MarketView for July 24

 

 

Summary 

 

Although two of the three major equity indexes managed to close out the day in positive territory, unfortunately the same could not be said for the Nasdaq. Ending a 12-day run-up, the Nasdaq ran into trouble following Microsoft’s disappointing quarterly results, while the Dow Jones industrial index and the S&P 500 index both managed chalk up 8-month closing highs as a result of pharmaceutical and energy shares finding continuing momentum. The Nasdaq's 12-day winning streak was its longest unbroken run since 1992.

 

Microsoft fell 8.3 percent to $23.45, a day after the software maker posted quarterly revenue numbers that were below Street expectations. Amazon.com also missed sales expectations, driving its stock down 7.9 percent to $86.49. Those results cast something of a dark cloud over what is so far shaping up to be a stronger-than-expected second-quarter earnings season.

 

Nonetheless, many investors Friday’s dips in the various indexes as an opportunity to do some buying of shares in other sectors, including energy and defensive plays such as big pharmaceuticals and utilities.

 

All three major equity indexes managed to put up a second straight weekly advance, with the Dow rising 4 percent, the S&P 500 up 4.1 percent and the Nasdaq adding a gain of 4.2 percent. For the day, both the Dow and the S&P 500 hit their highest closes since early November 2008.

 

Since hitting a 12-year closing low of 676.53 on March 9, the S&P 500 has gained 44.7 percent. The Nasdaq, which closed at 1,268.64 on March 9, was up almost 55 percent from that level at Friday's close. The Dow has risen about 39 percent from its March 9 close at 6,547.05. For the year, the Dow is up 3.6 percent, while the S&P 500 is up 8.4 percent and the Nasdaq is up 24.7 percent.

 

With 184 of the S&P 500 companies having reported second-quarter results through Friday, 77 percent, or 142 companies, have exceeded forecasts.

 

In Friday's session, shares of Johnson & Johnson rose 2.1 percent to $61.51 and provided the top boost to the Dow. The second-largest contributor to the Dow's advance was Merck, up 2.5 percent at $30.99.

 

Chevron ended the day up 0.8 percent to close at $68.43 after August crude oil futures gained 89 cents, or 1.3 percent, to settle at $68.05 per barrel.

 

In other earnings-related news, Black and Decker raised its full-year earnings view, sending its shares up 10.1 percent to $37.13.

 

In Friday's session, the broad market's gains were curbed by a report showing consumer sentiment waned in late July to its lowest reading since April, according to the Reuters/University of Michigan Surveys of Consumers. The final July reading for the consumer sentiment index was 66.0, down from June's reading of 70.8.

 

Price of Crude Oil Above $68 per Barrel

 

The price of crude oil was higher on optimism a turnaround in the global economy would lift battered fuel demand. Sweet domestic crude futures for August delivery settled up 89 cents per barrel at $68.05, the highest settlement since July 1. The gains extended a rally that has pushed prices up more than 14 percent since July 14. London Brent settled up $1.07 per barrel at $70.32 after an intraday high of $70 per barrel for the first time since July 1 earlier.

 

Hopes for a rebound in the economy and demand have helped lift crude off lows below $33 a barrel hit in December, after slumping demand knocked oil from record highs near $150 hit in July 2008. Europe produced a raft of survey reports on Friday that suggested the worst of the recession may have passed by mid-year and that industrial output has started to stabilize.

 

However, consumer confidence waned in late July to the lowest reading since April on growing pessimism about the long-term economic outlook, the Reuters/University of Michigan Surveys of Consumers showed.

 

Top oil services provider Schlumberger posted a sharp drop in profit on Friday and warned it did not expect a rebound in spending in 2009 by its oil- and gas-producing customers. CEO  Andrew Gould said energy price volatility made it hard for his clients to commit to spending since they would not see any cash flow increase next year unless oil prices rose above their current range of $60 to $70 a barrel.

 

"Sixty (dollars a barrel) is OK, but it is not going to lead to a rash of activity, whereas I think $70 might be a lot more encouraging," Gould told analysts on a conference call.

 

Rig Count Climbs

 

Baker Hughes released its newest data on rig counts for the last week. It seems that oil and gas producers might finally be increasing their rigs with higher prices again.  While there may be some seasonality, this is still an increase in all categories from the prior week. Domestically the rig count is up 23 from last week at 943; but still down 1014 year over year. The Canadian rig count is up by 28 from last week at 180; down 255 year over year. The domestic offshore rig count is 37, up 2 from last week; down 30 year over year.

 

If T. Boone Pickens was right on his last oil call for $75.00 per barrel by the end of the year and even higher average prices in 2010, chances are there will be additional rig count increases ahead.

 

Consumer Confidence Down Says Michigan Survey

 

Consumer confidence fell in late July to its lowest point since April on growing pessimism about the long-term economic outlook, especially with regard to income and jobs, even in the face of data indicating that the longest recession in decades may be easing.

 

The Reuters/University of Michigan Surveys of Consumers said its final July consumer sentiment reading fell to 66.0 from June's 70.8. The index of consumer expectations fell to 63.2 in July's final reading, from 69.2 in June.

 

"Consumers believe that the economic free-fall is now over, but consumers see little reason to believe the stimulus policies will improve their financial condition anytime soon," the Reuters/University of Michigan Surveys of Consumers said in a statement.

On the long-term outlook, 58 percent of respondents said they anticipated bad times, up from 49 percent in May. Lower income and less favorable job prospects in the next year are key factors making consumers anxious about their financial position, the statement said.

 

The current conditions index slipped to 70.5 in the final July reading, from 73.2 in June.

 

"Recent income gains were reported by the fewest consumers in the more than 60-year history of the survey in each of the past three months. Reported declines in income, from lost jobs, shorter work hours, cuts in pay or bonuses were also at record levels," the survey statement said.

 

Microsoft Falls

 

Microsoft saw its share price tumble more than 9 percent on Friday, after the company posted its weaker-than-expected results. The decline weighed on the broader indexes, including the Nasdaq, which declined about 1 percent. Microsoft was the largest percentage loser within the Dow Jones Industrial average.

 

In its fiscal fourth quarter ended in June, Microsoft's total sales fell 17 percent to $13.1 billion. It was also the first-ever decline in annual sales of the Windows operating system.

 

Microsoft lost about $20 billion of its market value on Friday, as its shares fell $2.31 to $23.25. The 9 percent drop was the largest single-day fall for Microsoft since January.

 

Some take a more optimistic view of the company.  While acknowledging the recent quarter was a difficult one for Microsoft, and lowered their 2010 fiscal year revenue and earnings forecasts, they saw a silver lining in the upcoming launch of the new Windows 7 operating system.

 

Jeffries & Co analyst Katherine Egbert said the company had "dismal revenue" and a "somber June," but still raised her price target to $29 from $28 and repeated her "buy" rating.

 

"Microsoft reported very weak revenue in all segments for June and an overall shift toward cost-conscious purchasing. But consumer PC and server sales flattened year-on-year, offering hope," she said.

 

Citigroup analyst Brent Thill said he was also disappointed by Microsoft's weak forecast for gross margins in fiscal 2010.

 

Still, in a client note titled "Keep Your Eye On The Prize," he repeated his "buy" rating, citing the potential for improvements in 2010 when corporate demand is expected to rebound and Windows 7 may help profit margins.