 2:1 05/11/2001 05/14/2001
STZ - Constellation Brands 2:1 05/14/2001 05/15/2001
WM - Washington Mutual 3:2 05/15/2001 05/16/2001
CHS - Chicos FAS, Inc. 3:2 05/16/2001 05/17/2001
IVX - IVAX Corporation 5:4 05/18/2001 05/21/2001
STT - State Street Corp. 2:1 05/30/2001 05/31/2001
BAX - Baxter International 2:1 05/30/2001 05/31/2001
Successful Announcement Predictions For The Past Week
Symbol Company Date Announced
LH Laboratory Corporation 04/23
GENZ Genzyme General 04/25
JNJ Johnson & Johnson 04/26
NEW SPLIT CANDIDATES LIST
New Split Candidates:
BZH - Beazer Homes USA, Inc. $57.50 (+10.45)
BZH has never split its shares before, but now that it is knocking
on the $60 level, we feel that it is very close to rewarding
shareholders with a 2:1 split. Historically, homebuilders have
split their shares around the $50-$60 level. BZH just announced
earnings, so we will keep our eyes open for any BoD meetings, as
far as a likely time for the stock to announce a split.
DP - Diagnostic Products $64.25 (+9.05)
DP last split its shares way back in 1989 when the stock was
trading at around $50. Given that the stock is now 25% over
historic split-levels, a 2:1 could come at any time. However, we
are targeting the company's next earnings release date of 5/18 as
the next probable time for a split announcement.
FIC - Fair Isaac and Company, Inc. $67.65 (+7.30)
FIC last split its shares back in June of 1995 at $56.50. We are
now ell above those levels, so FIC is ripe for a split
announcement. Given that FIC has 35 million shares authorized and
only 14 million issued, a 2:1 is definitely not out of the
HSE - HS Resources, Inc. $49.78 (+4.18)
HSE has yet to split its shares, but given its recent run beyond
the $50 benchmark, we believe HSE is ready to announce soon. The
company has 50 million shares authorized and only 20 million
outstanding. We are targeting the firm's unofficial earnings
release date of 5/18 as the next likely time for a 2:1 split
TK - Teekay Shipping $52.00 (+2.74)
To date, TK has held off on splitting its shares. However, now
that the stock is over $50 and given the fact that it has 725
million shares authorized and only 39 million outstanding, we
feel that the oil tanker company is ready to announce a 2:1. Its
unofficial earnings date of 5/22 should be the catalyst for a 2:1
split announcement. a
Expected/Likely Announcements for the Coming Week
Please use courier new font to view table
Symbol Company To Announce
FHCC First Health Group 04/30
SRCL Stericycle, Inc. 05/01
APPB Applebee's Int'l 05/02
FHCC - First Health Group $50.76 (+5.18)
FHCC last split its shares 2:1 in May of 1998 when the stock was
trading at $58. We feel that the stock is close enough to
historic split-levels to announce a 2:1 split in conjunction with
earnings on 4/30.
SRCL - Stericycle, Inc. $44.00 (-2.75)
SRCL has never announced a split, but due to its recent parabolic
move higher, we feel that it may announce a 3:2 split when it
reports earnings on 5/01. It has 30 million shares authorized
and only 15 million outstanding.
APPB - Applebee's International, Inc. $41.93 (+1.26)
The casual dining restaurateur last split its shares 3:2 in
January of 1994 when it was at $35.00. With the stock now
trading almost 15% above historical split-levels, we feel another
3:2 split announcement could come along with the company's
earnings release on 5/02.
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