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Thursday, August 18, 2011

Evening Market Update

Stocks Tumble Deep in the Red

The US equity markets traded solidly lower today, as worst case scenario fears were stoked by ongoing concerns about the financial stability of Europe and a deluge of disappointing US economic data. Treasuries moved sharply higher along with the price of gold and the US dollar, as reports showed an increase in US consumer prices and jobless claims, while the Philly Fed Manufacturing Index fell to its lowest level since March of 2009. Rounding out the economic docket was an unexpected drop in existing home sales, while a larger-than-expected improvement in leading indicators provided the lone bright spot in an otherwise dark day. In equity news, Dow member Hewlett-Packard reported slightly better-than-expected earnings, along with plans to spinoff its PC business and possibly acquire U.K. software firm Autonomy Corp. Additionally, NetApp missed the Street’s revenue forecast, Sears Holdings reported a larger-than-expected loss, and Limited Brands topped analysts’ estimates.

The Dow Jones Industrial Average lost 420 points (3.7%) to 10,991, the S&P 500 Index fell 53 points (4.5%) to 1,141, while the Nasdaq Composite plunged 131 points (5.2%) to 2,380. In heavy volume, 1.6 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $5.82 to $81.76 per barrel, wholesale gasoline declined $0.09 to $2.78 per gallon, while the Bloomberg gold spot price rose $34.25 to $1,825.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 74.19.

Dow member
Hewlett-Packard Co. (HPQ $30) reported 3Q EPS ex-items of $1.10, one penny above the Street’s estimate, while revenue of $31.2 billion matched expectations. The company also lowered its 4Q and full-year earnings and revenue guidance. Meanwhile, HPQ said it plans to announce that its board has authorized the exploration of strategic alternatives for its Personal Systems Group, which could include either a full divesture or partial separation though a spin-off. Additionally, the company plans to announce that it will discontinue operations for its webOS devices, including the TouchPad and webOS phones. Rounding out a busy day for the tech giant, HPQ confirmed that it is in discussions to acquire U.K. data-analytics firm Autonomy Corp. (AUTNY $38). AUTNY issued a statement confirming the discussions. Shares of HPQ traded lower, while AUTNY moved solidly higher.

NetApp Inc.
(NTAP $36) reported fiscal 1Q EPS ex-items of $0.55, inline with the consensus estimate of analysts surveyed by Reuters, but revenues, although growing 26% year-over-year (y/y) to $1.46 billion, missed the $1.51 billion that the Street had anticipated. The storage and data management solutions firm said a “challenging macroeconomic environment” modestly impacted its revenue growth, but its gross margin came in better than expected. The company saw demand slow from its US government and financial services customers. NTAP issued 2Q guidance that matched expectations. Shares were sharply lower.

Limited Brands Inc.
(LTD $34) announced 2Q adjusted earnings of $0.48 per share, two cents above the Street’s expectations, as revenues rose 9.6% y/y to $2.5 billion, above the $2.4 billion that analysts had projected. 2Q same-store sales—sales at stores open at least a year—gained 9% y/y. The specialty retailer said its focus on “managing inventory and expenses conservatively” yielded more full-priced selling and record results. LTD raised its August same-store sales and full-year EPS guidance. Shares finished lower.

Sears Holdings Corp.
(SHLD $55) posted a 2Q adjusted net loss of $1.13 per share, wider than the $0.64 shortfall that analysts were expecting, while revenues, which declined 1.2% y/y to $10.3 billion, exceeded the $10.1 billion that the Street was anticipating. 2Q domestic same-store sales declined 0.7% y/y. The retailer said the decreases in sales were primarily driven by consumer electronics. SHLD moved solidly lower.

Inflation, home sales, jobless claims, and Philly Fed headline disappointing economic data

Consumer Price Index showed prices at the consumer level were up 0.5% month-over-month (m/m) in July, more than the forecasts of economists surveyed by Bloomberg, which called for a 0.2% increase, while June’s 0.2% decline was left unrevised. Meanwhile, the core rate, which excludes the impact of food and energy, was 0.2% higher m/m in July, matching estimates, with June’s 0.3% increase unadjusted. On a y/y basis, consumer prices remained up 3.6% in July, above economists’ forecasts of a 3.3% increase, and the core CPI was 1.8% higher y/y, versus the 1.7% that was expected.

existing homes sales fell 3.5% m/m in July to an annual rate of 4.67 million units, lower than the increase to 4.9 million units forecasted by economists surveyed by Bloomberg, and June’s figure was slightly upwardly revised to 4.84 million units. The median existing-home price fell 4.4% from a year ago to $174,000, and declined 0.9% m/m. The supply of homes fell by 1.7% m/m to 3.65 million units, equating to 9.4 months of supply at the current sales pace. Single-family home sales decreased 4.0% m/m, while multi-family was flat. Sales of existing homes reflect closings from contracts entered one to two months earlier. The National Association of Realtors, who issues the report, noted that “many buyers are being held back because banks are offering financing only to the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers.” The NAR added that financing conditions, combined with appraisal values coming in below the negotiated price, are contributing to high cancellations, which remain at the same level as in June.

The recent moves in the stock market, highlighted by the decline after the credit rating downgrade in the US, as well as the drop in shares of European banks, illustrate the role that confidence has in investing. However, there is also a corollary in the real economy, as consumers feel a negative wealth effect from the market drop, and then possibly pull back on spending, damaging prospects for businesses, who then retreat from spending and hiring, in a negative feedback loop.

weekly initial jobless claims increased by 9,000 to 408,000, versus last week's figure which was upwardly revised by 4,000 to 399,000, and compared to the 400,000 level that economists had expected. However, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,500 to 402,500, while continuing claims rose by 7,000 to 3,702,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Meanwhile, the
Philly Fed Manufacturing Index tumbled back into contraction territory, falling from 3.2 in July to -30.7 in August—the lowest since March 2009—with a reading of zero the separating point between expansion and contraction. Economists had expected the index to decrease slightly to 2.0. The index turned sharply lower as new orders fell by 26.9 points to -26.8, shipments dropped to -13.9 from 4.3, and inventories fell 11.2 points to -9.8. Also, employment posted a 14.1 point decline to -5.2, while the prices paid component fell from 25.1 to 12.8.

Finally, the one bright spot from the economic front came in the form of the July Conference Board’s
Index of Leading Economic Indicators (LEI) (chart), which rose 0.5% m/m, compared to the 0.2% increase that economists expected, and following June’s unrevised 0.3% increase. The index was led by positive contributions from the components pertaining to money supply, the yield curve, and jobless claims, which offset declines in the building permits and consumer expectations components of the data.

Treasuries moved solidly higher, as the yield on the 2-year note was unchanged at 0.19%, the yield on the 10-year note was 8 bps lower at 2.08%, and the 30-year bond rate lost 12 bps to 3.44%.

European banking and global growth concerns return to pressure the eurozone

Concerns about the health of the European financial system were amplified by a report from the Wall Street Journal that US Federal and state regulators are intensifying their scrutiny of the US arms of Europe’s biggest banks to try to avoid the eurozone debt crisis from spilling into the US banking system, citing people familiar with the matter. US regulators have not commented on the report. Also, reports that an undisclosed European bank borrowed $500 million (350 million euros) from the European Central Bank’s seven-day US dollar liquidity facility—the first loan issued by this facility since February—added fuel to the financial concerns in the region.

Meanwhile, global economic growth concerns also contributed to the soured sentiment across the pond, as
Morgan Stanley (MS $16) cut its global GDP forecast to 3.9% from 4.2% for 2011 and 3.8% from 4.5% in 2012, noting that, “Our revised forecasts show the US and the euro area hovering dangerously close to a recession.” Moreover, UK retail sales came in below expectations for July, while construction output in the eurozone dropped in June.

In Asia/Pacific economic news, a report out of Japan showed foreign investments in Japanese stocks fell solidly last week, while the nation’s department store sales declined in July. Also, a separate report showed the nation’s exports fell more than expected in July. Finally, after the closing bell in Asia, Taiwan’s 2Q GDP was revised higher to a y/y growth rate of 5.02%, after growing 6.16% in 1Q, while Hong Kong’s unemployment rate moved lower from 3.5% to 3.4% for July.

After the flood of economic data reported today, there will be no releases on the US calendar tomorrow. The international docket will be quiet as well, with reports including German and Canadian PPI, as well as Brazil’s CPI.

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