Evening Market Update

Fed Hangover and Global Slowdown Leave Equities in the Red

Stocks finished the day solidly to the downside and turned negative for the year, as global economic concerns combined with a delayed negative reaction to yesterday’s Fed announcement to induce a sell-off. On the domestic economic front, separate reports showed that the US trade gap widened in June, while a modest increase was seen in mortgage applications. The earnings front was fairly positive, but did little to boost the overall market sentiment. Dow member Walt Disney Co. reported better-than-expected profit reports on strength in media networks and studio entertainment, while after the close, fellow Dow component Cisco Systems, Inc. beat analysts’ earnings expectation, but came up just shy on the revenue front. Elsewhere in earnings news, Macy’s Inc and CareFusion Corp both beat the Street’s bottom-line expectations, while Cree Inc. offered a mixed 1Q outlook. Treasuries moved higher as the economic uneasiness led investors to some flight-to-safety buying.

The Dow Jones Industrial Average fell 265 points (2.5%) to 10,379, the S&P 500 Index was 32 points (2.8%) lower at 1,089, and the Nasdaq Composite plunged 69 points (3.0%) to 2,209. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil fell $2.65 to $77.60 per barrel, wholesale gasoline lost $0.10 to $1.99 per gallon, while the Bloomberg gold spot price declined $4.30 to $1,199.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 1.7% to 82.28.

Dow member Walt Disney Co. (DIS $34) reported fiscal 3Q EPS of $0.67, above the $0.58 Reuters estimate, with revenues increasing 16% year-over-year (y/y) to $10.0 billion, compared to the $9.4 billion that was anticipated by analysts. Growth at the company’s media networks segment helped lead the way, with strength at ESPN, on earlier recognition of previously deferred revenues and higher affiliate and advertising revenue, partially offset by higher programming and production costs. Also, the company’s studio entertainment unit paced results, aided by strong worldwide performance of Toy Story 3, Alice in Wonderland, and Iron Man 2, partially offset by higher film cost write-downs. Shares were down amid the broad-based sell-off in the global equity markets.

After the close, fellow Dow component Cisco Systems, Inc. (CSCO $24) reported 4Q EPS of $0.43, one cent higher than analysts’ estimates, while revenue of $10.8 billion was just shy of the $10.88 billion expectation. CEO John Chambers said “whether the global economy continues to show mixed signals or not, the strength of our financial model and profit generation serves us well.”

Macy’s Inc. (M $21) announced 2Q earnings of $0.35 per share, above the $0.29 that analysts were anticipating, with revenues rising 7% y/y to $5.5 billion, roughly inline with the Street’s forecast. Same-store sales—sales at stores open at least a year—rose 4.9% y/y, and online sales were up 28.1%. The department store said the economic environment remains uncertain but it believes its business is “beginning to hit its stride” after implementing significant structural and organizational changes over the past two years. The company raised its full-year EPS outlook. M traded nicely higher.

Cree Inc. (CREE $60) was sharply lower after the LED and semiconductor firm issued a mixed fiscal 1Q outlook, with its revenue forecast of a range of $270-280 million coming in short of the $284 million forecast of analysts. The revenue guidance is more than offsetting a 1Q EPS outlook that exceeded forecasts, as well as the company posting fiscal 4Q EPS and revenues that topped analysts’ forecasts.

CareFusion Corp. (CFN $23) reported 4Q EPS of $0.38, one penny higher than the Street’s estimate, as revenue climbed 19% y/y to $1.04 billion. The medical technology company, which was spun off from Cardinal Health Corp. (CAH $32) last year, also announced plans to cut nearly 5% of its work force, which should create more than $100 million in annual savings. CFN also said it plans to make decisions during the new fiscal year to divest certain operations that aren’t a good fit or dilute operating margins. Shares of CFN were up over 8%.

Trade gap widens, mortgage applications tick higher

The trade deficit widened from a modest favorably revised $42.0 billion in May to $49.9 billion in June, versus the Bloomberg estimate calling for the deficit to come in at $42.1 billion. Exports declined from $152.4 billion in May to $150.5 billion in June, while imports increased to $200.3 billion from $194.4 billion.

In other economic news, the US MBA Mortgage Application Index rose 0.6% last week, after the index that can be quite volatile on a week-to-week basis, increased 1.3% in the previous week. The gain came as the Refinance Index increased 0.6%, along with a 0.3% rise in the Purchase Index. The increase in the overall index came amid a 3 basis-point decline in the average 30-year mortgage rate to 4.57%, posting a new record low.

Treasuries finished higher after showing little reaction to the trade and mortgage activity reports, and instead receiving a boost from some flight-to-quality buying as stocks slid amid the pessimism toward the global economic recovery. The yield on the two-year note fell 1 bp to 0.51%, the yield on the 10-year note lost 8 bps to 2.68% and the yield on the 30-year bond was 8 bps lower at 3.92%.

Disappointing data from Asia, led by reports showing a larger-than-expected moderation in China’s economic growth, and lackluster data out of the UK teamed up with the delayed negative reaction to yesterday’s monetary policy announcement from the US Federal Reserve. The Fed left rates unchanged at an “exceptionally low” level and maintained its “extended period” language when referring to the fed funds rate. However, the biggest reaction came as the US central bank downgraded its economic outlook and announced that it will opt to keep its balance sheet constant by reinvesting proceeds from principal payments from agency and agency mortgage-backed securities into longer-term Treasuries. On the economy, the Fed said it continues to anticipate a gradual recovery, but that the pace “is likely to be more modest in the near term than had been anticipated.”

UK and Chinese data both suggest moderating global growth

In European economic news, the Bank of England, in its quarterly inflation assessment, said the economic outlook is weaker than its last report in May, suggesting that growth will probably peak at 3% annually, down from the May forecast of 3.6%. Additionally, the BoE said inflation will be about 1.5% in two years, which would be below its 2% target rate. Also, UK consumer confidence deteriorated by a larger-than-forecasted amount and UK jobless claims declined by a much smaller-than-anticipated amount.

In Asia/Pacific news, Japan’s machine orders rose 1.6% month-over-month (m/m) in June, rebounding from the 9.1% drop seen in May, and well below the 5.4% growth that economists had anticipated. Meanwhile, data from the Chinese economic calendar did little to help the mood toward the economic recovery, as several reports in the region pointed to moderating growth in the nation that has helped lead the recovery. Chinese industrial production slowed inline with expectations in July, but reports on retail sales growth, new yuan loans, fixed asset investments, and money supply, all came in softer than anticipated. However, one bright spot may have come from the Chinese inflation front, as consumer prices rose by an amount that matched forecasts, while wholesale price increases were smaller than expected, possibly helping dampen expectations that the government may deploy further measures to slow down growth and prevent an overheating of the economy. In Australia, a report on consumer confidence showed sentiment slowed to a pace in August that was less than half the rate seen in July. Elsewhere, on the negative side on the economic ledger in Asia, South Korea’s unemployment rate increased from 3.5% in June to 3.7% in July.

Back in the Americas, Canada’s trade deficit unexpectedly widened in June to $1.13 billion, from a revised gap of $695 million in May, while economists were looking for the deficit to narrow to $300 million. Exports fell at the sharpest pace in 10 months and the Bank of Canada now estimates 2Q growth of 3%, less than half of the 6.1% figure reported in the first quarter. The Canadian Central Bank next meets on September 8th. Elsewhere, Brazilian retail sales rose 1.0% in June, compared to the 0.5% gain expected by economists. Latin America’s largest economy appears to be picking up steam again, after growth began to slow in the second quarter, leading the Brazilian central bank to slow the pace of interest rate increases last month.

Tomorrow’s US economic calendar will yield the Import Price Index, which is expected to increase 0.3% in July, after falling 1.3% last month. Additionally, economists are looking for weekly initial jobless claims to decrease to 465,000, from a previous reading of 479,000.

The international front will include euro-zone industrial production, Italian trade balance and CPI, Japanese industrial production and consumer confidence, and the Australian unemployment rate.