Evening Market Update

Disappointing Earnings Hamper Bulls

US equities finished mostly lower following a plethora of disappointing earnings results, while a sharp decline in crude oil pressured the energy sector. Headlining the disappointing earnings news, Dow member Pfizer missed the Street’s revenue estimates, Clorox fell short of EPS expectations while also lowering its outlook, citing higher-than-expected commodity costs, Chesapeake Energy severely missed revenue forecasts, despite beating on the top-line, and Sears Holdings warned of a large 1Q loss. However, on the positive side of the ledger, Mastercard topped earnings expectations, while automakers reported gains in April US auto sales. Treasuries were mostly higher, despite a larger-than-expected rise in factory orders.

The Dow Jones Industrial Average was flat at 12,807, the S&P 500 Index was 5 points (0.3%) lower at 1,357, and the Nasdaq Composite fell 22 points (0.8%) to 2,842. In moderately strong volume,1.0 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.47 to $111.05 per barrel, wholesale gasoline lost $0.02 to $3.33 per gallon, and the Bloomberg gold spot price fell $7.35 to $1,538.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.1% higher at 73.10.

Dow member Pfizer Inc. (PFE $20) reported 1Q EPS ex-items of $0.60, compared to the $0.59 consensus estimate of analysts surveyed by Reuters, with revenues roughly flat year-over-year (y/y) at $16.5 billion, just below the $16.6 billion that the Street was looking for. The company said its results were negatively impacted by the loss of exclusivity of its drugs Lipitor—which saw sales fall 13% y/y—and Aricept in the US, while growth of its patent-protected products including Lyrica, Spiriva, and Celebrex aided results. PFE reaffirmed its full-year guidance, and shares finished solidly to the downside.

Sears Holdings Corp. (SHLD $76) was sharply lower after the company said it expects to report a 1Q net loss of $1.35-1.81 per share after reporting EPS of $0.14 last year. Analysts were expecting the company to post 1Q EPS of $0.03. Also, SHLD announced that its 1Q same-store sales—sales at stores open at least a year—fell 3.6% y/y, driven by appliances, which were boosted by the Cash for Appliances rebate program last year, and apparel which experienced slow spring/summer sales due in part to worse weather than the prior year. Consumer electronics sales also declined. However, the company reported that its Board of Directors approved the repurchase of up to an additional $500 million in the company’s common stock.

Clorox Co. (CLX $67) came under heavy pressure after the company lowered its full-year EPS guidance and reported fiscal 3Q EPS ex-items of $1.02, below the $1.04 that analysts were expecting, as it is seeing higher-than-expected commodity costs and other inflationary pressures in the second half of the year. The company also posted 3Q revenue growth of 1% y/y to $1.3 billion, matching expectations, as volume increased.

Mastercard Inc. (MA $282) announced 1Q EPS $4.29, above the $4.10 that analysts forecasted, with revenues increasing 14.8% y/y to $1.5 billion, roughly inline with forecasts, as the credit card transaction processor said worldwide purchase volume rose 12.9% y/y. MA traded nicely higher.

Chesapeake Energy Corp. (CHK $31) posted adjusted 1Q EPS of $0.75, five cents above the expectations of analysts, but revenues fell 42% y/y to $1.6 billion, well below the $2.6 billion that the Street had forecasted, led by a steep decline in natural gas and oil sales. Shares were solidly lower.

General Motors Co. (GM $33) reported a 26% y/y increase in April US sales of its core brands—Buick, GMC, Cadillac, and Chevrolet. Elsewhere, Ford Motor Co. (F $15) announced that its sales rose 16% y/y in April. Both automakers noted that the recent spike in gas prices had boosted demand for fuel-efficient vehicles. Japanese automakers Nissan Motor Co. (NSANY $19) and Toyota Motor Corp. (TM $80) saw increases in April US auto sales as well, up 12% and 1.3%, respectively, despite major supply-chain disruption due to March’s earthquake and tsunami. GM was higher, while F, NASNY and TM traded lower. 

Factory orders jump in March

Factory orders rose more than expected, rising 3.0% month-over-month (m/m) in March, compared to the increase of 2.0% that economists surveyed by Bloomberg had expected, and February’s initial 0.1% decrease was revised to a 0.7% gain. March durable goods orders—reported last week—were favorably revised from a 2.5% increase to a 2.9% gain.

Treasuries remain modestly higher even after the favorable read on factory orders, with the yield on the 2-year note unchanged at 0.60%, while the yields on the 10-year note and the 30-year bond are declining 1 bp to 3.26% and 4.37%, respectively.

Mixed sentiment overseas

Sentiment in Europe was mixed as traders booked some profits from the recent string of advances that have been seen across the pond amid the backdrop of mostly better-than-forecasted earnings reports. However, the UK markets returned to action after sitting out the last couple of trading sessions due to public holidays, and stocks in the region posted modest gains, showing some resiliency in the face of a report that showed the UK PMI Manufacturing Index decelerated more than economists forecasted for April. Meanwhile, euro-zone producer prices came in hotter-than-expected y/y in March.

In the Asia/Pacific region, investors shifted focus from the death of Osama bin Laden to earnings reports and central bank action in the region. However, trading was lighter than usual with the Japanese markets closed for a holiday. The Reserve Bank of Australia kept its benchmark interest rate unchanged at 4.75% as expected, saying the appreciation in its currency will help hold down prices for some consumer products but over the longer term, inflation can be expected to increase somewhat if economic conditions evolve broadly, as expected. However, India’s central bank raised its interest rate by 50 basis points (bps) to 6.25%, compared to the expected 25 bps increase to 6.00% by economists, as it expects inflation to stay at an “elevated level.”

Service sector read on tap tomorrow

Tomorrow, the US economic calendar will bring a look at service-sector activity for April, in the form of the ISM Non-Manufacturing Index, expected to rise slightly from March’s smaller-than-expected reading of 57.3 to 57.5, continuing to show expansion denoted by a reading above 50. While services are relatively less-sensitive to rising commodity and food prices, the inflation component of tomorrow’s report should garner some attention as traders try to gauge whether broader inflation is taking hold. However, the employment component will likely command the lion’s share of attention ahead of Friday’s labor report.

Other items on the US economic calendar include MBA Mortgage Applications and the ADP Employment Change, where economists expect April private sector payrolls to rise 198,000, following a 201,000 increase in March.

Tomorrow’s international calendar will be a bit heavier with PMI services data coming from Italy, France, Germany and the eurozone, home prices, mortgage approvals and consumer credit out of the UK, France’s trade balance, and retail sales from the eurozone. As well, the Bank of England will begin its two-day monetary policy meeting.