Inflation Comments Spark Sell-off

123jump.com Staff
04 Oct, 2005
New York City

Profit warnings, downgrades, inflation scare, natural gas merger and tech deal between Google and Sun, all fed energy into last hour of trading. In an otherwise directionless trading in the morning succumbed to one negative news after another. Procter & Gamble was downgraded by Citigroup, Clorox narrowed earnings guidance and BP lowered earnings forecast by $700 million. Chesapeake Energy to buy Columbia Natural Resources for $2.2 billion and debt.

U.S. MARKET AVERAGES

Averages meandered for the morning session only to confront inflation scare in the afternoon. Market averages succumbed to spread of Dallas Fed President’s comment of rising inflation pressure and Fed’s need to be “vigilant.” Three major averages declined at close.

In the morning, market digested report from Census Bureau on new orders and shipments indicating rise of new factory orders of 2.5% in August and durable orders up 3.4% revised up from 3.3%. Goldman Sachs upgraded computer hardware sector from Neutral to Attractive but that did not stem the falling prices in the sector. Goldman also downgraded Texas Instrument ((TXN)) sending another wave of selling in the chip sector. Deutsche Securities upgrade of Linear Technologies ((LLTC)) did not help the stock in the day’s trading.

It is Google and Sun vs. Microsoft. Google has agreed to distribute Java technology and some of the productivity applications bundled with Google search technologies. Sun’ Star Office is a one example where the marriage of these two organizations will help it build a bigger customer base in direct competition with Microsoft’s Office.

In the past, Sun has not been successful in attracting large group of users to its Java based applications. This partnership hopes to change that. The partnership is likely to provide Office styled desktop application with search technology, all accessible through the Internet. Sun Microsystems ((SUNW)) shares rose 1.5% and Google ((GOOG)) shares were down 2% at close. Several lead techies at Google, hail from Sun Micro’ Java tech group.

Home Builder stocks faced another round of scrutiny. An article in NY Times suggested that while stocks of home builders are rising executive at these companies are selling stocks at three to four times higher rate than a year ago. According to the article, executives at the top ten home builders have sold close to $952 million of company shares so far in the year topping sales of $658 million of shares for all of last year. Toll Bros. ((TOL)) dropped 4%, Centex ((CTX)) and KB Homes ((KBH)) and Lennar ((LEN)) dropped 3%, and D R Horton ((DHI)) dropped 5%.

Speculators bid up stocks of flash memory makers SanDisk ((SNDK)) and Lexar Media ((LEXR)) for the fifth day for different reason. Both stocks advanced better than 8%. Lexar Media won a judgment against Toshiba of app. $420 million and this may lead to more opportunities for licensing flash memory storage technology with other companies. SanDisk has been a subject of speculation at a stock promotion TV show appearing on CNBC. In the last three months SanDisk shares have gained 130%.

MOVERS AND SHAKERS

Printer maker Lexmark International Group Inc. ((LXK)) lost 22.4%, which is nearly a quarter of their value, after the company predicted third-quarter earnings and revenue would come in well below its forecasts. The company pointed decreasing laserjet and inkjet supplies revenue as a result of a reduction in channel inventories as well as lower end user demand. The prediction is likely to stimulate investors to take a look at rival Hewlett-Packard's ((HPQ)) outlooks for the rest of 2005. Hewlett-Packard dropped 1% yesterday.

Clorox Co. ((CLX)) also narrowed its earnings targets for the second quarter and fiscal year due to boosting energy-costs. The Oakland-based company announced it will raise prices on about 40% in order to partly compensate those higher costs. The company fell 1.7% yesterday.

General Motors Corp. ((GM)) and Ford Motor Co. ((F)) may attract attention after both were put on CreditWatch by Standard & Poor's after yesterday's close. Both companies are dependant on sport utility vehicles and trucks amid rising energy prices. The ratings agency's move follows the reports by the both automakers about a sudden drop in U.S. vehicles sales for the next month. General Motors added 1.4% while Ford gained 0.3% yesterday.

Procter & Gamble ((PG)) dropped 1.7% after Citigroup downgraded the company to hold from buy, worried over raw material pricing. The broker said it will limit upside to earnings-per-share estimates. The broker also cut its price target to $59 from $61.

J.P. Morgan downgraded Eastman Kodak ((EK)) to underweight from neutral, citing its concerns that digital profitability remains weak and its traditional business is declining quickly. The company fell 0.9% yesterday.

Deutsche Bank cut Kimberly-Clark Corp. ((KMB)) to hold from buy. The broker pointed as a reason that rearranging the health product company to drive asset rationalization and support higher R&D is the right way but the fast growing raw material costs, a still suffering business in Europe and the loss of synthetic fuel tax benefits are too exhausting to calm down until restructuring savings begin.

ECONOMIC NEWS

New orders for manufactured goods in August increased $9.7 billion or 2.5 percent to $395.2 billion, the U.S. Census Bureau reported today. This followed a 2.5 percent decrease in July. Shipments, up for the fourth consecutive month, increased $6.6 billion or 1.7 percent to $393.5 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.1 percent increase in July. Unfilled orders, up for the fourth consecutive month, increased $9.2 billion or 1.6 percent to $590.0 billion. This was at the highest level since the series began and followed a 1.0 percent July increase. Inventories, down following two consecutive monthly increases, decreased $0.6 billion or 0.1 percent to $463.7 billion. This followed a 0.6 percent July increase.

INTERNATIONAL MARKET NEWS

Asian-Pacific benchmarks finished higher on a third consecutive rise of U.S. markets overnight and strong dollar against the yen, giving a boost to exporter-related issues. The Nikkei advanced on strong world semiconductor sales data and reached a new four-year high at 13738.84 points to close at 1.6%. Canon, Kyocera Corp., and Honda Motor were among the leading gainers. In South Korea markets gained 1.8%, while in Hong Kong lost 0.1%. The dollar traded at 114.12 yen.

European markets closed Tuesday session mostly higher on strong auto sector with the German DAX 30 rising 1.1% and the French CAC 40, up 0.6%. Oil-heavy London’s FTSE 100 fell 0.1% after crude-oil prices dropped and BP warned that it wouldn’t be able to meet its output targets.

ENERGY, METALS, CURRENCIES

Oil prices declined below $64 a barrel. Light sweet crude for November delivery dropped $1.57 to $63.90 a barrel on the Nymex. Heating oil fell over 3 cents to $2.049 a gallon, gasoline fell 6 cents to $2.005 a gallon. Natural gas declined by 20 cents to $14.2224 per 1,000 cubic feet. London Brent lost 82 cents to $61.98.

Gold prices climbed in European trading. In London the precious metal closed unchanged at $465.50 per troy ounce. In Hong Kong gold gained $3.20 to close at $467.45. Silver finished at $7.43, up from $7.36. At close in NY, gold was unchanged at $469.30 per ounce.

In European trading the U.S. dollar lost ground against its other major counterparts. The euro was quoted at $1.1939, up from $1.1909. The dollar changed hands at 114.12 yen, down from 114.20. The British pound was trading at $1.7613, up from $1.7540.

EARNINGS NEWS

Stolt-Nielsen S.A. ((SNSA)), specialty liquids services company, reported Q3 net income (and income from continuing operations) of $53.1 million, up from net income of $17.5 million ($12.2 million from continuing operations) for the same period last year. Operating revenue was $384.0 million for the quarter, down from operating revenue of $407.9 million for the same period last year (which included $84.8 million of Stolt Sea Farm (SSF) operating revenue from operations contributed to the new Marine Harvest).

CMGI Inc. ((CMGI)), a provider of electronic business services, reported a quarterly profit of $274,000, or break-even per share, up vs. a loss of $6.8 million, or 2 cents per share in the year-ago period on sales growth. The latest results incorporate $10.4 million in charges related to regulatory compliance, amortization of intangible assets and stock-based compensation.

Weider Nutrition International ((WNI)), seller of vitamins and other various nutritional supplements, posted Q1 earnings of 18 cents a share, up from a year-earlier profit of 14 cents a share on an increase in demand for branded products. Sales increased to $48 million from $43.7 million in the same period a year ago. No estimate has been published for the company's results. The company added though that gross margins declined by higher raw material costs.

CRYO-CELL International ((CCEL)), cord blood bank, announced Q3 net income of 5 cents per share, down from 16 cents per share in the year-ago period. Consolidated revenues for the quarter were approximately $3.8 million, up 17% from approximately $3.2 million for the comparable quarter last year.

Net income for the 2004 period included $1.6 million from the reversal of all prior accruals related to the PharmaStem litigation during the third quarter of 2004, as a result of the favorable ruling by the Court on post-trial motions in that case. Without the accrual reversal, net income in the third quarter of 2005 increased approximately $300,000 compared to the 2004 period due to a 17% increase in revenue.

CORPORATE NEWS

Fox & Hound Restaurant Group ((FOXX)), operator of the Fox and Hound and Bailey's restaurant chains, said Tuesday it has signed a letter of intent to be acquired by Los Angeles private equity firm Levine Leichtman Capital Partners for $14 per share. The offer is valued at the total price of $145.6 million based on 10.4 million shares outstanding.

Chesapeake Energy has agreed to buy Columbia Natural Resources from Triana Energy Holdings for $2.2 billion in cash and $75 million in debt. The deal will amass the third largest gas reserves in the U.S. after Exxon Mobil and ConocoPhillips.

The second-largest global oil company BP warned it won't meet 2005 production targets. The disappointing forecast and the expected profit decline of $700 million are largely due to Hurricanes Rita and Katrina.

Adidas-Salomon said its $3.8 billion deal to acquire Reebok International won't require any more antitrust scrutiny in the U.S. after the Hart-Scott-Rodino waiting period ended. The deal is expected to close in the first half of 2006.

Citigroup Smith Barney cut household products maker Procter & Gamble Co to hold from buy, citing concerns over raw material pricing. The broker said it will limit upside to earnings-per-share estimates. In addition, Citigroup also cut its price target to $59 from $61.

JP Morgan cut Eastman Kodak to underweight from neutral, saying it is concerned that digital profitability remains weak and its traditional business is declining rapidly.