Investors Cycle Out of Cyclicals
CYCLICAL STOCKS SUFFERED their second straight drubbing Thursday as decent economic data stoked jitters about higher interest rates. But late bargain-hunters lifted downtrodden techs and rescued the broader market.
The Dow came back from a triple-digit deficit to dip just 21 points to 10479, while the Nasdaq soared 2%, adding 36 to reach 1868. The S&P 500 gained not quite 2 to 1153. Home builders, truckers, retailers and manufacturers ran out of gas. Techs and utilities powered up.
After rooting for the economy to pick up, investors are now hoping it doesn't rebound so strongly as to provoke a succession of quick interest-rate hikes from the Federal Reserve. But they still need enough growth to convince cost-cutting bosses to end the freeze on business spending before their suppliers starve.
Thursday's statistics almost pulled off this difficult balancing act. Initial jobless claims dropped 12,000 to 371,000 in another sign that the labor market is stabilizing. And the consumer price index rose 0.2% in February, in line with expectations. But the core rate ticked up to 0.3%, slightly above forecasts.
General Electric (GE) shares slid for a second day, losing 3% to drag down the Dow, following stinging criticism of the company's borrowing and acquisition strategies by leading bond manager Bill Gross. Blue-chip financials, retailers and manufacturers were also weak as the market fretted higher credit costs.
Media giant AOL Time Warner (AOL) had been expected to be an early beneficiary of the recovery. But an advertising revenue shortfall at America Online has led Lehman Brothers to trim its first-quarter revenue estimate to $9.4 billion from $9.7 billion, and to lower the Ebitda cash earnings forecast by $100 million. The division has grown too dependent on advertising from other AOL units and old deals that are now winding down, warned analyst Holly Becker. The stock fell 2%.
The averages were spared by bargain-hunting in the tech sector ahead of an earnings report by Micron Technology (MU). The maker of flash memory chips is expected to post a sequential revenue jump of more than 50% thanks to firming prices as the sector recovers from a debilitating downturn. Micron shares popped 6%.
Micron is still expected to post a loss, unlike many of the firms that do business directly with free-spending consumers. The auto-parts chain Pep Boys (PBY) lent its high-octane stock some extra pep with fourth-quarter net income of seven cents a share, more than double the year-ago haul. The stock gained 5%.
Top cruise-ship operator Carnival (CCL) reported net income up only slightly from a year ago, but that amounted to a victory given the dire travel-business forecasts in the wake of the 9/11 attacks. At 22 cents a share, profits came in a nickel above Wall Street's consensus estimate. Bookings are up, and the discounts used to lure passengers are dropping. But the stock dropped anchor 1% south of break-even.
And home builder KB Home (KBH) got little thanks for a roof-raising 65% jump in profits. Interest-rate jitters saddled the stock with a 2% loss.
Computer maker Apple (AAPL) has taken advantage of strong consumer spending in launching its new line of iMacs. But the company stoked fears that the recovery will push up costs instead of margins when it announced a $100 price hike on the machines, citing skyrocketing prices for memory chips and flat-panel displays. Sales weren't going gangbusters as it was, warned J.P. Morgan in lowering Apple's profit estimates. The stock gravitated 3% lower.
In contrast, computer distributor Tech Data (TECD) surged 8% after topping estimates by two cents with quarterly net income of 62 cents a share. Sales have bottomed but business has not yet picked up, the chief executive told CNBC.
Revenues haven't quite hit bottom at software integrator Tibco Software (TIBX), falling to $74 billion from the $84 million in the previous period, and slightly missing analysts' forecasts. The stock took a 9% hit.
Life also keeps getting messier for telecom-equipment makers, which are bleeding from a multitude of cuts as telephone companies continue to slash investment budgets. Eastern giant Verizon (VZ) said in a new filing with the Securities and Exchange Commission that it will trim capital spending to a range of $15 billion to $16 billion, from $17.4 billion last year. This isn't what suppliers like Lucent Technologies (LU) and Nortel Networks (NT) wanted to hear as their stocks hover near all-time lows, but likely what they had come to expect. Lucent's stock rose 6%, while Nortel's recouped 5%.
Verizon has good reason to cut spending: It's facing relentless pricing pressures as greater competition forces it to lower rates. "We believe overall Bell Ebitda margins could come down over time," J.P. Morgan analyst Marc Crossman warned clients. "However we believe that the Bells and the Street in general have modeled margins to remain constant or even increase going forward." Verizon shares fell 2%.
Meanwhile, two global corporations are cashing in with partial spinoffs that will raise a combined $6 billion from investors. Swiss food giant Nestle liked what it saw when an offering of U.S. eye-care subsidiary Alcon priced at $33 per share, and then gained 3% in its market debut. The IPO raised $2.3 billion, good for bragging rights on most weeks but second this time to the $3.7 billion financial powerhouse Citigroup (C) stands to gain from Friday's sale of a stake in its Travelers Property Casualty insurance unit. Citigroup is reducing its exposure to a business line that's not growing as fast as the parent firm. But it will keep the Travelers umbrella logo. Citigroup shares rose less than 1%.
Treasury prices halted their extended slide. The yield on the 10-year Treasury note dropped to 5.37% from 5.39% late Wednesday, while the two-year note yielded 3.63%, just as it did a day earlier
