MarketView for July 23

 

 

Summary 

 

It was a great day for Wall Street on Thursday, with the Dow Jones industrial average closing above the key 9,000 mark for the first time since last January, the result of both strong corporate profits and rebounding home sales. The broad-based rally helped all 10 of the S&P 500's benchmark sectors finish the day in positive territory. The Nasdaq chalked up its 12th straight day of gains, its longest winning streak since 1992.

 

The S&P 500 managed to exceed the critical technical resistance level at 960, sparking a rally that lifted the benchmark index to 979.42, its highest intraday level in eight months. That breakout, according to some analysts, was an indication that the S&P 500 could take aim at the 1,000 mark. The S&P 500 is now up 44.3 percent since its 12-year closing low on March 9. However, it's still 37.6 percent below its record closing high of 1,565.15 in October 2007.

 

For the year, the Nasdaq is up 25 percent, while the blue-chip Dow average is up 3.34 percent and the S&P 500 is up 8.09 percent. Nonetheless, stock index futures dropped in late trading, suggesting Wall Street might hit a pothole on Friday after Microsoft, Amazon.com and American Express posted disappointing quarterly results after the close of regular trading, sending their stocks lower in afterhours trading. Their reports provided a sharp contrast to robust results that 3M and AT&T reported before the bell, giving the broader market a strong start on the day.

 

After the bell, shares of Microsoft, a tech bellwether and a Dow component, fell about 8 percent to $23.60 from its Nasdaq close at $25.56. During the regular session, Microsoft's stock climbed 3.1 percent ahead of the results.

 

Shares of Amazon.com lost 7.7 percent to $86.60 in extended-hours trading, down from their Nasdaq close at $93.87. During regular trading, Amazon's shares rose 5.7 percent before the earnings were released. The quarterly revenues of both Microsoft and Amazon.com missed forecasts.

 

American Express, also a Dow component, posted a lower quarterly profit, hurt by weakness in card member spending, record credit losses, restructuring charges and repayment of government funds. After the bell, American Express shares were down nearly 5 percent to $28.07 from a close of $29.45.

 

During the regular session, 3M's stock rose 7.4 percent to $69.43 and contributed the most to the Dow's gain after the diversified manufacturer's profit exceeded expectations and the company lifted its revenue outlook for 2009.

 

AT&T's shares gained 2.6 percent to $25.48 after it reported a smaller-than-expected drop in quarterly earnings as strong sales of Apple's iPhone helped increase wireless subscriber growth. Among the Nasdaq's major advancers was eBay, whose second-quarter results also exceeded expectations. eBay’s shares rose 10.6 percent to $21.52.

 

Only three of the Dow's 30 components ended lower, including McDonald's Corp (MCD.N). The hamburger chain's stock fell 4.6 percent to $56.09 after it posted lower-than-expected June same-store sales and its quarterly profit matched Wall Street's forecasts.

 

Moody's shares fell 3.8 percent to $25.52 following news that Warren Buffett's Berkshire Hathaway had reduced its stake in the credit ratings provider.

 

Before the opening bell, Labor Department data indicated that claims for jobless benefits rose last week, roughly in line with expectations, while continuing claims declined.

 

Existing Home Chalk Up Third Monthly Increase

 

Existing home sales managed their third monthly rise in June and prices hit the highest level since October, adding to the expectation that the housing sector is finally on the mend and will help propel a broader economic recovery.

 

The National Association of Realtors (NAR) said sales of existing homes in June rose 3.6 percent to an annual rate of 4.89 million units, compared with a downwardly revised 4.72 million pace in May. The June reading was the fastest sales pace since October, and topped forecasts for a 4.84 million unit annual pace. According to NAR, it was the first time the industry had experienced three straight months of gains in existing home sales since early 2004.

 

"Overall, the news is positive. We have increasing home sales for the third straight month, declining inventory and although prices fell, they declined at a less steep pace," NAR chief economist Lawrence Yun told a press conference. "The housing market is healing after four years of recession."

 

The inventory of existing homes for sale declined 0.7 percent to 3.82 million in June. The median national home price came in at $181,800, down 15.4 percent from the same period a year ago. But the median price was up 4.0 percent compared with May and was at the highest level since October.

 

NAR's Yun said that the inventory of previously owned homes for sale represented 9.4 months' supply at the current pace of sales, down from 9.8 months' in May.

 

This was still above the historic average of six months' supply, which Yun said was consistent with a national price appreciation of around 4.0 percent. Seven to eight months' supply would be consistent with no change in median prices, so the fundamentals still point to lower house prices over the rest of the year, he said.

 

Freddie Mac, the second biggest U.S. home financing provider, separately said that average 30-year fixed U.S. mortgage rates rose by 0.06 of a percentage point in the past week to 5.20 percent, increasing for the first time in three weeks, but remained sharply lower than a year ago.

 

Jobless Claims Rise

 

Other data on Thursday showed a jump in new claims for jobless aid last week, but claims by those already receiving benefits declined. The Labor Department said the numbers were distorted by a seasonally unusual pattern of layoffs in the auto sector that should fade in the next week or so. You could also make the case that the jobs report is evidence that employment conditions are stabilizing.

 

The number of new claims for jobless benefits rose roughly as expected last week, but the data was again distorted by an unusual pattern of layoffs in the automotive industry. Initial claims for state unemployment insurance rose by 30,000 to a seasonally adjusted 554,000 in the week ended July 18, the Labor Department said. A Labor Department official said there were more layoffs than anticipated based on past experience in the automotive sector and elsewhere in manufacturing, following two weeks when there had been fewer layoffs.

 

Because the department uses past history to try to smooth out the impact of seasonal patterns, this amplified the rise in claims last week. Actual claims fell by less than expected, in part because they had risen by less than anticipated in the previous two weeks.

 

U.S. stocks index futures held gains, while prices for U.S. government bonds slipped and the euro rose against the dollar after the data was released.

 

Keep in mind that the seasonal adjustment problems make it hard to accurately determine the underlying trend, although the large decline in claims earlier this month hinted the pace of layoffs was slowing.

 

Continued claims of people still on jobless aid after an initial week of benefits fell by 88,000 to 6.225 million in the week ended July 11, the latest for which data is available. Analysts had expected continued claims to be 6.32 million.

 

In another gauge of labor market health, the 4-week moving average for new claims fell to 566,000 from 585,000 the previous week. This measure is closely watched because it is supposed to iron out weekly volatility. It has now fallen for four straight weeks.

 

Ford Surprises Everyone

 

Helped by a lightened debt load, Ford posted a surprise second-quarter profit of $2.8 billion Thursday, following the worst loss in company history a year earlier. The net profit ends a string of four straight quarterly losses for the nation's second-largest automaker, which has gained U.S. market share at the expense of cross town rivals Chrysler and General Motors, both of which spent time under bankruptcy court supervision.

 

Ford last went into the black in the first quarter of 2008, with net profit of $70 million.

However, excluding its debt reduction and other items, Dearborn, Mich.-based Ford would have reported a quarterly loss, though smaller than Wall Street expected.

 

Chief Financial Officer Lewis Booth said the improved second-quarter results are a sign that the company's cost cuts and emphasis on new products are paying off. He stuck to Ford's earlier prediction that it would return to annual profitability in 2011. "We're 18 months away, I guess," he said, adding that a full year of profitability hinges on improved auto sales in the U.S. and Europe.

 

Ford reported second-quarter net income of 69 cents a share, compared with a loss of $8.7 billion, or $3.89 a share, for the same quarter a year ago. The profit came because of a $3.4 billion gain due to debt reduction. In March Ford swapped stock and cash to reduce its loan and bond debt by $7.7 billion. The company has cut its debt by $10.1 billion for 2009, and is likely to take further steps this year to lower debt and raise cash.

 

But excluding special items, including the debt reduction, Ford would have lost $424 million, or 21 cents a share. Still, that beat analysts' expectations of a per share loss of 50 cents on revenue of $24.7 billion. Excluding special items, the company lost just over $1 billion in the second quarter of last year.

 

Ford spent $1 billion more in cash than it earned in the quarter, compared to $1.4 billion in the first quarter of 2009. Revenue totaled $27.2 billion, $11 billion less than a year earlier.

 

Ford is predicting a modest improvement in U.S. sales next year to about 12.2 million light vehicles. Sales so far this year have run below an annual rate of 10 million. The company said it made $1.8 billion in structural cost cuts during the second quarter, with $1.2 billion coming in North America.