librarians without borders

June 12, 2004 Volume 79, #2W


Welcome to this week's issue of
The Bull Market Weekly Advisor!
(A FREE Publication From BullMarket.com)


IN THIS ISSUE

- MARKET INDICES
- COMMENTARY: MARKET KEEPS CHIN UP IN SHORTENED WEEK
- ECONOMY WATCH
- MARKET MOVERS

1. SECTOR-RELATED NEWS
ENERGY -- EXXON MOBIL GIVES ENERGY SECTOR A DOSE OF REALITY
TECHNOLOGY -- HEWLETT-PACKARD TRIES TO DISTINGUISH ITSELF FROM RIVALS
INVESTING -- DIVIDENDS MORE POPULAR ON WALL STREET & MAIN STREET


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Market Indices from Around the World
Thursday, June 10, 2004 Index
Close Change Day% WTD% MTD% YTD%
UNITED STATES -
- - - - -
Dow Jones 10410 42 0.4% 1.6% 2% 0%
S&P 500 1136 5 0.5% 1.2% 1% 2%
NASDAQ 2000 9 0.5% 1.1% 1% 0%
NASDAQ 100 37 0 0.7% 1.8% 1% 1%
S&P 400 109 1 0.5% 0.7% 0% 4%
TREASURY BONDS
- - - - - -
10 Year 4.79 down 2 basis points
+2bp +14bp +53bp
30 Year 5.47 down 2 basis points
0bp +12bp +40bp
EUROPE
- -1 - - - -
UK FT-SE 100 4486 -3 -0.1% 0.7% 1% 0%
FRANCE CAC 40 3711 12 0.3% 0.3% 1% 4%
GERMANY DAX 4022 24 0.6% 1.5% 3% 1%
ASIA
- - -
JAPAN NIKKEI 225 11576 126 1.1% 4.0% 2% 8%
HONG KONG HANG SENG 12423 83 0.7% 3.3% 2% -1%
AMERICAS
- - - -
BRAZIL BOVESPA 19865 0 0.0% 0.2% 1% -11%
CANADA TSE 300 8345 28 0.3% -3.5% 0% 2%
MEXICO BOLSA 10231 11 0.1% 1.7% 2% 16%





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(Please note that all prices are as of the close of trading on Thursday, and all changes in price are for the week.)

COMMENTARY: MARKET KEEPS CHIN UP IN SHORTENED WEEK

Oil prices rose this week, and the Fed gave the market sure signs that it is prepared to take on inflation, yet neither higher prices for crude nor the prospect of larger-than-expected interest rate hikes could keep the market from climbing. Sure, it was buffeted a bit, dropping on Wednesday, but it came back on Thursday (the last day of trading in a week shortened by the funeral for president Reagan) as the focus clearly shifted from geopolitical concerns to the prospects for growth in Corporate America. Those prospects are good, and the action reflected that.



For the WEEK:

THE DOW JONES closed up an impressive 167 points, or 1.6%, at 10,410.

THE S&P 500 added 13 points, or 1.2%, to 1,136.

THE NASDAQ rose 21 points, or 1.1%, to 2,000.

The airwaves were plugged with remembrances and evaluations of the Reagan years in office, and no doubt there were more than few investors who fondly recalled how the economy turned around while his administration was in power. But the action in the market wasn't based on reminiscences of times long gone by. They were based on what's happened in the recent past to strengthen the economy, and more importantly on what lies ahead for Corporate America.

There were geopolitical concerns aplenty to distract the stock market, but it paid little attention. This week more than most in the past couple of months, the market ignored what happened to the price of oil. It certainly has come off the record highs, but after declining on expectations of a huge inventory gain in the U.S., it has bounced up again, finishing the week above $38. Oil traders are concerned about ongoing violence in the Mideast, especially attacks on Iraqi pipelines. Supplies are also threatened by a possible strike in Nigeria, the #7 oil exporter on the globe.

This could have easily unnerved the market. So, too, could have comments from Federal Reserve chairman Alan Greenspan, who in a speech on Tuesday laid the groundwork for rate increases that could be sharper than 25 basis points, if warranted by inflation data. The message from the Fed was: The jobs situation is fine. We don't have to worry so much about stimulating job growth; our main concern is inflation, and if it shows signs of getting ugly, we're going wipe it out with necessary interest rate hikes.

While we're confident that the economy, the U.S. consumer, and the top-flight U.S. companies can more than handle rising rates, not everyone shares our view. We know that. Which makes it all the more impressive that the market didn't slide on the Fed's guidance. Rather, it reacted to the positive outlook from FEDEX (FDX, $77, up 3), which gives a great endorsement to what's happening in the global economy. (See Market Movers).

The market also reacted to more activity on the merger and acquisitions front. As you'll see below, MGM MIRAGE (MGG, $48, up 2) is on the hunt to grow operations in Las Vegas. At the same time, Discount Retailer TARGET (TGT, $46, up 1) unloaded the upscale Marshall Field's unit. That's a great move for Target, and it's also an aggressive one from the buyer, MAY DEPARTMENT STORES (MAY, $28.87, 0.22). These are just a few of the recent deals that show that CEOs are ready to take risks and use their cash to grow business. Why? They are confident that now is the time to expand.

The market didn't put up huge numbers, but we found this to be a bullish week, indeed.



ECONOMY WATCH

1. WHOLESALE SALES CONTINUE TO GROW

The Commerce Department reported that wholesale sales in April climbed 0.8%. While that's down from the huge 2.9% jump in March, it marks the continuation of an excellent trend, one which points to ongoing strength in the robust U.S. economy. Wholesale inventories, meanwhile, fell for the first time since August, dipping 0.1% in April compared to an increase of 0.5% in March. Analysts had expected a rise of 0.5%.

What does this mean? Consumer demand is running strong, and companies are going to have to boost output to keep up. The inventory-to-sales ratio, which measures how fast current demand will deplete inventories, fell to a historic low of 1.1 months.



2. OUTLOOK AMONG AFFLUENT INVESTORS SHOW UNCERTAINTIES PERSIST

A survey of affluent investors showed that optimism about the future continues to be undermined by problems in Iraq, higher energy prices, and the presidential election. The "Affluent Index" supplied by a research firm fell in May from levels in the previous month, but still remained bullish. Yet when questioned about the outlook for the year ahead, those surveyed turned markedly negative. The component of the index measuring the outlook for the economy over the next 12 months dropped from 40 in April to 15.

This demonstrates that the low trading volumes we're seeing in the market have less to do with the traditionally slow summer season and more to do with the doubt that continues to waft through investor minds. Fears about terrorism, energy prices, the unemployment rate, and what happens in Iraq, are legitimate. People are afraid of getting too optimistic, for high hopes can be dashed easily by events far outside of their control. With this in mind, you should expect the market to advance slowly on good news. At the same time, however, bad news shouldn't rock the market too much either, as there is some pessimism built into prices.



3. IMPORT PRICES BRING FEARS OF INFLATION

Import prices in May rose a surprisingly high 1.6%, the highest level since February 2003, and more than double the level economists expected. Although prices have been rising for eight straight months, it was the size of the increase that caught the market off guard. By comparison, import prices climbed just 0.2% in April.

Energy imports were the biggest contributor to the surge, as they jumped 10% compared to 0.4% in April. Excluding petroleum products, the May figure came in at 0.4%.



4. OIL INVENTORIES HIT HIGHEST LEVEL IN NEARLY 2 YEARS

Oil inventories climbed 400,000 barrels last week to 300 million, the highest level in nearly 2 years. Gasoline inventories also jumped, growing 2 million barrels to 205 million. As you saw in our discussion of oil prices above, the news brought prices down. One reason is that demand for gasoline in the country is slowing, suggesting that people are unwilling to pay up at the pump when prices climb too far. Gas demand last week rose about 0.5% YoY, whereas a month ago (when gas prices were approaching record levels) demand was climbing closer to 4%.

Analysts were looking for inventories to climb 1.3 million barrels, and a day ahead of the figures, prices dropped sharply 1.38 to $37.28. After the figures came out, prices subsequently rose on Wednesday and Thursday.



MARKET MOVERS

I. FEDEX SET TO TOP ESTIMATES

Global Shipping company FEDEX (FDX, $77, up 3) continues to up earnings estimates for the fiscal fourth quarter ended May 31st. After boosting them in mid-March and more recently in mid-April to $1.20 a share, the company now expects to earn $1.35. That's good for 45% QoQ growth. Awesome. The company is truly executing in all aspects of the business, and that is reflected in the stock, which is trading near a 7-month high.

Note also, that company gave a ringing endorsement of the strength in the U.S. and world economies, stating that it continues to see "strong and sustainable economic recovery across many sectors of the economy that we serve." Folks, the company serves nearly ALL the sectors of the economy, and it does business around the world. This is a sign of better things to come for the company and the economy.



II. MGM TAKES MANDALAY BAY BID PUBLIC

On June 4th, Casino and Hotel operator MANDALAY BAY GROUP (MBG, $68, up 8) soared 10% on a 90% QoQ gain in earnings in fiscal first quarter ended April 30th. It turns out that in the week prior to that announcement, the firm was engaged in merger talks with MGM MIRAGE (MGG, $48, up 2), already a major player in Las Vegas. With Mandalay stock surging, MGM's owner -- billionaire Kirk Kerkorian -- took his bid for Mandalay public late on the 4th, partially in the hopes of keeping it from soaring to levels that could put it out of reach. He revealed a $4.5 billion, or $68 a share, offer for Mandalay, which represented a 13% premium from the close on that day.

Guess what? That's not going to be enough. On Monday, June 7th the stock surged 17% on news of the offer, in part because it raised speculation of an imminent bidding war that could include HARRAH'S ENTERTAINMENT (HET, $53, up 1). Other Gaming stocks moved higher on the news, including BOYD GAMING (BYD, $25.65, up 1.68) and CAESAR'S ENTERTAINMENT (CZR, $14.43, up 0.29) .If Kerkorian ends up winning Mandalay, he would own most of the biggest names on the strip, and he would likely have to sell some of the properties to avoid antitrust problems.



III. AIG PARTNER IN CHINA RAISING FUNDS IN HONG KONG

AMERICAN INTERNATIONAL GROUP (AIG, $75, up 1) has been doing business in China since 1975, when it teamed up with Ping An Insurance, the #2 domestic firm. Now Ping An is ready to go public in the Hong Kong market, and the IPO is expected to be the largest from China this year. The road show for the deal kicked off this week, with trading expected to begin around June 24th. If the deal prices at the higher end of the anticipated range, it will raise $2.1 billion, more than the $1.8 billion raised by SEMICONDUCTOR MANUFACTURING INTERNATIONAL (SMI, $11.54, down, 0.53), the biggest Chinese IPO of 2004 so far. The company expects to use proceeds of the IPO for computer upgrades, operations improvements, and general corporate purposes. That's good news for AIG, as we expect the improvements will help the partnership thrive.



IV. COCA-COLA DOWN AS TOP EXECUTIVE RESIGNS

Although Steven Heyer, the president and chief operating officer at COCA-COLA (KO, $52, unch.), was passed over for the vacant CEO position in May, many shareholders still hoped he would assume the position down the road. It's not to be, as he resigned today, joining a number of other top executives that recently left the company.

The stock sank 2% on the news, indicating that the market sees Heyer's departure as a sign of problems at Coke, not a sign that it is in a process of getting over them. Among those problems are slowing sales of the top soft drink, and a government probe into alleged accounting fraud. Any hopes of a turnaround will have to come under the new CEO and chairman, Neville Isdell. Watch for more changes at the top, as he brings in his own management team.



V. PORK PROFITS SOAR; SMITHFIELD DOWN

QUARTER F4Q03 F4Q04 %CHG.
REVENUE $1.8B $2.1B +15
NET INCOME $5M $70M +1,300
EPS $0.05 $0.63 +1,200
Fiscal fourth quarter ended 05/02/04
Reported 06/09/04

Pork Producer SMITHFIELD FOODS (SFD, $28.64, down 0.12) generated huge profit growth in the fiscal fourth quarter, as hog prices climbed more than 30% from a year ago. Yet the stock dropped 4% on the earnings release, as the company announced it hedged some hog contracts to lock in profits. The hedge could put a lid on profits and keep the company from realizing bigger gains.

Still, the new good news looked better than the bad. The company aims to increase bacon production 20% this year to take advantage of higher margins on processed meat, and to reap more benefits from the popularity of low-carb diets. (Yes, bacon is now a part of dieting, thanks to Atkins, and demand is running high.) Earnings in the pork unit were also helped by strong exports, as many foreign countries have full or partial bans on U.S. beef and poultry due to mad cow disease and avian flu, respectively.

Including an after-tax gain of $50 million, or 44 cents, related to the sale of a Canadian pork processing unit, the firm earned $120 million, or $1.09.



VI. UNION PACIFIC CUTS PROFIT OUTLOOK

The #1 Railroad Freight company warned that it doesn't yet have operations running as it would like, and said that it now expects to earn 65 cents a share in the second quarter, down from $1.05 a year ago. miles short of analyst expectations of 95 cents. Fuel costs for UNION PACIFIC (UNP, $58, down 1) are expected to come in 30% higher QoQ, but the real problem is the rail network, especially in the West. Problems there are causing trains to run about 10% slower than a year ago. Talk about bad timing. Cargo shipments have been on the rebound, but slower trains mean higher costs and lower volumes. The stock lost 2% on the reduced outlook.



VII. BABY BELLS UP ON SOLICITOR GENERAL DECISION

The Baby Bells have been fighting with AT&T (T, $16.35, down 0.10) and MCI (MCIA.PK, $14.60, up 0.30) ever since the Federal Communications Commission enacted rules in 2003 that forced the Bells to grant local access to the Long Distance firms at wholesale rates set by the government. In March, the FCC rules were tossed out in court, and the fight has continued since then, with Baby Bells QWEST COMMUNICATIONS (Q, $3.66, up 0.03), SBC COMMUNICATIONS (SBC, $24.81, up 0.88), BELLSOUTH (BLS, $26.01, up 1.09), and VERIZON COMMUNICATIONS (VZ, $36.26, up 1.30) arguing that the rates are unfairly low, and remove all incentive to upgrade networks. Now, their argument got a big boost, as the government said it won't appeal the court ruling.

While the Bells celebrated, noting that the decision will provide some stability in the industry and lead to more innovation, consumer groups said it would lead to higher local phone rates. For their part, AT&T and MCI will appeal the decision. Still, right now the Bells are better positioned than they have been in a long time to renegotiate more favorable rates.

Good investing next week!

Todd Shaver
Editor in Chief
Editor@BullMarket.com
THE BULL MARKET REPORT
United States of America

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1. SECTOR-RELATED NEWS

ENERGY

EXXON MOBIL GIVES ENERGY SECTOR A DOSE OF REALITY

With oil prices hovering in the high $30s, discussion about alternative fuels and ways that the U.S. can lessen dependence on foreign oil has grown louder, particularly on Capitol Hill. The solutions offered, ranging from ambitious to fanciful, have raised hopes that the country can gain some control over its energy needs. But the CEO of EXXON MOBIL (XOM, $44, up 1) recently threw a cold dose of reality on this wishful thinking. In a speech in Washington, Lee Raymond outlined that U.S. dependence on foreign oil, and specifically oil from the Middle East, will remain high for decades to come. This is due to the amount of reserves located in that region, and the fact that oil alternatives remain expensive and unrealistic options.

TODD'S TAKE: Despite the possibility that oil prices could drop dramatically from current levels (remember, anything is possible), the issues outlined by Raymond are precisely why we are bullish on the Energy sector for the long term. Yes, even if the market were to fully price in record annual earnings, we would still be bullish on Energy stocks because the hard truth is that the U.S. and the world are addicted to oil, and no alternative can satisfy that need.

Certainly, there are things you can do to reduce your own spending on oil and gas, like buy a hybrid car or ride your bike to work. But to make this modern world spin, we need oil; we need it to produce electricity, heat, and goods. We need it to transport people and products. In fact, you'll be hard pressed to find a part of your life that isn't somehow affected by oil, and things like solar power and wind power aren't going to change that.

Why is this so? As Raymond pointed out, wind and solar power cost far more than oil and natural gas. As for government hopes to increase the use of ethanol -- which is made from corn -- to replace 10% of all gasoline in the U.S. by 2020, Raymond showed that it makes no economic sense. Making ethanol takes more energy than it produces. Furthermore, to make that amount would require more than 20% of all the land in the U.S. currently used for food crops. These alternatives are just not feasible.

When you realize that it is oil and only oil that we need, then you can evaluate what's going to move the price in the coming years. As we've pointed out many times throughout the year, the major factors include rising global demand, especially as China advances into the modern age and adopts all the Western-style, energy consuming accoutrements that go with it. On the other side, we have a diminishing supply of oil, especially oil that is cheap to extract. Finally, there are issues of oil ownership and security, which are problems now (as they have been for decades) by nature of the fact that 50% of all proven oil and gas reserves are in the Middle East.

Because demand is only going to increase over the coming decades, the only way to limit price and supply risks must focus on diminishing reliance on Mideast oil. The Exxon Mobil CEO pointed to a few ways this can be achieved: Develop energy sources in the U.S., including those in areas currently closed to drilling and exploration; use energy more efficiently; and import more oil from places like Russia, Africa, and the areas around the Caspian Sea.

THE BOTTOM LINE: Promoting alternatives to oil, and using energy more efficiently, are great ideas -- but you can't let them cloud your view of the facts. Economic growth and prosperity depend on oil. Energy companies exist to bring oil and gas to market, to feed our needs. As our needs grow, and the process of bringing oil to markets gets harder, Energy companies are going to realize bigger profits. Investments in the best-run companies in the sector, which include those in our model Energy Portfolio, will serve you well. Check them out here: http://www.BullMarket.com/members/energy.php3

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TECHNOLOGY

HEWLETT-PACKARD TRIES TO DISTINGUISH ITSELF FROM RIVALS

Nearly three years after HEWLETT-PACKARD (HPQ, $21.75, up 0.49) announced the merger with Compaq Computer, the company is still fighting an uphill battle to justify the deal to Wall Street and shareholders. From the start, the firm had to overcome outcries from Walter Hewlett, a major shareholder who publicly stated the deal was ill-advised. His concern was that the low-margin computer business would turn the company into a muddled technology conglomerate, one in which the profitable businesses would be dragged down by the slow ones. That perception still holds, and continues to haunt both the company and the stock.

TODD'S TAKE: In mid-May, the company posted results for the fiscal second quarter ended April 30th, and we said the numbers helped quell questions about the wisdom of the company's $19 billion acquisition of Compaq, which closed two years ago. It helped for a couple reasons: First, because it was the third quarter in a row that it generated profits over $850 million, which helped dispel disappointment about the firm's track record of inconsistent profits. Second, it finally got positive results across all business lines for the first time in a long time.

But the second quarter results also shone a spotlight on exactly what the market considers the company's weak spot. The printer business generated $955 million in profits on revenues of $6.1 billion. The Personal Computing unit posted earnings of $45 million on $6.0 billion in revenue. In other words, the PC business is being carried by the highly profitable printer business, watering down the value of the company overall. That's what prompted one Wall Street firm to call on the company to spin off the printer operations.

This kind of stuff has to drive Hewlett-Packard crazy. It uses the annual meeting with analysts to talk about the strengths of the company, and instead it has to jump on the defensive, justifying a two-year old deal in the face of suggestions it divvy up operations. The problem is the analyst call is warranted. Printers are the company's bread and butter. They drive profits, and continue to be the one segment where the company dominates. It ships about a million printers a week, compared to 60,000 from DELL (DELL, $35.10, up 0.10).

The rest of the company, meanwhile, is viewed as something of a mish-mash, competing with IBM (IBM, $90, up 2) on servers and IT services, and with Dell on consumer hardware like PC's, printers, and PDAs. Unfortunately, aside from printers, the company's businesses don't stand out from rivals, and certainly don't grow profits at stellar rates. What's worse is that although the company is the giant in printers, Dell has made awesome progress since joining the market a year ago. Hewlett-Packard profit margins and market share will face growing challenges here in the coming years.

The company fought back at the analyst meeting by reiterating it can grow earnings 20+% in fiscal 2004 ending October 31st, and continuing at this pace over the coming few years, mainly by growing market share. It also highlighted strengths by pointing to weaknesses at IBM, which it contends is focused on slow growth markets for databases and other IT equipment. The firm derided Dell, meanwhile, as a distribution company that relies on volume to drive growth.

Projected 5-year Growth: 10%
Trailing PE: 26
Forward PE: 16
PEG Ratio: 2.6

Price/Sales: 0.9
Price/Book: 1.8
Total Cash: $15B
Total Debt: $6.5B
Market Cap: $67B

% Held by Insiders: 6%
% Held by Institutions: 65%
Dividend Yield: 1.5%
Options: Yes

Hewlett-Packard
Palo Alto, CA
Website: www.hp.com

*Note: Revenue and earnings growth figures are from the company's last fiscal year. Projected 5-year growth is our forward-looking growth estimate. The PE-to-Growth ratio, or PEG, is calculated using the Trailing PE divided by the Projected 5-year Growth rate.

THE BOTTOM LINE: When queried about why the stock has lagged the performance of Dell and IBM over the past year, Hewlett Packard contended that sometimes the market gets things wrong. That's true in the short term, but in the two years since the merger the stock has barely moved. That suggests the market is onto something: The company might be huge, but it hasn't been a good investment. The printer business is valuable, yet shareholders aren't benefiting from it because the company is set on having a finger in all parts of the computer business, whether profitable or not.



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INVESTING

DIVIDENDS MORE POPULAR ON WALL STREET & MAIN STREET

Some on Wall Street call it one of the biggest developments in the market in years: The proliferation of dividends. Nearly 700 U.S. companies increased dividends in the first four months of 2004, continuing a trend begun last year. S&P 500 companies are now set to pay out $185 billion in dividends this year, 25% more than in 2002. The main factors driving the payouts higher are growing profits, and a tax cut that chopped the rate on dividend income from 39% to 15%.

TODD'S TAKE: Whether the stock market is booming or barely moving, we have always loved dividends. In the case of Mortgage REITs, many of which yield 6-12%, you're looking at awesome income that in many cases beats the average appreciation you'll get from some stocks. In the case of stocks that yield 2% (the average for the S&P 500 is 1.7%), you're getting a nice little bonus that can add handsomely to your total annual return.

Interestingly, the market was slow to react to the rising dividends in 2003. Why? So many investors were still accustomed to the huge stock appreciation in the late 1990s. That was an aberration, and made people forget that over the long haul you're not going to see stocks climb 25% a year. But since the market has cooled off in 2004, higher-yielding stocks have attracted more investors, especially as the pace and breadth of dividend increases rose in the early part of this year. Right now, 75% of S&P 500 stocks pay dividends. This year, those stocks are up an average of 4% compared to the 1% dip for those S&P 500 stocks that don't pay dividends.

Among many investors there remains a perception that high-yield stocks don't provide much of an upside. That's false. Look at the Mortgage REITs in our model Income Portfolio. Among them you'll find stocks that yield 12%, and with the real possibility of appreciating 40% over the coming 12 months, that's enough for a 50% return! But you don't have to look just at Mortgage REITs. Our 12-Month Price Target for CITIGROUP (C, $47, unch.) is $64. Throw in the 3.4% yield, and you're looking at a return approaching 40%.