MarketView for July 14

 

 

Summary 

 

Stock prices managed to chalk up some reserved gains on Tuesday as better-than-expected corporate profits overshadowed concerns about weak consumer demand. At the same time, much of Tuesday's news that was released during the regular session on Tuesday, including the obscene profit from Goldman Sachs had already built into the trading day on Monday, when major stock indexes climbed more than 2 percent in anticipation of strong numbers from the banking sector.

 

Furthermore, gains were muted by the less than glowing retail sales numbers and comments from Dell that its second-quarter margins would be lower as demand has shifted toward cheaper computers, such as netbooks. However, this was offset by encouraging comments from CSX and results from Johnson & Johnson that surpassed expectations. CSX, which reported better-than-expected results after Monday's closing bell, saw its shares climb 7 percent to $34.80. Johnson & Johnson closed up 0.9 percent at $58.23.

 

According to the economic reports released on Tuesday, June retail sales increased 0.6 percent, which was more than forecast. However, a large portion of the gain was due to rising gasoline prices. If you exclude the sales numbers from automobiles and gasoline, retail sales registered the fourth consecutive monthly decline.

 

The current earnings season is under particular scrutiny as investors look for signs of economic improvement. In fact, the comments by CSX’s CEO indicating that his firm was of the impression that the worst of the recession seems to be over, helped bolster stocks.

 

Retail Sales Rise Along With Inflation

 

A rise automobile and gasoline sales salvaged an otherwise lackluster June for retailers, while an inflation gauge jumped by more than twice the expected amount. According to a report released on Tuesday by the Commerce Department, retail sales were up 0.6 percent from a month earlier.

 

However, outside of motor vehicles and gas station the sales results were disappointingly weak, indicating consumers continue to refrain from increasing their discretionary spending despite signs the recession may be drawing to a close.

 

Excluding autos and parts, which recorded a 2.3 percent gain, retail sales were up a modest 0.3 percent. Gasoline sales showed strong gains, helped by rising prices. The average price per gallon of gas rose to $2.68 in June from $2.32 in May, according to government data.

 

If you exclude both autos and gasoline, retail sales were down 0.2 percent, the fourth consecutive monthly decline. Department stores and restaurants were among the biggest laggards. 

 

A separate report from the Labor Department indicated that the producer price index was up 1.8 percent last month. At the same time, business inventories fell for a ninth consecutive month, pressured by a steep drop in stocks of motor vehicles and parts.

 

According to the Labor Department, the producer price index, which measures prices received by farms, factories and refineries, recorded its steepest gain since November 2007. Core prices, which strip out volatile food and energy costs, rose a much greater-than-expected 0.5 percent, boosted by cars and trucks.

 

With unemployment at a 26-year high and climbing, consumers have been reluctant to splurge, and that has left businesses feeling conservative about hiring and investment. President Barack Obama said he expected unemployment to keep ticking up in the coming months.

 

Nonetheless, Treasury Secretary Timothy Geithner struck a somewhat more upbeat note, stating that he saw signs of confidence returning to the U.S. financial sector. A sluggish economy plus inflationary pressure would normally be considered a dangerous mix leading to stagflation. However, at the moment there is no reason to  be concerned over pricing pressures when there is so much slack in the economy.

 

High unemployment keeps wages in check. Energy prices, the primary cause of last month's rise in inflation, have come down in the past two weeks, which should help cool prices.

 

Business inventories fell 1 percent in May, according to Commerce Department data. That was steeper than the 0.8 percent decline that economists had predicted. The inventory of motor vehicles and parts dropped 4.2 percent in May, the biggest decrease since a 5.4 percent drop in July 2005.

 

Companies have been purging inventory as the weakening economy crushed demand, and that contributed to the deepening of the recession in late 2008 and early 2009. Many economists expect that pattern to reverse soon, which should help lift economic growth in the second half of the year.

 

Crude Prices Down Again

 

The price of crude oil was lower again on Tuesday with dealers remaining concerned that a slow and bumpy economic recovery could delay a rebound in ailing world energy demand. Domestic sweet crude for August delivery settled down 17 cents per barrel at $59.52, extending a decline that shaved 11 percent from the price last week. London Brent crude settled up 17 cents per barrel at $60.86.

 

Adding gloom to the economic outlook, the Organization for Economic Cooperation and Development said developed countries are expected to lose nearly 30 million jobs between the end of 2007 and the end of 2010.

 

In a sign of soft demand in the United States, MasterCard said on Tuesday gasoline consumption over the peak travel July 4 holiday was 4.3 percent lower than a year ago. At the same time, OPEC said world demand for its oil would fall by 380,000 barrels per day to 28.11 million bpd in 2010, compared with this year.

 

Over the short-term, the market will look to domestic inventory data from the American Petroleum Institute and EIA data.

 

Goldman’s Gains Astronomical

 

Goldman Sachs announced that its quarterly earnings rose 33 percent as a result of  trading results, trouncing forecasts and putting the bank on pace for hefty bonuses that could draw unwanted scrutiny. The results continued Goldman's extraordinary rebound from a near meltdown of the banking industry last fall that led to a $125 billion taxpayer bailout for its largest members. Goldman set aside $6.65 billion for salary, bonuses and benefits in the quarter, up by nearly half from the quarter ended in May last year.

 

That puts the average Goldman employee on pace to earn more than $900,000 this year. Chief Executive Lloyd Blankfein, senior officers and star traders will likely receive tens of millions of dollars.

 

Goldman reported net income for common shareholders of $2.7 billion, or $4.93 a share. That compares with $2.05 billion, or $4.58, in the quarter ended May 30, 2008, before the bank switched to a calendar-year schedule.

 

Goldman said trading income nearly doubled from a year ago to $10.78 billion while its equity underwriting business produced record revenue of $736 million. Goldman's traders thrived in an environment of wide price swings, robust demand and fewer rivals.

 

"There's less competition out there," Chief Financial Officer David Viniar told reporters in a briefing. Goldman's second-quarter investment banking revenue of $1.44 billion was down 15 percent from a year ago but rose 75 percent from the first quarter.

 

Goldman has come under fire for its government connections, seemingly sailing through a deep recession shortly after accepting $10 billion of taxpayer bailout money and benefiting from a host of other government programs, including access to the U.S. Federal Reserve's borrowing window.

 

The bank incurred a one-time $426 million charge in the second quarter related to last month's repayment of loans from the U.S. Treasury's Troubled Asset Relief Program, known as TARP. Viniar said there was "no timeline" for buying back stock warrants issued to the government under TARP.

 

In the conference call with investors, Viniar said the company has amassed substantial capital as it awaits word from the government on new capital requirements.

 

"There are going to be new capital regulations coming out," said Viniar, adding that he didn't expect them to harm Goldman's business. "We don't know what they are going to be so we have to wait and see."

 

Reaction to Goldman's earnings was muted among U.S. lawmakers, some of whom have been harsh critics of Wall Street's excesses proceeding the credit crunch and bailout.

 

Viniar said his firm was "not immune to public sentiment."

 

"We know it. We see it. We don't like it," Viniar said of the firm's vilification in parts of the media. "We believe we are doing good things. We are helping the economy recover. I don't like reading bad things about Goldman Sachs."

 

Intel Up in After-Hours Trading on Earnings Release

 

Intel’s quarterly results and outlook well exceeded Wall Street forecasts on better-than-expected consumer demand for PCs, especially in Asia, setting an auspicious tone for the technology sector.

 

Shares of Intel, the world's largest chipmaker, rose 8 percent on the report, driving Standard & Poor's 500 stock index futures sharply higher and bolstering technology shares such as arch rival Advanced Micro Devices.

 

Intel projected third-quarter revenue at $8.1 billion to $8.9 billion, compared with analysts' average forecast of $7.8 billion, according to Reuters Estimates.

 

CFO Stacy Smith said fourth-quarter gross margins could scale the high end of a "normal" range -- which Intel defines as 50 to 60 percent -- due partly to declining production costs for new generations of chips and other factors.

 

Intel's strong showing came despite what it described as weak demand from the corporations that traditionally are big buyers of computer equipment, and comments by Intel executives that Microsoft's forthcoming Windows 7 operating system is unlikely to revive corporate spending this year.

 

If you exclude charges for a European antitrust fine, Intel said it earned 18 cents a share in the second quarter. Revenue for the three months ended June 27 was $8 billion, down 15 percent year-over-year.

 

The company forecast third-quarter gross margin at 53 percent, plus or minus 2 percentage points, an improvement from the second quarter's 51 percent.

 

Intel posted a second-quarter net loss of $398 million, or 7 cents a share, its first quarterly loss since 1986, after taking charges linked to a $1.45 billion fine imposed by European regulators, which ruled in May that Intel abused its market position to squeeze out AMD. Intel intends to appeal. This time last year, Intel earned $1.6 billion in net income, or 28 cents a share.

 

Intel has felt the effects of the recession and a slowdown in IT spending, though Chief Executive Paul Otellini said in April that PC sales had "bottomed out" in the first quarter and that the industry was returning to seasonal business patterns.

 

Intel's microprocessors are used in more than three-quarters of the world's personal computers, so its results are a barometer for the global PC sector.

 

Intel had stopped providing official forecasts in January, limiting its comments to internal revenue targets. Smith said the resumption of forecasts was a sign that visibility had improved as order rates become more predictable.

 

Shares of Intel were trading at $18.06 after-hours, compared to their Nasdaq close of $16.83.