MarketView for October 18

 

 

Summary

 

There was a late rally on Wall Street on Tuesday that sent the major equity indexes well into positive territory. What was the reason, as if you really need to ask? Essentially, Wall Street once again fell under the spell of the Sirens of the European Union with their enchanting stories of supposed agreements to strengthen the euro zone's rescue fund.

 

All three major indexes rose sharply after a Britain's Guardian newspaper said France and Germany will increase the euro zone's rescue fund to 2 trillion euros as part of a plan to resolve the sovereign debt crisis. Trading picked up shortly after the Guardian report, with 3 billion shares changing hands in the final hour on three major equity exchanges. A total of 8.86 billion shares traded for the day, above the year's daily average so far of about 8 billion shares.

 

That sent the Street lusting after financial shares, which had started the day weak but gained momentum on the late news. Shares of Bank of America ended the day up 10.1 percent to close at $6.64. Bank of America shares on Tuesday had been lower after it reported a third-quarter profit but showed its main businesses struggled as income from lending and investment banking fell. Goldman Sachs added 5.5 percent to $102.25 after reporting a rare loss, but Goldman said it was moving to cut costs, including employee pay. Nonetheless, financial stocks were the top gainers for the day.

 

Stock index futures sold off after the bell following weak quarterly results from Apple. Its shares lost more than 5 percent to below $400 in extended trade after the company reported a rare miss in quarterly results after sales of its flagship iPhone fell short of Wall Street expectations. The stock had closed up 0.5 percent at $422.24 during the regular session.

 

Shares of Yahoo fell more than 3 percent to $15.96 in extended trading after the company reported its net revenue and profit slipped in the third quarter.

 

Intel rose nearly 5 percent to $24.54 after the company forecast quarterly revenue above Wall Street's expectations, defying concerns that the growing popularity of tablets and a shaky economy are eating into demand for personal computers.

 

The CBOE Volatility Index VIX, Wall Street's "fear gauge," was down nearly 5 percent but still remained elevated above 30.

 

U.S. homebuilder stocks were helped by strong homebuilder sentiment data, signaling improvement in the housing market. Shares of KB Home closed up 11.6 percent at $7.02.

 

Apple Misses

 

Apple reported quarterly results after the close of regular trading and they missed Street expectations for the first time in years, blaming rumors of the new iPhone for hurting demand in the September quarter. The company’s shares fell 7 percent in extended trading on Tuesday, wiping $27 billion off the value of the world's largest technology company.

 

It was Apple's first quarterly earnings under Chief Executive Tim Cook, who took over from Steve Jobs in August at a critical juncture for the company. Apple is battling Google in the mobile arena, as well as other challengers such as Samsung and Amazon.com Inc.

 

Apple said it sold 17.07 million iPhones in its fiscal fourth quarter ended September 24 -- well short of the roughly 20 million forecast by analysts. The iPhone is Apple's flagship product, yielding some 40 percent of annual sales.

 

Revenue rose 39 percent to $28.27 billion, lower than the average analyst estimate of $29.69 billion, according to Thomson Reuters I/B/E/S. It was the first time Apple missed revenue expectations since the fiscal fourth quarter of 2008.

 

Net profit was $6.62 billion, or $7.05 a share. That fell shy of expectations for earnings of $7.39 per share. The last time Apple missed EPS estimates was in the first quarter of 2001, according to Thomson Reuters I/B/E/S.

 

Apple executives said consumers had postponed purchase decisions until the crucial holiday quarter because of speculation that a new phone was on the way. Apple unveiled the iPhone 4S in early October, and it hit stores last Friday.

 

Apple -- which typically offers projections so conservative they are disregarded -- on Tuesday forecast December quarter revenue and earnings above Wall Street's estimates.

 

Cook started his first earnings conference call as CEO by honoring Jobs, who died on October 5 after a years-long battle against pancreatic cancer.  He said he was "very confident" of posting record iPhone sales in the current quarter. The company moved 4 million iPhone 4S units -- more than double its predecessor -- in its first three days, despite lukewarm reviews.

 

Another area for optimism for Apple was iPads. The company moved 11.12 million units during the quarter despite attempts by various manufacturers, including Samsung, to capture a slice of the tablet market. Now Amazon.com has also entered the fray with its Kindle Fire tablet.

 

Acknowledging the competition, Cook said it was "reasonable to say" none of Apple's rivals have gained any traction, and he expected the tablet market to be bigger than personal computer in the long term.

 

Cook also told analysts that Greater China -- mainland China, Hong Kong and Taiwan -- was becoming an all-important region for Apple as it has "quickly become No. 2 on our list of top revenue countries very, very quickly." Revenue from the region increased four-fold to $4.5 billion during the quarter.

 

The new CEO fielded questions on Apple's cash pile of over $81 billion, saying the money provided flexibility for acquisitions and investing in the supply chain.

 

"That said, I'm not religious about holding cash or not holding it," he added. "It's a topic for the board on an ongoing basis."

 

Apple's Mac sales saw a large spike during the September quarter but it failed to lift earnings. Apple sold 4.89 million Macs, up 27 percent from a year ago.

 

Gross margin came to 40.3 percent -- a tad higher than Wall Street's forecast of 39.74 percent. International sales accounted for 63 percent of the quarter's revenue.

 

"We expected iPhone sales to decline in the September quarter from the June quarter as a result of the announcements we made ... in June, where we said we would launch iOS 5 and iCloud in fall," Peter Oppenheimer, Chief Financial Officer, said in an interview with Reuters.

 

"That basically created the rumor of the day across the September quarter, especially at the end."

 

Apple said it expected December quarter earnings of $9.30 a share on revenue of about $37 billion. Wall Street is projecting $9.01 for the period, but it was unclear if that was comparable. Apple’s shares fell to $394.78 in after-hours trading, after closing at $422.24 on the Nasdaq.

 

Intel Surprises to the Upside

 

Intel forecast quarterly revenue above Wall Street's expectations, defying concerns that tablets and a shaky economy are eating into demand for personal computers. Intel shares moved sharply higher after the company beat earnings expectations and said developing countries like China are fueling expansion and helping make up for slower growth in the United States and Europe.

 

Intel's processors are used in 80 percent of the world's PCs but the company has failed to gain traction in increasingly popular mobile gadgets like Google Inc's Android smartphones and Apple's iPad, which some people are buying instead of laptops.

 

Chief Financial Officer Stacy Smith said Intel's outlook was a little lower than normal for this time of year, mostly because of weakness in Europe's economy.

 

Corporate information technology spending has held up in recent quarters despite the lackluster economy, helping sales of Intel's high-margin server chips.

 

Tech companies such as Facebook are also investing heavily to build out their computing capacity, helping data center sales for the world's leading chipmaker rise 15 percent in the quarter.

 

"Emerging markets are good, enterprise is strong, the mature market consumer is a little bit weaker," Smith told Reuters. "I'd say Europe was a little bit weaker than the U.S."

 

In the third quarter, sales of Intel's Atom mobile chips plummeted 32 percent, reflecting consumers' growing preference for tablets over netbook PCs the Atom chips are widely used in.

 

Shares of Intel have risen about 11 percent this year, outperforming the Nasdaq composite index, which has been flat. Analysts recommending the company say it has been punished too much for its lag in mobile computing and point to the stock's 3.6 percent dividend yield.

 

Intel said it spent $4 billion to buy back shares during the third quarter and authorized another $10 billion for more buybacks.

 

Intel is rushing to develop more energy efficient chips for tablets and phones although it is not expected to become competitive in mobile any time soon. It is also promoting Ultrabooks, a new super-thin category of laptops using Intel processors -- similar to Apple's MacBook Air.

 

Early Ultrabook models, meant to combine the best features of tablets and laptops, may seem expensive to consumers, analysts say. But as new features are added to them, such as touch screens and "instant on" capability, Intel expects the Ultrabooks to account for 40 percent of the consumer PC market by the end of next year.

 

Chief Executive Paul Otellini told analysts on a conference call that the potential release of Microsoft Corp's upcoming Windows 8 operating system next year could fuel higher PC sales and help Intel.

 

Intel said revenue in the current quarter would be $14.7 billion, plus or minus $500 million. Analysts' average forecast was $14.23 billion, according to Thomson Reuters I/B/E/S.

 

The company's GAAP net income in the third quarter was $3.5 billion, up 17 percent. Earnings per share were 65 cents. Analysts on average had expected 61 cents.

 

Intel said non-GAAP revenue in the third quarter was $14.3 billion, up 29 percent and higher than the $13.87 billion expected on average by analysts, according to Thomson Reuters I/B/E/S.

 

Shares of Intel rose 4 percent in extended trade after closing up 0.52 percent at $23.40.