Investors had both thrills and chills in the first quarter, as stocks turned the page on their 2006 fairy-tale performance and shifted into the mystery and suspense category.
Coming off double-digit returns in 2006, equities continued an upward trek for the first two months of 2007 until a late February sell-off shook Wall Street, a downturn that erased the year's gains and prompted investors to put their stocks and philosophies under the microscope.
A slow and steady rise in stocks was forecast for 2007 and while some analysts cautioned against complacency, it was to everyone's surprise when the Dow Jones industrial average plummeted 416 points, or 3.3 percent, Feb. 27 on fears of global market performance.
The rosy outlook of early January has been tempered over the past six weeks, as investors take into account more uncertainty from a subprime mortgage market on the skids, rising energy prices, and heightened tensions in the Middle East.
Corporate earnings from the fourth quarter met expectations and the Federal Reserve removed its bias that it might tighten rates, a move applauded on Wall Street. But mixed signals abound, as regulators contend with higher-than-desired consumer prices and weakness in the housing and mortgage sector.
All of which means investors must remain diligent and nimble, acting as needed on news that could easily move the markets, said Thomas J. Bartholomew, president of Bartholomew and Co. Inc., a private Worcester-based investment planning company.
Major banks and other financial institutions have yet to provide details about their exposure to the subprime lending market and that information will become more transparent over the next few weeks, he said. If banks begin putting more money into reserves in anticipation of problems, it could scramble everyone's outlook. The Federal Reserve might have to act earlier than expected in cutting interest rates, he said.
The first quarter pullback left stock indices mostly flat for the quarter, a lack of momentum that, while unanticipated, doesn't foreshadow an economy on the ropes, analysts said.
The T&G/Bloomberg Central Massachusetts Index of locally based public companies slightly outpaced the major indices. The index of 32 companies rose 1.48 percent based on price appreciation and had a total return of 1.69 percent. Gainers and losers were evenly split at 16 each.
For the quarter, the Dow Jones industrial average fell .87 percent. The Standard and Poor's 500 Index was up only slightly, at .18 percent based on price appreciation, with a total return of .64 percent. The Nasdaq Composite Index barely stayed positive, registering a .26 percent increase on price appreciation, with a total return of .44 percent.
Stocks had a terrific run over the past seven or eight months and the recent downturn can't be classified as any type of correction, Mr. Sherr said.
Mr. Sherr is holding to his prediction that equities will post high single-digit returns for the year. He said savvy investors may find bargains in the real estate and financial services sectors. Several companies in those sectors have been dragged down by the subprime mortgage problems even though they have no exposure to the issues, he said.
The housing market is much different from 1989, when the state experienced the last major downturn, said Mr. Bartholomew. Approximately 75 percent of the $10 trillion in outstanding mortgages are fixed rate, according to data from the Federal Reserve. Unlike 20 years ago, local banks don't hold most mortgages, opting instead to pool and convert them into tradable securities.
Some Massachusetts economists say they are more worried about the state's sputtering economy as a whole rather than any exposure to the subprime loan market.
The Massachusetts economy plugs along below the national average at a time when many young people are fleeing because of the state's high cost of living, said Andre Mayer, senior vice president of communications and research at Associated Industries of Massachusetts, the largest employer organization in Massachusetts.
Capital spending remains low, college graduates are moving out, and many companies are shifting operations to other parts of the country, he said.
The leading gainer for the quarter was Westboro-based American Superconductor Corp., whose shares rose 37 percent. Late last month the company, which makes high temperature superconductor wire, said it was cutting 13 percent of its workforce, or 37 jobs. In addition, it merged two units in an attempt to become profitable for the first time since it went public in 1998.
“With a solid foundation of technology, patents, know how and demonstrated machines beneath us, this is the opportune time to consolidate and streamline our HDS operations,” Chief Executive Officer Gregory J. Yurek said on a March 29 conference call.
The realignment, expected to save $4 million this year, was applauded by analysts, who suggested the company was successfully transitioning to the manufacturing stage for its high temperature superconductor products, which transmit electricity with minimal resistance.
While American Superconductor Corp. was cutting staff, Marlboro-based Cytyc Corp. was boosting employment through two deals in the first quarter.
In February, Cytyc, a provider of surgical and diagnostic products for women's health and cancer diagnostics, announced it would purchase Adiana Inc., a privately held contraceptive-product maker, for up to $215 million. It also acquired Adeza Biomedical Corp., which markets tests for pre-term birth and infertility, for $425 million. Shares of Cytyc rose 21 percent for the quarter.
EMC shares got a bump up in February after the company said it would sell 10 percent of its VMware unit in an initial public offering, prompting analysts to raise their ratings on the Hopkinton company. VMware has about 80 percent of the market for server-virtualizations software. For the quarter, EMC shares gained 4.92 percent.
Shares of EMC have languished for years, frustrating both management and investors, said Mr. Sherr. The company has matured but still carries the expectations of a growth company, he said.
A Canadian investor got a chilly reception from the management at Westborough Financial Services Inc. Toronto-based shareholder Marc J. Bistricer was rebuffed in his attempt to derail the company's merger with Assabet Valley Bancorp. The company agreed last year to a $20.6 million merger with Assabet Valley, the parent of Hudson Savings Bank. Assabet offered $35 a share for Westborough Financial Services.
The board of Westborough Financial Services declined Mr. Bistricer's initial offer of $40 per share, and as the quarter came to a close, he raised his bid to $41 per share. The bank Friday rejected the latest proposal but said it was willing to meet with Mr. Bistricer.
Shares of Marlboro-based Sepracor Inc. fell 24 percent during the quarter as analysts downgraded the stock in response to 2007 forecasts that disappointed Wall Street. In addition, the Food and Drug Administration in March ordered makers of sleeping pills, including Sepracor's Lunesta, to impose new safety warnings on the drugs after regulators decided the popular drugs were more dangerous than consumers realized. The company also announced the hiring of Adrian Adams as president and chief operating officer. He is expected to take over the chief executive officer's title later this year from CEO and Chairman Timothy J. Barberich.
While Mr. Adams was arriving, other companies announced the departure of senior managers. Hanover Insurance Group Inc. is in the market for a new chief financial officer after Edward J. Parry III said he would step down in order to seek a CEO's post in the financial services industry The Providence and Worcester Railroad Co. said general counsel Mary A. Tanona resigned, effective April 30. The company also restated its financial results for 2005 and 2004 to account for the accrual of compensatory time off owed to certain employees under a union contract. Investors should expect more volatility in the quarter ahead as Wall Street has contracted a case of the jitters, said Mr. Sherr.
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