Friday, July 27, 2007

Here's to Healthcare

Jim Cramer (from The Street)

We need a little broader market. We don't have the financials, or else Bank of America (BAC) wouldn't be under $50 and Citigroup (C) sitting at $51.

We don't have the packaged goods companies, or Hershey (HSY) wouldn't be at $50 and Coke (KO) stuck in $52 purgatory. These drug stocks, I mean isn't Pfizer (PFE) just paint peeling? Ever since Glaxo (GSK) got its butt kicked there's been nothing here. Biotech's been a total drag.

Homebuilding, and anything remotely related, has been terrible. Retail's miserable. All of the stuff that needs a Fed ease simply hasn't gotten it.

That is why I was encouraged today by the second-half-of-the-day move up in the Hologics (HOLX) and the UnitedHealths (UNH) and the Cloroxes (CLX) and the Colgates (CP). I'll even take the 50 cents that Kellogg (K) gave us.

You can't make it on oil and machinery and infrastructure plus Apple (AAPL), Research In Motion (RIMM) and Google (GOOG). It's not bad, don't get me wrong. But we want these stocks to lead, and eventually something to follow.

Watch the UNH cohort. That's where I am betting you see some good action. Of course, we need a number that's not too strong or soft tomorrow on payrolls to make it happen. But I bet it's the next place to go.

More from Jim Cramer

Market May Force Fed to Shift From Prices to Growth

By Rich Miller (Bloomberg)

July 27 (Bloomberg) -- The week's turmoil in financial markets casts doubt on the Federal Reserve's forecast of a gradual U.S. economic recovery in the second half, raising the odds it will need to shift its focus to spurring growth from fighting inflation.

The turbulence, as stocks suffered their worst drop in five months while corporate borrowing costs soared, threatens a triple whammy for the economy. It robs investors of spending power, makes business investment more expensive and may prolong the housing recession.

``The risks have shifted to the downside,'' said Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other financial institutions.

Traders are betting that the fallout will force Fed Chairman Ben S. Bernanke and his colleagues to cut rates by the end of the year. Federal fund futures prices on the Chicago Board of Trade suggest traders see a 100 percent chance the Fed will trim its target rate a quarter-point to 5 percent at its December meeting, up from 44 percent odds two days ago.

The shift in market sentiment comes just as new evidence arrives showing the economy regained strength in the second quarter. The question now is whether that can be sustained.

Lowered Forecasts

Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, said he'll probably lower his forecast for second-half growth. He also sees the Fed shifting rhetoric away from fighting inflation as growth slows.

The government reported today that the economy grew at a 3.4 percent annual pace in the second quarter after expanding 0.6 percent in January to March.

The consensus forecast, inside and outside the Fed, calls for growth to keep up for the rest of the year at a pace of 2.5 percent to 3 percent.

``We have a healthy economy in the U.S., transitioning from an unsustainable level of growth to one that is much more sustainable,'' Treasury Secretary Henry Paulson said in an interview yesterday.

As recently as May, traders were certain of a rate cut by the end of 2007, only to be dissuaded by continued growth in employment and comments by Fed officials that recession isn't likely. Some economists said traders may again be getting ahead of themselves.

``The Fed should be pretty happy with these numbers,'' said David Wyss, chief economist at Standard & Poor's in New York, referring to the second quarter figures for gross domestic product. ``I don't think the Fed does anything this year.''

The trouble-free second half that economists forecast rests on moderate consumer-spending growth, stronger business investment and a diminishing drag from the housing market. Market turbulence poses a risk to all three.

Consumers Suffering

Consumers are already suffering from rising gasoline prices and sagging home values. The average price of regular gasoline shot up to $3 a gallon last quarter, from $2.34 in the previous three months, according to the American Automobile Association.

Home values in 20 U.S. metropolitan areas fell by the most in at least six years, making it harder for homeowners to borrow against their equity to fund purchases.

Auto dealers are bracing for the fallout. Sales last month were the lowest for June since 1997, says Autodata Corp. of Woodcliff Lake, New Jersey.

``There's real stress in this economy beyond just housing,'' Michael Jackson, chief executive officer of Fort Lauderdale, Florida-based AutoNation Inc., the largest U.S. auto retailer, said in an interview yesterday.

Stock Market's Drag

Economists had been counting on rising stock prices to help offset the hit to household wealth from the depressed housing market. That bet is off if stocks continue to decline.

``The stock market may bounce right back, but if it doesn't, you won't have stock prices offsetting the drag from housing,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Companies are also feeling a pinch as borrowing costs rise. The extra yield investors demand to own investment-grade corporate bonds instead of U.S. Treasuries jumped July 25 by the most for a single day in five years, according to index data from Merrill Lynch & Co.

More than 40 companies have reworked or abandoned bond offerings in the past three weeks as investors, stung by losses from subprime mortgages, balked at absorbing more risky debt.

The tougher borrowing environment threatens to curb capital spending at a time when companies are already showing signs of turning more cautious on investment.

Non-defense capital goods orders excluding aircraft, a proxy for future business investment, fell 0.7 percent in June, after decreasing 1.5 percent in May.

Home Sales

Housing looks even worse. Sales of new homes declined 6.6 percent in June while building permits fell to their lowest level in a decade. The slump has left seven homebuilders nursing losses of $1.80 billion.

Angelo Mozilo, chief executive officer for Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, said July 24 he expects ``difficult housing and mortgage market conditions to persist'' through year's end.

As financial turbulence spreads, Treasury securities benefit as investors seek the safety of risk-free debt. Treasury yields yesterday fell the most since 2004.

That should help lower mortgage rates. The benefits to housing though will be limited, Crandall said, because lenders are tightening standards so much that some prospective home buyers can't get credit.

``Housing has a long way to go, the consumer is slowing and capital spending is only growing at a moderate pace,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``The idea that we're going to get a pickup in the second half is wishful thinking.''

GDP Grew 3.4% in Second Quarter As Core Inflation Readings Eased

By JEFF BATER (Wall Street Journal)

WASHINGTON -- The U.S. economy resurged in the second quarter from its wintertime fizzle as the drag from the housing sector lessened, businesses built inventories, and exports grew.

Gross domestic product rose at a 3.4% annual rate April through June, the Commerce Department reported Friday.

The first estimate for second-quarter GDP showed the economy rebounded from its paltry, downwardly revised 0.6% advance during January through March. Previously, Commerce estimated first-quarter growth at 0.7%.

Inflation gauges were mixed. The government's price index for personal consumption surged 4.3% April through June, after rising 3.5% in the first quarter. But the PCE price gauge excluding food and energy rose just 1.4% April through June, after climbing 2.4% in the first quarter.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.9% April through June, after increasing 3.8% in the first quarter. The chain-weighted GDP price index advanced 2.7% April through June, after increasing 4.2% in the first quarter.

The 3.4% pickup in growth exceeded of Wall Street expectations for GDP, which is a measure of all goods and services produced in the economy. The median estimate of 25 economists surveyed by Dow Jones Newswires was a 3.3% increase.

GDP accelerated April through June at its fastest since 4.8% in first-quarter 2006 even though consumer spending slowed sharply. The biggest component of GDP, consumer spending rose 1.3% in the second quarter. It had increased 3.7% during the first quarter. Consumer spending accounts for the lion's share of economic activity -- about 70%. It made a contribution of 0.89 percentage point to GDP in the second quarter.

Second-quarter services spending rose by 2.2%, after increasing 3.1% in the first quarter. Consumer purchases of durable goods rose 1.6% in April through June, after increasing 8.8% in the first quarter. Durable goods are expensive items designed to last at least three years, such as televisions and refrigerators. Second-quarter nondurables spending fell by 0.8%, after increasing 3.0% in the first quarter.

Residential fixed investment, the GDP component that includes spending on housing, dropped, but the decrease of 9.3% was much smaller than previous quarters. First-quarter spending fell by 16%. Fourth-quarter spending dropped 17%. Third-quarter 2006 spending plunged 20%.

The second-quarter decline in housing took a bite of 0.49 percentage point out of GDP, compared to a bite of 0.93 in the first quarter.

Businesses increased inventories by $3.6 billion in the second quarter, after drawing down supply by $100 million in the first quarter and $17.4 billion in the fourth quarter.

The buildup of inventories added 0.15 percentage point to second-quarter GDP. In the first quarter, inventories had robbed GDP of 0.65 percentage point.

Real final sales of domestic product, which is GDP less the change in private inventories, climbed 3.2%, above a 1.3% increase in the first quarter.

International trade added to GDP in the second quarter. U.S. exports climbed by 6.4%, and imports decreased 2.6%. In the first quarter, exports had gone up 1.1% and imports rose 3.9%. Trade added 1.18 percentage points to GDP, after reducing GDP by 0.51 percentage point in the first quarter.

Businesses increased second-quarter spending by 8.1%, after rising 2.1% in the first quarter. Investment in structures surged 22.1%. Equipment and software rose 2.3%.

Federal government spending rose 6.7%. First-quarter spending decreased 6.3%. State and local government outlays increased 2.9%.

U.S. Stocks Rebound After Economy Grows More Than Forecast (Bloomberg)

By Lynn Thomasson

July 27 (Bloomberg) -- U.S. stocks rebounded from the biggest declines since February and bank shares climbed from a 10-month low after a government report showed the economy grew at the fastest pace in more than a year last quarter.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the largest U.S. banks, advanced. Chevron Corp., the second-biggest U.S. oil company, gained after it said earnings rose as profit margins improved on gasoline and other fuels. Ford Motor Co. advanced on an upgrade by Merrill Lynch & Co. after the second-biggest U.S. automaker reported its first profit in eight quarters.

Stocks gained after the Commerce Department said the U.S. economy grew at a 3.4 percent annual pace in the second quarter, propelled by rising exports, commercial construction and government spending. Signs of strength in the economy helped stocks bounce back from a plunge caused by concern that takeovers will slow as money to pay for them grows scarcer.

The Standard & Poor's 500 Index climbed 2.64, or 0.2 percent, to 1485.3 at 10:17 a.m. in New York. The Dow Jones Industrial Average added 20.89, or 0.2 percent, to 13,494.46. The Nasdaq Composite Index climbed 5.06, or 0.2 percent, to 2604.4.

Chevron rose 32 cents to $87.78 after it said earnings rose 24 percent to $5.38 billion, or $2.52 a share, from $4.35 billion, or $1.97, a year earlier.

Ford added 18 cents to $8.27. The shares were upgraded to ``neutral'' from ``sell'' by analysts at Merrill Lynch & Co. after the company reported its first profit in eight quarters. The analysts said savings from restructuring in North America are progressing faster than they expected.

EU Charges Intel over for competition abuse

Times Online and Agencies in Brussels

The European Union has this morning formally charged Intel with monopoly abuse over a long-running campaign to block rival computer chipmaker Advanced Micro Devices (AMD) from getting access to customers.

In a statement confirming the charges, EU regulators alleged that Intel gave "substantial rebates" to computer makers for buying most of their computer processing units (CPUs) from the US manufacturer.

The regulators also accused Intel of paying computer manufacturers to delay or cancel products that used AMD chips as well as selling certain products below cost price to corner markets.

"These three types of conduct are aimed at excluding AMD, Intel's main rival, from the market," the European Commission said.

"The three types of conduct reinforce each other and are part of a single overall anticompetitive strategy."

Intel, the world's biggest chipmaker, has ten weeks to reply to the preliminary charges and can seek an oral hearing to defend itself, after which regulators may make a decision that would force the company to change its ways under threat of fines.

The EU has been investigating Intel's business behaviour since 2001, looking into complaints from AMD and computer manufacturers that it used its power as a market leader to shut out rivals.

The case has had a chequered history. EU regulators had to shut down one line of inquiry when Taiwan's Via Technologies withdrew its complaint in 2002.

AMD filed another complaint in 2004. A year later, EU regulators raided Intel offices in Britain, German, Spain and Italy.

Last year the EU widened its investigation to include AMD's allegations that Intel had pressured Europe's largest consumer electronics retailer Media Markt not to offer computers that carried AMD chips.

Microprocessors from Intel dominate the global market in desktop computers that run Microsoft's Windows operating system, accounting for 90 per cent in revenue terms.

Separately, the EU said yesterday that is has launched legal proceedings against Suez and Electricite de France, the French energy companies, on suspicion of employing anti-competitive tactics in the French and Belgian electricity markets.

The commission did not provide details of its investigation but said the companies' arrangements might have created "higher prices and lower quality of service for all electricity consumers" in the two countries.

The commission said it is still investigating whether the power companies EU competition laws before deciding whether or not to press charges.