Disappointing Durables Demand Dampens Bulls’ Command
The equity markets remain biased toward the downside heading into afternoon trading as an unexpected decline in durable goods orders, which stymied economic sentiment, is stalling the recent upward momentum in stocks. Treasuries moved higher following the report, extending modest gains that came from a decline in mortgage applications, but have pared gains and continue to trade mixed. Traders may be treading with some caution ahead of a reading of business conditions in the US as the Federal Reserve is set to release its Beige Book in the mid-afternoon. Earnings news is diverse, with Dow member Boeing Co and International Paper both posting mixed results, while Aetna Inc, CVS Caremark, and Comcast Corp all topped analysts’ profit forecasts. Meanwhile, ConocoPhillips announced earnings that exceeded the Street’s forecast and it said it will sell its entire stake in Lukoil Holdings, and subscriber growth optimism is helping overshadow Sprint Nextel Corp’s wider-than-forecasted loss. Overseas, Europe was lower amid some possible profit-taking.
At 1:00 p.m. ET, the Dow Jones Industrial Average is flat, the S&P 500 Index is 0.1% lower, and the Nasdaq Composite is declining 0.4%. Crude oil is down $0.51 at $76.99 per barrel, wholesale gasoline is down $0.01 at $2.05 per gallon, and the Bloomberg gold spot price is down by $0.70 at $1,160.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 82.11.
Dow member Boeing Co announced 2Q EPS of $1.06, above the $1.01 Reuters consensus estimate of analysts surveyed, but revenues fell 9% year-over-year (y/y) to $15.6 billion, below the $16.2 billion that was expected on the Street. The aircraft maker said its order backlog is nearly five times its current annual revenue projection of between $64-66 billion, which it reaffirmed today. BA said, “With our commercial markets recovering, and the priorities of our government customers gaining clarity, we remain well positioned for growth in 2011 and beyond.” However, shares are lower on the softer-than-expected revenues and as some are expressing disappointment in its reaffirmed full-year 2010 and 2011 revenue guidance.
Aetna Inc reported 2Q adjusted earnings of $1.05 per share, compared to the $0.74 that analysts were anticipating, with revenues excluding capital gains dipping 2% y/y to $8.50 billion, but above the $8.49 billion that was expected. AET said it benefitted from higher commercial underwriting margin and improved underlying performance, partially offset by lower commercial insured membership. Also the company said its medical benefit ratios—a key industry metric measuring costs—improved y/y from 86.8% to 81.8%. AET increased its full-year EPS guidance, but shares are under pressure.
Separately, AET announced that it has entered into a 12-year contract with CVS Caremark Corp to provide Pharmacy Benefit Management services that will further enhance value and service for AET’s customers and members. Meanwhile, CVS reported 2Q EPS ex-items of $0.68, one cent above analysts’ expectations but the company lowered its full-year EPS and same-store sales—sales at stores open at least a year—guidance. However, CVS is trading solidly higher.
Comcast Corp posted 2Q profits ex-items of $0.33 per share, one penny above the Street’s forecast, with revenues rising 6.1% y/y to $9.5 billion, topping the $9.3 billion that was forecasted. The company’s Chief Financial Officer said the total subscriber growth in June and July was weaker than expected, reflecting the sluggish economy, rising competition, and a loss of customers who took advantage of deep promotions offered last year in response to the government-mandated transition to a digital broadcast spectrum, per Dow Jones Newswires. CMCSA’s CEO said he remains cautious but optimistic about the company’s ability to execute in a soft economic environment. Shares are higher after overcoming early sluggishness.
ConocoPhillips announced that its adjusted 2Q EPS came in at $1.67, above the $1.56 that analysts had anticipated, aided by improved global refining and marketing margins and higher US refining capacity utilization rates. COP said its exploration and production volumes and costs were inline with expectations. Also, COP said it will sell its entire stake in Lukoil Holdings, a portion of it being set to close this quarter and the rest being sold by the end of next year. Shares are slightly higher.
Sprint Nextel Corp is moving higher despite posting a larger-than-forecasted 2Q loss as the company posted the first total net wireless subscriber growth in three years and its best postpaid subscriber—clients under contract—churn result, which is a ratio of clients leaving and joining the company’s service, ever. The upbeat subscriber results at the firm are overshadowing the company’s 2Q net loss of $0.25 per share, which was wider than the $0.20 that analysts expected. S posted revenues of about $8.0 billion, which dipped 1% y/y, matching the Street’s forecasts.
International Paper Co posted 2Q EPS ex-items of $0.42, one penny above the consensus estimate, with revenues growing 5% y/y to $6.1 billion, which was just shy of the $6.2 billion that was expected. The company said each of its businesses posted strong results and operating rates are strong, inventories are low, and input costs are moderating, positioning it “well for a stronger third quarter.” But shares are under heavy pressure on the revenue shortfall and after the company’s CEO sounded a cautious tone on a conference call with analysts, saying that the US economy is still growing, but it is growing at a slower rate.
Durable goods unexpectedly fall, mortgage apps dip, Fed data slated for the afternoon
Durable goods orders (chart) fell 1.0% month-over-month (m/m) in June, versus the forecast of a 1.0% increase by economists surveyed by Bloomberg, and ex-transportation, orders declined 0.6%, compared to the expectation of a 0.4% increase. The drop in the headline rate was the second-straight monthly decline and the unexpected declines in June add to a string of recent reports that suggest manufacturing activity is leveling off. The national Institute for Supply Management Manufacturing Index has showed expansion has decelerated in May and June, and GDP forecasts have been downwardly revised recently, most notably at the Federal Reserve’s most recent policy meeting last month. 2Q GDP will be reported on Friday and economists are expecting the broadest measure of US output to expand by 2.5% compared to 1Q on an annualized basis (economic calendar).
However, Schwab’s Chief Investment Strategist Liz Ann Sonders, Director of Market and Sector Analysis, Brad Sorensen, CFA and Senior Market Analyst, Michelle Gibley, CFA have noted for some time that a soft patch in the economy is likely to emerge as we transition to more sustainable growth after the sharp V-shaped recovery we have experienced. They also point out in their latest bi-weekly Schwab Market Perspective: Will Earnings Light the Way?, that the possibility of a double-dip recession is still relatively remote. Some of the details of today’s durable goods report supports this view, with May’s 1.1% decline being revised to a 0.8% drop and non-defense capital goods excluding aircraft, considered a good proxy for business spending, increasing by 0.6% in June, which suggests that businesses continue to invest in capital. With businesses supporting demand for capital goods, the positive feedback loop of ramped up production—to meet this demand and as inventories have been running lean—could begin to spillover to the employment arena, which would result in further support to the economic recovery.
Our Schwab experts are looking to the ongoing 2Q earnings season, paying more attention to what companies say about their current operating environment than the actual second-quarter results, which only reflect the past. Liz Ann, Brad, and Michelle note that to this relatively early point in the reporting season, results have largely bested muted expectations, with confidence about the continuation of the economic recovery relatively pervasive. There are certainly still plenty of concerns and uncertainty in the corporate sector, but the relative optimism gives further credence to continued stabilization in the economy.
In other economic news, the Mortgage Application Index decreased 4.4% last week, after the index that can be quite volatile on a week-to-week basis, rose 7.6% in the previous week. The decline came as the Refinance Index fell 5.9%, offsetting a 2.0% gain in the Purchase Index. The decline in the overall index came amid a 10 basis-point increase in the average 30-year mortgage rate to 4.69%, moving off the record low of 4.59% that was reached last week.
Treasuries remain mixed in afternoon action after paring some gains that followed the durable goods and mortgage applications reports, and ahead of the release from the economic calendar in the form of the Federal Reserve’s Beige Book. In this report, due out at 2:00 p.m. ET, Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 10, used as an input to the Fed’s decision on whether to make changes in monetary policy.
Winning streak ends in Europe
Stocks in Europe finished lower, snapping a six-session winning streak, with broad-based weakness among the major sectors as traders may have been compelled to book some profits from the recent string of gains across the pond. Also, financials gave up an early advance and traded lower to apply pressure on stocks in Europe, as the sector’s momentum that came in the wake of the stress test results, favorable earnings, and the recent announcement from the Basel Committee on Banking Supervision that it will temper some of its proposed industry capital and liquidity rules was stymied. However, Air France-KLM traded higher after Europe’s largest airline posted the first quarterly profit in almost two years, topping analysts’ expectations, on recovering cargo and passenger traffic.
The economic calendar was relatively light in Europe, with Spain reporting an unexpected increase in retail sales y/y in June, which rose 0.8%, versus the decline of 1.4% that economists forecasted. Also, German capacity utilization improved for manufacturing and capital goods, but declined in consumer and food sectors. Additionally, Germany released its report on the nation’s consumer prices for July, which rose 0.2% month-over-month, compared to the 0.3% increase that was expected, while y/y prices increased 1.1%, versus the 1.2% forecast. In other economic news in the area, Bank of England Governor Mervyn King noted that it may take “considerable” time before UK interest rates return to normal levels, per Bloomberg.
The UK FTSE 100 Index was down 0.9%, Germany’s DAX Index declined 0.5%, and Spain’s IBEX 35 was flat, while France’s CAC-40 Index traded 0.1% higher.
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