MarketView for January 27

 

 

Summary

 

The equity markets extended their recent losses on Monday, with the S&P 500 falling for a third straight session as concern grew about the Federal Reserve's plans for withdrawing stimulus. The negative numbers, which picked up late in the session after the S&P 500 briefly traded in positive territory, followed a steep selloff late last week tied to emerging market concerns. The slide gave the S&P 500 its worst weekly percentage loss since June 2012.

 

Caterpillar limited the day’s losses of both the Dow Jones Industrial Average and the S&P 500 indexes. Caterpillar ended the day up 5.9 percent to close at $91.29 after the company reported a stronger-than-expected quarterly earnings number.

 

The technology sector led the day's decline, with the S&P 500 technology sector index falling 1 percent and the Nasdaq underperforming both the Dow and S&P 500. Google closed down 2 percent at $1,101.23, and Microsoft fell 2.1 percent, closing at $36.03,.

 

In after-hours trading, shares of Apple fell 5.7 percent to $519.38 after its results showed iPhone holiday sales lagged Wall Street's expectations.

 

The Fed's two-day policy meeting begins on Tuesday. Many market participants are bracing for the market to sell off if the Fed decides to keep withdrawing stimulus.

 

Last week's heavy selling raised some concerns that the market may be in for a major correction, especially with the S&P 500 closing on Friday below its 50-day moving average for the first time since October 9 and falling further below that level on Monday. The Nasdaq also ended below its 50-day moving average on Monday.

 

In another indicator of possible market direction, the Dow Jones Transportation Average ended the day down 0.8 percent after dropping 4.1 percent on Friday, its largest decline since September 2011. Nonetheless, Some did not consider the recent selling as cause for concern, including myself.

 

Another dampener on Monday's sentiment was data showing sales of new single-family homes fell more than expected in December, even though lean inventories and steady price gains suggested sufficient strength in the housing market.

 

However, Caterpillar was the latest major company to beat on bottom-line results. Caterpillar's cost cuts and an uptick in demand for building equipment offset weak sales to the mining industry.

 

S&P 500 earnings for the fourth quarter are now expected to have increased 8 percent from a year ago, with 66.7 percent of results so far beating analysts' profit expectations, Thomson Reuters data showed. Revenue growth for the quarter is estimated at just 0.5 percent.

 

Volume was above average for the month. About 8 billion shares changed hands on the major equity exchanges, as compared with the average of 6.8 billion so far this month, according to data from BATS Global Markets.

 

Wall Street Not Happy With Apple

 

Apple missed the Street's lofty target for iPhone sales over the crucial holiday shopping season and offered a weaker-than-expected forecast for this quarter, sending its shares down 8 percent in after-hours trading on Monday.

 

The world's most valuable technology company sold a record 51 million iPhones in the quarter, but that was shy of the 55 million or so analysts had expected, reflecting intense competition from arch-foe Samsung Electronics.

 

The company forecast sales of $42 billion to $44 billion this quarter, which investors anticipate will be brisker than usual because of its recently sealed deal to sell iPhones through China Mobile. Wall Street was expecting $46 billion, on average.

 

The March quarter is especially important because of the China Mobile deal and the initial launch in that region. So the lower-than-expected revenue guidance was a troubling sign. That long-awaited China deal had been expected by analysts to tack on more than 11 million units of new iPhone sales in fiscal 2014, starting with the typically sedate March quarter.

 

The company on Monday recorded sales of $57.6 billion in its December or fiscal first quarter, versus expectations for about $57.5 billion. First fiscal quarter earnings were $14.50 a share, as compared to Thomson Reuters I/B/E/S estimate of $14.07.

 

Chief Financial Officer Peter Oppenheimer said on a conference call that the March-quarter revenue outlook reflected negative effects from currency rates with a stronger U.S. dollar and more balanced levels of demand and supply for iPhones at the start of 2014 than a year earlier, when demand outstripped available inventory.

 

In the December quarter, Apple recorded a net profit of $13.07 billion, flat from a year ago. Its gross margins came in at 37.9 percent, roughly in line with expectations.

 

However, it was the iPhone sales and revenue outlook shortfall that drew attention, given many on Wall Street had high expectations heading into Monday's results.

 

Apple continued to draw investor scrutiny over sales in ultra-competitive China, its No. 2 market but a drag on revenue and margins in past quarters. The iPhone maker has been ceding ground to Samsung and other rivals there, but investors hope its tie-up with the country's dominant mobile carrier will help reverse its fortunes in the world's largest cellular arena.

 

In the closely watched greater China region, which includes Hong Kong and Taiwan, revenue increased 29 percent from a year earlier to $8.84 billion, due in no small part to strong iPad sales and the iPhone's global launch in September, when China was included among launch countries for the first time.

 

Apple executives did not talk about iPhone unit sales in China. Yet, intense competition not just from Samsung but also lower-cost, local rivals like Huawei and Xiaomi is impeding sales. In the less competitive tablet arena, Apple sold a record 26 million iPads globally in the quarter, in line with Wall Street estimates.

 

Longer term, many of the Apple “believers” continue to hope that Apple, which last came out with a revolutionary new device - the iPad - in 2010, has something up its sleeve for 2014. Speculation currently revolves around a smart watch or even a long-rumored TV product. Others say Apple can use its huge iPhone and iTunes base to get into mobile payments or advertising.

 

New Single-Family Home Sales Down

 

Sales of new single-family homes fell more than expected in December, but lean inventories and steady price gains suggested the housing market recovery remained intact. Much of the decline was likely due to  frigid temperatures.

 

The Commerce Department said new home sales fell 7.0 percent to a seasonally adjusted annual rate of 414,000 units. Sales were at a 445,000-unit pace in November and economists had expected them to slow to only a 457,000-unit rate in December.

 

Apart from the bitterly cold weather, last month's decline in sales was likely a continuation of the payback after October's outsized 14.9 percent increase. Sales in the Northeast, which was hard hit by cold temperatures, tumbled 36.4 percent to their slowest pace since June 2012.

 

Home sales are traditionally weak during the winter, but a cold snap last month could have exaggerated the magnitude of the slowdown. New home sales stumbled in the summer in the aftermath of a spike in mortgage rates, but economists said a lack of supply could also be curbing activity. Last month, the supply of houses on the market fell 2.8 percent to 171,000 units. That was the lowest since July.

 

At December's sales pace it would take five months to clear the supply of houses on the market. That was up from 4.7 months in November. A supply of six months is normally considered a healthy balance between supply and demand.

 

Housing is expected to have contributed significantly to economic growth last year, through residential investment and rising home prices that have boosted the net worth of households, allowing for greater discretionary spending.

 

For the fourth-quarter, however, the contribution likely moderated a bit from the July-September period.

 

Separately, Markit said its January "flash" or preliminary services sector gauge rose to a four-month high of 56.6 from 55.7 last month. A reading above 50 signals expansion in economic activity.

 

The solid Markit reading feeds into expectations for stronger economic growth this year. That has economists confident that the housing market will regain some lost ground, even in the face of higher mortgage rates.

 

For all of 2013, a total of 428,000 new single family homes were sold. That was the most since 2008 and represented a 16.4 percent increase from 2012. The median price of a new home last month rose 4.6 percent from December 2012. For the year as a whole, prices were up 8.4 percent, the most since 2005, with the median new home price climbing to $265,800, the highest on record.