MarketView for July 22

 

 

Summary 

 

The Nasdaq closed higher on Wednesday for the 11th straight day, the result of better than expected earnings at Apple and Starbucks. Disappointing bank results and declining energy shares weighed on the blue chips of the Big Board sent the Dow Jones industrial average to its first negative day in the past seven days.

 

Apple saw its share price rise 3.5 percent to close at $156.74, after iPod and iPhone sales enabled Apple to report some excellent quarterly numbers after the close of regular trading on Tuesday. Starbucks, up 18.4 percent at $17.39, ranked as the Nasdaq's second largest gainer, after its quarterly profit also exceeded estimates.

 

Their advance helped extend the Nasdaq's winning streak, now the longest such stretch since September 1996. Apple and Starbucks are among the key companies that investors use as barometers of consumer spending trends.

 

Although the S&P 500 briefly hit a 2009 intraday high of 959.83, both the S&P 500 and the Dow were felt the restraint caused by disappointing results from banks, including Wells Fargo, down 3.6 percent close at $24.45 and Bank of New York Mellon, which closed down 6.2 percent at $27.32 after it posted a 43 percent drop in second-quarter earnings.

 

Profit-taking in some of the markets’ recent winners, including Coca-Cola, down 2.4 percent at $49.13, were also responsible for the Dow’s red ink. IBM was down 1.3 percent to close at $115.57, while Caterpillar fell 2 percent to close at $38.66.

 

On the energy front, Exxon Mobil fell 0.7 percent to $69.99 as oil prices retreated slightly. Domestic sweet crude futures for August delivery settled down 21 cents per barrel at $65.40.

 

After the bell, Qualcomm posted a smaller quarterly profit as demand weakened for its wireless chips because of slowing cell phone sales. But the company raised its revenue target for 2009, citing strong fundamentals.

 

Qualcomm's stock, which was up sharply in the past week, fell 4 percent after the news in extended trading. Qualcomm shares ended regular trading at $48.45, up 1 percent before the quarterly results.

 

Federal Reserve Chairman Ben Bernanke reiterated in testimony to the Senate Banking Committee on Wednesday that the economic outlook is improving, but that supportive policies would be necessary for a while to prevent rising joblessness from sapping the recovery.

 

High Grade for Bernanke

 

Federal Reserve Chairman Ben Bernanke received the highest rating for handling the worst financial crisis since the Great Depression, according to the first Quarterly Bloomberg Global Poll. The first Quarterly Bloomberg Global Poll surveyed investors and analysts on six continents. The current poll contained 1,076 respondents, who were interviewed July 14-17.

 

In the survey, 75 percent of respondents had a favorable view of Bernanke, and believed that the 55-year-old chairman should be re-appointed to another four-year term as head of the world's most powerful central bank when his current one expires in January. What's more, 61 percent of those surveyed say the global economy is stable or improving.

 

Bernanke also outpolled U.S. Treasury Secretary Timothy Geithner, former head of the Federal Reserve Bank of New York, who received a 57 percent favorable rating.

 

The poll's release occurs amid Bernanke's semi-annual testimony before Congress on the state of the economy. On Tuesday, the Fed chairman told House Financial Service Committee members that the economy is finally improving, but because several hurdles and hazards remain, the Fed must keep interest rates close to zero, at least until unemployment shows signs of falling, The New York Times reported Tuesday. Further, given economic slack, Bernanke added that the U.S. economy contained the risk of "only limited" inflation pressure, at this juncture.

 

As a part of a government plan to stabilize the financial system, the Fed has provided record amounts of funds to credit markets, increasing its balance sheet to $2 trillion from about $800 billion before the financial crisis. Up until Tuesday's testimony, Bernanke and other Fed officials had said almost nothing about when they expect to unwind its balance sheet and withdraw liquidity, on concerns that investors would interpret those comments as a sign the central bank plans to wind down its intervention soon.

 

So far, Bernanke deserves a high grade concerning the Fed's response to the financial crisis. I'd say he's earned a B+. The Fed, in conjunction with the actions by other, major central banks (European Central Bank, Bank of England, Bank of Japan, Swiss National Bank), has effectively maintained the U.S. and global financial systems, and has re-liquefied key financial markets.

 

However, keep in mind this is only a 'mid-term' grade: much monetary work remains. The liquidity crisis is over, but the lending crisis is not: banks are still not lending enough, and companies, particularly small businesses, are having trouble accessing sufficient lines of credit. The Fed must find ways to encourage banks to increase credit lines to facilitate commerce -- essential for a return to adequate economic growth.

 

Loan Losses Hurt Banks Such As Wells Fargo

 

Wells Fargo and some of the other major banks said the troubled economy drove big increases in loan losses, reducing second-quarter earnings. What it means is that the banking sector is still facing a rough road ahead as loan losses, once concentrated primarily in home mortgages, are now migrating to commercial loans, commercial real estate loans and credit cards.

 

Although Wells Fargo joined Bank of America, Citigroup and JPMorgan in posting multibillion-dollar profits, all were forced to increase reserves for bad loans. Rising loan losses also reduced earnings at U.S. Bancorp, SunTrust Banks Inc and KeyCorp, which like Wells Fargo took billions of dollars of federal bailout money from the Troubled Asset Relief Program. U.S. Bancorp is the only one of these allowed so far to repay its infusion.

 

Bank of New York Mellon Corp, which focuses on securities services for institutional clients as well as asset management, said profit fell 43 percent to $176 million, or 15 cents per share, from $309 million, or 27 cents. It attributed the drop in part to the cost of repaying its own TARP money, and to write downs of some investments.

 

Wells Fargo, the nation's fourth-largest bank and largest mortgage lender, said quarterly profit after preferred dividends increased 47 percent to $2.58 billion, or 57 cents per share, from $1.75 billion, or 53 cents.

 

Wells Fargo wrote $129 billion in mortgages, the second-most since 2003. However, nonperforming assets, where borrowers are not making payments, soared 45 percent from the end of March to $18.34 billion, and swelled 69 percent in commercial and commercial real estate loans. Net charge-offs over that period rose 35 percent to $4.39 billion. The bank nevertheless added just $700 million to reserves, giving it $23.53 billion. Fitch Ratings cut Wells Fargo's credit rating.

 

U.S. Bancorp said profit fell 76 percent to $221 million, or 12 cents per share, from $926 million, or 53 cents. Net revenue rose 9 percent to $4.16 billion. The bank's set-aside for loan losses and net charge-offs both more than doubled.

 

SunTrust lost $164.4 million, or 41 cents per share, compared with a year-earlier profit of $530 million, or $1.52. SunTrust more than doubled the amount it reserved for loan losses and said borrowers were not making payments on about $5.5 billion of loans, or 4.48 percent of all SunTrust loans.

 

KeyCorp posted a loss of $390 million, or 68 cents per share, as the bank set aside 31 percent more for bad loans. It lost $1.13 billion a year earlier, although that figure was inflated by an unrelated $1.01 billion accounting charge.

 

Third Quarterly Loss at Morgan Stanley

 

Morgan Stanley on Wednesday reported a third straight quarterly loss, falling further behind chief rival Goldman Sachs as fixed income and asset management results disappointed. While Goldman posted a blowout quarter with strong gains in trading and profit, Morgan Stanley was saddled with red ink from the repayment of government bailouts and the accounting ramifications of improvements in its debt prices. Its loss was even wider than Wall Street had expected.

 

Morgan Stanley reported a loss applicable to common shareholders of $1.26 billion, or $1.10 per share, for the second quarter, compared with a profit of $1.1 billion, or $1.02 a share, a year earlier. Net revenue fell 11 percent to $5.4 billion. If you exclude one-time items, Morgan Stanley posted a loss of $1.37 a share.

 

Morgan Stanley struggled in key areas during the quarter, including commercial real estate, where it reported net losses of $700 million amid declines in the market.

 

During the quarter, Morgan Stanley repaid $10 billion from the government's Troubled Asset Relief Program, incurring a one-time charge of $850 million. The improvement in its debt prices reduced net revenue by $2.3 billion. Fixed income trading revenue rose 44 percent from a year earlier to $973 million, including a $1.3 billion loss related to debt-related credit spreads.

 

Morgan said concerns about fixed income performance, which fell short of expectations, were being addressed. The bank set aside $3.9 billion for compensation expenses in the second quarter, up from $3.1 billion a year earlier.

 

Morgan Stanley, which ratcheted down risk-taking after the fall of some of its competitors last year, said its risk measurements were flat in the quarter. The bank's "value at risk," a measure of the maximum possible losses it faced on 95 percent of its trading days, on average was $113 million, compared with $100 million a year ago and $115 million in the first quarter of 2009.

 

Pharmaceutical Earnings Reasonable

 

Three of the largest pharmaceutical companies posted better-than-expected quarterly earnings on Wednesday and gave bullish forecasts for the rest of the year, demonstrating the industry's resilience in the weak economy. Results from Pfizer, GlaxoSmithKline and Eli Lilly follow the upbeat report earlier this week Merck.

 

The strong forecasts contrast with doubts about the industry's long-term outlook, as a dearth of new products and generic competition are forcing the companies to rely on mega mergers and cost cutting to shore up profits. Such cost-control efforts buoyed Pfizer, the world's largest drug manufacturer, which symbolizes the industry's woes. Pfizer's shares rose 3.4 percent after it reported better-than-expected earnings as cost-cuts took hold, and the company raised its full-year forecast.

 

Shares of GlaxoSmithKline rose less than 1 percent as it posted profit slightly ahead of targets and predicted flu vaccine sales would spur second-half strength.

 

Lilly boosted its full-year forecast, although its shares gave back initial gains after the company cautioned that a currency benefit to international inventories that boosted first-half results would not be repeated.

 

Pfizer's second-quarter earnings fell 19 percent as the strong dollar crimped revenue across its product line. The company earned $2.26 billion, or 34 cents per share, compared with $2.78 billion, or 41 cents per share, in the year-earlier period. If you exclude special items, it earned 48 cents per share.

 

Pfizer sales fell 9 percent to $10.98 billion, shy of the $11.26 billion estimate, but revenue would have been generally unchanged without the impact of the strong dollar, which weakens the value of overseas sales. Pfizer has been cutting jobs and other costs to shore up profits as its top-selling medicines endure generic competition and other pressures.

 

Glaxo's pretax, pre-restructuring profit in the second quarter was 2.25 billion pounds ($3.7 billion), equivalent to earnings per share before major restructuring charges of 31 pence (about 51 cents), up 14 percent, on sales up 15 percent at 6.75 billion pounds ($11.07 billion).

 

The British company indicated that increasing sales of new products and its portfolio of flu products should help drive its improving performance into the second half of the year as the heavy impact of generic competition to its formerly patented drugs begins to abate.

 

Lilly's net income rose 21 percent to $1.16 billion, or $1.06 per share, in the second quarter. That compared with $959 million, or 88 cents per share, in the year-earlier period, when Lilly had a favorable tax rate. If you exclude special items, Lilly earned $1.12 per share.

 

Lilly said it expects to launch its long-awaited blood clot-preventer Effient, which will vie with Sanofi-Aventis and Bristol's Plavix, in the United States in early August.