Sentiment Stymied as Durable Goods Surprisingly Slumps
The equity markets are under some pressure in late-morning action as the recent upward momentum in stocks has stalled following an unexpected decline in durable goods orders, which is stymieing economic sentiment. Treasuries moved higher following the report, extending modest gains that came from a decline in mortgage applications, but have pared gains and are mixed. Traders may be treading lightly ahead of the Federal Reserve’s release of its Beige Book in afternoon action, which is a look at business activity across the nation. In earnings news, Dow member Boeing Co provided a mixed report, while Aetna Inc, CVS Caremark, and Comcast Corp all topped analysts’ profit forecasts. Meanwhile, ConocoPhillips posted earnings that exceeded the Street’s forecast, and it said it will sell its entire stake in Lukoil. Overseas, Europe is lower amid some possible profit-taking, while Asia moved nicely higher on earnings optimism.
At 11:01 a.m. ET, the Dow Jones Industrial Average is 0.1% lower, the S&P 500 Index is 0.3% lower, and the Nasdaq Composite is declining 0.5%. Crude oil is down $1.02 at $76.48 per barrel, wholesale gasoline is down $0.02 at $2.04 per gallon, and the Bloomberg gold spot price is down by $0.95 at $1,160.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 81.97.
Dow member Boeing Co. (BA $67) 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 as some are expressing disappointment in its reaffirmed full-year 2010 and 2011 revenue guidance.
Aetna Inc. (AET $27) 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.
Separately, AET announced that it has entered into a 12-year contract with CVS Caremark Corp. (CVS $31) 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 higher.
Comcast Corp. (CMCSA $19) 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 modestly lower.
ConocoPhillips (COP $54) 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 (LUKOY $58), 20% of it being set to close this quarter and the rest being sold by the end of next year. Shares are slightly lower after relinquishing early gains.
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.
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 are mixed in late-morning action, paring some gains that followed the durable goods and mortgage applications reports, and ahead of the afternoon release from the economic calendar in the form of the Federal Reserve’s Beige Book. In this report, 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 in Europe in jeopardy
Stocks in Europe remain lower in late-day action, with weakness in industrials as traders may be booking some profits from the recent string of gains across the pond, in which the equity markets have been on the positive side of the ledger for six consecutive sessions. Also, financials have given up an early advance and are 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 have been stymied. In earnings news across the pond, Air France-KLM (AFLYY $15) is 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 is 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 is down 0.8%, France’s CAC-40 Index is 0.1% lower, Germany’s DAX Index is declining 0.7%, and Spain’s IBEX 35 is decreasing 0.2%.
Asia posts a nice advance led by Japan and China
Stocks in Asia were broadly higher as favorable global earnings reports continue to sweeten sentiment regarding the economic recovery. Stocks in Japan led the way, with the Nikkei 225 Index rising 2.7%, boosted by a solid advance in shares of Canon Inc. (CAJ $41) after the world’s largest camera maker posted a sharp increase in 2Q profit that topped analysts’ forecasts. Also, shares of Fuji Heavy Industries Ltd. (FUJHY $52) were up nicely to contribute to the advance in the region, as the maker of Subaru automobiles announced that its total production jumped 70% y/y in June. Also, yesterday’s solid decline in the Japanese yen versus the US dollar and other major currencies helped improve sentiment as a weaker currency improves the outlook of revenues for companies that rely heavily on sales outside the Asian nation. Moreover, the Japanese economic front added to the upbeat backdrop, with a report showing Japanese small business confidence improved in July. Meanwhile, stocks in China posted strong gains, with the Shanghai Composite Index rising 2.3% and the Hong Kong Hang Seng Index advancing 0.6%, aided by a government report that showed earnings of Chinese industrial companies surged 72% in the first-half of the year compared to the same period a year earlier, per Bloomberg.
Australian shares moved higher, with the S&P/ASX 200 Index advancing 0.7%, on the aforementioned global economic optimism and after a report showed 2Q consumer prices rose 0.6% quarter-over-quarter (q/q), versus the 0.9% increase in 1Q and compared to the 1.0% gain that economists had expected, limiting some expectations that the Reserve Bank of Australia will raise interest rates at its next meeting. In other economic news from down under, reports on New Zealand’s business confidence and activity outlook both declined in July, but the NZX 50 Index rose 0.5%. In other markets in Asia, South Korea’s Kospi Index rose 0.3% on the heels of a report that showed the nation’s current account surplus widened in June, and Taiwan’s Taiex Index gained 0.5%, while India’s BSE Sensex 30 Index declined 0.7%.
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