Wall Street pushes Dow to record high with better earnings

S&P 500 Summary Week: July 5, 2013 – July 12, 2013

BY Howard Silverblatt | FROM CSJ | 2013-07-15 09:33

THE MARKET


It was a very good week for the market.  Not because the index closed at a new closing high, or posted its seventh consecutive daily gain in a row giving it a perfect week (Monday through Friday were each up), or because earnings started to come in mostly on the positive side, or that the market was up a whopping 17.04% year-to-date (19.16% with dividends), and not even because the Fed Chairman signaled that the Fed would be accommodating until the economy improved, with a stable 6.5% unemployment rate mentioned (although not all members agreed, as seen by Philadelphia Fed president’s statement on Friday).  No the reason it was a good week for the market (besides that we have more money in our account than last week) was that investors and traders appeared to accept that the Fed would eventually pull back and that interest rates would eventually go up.  And, that the world, or at least the market, would not come to end when they do. Sounds simple, but growing up never is simple, or easy.  For the week, the market set a new closing high Thursday (with a broad 1.36% gain for the day) and Friday (with a 0.31% gain), to close at the new closing high of 1680.19, up 2.96% for the week, its best weekly gain since the opening week of the year (with 451 issues up for the week).  Earnings releases would pick-up next week, as should issue reaction to the news.  Earnings are expected to post a 2.4% gain over Q1, and while some will complain it is not enough, it would be enough to set a new earnings record (if we make it).
S&P Dow Jones Indices admitted information and measurement issue Nielsen Holdings (NLSN) into the S&P 500, replacing Sprint Nextel (S).
 
S&P DOW JONES INDICES RESEARCH: PERSONAL COMMENTARY

The Q2 2013 earnings season has started, with over 70% of the issues expected to be reported by month-end.  Q1 2013 set a record for earnings, and Q2 is expected to slightly beat that, with a 2.4% gain over Q1 2013 and a 3.7% gain over Q2 2012.  Sales are expected to increase at a slightly lower rate of 2.1% over Q1 2013 and 3.2% over Q2 2012.  Two sectors, contributing 37% of the earnings, will dominate the season.  Financials, the largest contributor with 19%, is expected to gain 11% over last year, with the question being how: with lower (or reversed) reserves, better portfolios (housing), underwriting or more loans?  The other sector is information technology, which is expected to post a meager 1% gain in earnings.  Their sales are expected to decline, as enterprise spending continues to be slow, and PCs struggle against tablets and smartphones. Looking at the second half of the year, estimates have held up (so far), with strong earnings forecasted for Q3 and Q4, which would each set a new record.  At this point, the U.S. economy has solid, slow forward growth, which could help it meet those goals.  
 
ACTIONS, SECTORS AND INDIVIDUAL ISSUES


Premarket news was light, but consisted of the protests in Egypt, where confrontations between the former president and the military reportedly resulted in 42 fatalities.  Oil continued at its higher price, USD 102.55.  European issues were higher, as Chinese issues were broadly down, pulling most Asian markets with it.  Japanese M&A for the first half of 2013 fell to its lowest level in nine years.  In the U.S., Friday’s employment report still made a positive impression, but it was earnings season that was dominating the airwaves and trading floor.  At this point, Q2 was expected to set another new earnings record, with a 2.2% increase over Q1 (the current record holder).  Sales were expected to show a gain, be it even less than earnings.  After the close, Alcoa would start off the season, with the heavy hitters (J P Morgan and Wells Fargo) starting on Friday.  SunTrust increased its target price for electronics and appliance store Best Buy (BBY), with Best Buy opening 0.7% higher and closing 1.0% higher.  Semiconductor maker Intel (INTC) was cut to underweight by Evercore, opening off 0.7% and closing off 3.6%, the worst issue in the index for the day.  Morgan Stanley raised its opinion of internet buy-and-sell issue Priceline.com (PCLN), with the issue opening up 2.3% and closing up 3.9%. Computer maker Dell (DELL) opened 2.5% higher (closing 3.15% higher), as ISS (an investor advisory firm) recommended that shareholders vote for the company founder’s (Michael Dell) plan to take over the company.  The market opened up 0.2% and continued up to reach +0.8% at the 10 a.m. posting—optimism over earnings had started to play a role.  The market then tested its level for the next hour, and afterwards declined to +0.4% at noon, where it stayed until 1:30 p.m.  It then traded up to the +0.50%-to-0.6% level, which is where it stayed for the rest of the day.  There were no major stories or major events, but there was optimism that the economy would survive the eventual Fed pullback, and that earnings would be “at least” acceptable.  The uneventful day ended with a 0.53% gain.  Coal and power generating issues did well, as CONSOL Energy (CNX) gained 4.0%, NRG Energy (NRG) added 4.2%, and Peabody Energy (BTU) closed up 4.9%, the best issue in the index for the day. After the close, aluminum issue Alcoa (AA) opened the earnings with a beat, and said it expected aluminum demand to increase; the issue, however, still posted a loss (including restructuring costs), and traded down 0.1%, after closing the day up 1.4%. 

In Tuesday’s premarket news, Egypt remained an issue, although concern was lower, even as the situation continued (oil, however, remained over USD 102).  Egypt’s market rebounded 3.3% (after recent losses), as its interim president set a timeline for new elections.  A report showed that Chinese inflation rose more than expected in June, as producer prices fell for their sixteenth consecutive month (the longest decline in ten years). China’s central bank tightened rules on interbank bond market trading, as it attempts to improve transparency.  European governments agreed to release USD 3.9 billion of aid for Greece. Reports said that the NYSE Euronext (NYX) will replace the British Bankers’ Association as Libor’s administrator in early 2014.  U.K. house prices rose in June, as government programs to help the property market pushed demand to the highest level in almost four years.  U.K. factory output declined 0.8% (in May), when a 0.2% decline was expected; total industrial production was unchanged.  LVMH Moet Hennessy Louis Vuitton said it would buy 80% of Italian cashmere brand Loro Piana for USD 2.6 billion.  In the U.S., the prior day’s Alcoa beat left the market in a positive mood—even though Alcoa is no longer a bellwether issue, the beat helped psychologically. Wednesday would see two issues (Yum and Dollar General), but reporting from major issues (J P Morgan, Wells Fargo) would begin on Friday.   U.S. interest rates pulled back slightly, as the 10-year traded at 2.63%--still historically low, but above its recent lows.  Supermarket and convenience store owner Kroger (KR) said it would buy S&P MidCap 400 issue Harris Teeter Supermarkets (HTSI) for USD 2.5 billion; Harris opened 1.0% higher, as Kroger opened 1.1% higher (closing up 1.5% and 2.7% respectively).  Business machinery issue International Business Machines (IBM) was downgraded by Goldman Sacks, opening off 1.6% and closing off 1.9%.  Advanced surgical system maker Intuitive Surgical (ISRG) opened 14.4% lower, and closed off 16.2%, the worst issue in the index, as it warned on lower earnings.  The market opened higher again, as optimism rules, with the index posting a 0.6% gain and then declining to be up 0.2%, before moving higher again to leave the noon reading up 0.6%, at the 1650 level.  1.1% away from its all-time high close, the market was on its way to its fourth consecutive gain.  Hazem el-Biblawi (former finance minister) was named Egypt’s premier and Mohammed ElBaradei (an opposition leader) was named Vice President, as the military tries to transition back to democracy. 

The IMF cut its 2013 growth forecast for this to 3.1% (down from 3.3% in April) and to 3.89% for 2014 (formerly 4.0%).  From there (noon), the market traded in a range, changing by slight tilts over the afternoon, but never moving far out of its range.  The market ended the day up 0.72%, its fourth straight day of gains (2.37%), and 1.01% away from its closing high.  U.S. regulators released a plan to require large banks to set aside additional capital, which was seen as trying to make big banks more conservative in their risks.  Package delivery issue FedEx (FDX) added 4.4%, as it was rumored to be the target of a potential takeover.  Business machinery issue International Business Machines (IBM) was downgraded by Goldman Sacks, opening off 1.6% and closing off 1.9%.  Earnings hope was keeping the market up, with reality coming Friday morning, for better or worse.  In Wednesday’s premarket news, Chinese exports declined 3.1% in June (over June 2012), up from the 1.0% decline in June.  The report reinforced concern over Chinese overall growth.  Chinese markets, however, looked past the report and were trading slightly higher.  In Europe, French industrial production declined less than expected, as Italian output rose, with Moody’s Investors Service raising its outlook for the U.K. banking system to stable.  European issues, however, traded lower.  In the U.S., traders were waiting for the 2 p.m. FOMC meeting minutes, which they hoped would give additional insight into the Fed’s pullback schedule.  Egypt remained in the background, but oil traded up at USD 104, which was not good for the economy.  Appliance and electronics store owner Best Buy (BBY) received negative comments in a research paper, opening 0ff 0.8% and closing off 4.2%.  Self-service retail store owner Family Dollar Stores (FDO) beat estimates, even as they reported year-over-year earnings slightly down, opening 3.3% higher and closing 7.1% higher, the best issue in the index for the day. Computer products maker Hewlett-Packard (HPQ) was upgraded by Citigroup to a Buy (from a Sell), opening 2.3% higher and closing 1.8% higher.  After four days of gains, U.S. markets opened mixed, declining 0.1% at first, then moving positive, and then moving back into the black to be off 0.1% at 10:30 a.m. Little was expected until the 2 p.m. Fed report, as the market sought its level and consolidated its recent gains.  The earnings view was still mostly positive, with the overall view being for slow growth, with some resistance due to the dollar.  The market continued down, reaching a low at 11:30 a.m. of -0.25%.  The decline then stopped, and the market tilted slightly higher, but stayed in a trading range until 2 p.m., when it was off 0.1% and the Fed notes were released.  The notes showed that half the members felt that buying should stop (USD 85 billion monthly), and half felt it should be continued. 

The notes also showed that most members separated the issue of bond-buying and changing interest rates.  The market immediately moved higher, as it appeared that shorter-term action would not occur. The market quickly moved into positive territory and posted a 0.34% gain within a few minutes.  The initial reaction, however, was soon overpowered by deeper analysis, which while suggesting that the Fed wouldn’t move in September, offered few positive items or indications for later in the year.  The market was unable to hold its gains, and broke back into the red, quickly setting a new intraday low at 2:50 p.m., off 0.28%.  The selling then subsided, just as the buying a half hour ago did, as the market turned up, moving back into the black at 3:25 p.m., and then starting to seesaw between positive and negative territory. The session ended in the black, be it with just a 0.02% gain.  However, it was enough to mark the fifth consecutive day of gains for the index, last seen on May 2-8 of this year.  Market researcher Gartner estimated that personal computer sales in the second quarter declined 10.9%.  Microcomputer parts maker Micron Technology (MU) continued to be under pressure from profit taking, declining 4.5% (in heavy volume), and is off 12.3% over the past three days, but remains up 97.6% year-to-date. After the close, family style restaurant Yum! Brands (YUM), which closed down 0.9% today, reported lower earnings, but beat estimates, with the issue trading up 0.5%.  The market was waiting until Friday’s bank earnings, with the next day expected to be noncommittal, with only the import-export report, and no major earnings reported. In an after the close conference, Chairmen Bernanke said the U.S. economy will continue to need stimulus, adding that he expects the Fed won't increase short-term interest rates for some time until after the unemployment rate hits 6.5% (and stays there), which is currently at 7.6%.  Global markets, which were open at the time immediately reacted by moving higher.  In Thursday’s premarket news the Fed Chairmen’s remarks pushed global stocks up and the U.S. dollar down.  European issues were higher, as China’s stocks moved higher for the second day, aided by hopes that the Chinese government would take action to help its economy.  A report by Credit Suisse said the yen may slide another 18% as the Bank of Japan expands the money supply.  Australia’s unemployment rate rose to 5.7%, the highest since September 2009. Oil traded up at USD 105, as the yen declined to under 100 (99.22), and the U.S. 10-year treasury traded at 2.57%. 

In the U.S. news was lite, but expectations for tomorrows bank reports, and earnings in general, were high.  Futures pointed to a strong opening, in the mid-1660s, with the all-time intraday high being 1687.18 (5/22/2013) and the closing high being 1669.18 (5/21/2013). New weekly jobless claims increased 16,000 to 360,000, when a 9,000 decline to 335,000 was expected.  Bank of America Merrill Lynch raised it the classification of semiconductor maker Advanced Micro Devices (AMD) to Buy from Underperform, with AMD opening 6.0% higher and closing 11.8% higher, the best issue in the index for the day.  Biopharmaceutical issue Celgene (CELG) said its study showed its Revlimid cancer drug could be an initial treatment for patients with multiple; the issue opened 5.9% higher and closed 7.9% higher.  Software maker Microsoft (MSFT) presented its expected restructure to help it compete quicker, opening 0.8% higher and closing up 2.8%.  Yum! Brands (YUM) opened down 2.1% on opening orders (from last night’s earnings), and closed off 1.1%.  The market opened 0.32% higher on the opening orders, the best opening since May 6, 2011.  The market continued up, passing the old closing high and reaching 1671 (up 1.11%) within the first few minutes.  Stocks then started to waver and test its level (as expected), with the 11 a.m. reading being up 1.0%, for a potential sixth day of gains (last seen on May 1–11, 2013, for seven days, with a 2.74% gain).  The market continued to test its level drifting slightly higher to be up 1.1% (1670) at noon, 1 p.m. and 2 p.m.  The market then broke out of its range and tilted up, adding to its gains.  The market closed up 1.36%, closing at 1675.02, a new all-time high (although the intraday high remains at 1687.18 from 5/22/13).  It was the sixth consecutive daily gain, cumulative 3.78%.  The DJIA also closed at an all-time high, 15,460.92, replacing the May 28, 2013, high of 15,409.39 (with the intraday high remaining at 15,542.40 from May 22, 2013).  The street was happy, content and relived–for now.  Tomorrow the financials will start to report (J P Morgan and Wells Fargo), and good numbers could carry us past the intraday high, but.... anticipation is typically better than reality.  In Friday’s premarket news, European issues were broadly higher, helped by the prior U.S. gains.  A report said France’s Schneider Electric (the maker of voltage equipment) was in talks to buy UK’s Invensys for USD 5 billion.  Standard & Poor’s Ratings Services revised its outlook on Ireland’s sovereign rating upward, citing the government’s potential to exceed its debt reduction target.  China, however, declined after two days of strong gains, as the Chinese Finance Minister signaled that China may expand less than expected, with growth as low as 6.5%.  In the U.S., the market turned to earnings, as the positive mood set from the chairman’s remarks faded into ‘yesterday’s news’. 

J.P. Morgan beat estimates with a 31% gain in earnings, but book value increased more modestly, apparently due to the fall in bond prices.  The issue opened 0.7% higher and closed 0.3% lower.  Wells Fargo (WFC) reported 19% higher earnings on flat revenue, opening 1.7% higher and closing 1.8% higher.  Express carrier and package delivery issue United Parcel Service (UPS) said it will miss estimates, as it cut its forecast; the issue opened 5.3% lower and closing 5.8% lower, the worst issue in the index for the day.  The producer price index for June rose 0.8% (seasonally adjusted), which was higher-than-expected due to a 2.9% increase in energy prices.  The market opened mixed after yesterday’s strong gains and this morning’s mostly positive earnings reports, as it attempted to absorb its six days of gains and go for its seventh – and a perfect week (up each day Monday – Friday; last seen in May 2013).  The market jig sawed back and forth between 0.1% down and 0.1% up until 11:30 a.m. when it was the break-even line, as it consolidated its positions.  A statement by Federal Reserve Bank of Philadelphia President Plosser saying that he thought tapering in Fed bond buying should start in September disrupted the market.  Posner had opposed buying before, but the market was working under the belief that the Chairman’s statements ended any early ending.  The market turned down, and started to in the red, at 0.2% down, for the next hour.  Airline maker Boeing (BA) reported a fire in their new 787 Dreamliner at Heathrow Airport (London), as the issue immediately turned from slightly up to 6% down, closing off 4.7% for the day. The decline was acceptable, given the recent gains and news, as trading became uneventful.  The market continued in the red, trading off 0.1% at the 1 p.m. reading. 

 If the market could hold its own traders would be content, even if a loss stopped the run of gains.  The market started to turn up a little after 1 p.m., as it make its way back into the black a little before 2 p.m., then lost it, going back into the red a little after 2 p.m.  Shares continued to waver up and down with the 3 p.m. reading just a tick (.01%) into the red, and the 3:15 p.m. reading a tick in the black.  Shares then increased quickly, as some buying (potentially a program) came in pushing the market to the up 0.23% level with twelve minutes left to the session – traders could fell the seventh gain.  Over the remaining minutes the market added a few points to close up 0.31%, at 1680.19 – its intraday high.  It was the index’s seventh gain in a row, which included a perfect week, and a new all-time closing high. Generic drug maker Regeneron Pharmaceuticals (REGN) was upgraded to a ‘buy’ from ‘natural’ by Lazard Capital Markets, closing up 7.3%, as biopharmaceutical research and development issue Alexion Pharmaceuticals (ALXN) added 12.7% (the best issue in the index for the day) on a report that Roche was in takeover talks with it.  Initial earnings had come through and supported the enthusiasm from the Chairman’s statement. It was, however, just the start, as next week would begin the onslaught of earnings, starting with global banker Citigroup before the opening on Monday. 
 
UPCOMING


Earnings will start to pick up, as banker Citigroup (C) is expected to report a 16% gain on Monday, with sales & rental of uniform issue Cintas (CTAS) also expected to post a 16% gain.  Tuesday will bring soft drink maker Coca-Cola (KO), expected to post a 5% gain, with transportation issue CSX (CSX) expected to post a 6%, and health care products maker Johnson & Johnson (JNJ) estimated to have increased earnings 7% in the quarter.  After the close, internet search and advertising issue Yahoo (YHOO) is expected to report an 11% gain in earnings.  Wednesday will bring banker Bank of America (BAC), expected to report a 47% gain, as charge card issue American Express (AXP) is expected to post a 5% gain.  Semiconductor issue Intel (INTC) is expected to post a sharp 28% decline, with heart valve and medical device maker Saint Jude Medical (STJ) projected to report a 7% increase.  Thursday will bring hospital and laboratory products maker Baxter International (BAX), which is expected to report flat-to-slightly-higher earnings.  Advanced surgical systems maker Intuitive Surgical (ISRG), which warned on its report, is expected to post a 14% gain in earnings.  Semiconductor maker Advanced Micro Devices (AMD) is expected to post a loss, as bank card Capital One (COF) is expected to report that its earnings doubled in the quarter.  Friday will bring banker State Street (STT), expected to post a 16% gain, along with oilfield services issue Schlumberger (SLB), which is expected to post a 6% gain, and aerospace and automotive parts maker Honeywell International, which is expected to also post a 6% gain.  Economic reports will start Monday with June’s retail trade report, expected to show a 0.6% gain, and a 0.3% gain ex-autos.  Business Inventories for May are expected to have increased 0.2%. Tuesday will bring the CPI report for June, which is expected to post a 0.3% gain, with the year-over-year gain being 1.7%.  Ex-food and energy the month is expected to be up 0.2% and the year-over-year up 1.7%. U.S. Industrial Production for June is expected to have increased 0.3%, with Capacity Utilization increasing to 77.8% from May’s 77.6%.  Wednesday will bring the weekly mortgage report.  Housing starts are expected to have increased to the 0.941 million level (from 0.914 million last month), with Permits increasing to 1.000 million from the prior 0.974 million level.  Completions are expected to be 0.78 million, up from 0.69 million.  Thursday will bring the weekly new unemployment claims report, as well as the Leading Indicators report, which is expected to show a 0.2% increase.  No major reports are expected Friday.

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