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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Tuesday, February 12, 2013
Summary
The markets in general were modestly higher on
Tuesday, putting the Dow Jones Industrial Average within striking
distance of an all-time high, as investors looked ahead to President
Barack Obama's State of the Union address. Specifically, what is being
looked for are any indications that there is an deal in the offing to
avert automatic spending cuts due to take effect March 1.
The tone of the speech will also be scrutinized,
with any sign of compromise likely to be warmly received. The White
House has signaled Obama will urge investment in infrastructure and
clean energy, suggesting companies in those sectors may be volatile in
Wednesday's session. The S&P 500 index has been moving higher for the
past six weeks, putting it up 6.5 percent so far this year, while the
Dow is about 1 percent away from its all-time closing record of
14,164.53, reached in October 2007. However, gains have been harder to come by since the
S&P hit a five-year high on February 1. Daily moves have been small and
trading volume light as investors search for new reasons to drive stocks
higher. Housing shares were among the strongest of the day,
led by a 12.5 percent jump in Masco Corp to $20.02 after the home
improvement product maker said it expects new home construction to show
strong growth in 2013. Avon Products rose 20 percent to $20.79 as the S&P
500's top percentage gainer after the cosmetics company reversed sales
declines and cut costs. On the downside, Coca-Cola fell 2.7 percent to
$37.56 and was the largest drag on the Dow after reporting revenue below
estimates, hurt by a weaker-than-expected performance in Europe. Michael Kors Holdings ended the day up 8.8 percent
to $62.04 after the fashion company handily beat Wall Street's estimates
and raised its full-year outlook. With earnings season starting to wind down, Thomson
Reuters data through Tuesday morning shows of the 353 companies in the
S&P 500 that have reported results, 70.3 percent have exceeded analysts'
expectations, above a 62 percent average since 1994 and 65 percent over
the past four quarters. Fourth-quarter earnings for S&P 500 companies
are estimated to have risen 5.3 percent, according to the data, above a
1.9 percent forecast at the start of the earnings season. Approximately 5.73 billion shares changed hands on
the three major equity exchanges on Tuesday, a number that was below the
daily average so far this year of about 6.48 billion shares.
Tone of the Talk Is What Counts Wall Street has any number of concerns regarding
what happens in Washington, D.C., from "fiscal cliff" fears to concerns
about a debt default or government shutdown. But President Barack
Obama's State of the Union address on Tuesday night is unlikely to be
one of those reasons. Unless Obama's speech is so combative that it
heralds even uglier battles with Republicans over the budget, market
strategists say, it is unlikely to derail a stock market rally that has
pushed the S&P 500 index to just a few percentage points from all-time
highs. The president is expected to strike an optimistic
note on the U.S. economy, highlighting the prospects of job growth. That
should help maintain the positive tone in financial markets, analysts
said, even though the White House and Congress still have to cut a deal
to delay or modify "sequestration," the $85 billion in automatic
spending cuts due in March. Wall Street broadly sees the State of the Union
speech as an opportunity for the president to present long-term goals,
many of which are unlikely to come to fruition. The chances that Obama
will announce concrete measures that will excite investors are viewed as
slim, though he could give a nod to corporate tax reform, which carries
the possibility of lower tax rates on the repatriation of overseas
profits. On the downside, Obama could suggest raising tax
rates again to help close the deficit, or target tax benefits for
specific industries such as oil and gas, or again mention eliminating
the "carried interest" provision that reduces taxes for investment
managers. In the aftermath of having moved into riskier assets
on the assumption that Washington will eventually work out a budget
deal, many investors are watching to see what tone Obama adopts for
working with the Republicans. A combative approach could provoke a short-term
flight to safety and see equity indices sell off by up to 1 percent.
Most State of the Union speeches see less than a 1 percent move in the
stock market on the following day. The average move is only 0.15 percent
since 1934, when President Franklin D. Roosevelt first used the term
"State of the Union.” Still, stocks in the defense, retail and energy
sectors could see some action. Under the current plan, defense spending
will be cut by around 8 percent, while non-defense funding is subject to
reductions of 5 to 6 percent. If Obama suggests he is open to mitigating
the defense cuts, that would be a positive for the sector, which has
pulled back lately. Shares of defense companies, such as Lockheed Martin
and Raytheon, have recently fallen from 52-week highs in anticipation of
budget cuts. The energy sector is another focus. "Clean energy"
companies could get a lift if Obama discusses energy independence, while
any remarks on eliminating tax breaks for the exploration and production
companies could hit shares of companies such as such as Anadarko
Petroleum and ConocoPhillips. The January 1 deal that Washington struck on the
fiscal cliff raised tax rates on the wealthiest Americans and allowed a
previous reduction in the payroll tax to expire. That cuts into
take-home pay for Americans, but is expected to hit lower- and
middle-class citizens harder.
“Silly Sideshow,” says Apple
Apple CEO Tim Cook said the board is carefully
considering David Einhorn's proposal for the company to issue preferred
stock and return more cash to investors, but he called a lawsuit brought
by the star hedge fund manager against Apple a "silly sideshow." Waving aside Einhorn's assertion that Apple is
clinging to a "Depression-era" mentality, Cook said on Tuesday the
company's board is in "very active discussions" on how to dole out more
of its $137 billion hoard of cash and marketable securities. Einhorn and his Greenlight Capital are suing Apple
as part of a wider effort to get the iPhone maker to share more of its
cash pile, one of the largest among technology companies. They are
challenging "Proposal 2" in Apple's proxy statement, which would abolish
a system for issuing preferred stock at its discretion. Einhorn wants Apple to issue perpetual preferred
shares that pay dividends to existing shareholders, which he argued
would be superior to dividends or buybacks. Cook gave Einhorn credit for a novel idea, but the
usually unflappable chief executive turned slightly impatient when
discussing the lawsuit. He was also dismissive of Einhorn's media and
legal blitz - which included the lawsuit as well as multiple television
and media interviews. Einhorn seeks an injunction to block a February 27
shareholders' vote on Proposal 2, in what amounts to the biggest
challenge to Apple from an activist investor in years. "This is a waste of shareholder money and a
distraction, and not a seminal issue for Apple, that said, I support
Prop 2. I am personally going to vote for it," Cook told a packed hall
at Goldman Sachs' annual technology industry conference in San
Francisco. The conflict over Prop 2 "is a silly sideshow,"
added Cook, who on Tuesday traded in his usual casual jeans attire for
slacks and a dark suit jacket, in a nod to Wall Street. Cook said he
thought it "bizarre that we would find ourselves being sued for doing
something good for shareholders." Einhorn's clash with Apple centers on a proposed
change to its charter that would eliminate the company's ability to
issue "blank check" preferred stock at its discretion. Apple, which said
the change would not preclude future issuance of preferred shares, is
recommending shareholders vote in favor at its annual meeting on
February 27. The lawsuit, filed in the U.S. district court in Manhattan,
objects to the bundling of the charter change with two other corporate
governance-related proposals in "Proposal 2." The hedge fund manager, a well-known short-seller
and Apple gadget fan, counters that striking the preferred-share
mechanism from the charter would make it more difficult to issue such
securities down the road. "If Apple thinks the lawsuit is a waste of
resources, it could simply end the matter by complying with existing law
and filing a new proxy that unbundles the proposed changes to the
charter, so that shareholders can express their views on each matter
separately," a Greenlight Capital spokesman said in an emailed
statement, responding to Cook's comments. On Tuesday, influential advisory firm Glass Lewis
recommended shareholders vote in favor of Proposal 2, joining ISS and
the California Public Employees Retirement System - the top U.S. pension
fund - in voicing support for the measure. Apple and Greenlight appear for oral arguments in
U.S. district court in Manhattan on February 19. Investors however were disappointed that Cook - who
rarely makes lengthy public-speaking engagements - did not provide a
"more substantial" view on returning cash. Apple stock is a mainstay of many fund managers'
portfolios, with research firm eVestment estimating that 75 percent of
U.S. large-cap growth managers had invested more than 5 percent of their
portfolios in Apple as of the end of the third quarter of 2012. However,
that also increases the pressure on Apple to give away a bigger portion
of its cash hoard, which is rising as the share price declines and its
outlook grows murkier. Last March, Apple announced a quarterly cash
dividend and a share buyback that would pay out $45 billion over three
years. At the time, it was sitting on $98 billion in cash. It has so far
returned $10 billion of that, but investors want more. Apple's own view is that its cash pile is a
strategic cushion, offering it more flexibility if a need ever arises,
such as a major acquisition. Cook said the company had pondered more
than one large acquisition in the past, but none passed its internal
test. The company could well do one in the future if the technology
fits, he said. "We have the management talent and depth to do it,"
Cook said. "We don't feel the pressure to go out and acquire revenue." Cook, introduced by Goldman Sachs CEO Lloyd
Blankfein at the outset, offered other views on topics from screen sizes
and the future of the personal computer to Apple's commitment to "great
products." He disputed a popular view that the smartphone
market in developed markets may be saturated. "On a longer-term basis, all phones will be
smartphones and there's a lot more people in the world than 1.4 billion,
and people love to upgrade their phones very regularly," he said. The company is also trying to appeal to
cost-conscious customers. Apple has moved to make the iPhone more
affordable without introducing a specific cheaper phone, by cutting
prices of older models. "We didn't have enough supply of iPhone 4 after we
cut the price," he said. "It surprised us, the level of demand for it." The chief executive, who departed for Washington,
D.C after the conference to join U.S. first lady Michelle Obama at the
President's State of the Union address later on Tuesday, otherwise stuck
pretty much to his regular script - with a sprinkling of lighter, more
personal moments. He grew animated when praising Apple employees or
talking about the company's efforts to improve labor conditions across
its sprawling supply chain, and touted the Apple store concept for its
uplifting ability. Cook said that when he is down, he just visits an
Apple retail store. "It's like Prozac. It's a feeling like no other."
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MarketView for February 12
MarketView for Tuesday, February 12