MarketView for July 22

 

 

Summary

 

The S&P 500 just managed to notch a third consecutive record closing high on Monday, while disappointing earnings from McDonald's kept the Dow Jones Industrial Average from making significant gains. Banks and health related shares were the day's best performers, with financials advancing for the 10th time in the past 12 sessions. Bank of America led the group, while shares of UBS rose 3.2 percent to $19.23 after the Swiss bank's second-quarter profit exceeded forecasts despite a charge to settle a U.S. lawsuit.

 

Analysts said the market is likely to trend higher in the absence of any weak economic news but would need strong earnings and positive forecasts from companies to post large gains. Weaker-than-expected results from McDonald's weighed on the Dow after the company said full-year results would be "challenged" by falling sales in Europe, its largest market. McDonald’s ended the day down 2.7 percent to close at $97.58.

 

Shares of Netflix fell 6.1 percent in after-hours trading after the company reported a higher profit for the second quarter but added fewer subscribers to its video streaming service than the Street had been expecting.

 

Five of the S&P 500 industry sectors advanced in Monday's session. The S&P 500 has added nearly 19 percent so far this year. Recent data showed funds that hold stocks gained $16.96 billion in the week ended Wednesday, the most since June 2008.

 

A rise in metal prices boosted materials shares, with Newmont Mining up 5.8 percent to $30.35, enough to lead gains in the S&P materials sector. Tech shares also moved higher, with Microsoft adding 1.9 percent to end the day at $32.01, after the Company fell 11.4 percent on Friday following dismal results.

 

The PHLX housing sector index fell 0.8 percent after an unexpected drop in U.S. home re-sales in June. The data also gave support to bets the Federal Reserve will extend its rate of bond purchases to support the economy. September, however, remains the most likely time for the Fed to announce that it will begin scaling back its $85 billion a month in bond purchases, according to a Reuters poll.

 

Nearly one-third of S&P 500 companies are expected to report earnings this week, including Apple on Tuesday. Of the 109 companies in the S&P 500 that have reported earnings for the quarter, 64.2 percent have beaten analyst expectations, while fewer than half have topped revenue estimates, Thomson Reuters data showed.

 

Home Re-sales Fall Unexpectedly

 

Home re-sales were lower in June after two straight months of hefty increases, much to the surprise of Wall Street, but an increase in prices to a five-year high suggested the housing market recovery remained on course.

 

The National Association of Realtors said on Monday home sales fell 1.2 percent to an annual rate of 5.08 million units. Still, the sales pace was the second highest for any month since November 2009. While the NAR suggested that a spike in mortgage rates had contributed to dampening sales last month, yet apparently re-sales mostly reflected contracts signed in May.

 

Economists polled by Reuters had expected sales to increase to a 5.25 million unit pace in June. Sales, which were up 15.2 percent from their year-ago level, fell in three regions and were flat in the Midwest compared with May.

 

Mortgage rates have been rising in anticipation of the Federal Reserve starting to reduce its massive monetary stimulus later this year.According to Freddie Mac, the 30-year fixed mortgage rate increased 0.53 percentage point in June to 4.07 percent, its highest level since October 2011. Still, mortgage rates remain low and Fed Chairman Ben Bernanke last week expressed optimism the housing market recovery would continue.

 

The recovery, marked by a surge in prices and dwindling inventories, is helping to shore up the economy by bolstering household finances and supporting consumer spending. Even though sales pulled back last month, there was little in the home data to suggest an unraveling of the recovery.

 

The median price for a previously owned home increased by13.5 percent from a year ago, to $214,200, the highest since June 2008. The inventory of unsold homes on the market rose 1.9 percent from May, pushing the months' supply to 5.2. Although that was up from May's 5.0 months, it remained below the 6.0 months that is normally considered as a healthy balance between supply and demand. Economists say tight supply has weighed on sales.

 

Other details of the report were also encouraging. Distressed properties - which can depress prices because they typically sell at deep discounts - accounted for only 15 percent of sales last month. That was the lowest since the Realtors group started monitoring them in October 2008. These properties, foreclosures and short sales, had made up 18 percent of sales in May.

 

In another sign of underlying strength, properties are selling more quickly. A home's median time on the market in June was 37 days. That was down from 41 days in May and 70 days a year ago, and it was the fewest days since the NAR started monitoring that number in May 2011. Before the market collapsed in 2006, it usually took about 90 days to sell a home. About 47 percent of all homes sold in June had been on the market for less than a month.

 

But there was data leading to some concerns in the report. For example, first-time buyers accounted for 29 percent of the transactions, far below the 40 percent to 45 percent economists and real estate professionals view as ideal. These buyers are being sidelined by stringent lending practices and lean inventory in the low end of the market. Investors, who have been the main drivers of sales, bought 17 percent of the homes in June.

 

That was down a touch from 18 percent in May and 19 percent a year ago. The NAR said it was unclear whether this was just an anomaly or a sign the sustained increase in home prices was starting to make investors a bit more cautious. Cash sales accounted for 31 percent of transactions in June, down from 33 percent in May.

 

McDonald’s Throws Cold Water on Wall Street

 

McDonald's on Monday through cold water on the Street’s hopes that McDonald’s business would strengthen in the second half of the year, blaming tougher competition in the U.S. and weaker sales in Europe.

 

The world's largest restaurant chain by sales reported a lower-than-expected quarterly profit and said it expects global same-restaurant sales in July to be relatively flat, sending its shares down almost 3 percent in midday trading.

 

"Based on recent sales trends, our results for the remainder of the year are expected to remain challenged," Chief Executive Don Thompson said in a statement. Wall Street analysts had expected McDonald's business to pick up in the middle of this year as food inflation and other pressures ease.

 

The latest quarterly increases the pressure on Thompson, who was promoted to the CEO position in July 2012, when the chain was enjoying a multi-year run of rising sales and profits.

 

In the second quarter ended June 30, global sales at McDonald's restaurants open at least 12 months rose 1 percent, in line with analysts' expectations. McDonald's indicated that second-quarter same-restaurant sales in the United States were up 1 percent, missing the average analysts' forecast of a 1.5 percent increase.

 

The company is fighting to increase sales as smaller rivals such as Wendy's and Burger King debut attention-grabbing food, like bacon sundaes and limited-time offers. Wendy's, known for its thick Frosty shakes and square hamburgers, recently launched a Pretzel Bacon Cheeseburger that appears to be chain's best-selling new product in at least a decade.

 

McDonald's, which still dominates the fast-food industry, has been offering late-night breakfasts, tweaking other menus and advertising value-priced meals to bring in more traffic. The chain said its indulgent new line of Quarter Pounder hamburgers - including a bacon habanero ranch version - have performed well. It recently axed lackluster sellers like premium Angus burgers and its Fruit & Walnut Salad while also catching up with rivals by introducing an egg white version of its popular McMuffin breakfast sandwich.

 

In Europe, same-restaurant sales were down 0.1 percent in the quarter - the third consecutive quarter of declining sales in the region. In the Asia/Pacific, Middle East and Africa (APMEA) region, second-quarter sales fell 0.3 percent. McDonald's second-quarter net income rose 3.7 percent to $1.40 billion, but earnings per share of $1.38 missed analysts' estimate by 2 cents, according to Thomson Reuters I/B/E/S.

 

Nevertheless, McDonald's executives said the chain is gaining share in the so-called informal eating out category, which is dominated by fast-food operators. Still, they warned that significant coupon and voucher discounting is keeping them from raising prices to offset higher costs.

 

Hasbro Shares Up Despite Lagging Sales and Earnings

 

Sales of Hasbro games, including "Monopoly" and "Magic: The Gathering," rose 19 percent in the second quarter, suggesting that the country’s second  toymaker may be shoring up a weak area that could help offset a steady decline in demand for action figures.

 

The stronger-than-expected showing for its games business boosted Hasbro shares on Monday and helped offset a sharp decline in sales of toys aimed specifically at boys. Notably, Hasbro's Beyblade spinning-top toys and playthings themed on Marvel comic characters fizzled during the quarter.

 

 

Hasbro has sought to broaden the appeal of its classic brands like Twister, Monopoly and Jenga by giving them a digital makeover. It has also been investing in its mobile gaming business as children gravitate to games played on Apple’s iPad and other devices. And Hasbro recently acquired 70 percent of Backflip Studios, a mobile game studio. It also signed a separate agreement with Electronic Arts to make mobile games.

 

In the seasonally weak second quarter, Hasbro's net profit fell to $36.5 million, or 28 cents a share, from $43.4 million or 33 cents a share a year ago. Excluding a pension charge, it earned 29 cents a share, missing the analysts' average estimate of 34 cents, according to Thomson Reuters I/B/E/S.

 

Hasbro also indicated that it had expanded its partnership with Walt Disney, obtaining the rights to make toys and games for Marvel characters such as Spider-Man, the Avengers and Iron Man through 2020. Hasbro's rights for the "Star Wars" franchise, which Disney bought recently, also run through 2020.

 

Overall sales in the second quarter fell 6 percent to $766.3 million. Hasbro indicated that revenue in its boys' toy business fell 35 percent to $253.7 million in the second quarter, making it the fifth straight quarter of declines at the unit. Unlike the second quarter of 2012, Hasbro this year had fewer movie franchises supporting its toys modeled on Marvel characters such as Spider-Man and the Avengers.

 

Revenue for the girls unit rose 43 percent in the quarter. Hasbro shares ended 3.3 percent higher at $46.87 on Monday.