The euphoria exhibited after the Dow pierced that psychologically significant 10,000 level failed to follow through in today's session thus far. Market participants appear to be taking a bit of a pause and locking in some profits. However, the selling has been moderate and orderly. The action is interesting to say the least, following some great bank sector earnings reports over the past two days. There are still a few more important earnings releases out later today and into tomorrow, so it's hard to rule out profit taking continuing/accelerating when these companies surprise to the upside.
Afternoon Notes from WSS Research Desk
- Dow 10,000 has brought the reporters back to Wall and Broadway. Last night on the "Jay Leno" show audience members applauded enthusiastically as Dow 10,000 rolled off the lips of the late night host. "Wall Street 2" comes out in February 2010. Can't help to feel a little nostalgia in the air. That could end, however, should we receive an earnings report clunker from a major industrial company in a few weeks. It won't be from General Electric (NYSE:GE) though as the global monster is receiving its fair share of stimulus dollars to offset write-downs on bad mortgage bets.
- The recession has found its way to DSW Inc. (NYSE:DSW), the operator of no frills warehouse shoe stores. This morning, the retailer issued one heck of an earnings pre-announcement ($0.40 ahead of consensus) as consumers continued to trade down. Whereas consumers once spent $80.00 on a pair shoes from a specialty retailer, they are now taking that $80.00 to purchase two pairs of shoes from DSW. From an operational standpoint, excess overseas manufacturing capacity is undoubtedly helping DSW receive advantageous costs. The stock was an open recommendation on our Swing Strategies service; it's up 13.0% today.
- This afternoon I will be lucky enough to attend the American Eagle Outfitters (NYSE:AEO) analyst conference in NYC. Since Wall Street Strategies is now included as part of the Thomson Reuters consensus estimates, we are able to obtain direct access to management. In my view, this access helps to foster a best of class equity research product that showcases cutting-edge opinions and great medium-term to long-term investment recommendations. Today's analyst event will display the company's pre-holiday and post-holiday assortments via a fashion show, which runs in addition to a presentation by the management team. Please be sure to visit our website at www.wstreet.com tomorrow to check out my recap of the event and what it ultimately means for AEO shares.
Crude oil is bucking the performance of the broader market and actually moving up today. This move up is predicated on the fact that the value of the dollar continues its downward trend today against a basket of other international currencies. Oil has an inverse relationship with the dollar. The persistent weakness of the greenback has pushed the price of crude oil up to where it is now in positive territory on a year over year basis.
Further fueling oil's advance is a report put out by the Energy Information Agency which showed that there were large declines in gasoline and distillate stocks. This report came as a surprise to pretty much everyone, and incentivized many to allocate addition capital to the oil trade.
The report appears to underscore other sources of data which point to the fact that the economy is starting to show modest improvement. The logic is that with improvement will come increased activity which in turn will drive demand for energy. However, there is still a fair amount of concern that the state of the recovery is still fragile and expectations must be managed. To this end, and perhaps a reflection of this cautious stance is in the mixed performance of oil-related issues in the session.
Overall tech shares, as measured by the Philadelphia Semiconductor Index (SOX), have been pulling back during today's trading session. After reaching its one-year high yesterday at 334.51 (October 14 closing price), the SOX opened lower today and has continued to slide further. We believe that the main force putting pressure on the tech stocks is that the sector seems to be running out catalysts to lift it higher. Yesterday, Intel's (NASDAQ:INTC) great earnings results and outlook for the December quarter gave the SOX an extra boost, but that is now priced into the market. Continuing high levels of unemployment and initial claims, together with still unfavorable housing conditions is the reality that the consumer is facing going into this holiday shopping season, and this may limit growth in the short-term for this sector.
Today's pullback in the SOX as well as other indices can also be attributed to profit taking, as investors choose to "sell on the news." Today, three very important tech companies are scheduled to report earnings after the close of trading: Advanced Micro Devices Inc. (NASDAQ:AMD), Google Inc. (NASDAQ:GOOG), and International Business Machines Corp. (NYSE:IBM). As far as AMD is concerned, we believe the results are likely to come in slightly above the consensus estimates on both the top and bottom lines as the company's business will surely benefit from the industry's end-demand up tick. Still, we believe this stock will likely sink further when investors realize that the company's fundamentals are weak and that the stock is overpriced.
IBM on the other hand, is very likely to surprise on revenues and earnings. We believe the back to school sales of PCs were very strong for the company and its services business should provide even further momentum to the company's financial results, specifically from servers and maintenance.
Finally, Google will also very likely provide great financial results as the company's internet search advertising has been more resilient to the economic downturn than other forms of online marketing. The company is also expected to have benefited from newer facets of its business such as its YouTube video service.
The wait appears to be over for General Motors and Opel as it is apparently in final discussions with Canadian auto parts giant Magna (NYSE:MGA) and its Russian partner Sberbank to purchase a controlling 55.0% stake in Opel and Vauxhall. The negotiations continue to be slow, but an announcement is said to be coming in the next few days. Negotiations have seen two deadlines pass, and problems have ranged from intellectual property to a controlling stake, to the amount of cash upfront, to who would guarantee the debt being offered. Germany is backing approximately $4.5 billion of loans, and Magna and Sberbank are putting up almost $800.0 million for a controlling 55.0% stake, with General Motors holding a 35.0% stake and the employees of Opel in Germany owning 10.0%.
It is about time for this deal to go through as it has apparently been on the brink of being completed twice before, but something always came up (and it was normally from GM's point of view). It seems now that Ford CEO Alan Mulally had the right idea and by offloading Jaguar and Land Rover, as General Motors is now struggling to offload its weak brands. Pontiac is gone, Saab is a Swedish car company (again) in bankruptcy, Hummer is being sold to a Chinese heavy-vehicle producer, and Opel and Vauxhall are being sold. Saturn was going to be sold to Penske Automotive Group (NYSE:PAG) but that sale fell through once a foreign auto manufacturer couldn't come to an agreement to produce vehicles in three-years when the agreement with General Motors was up. Refer to our website at www.wstreet.com for some of our articles on the automotive industry.
According to RealtyTrac, foreclosures remain a big problem, as the third quarter of this year was the worst quarter on record. July, August, and September were the worst three-months in history, despite vast efforts to get struggling borrowers refinanced into more affordable loans. On the positive side, foreclosure filings did decrease by 4.0% from August to September, but looking at the data one would by no means conclude that we are turning the corner. Worse yet, the percentage of filings represented by repossessions is rising. Repossessions jumped by 15.4% month to month, which is likely the result of a number of loan modifications going back into default and foreclosure delaying processes cycling over. As a result, we may see an increasing number of vacant houses hitting the market which of course will not bode well for home values.
It's also important to note that many lenders have implemented moratorium programs under which the lenders do not act on the foreclosures, but rather seek out alternatives for extended periods of time. Over the next several months many of these programs are expected to end, leading to more waves of foreclosures filings. As of October 1, the White House noted that it has entered more than 500,000 homeowners into its mortgage modification program, which may have led to the decrease during the month, but so far the program has not kept up with the problem.