MarketView for October 21

Summary

Stocks ended little enthusiasm on Monday as lackluster earnings reports from McDonald's and others had some believing that perhaps the equity markets were a bit over bought after the S&P 500 index's reached record highs last week. Moreover, there was some reluctance to make aggressive bets ahead of Tuesday's release of the payrolls data for September, which was delayed by the recent government shutdown. However, the importance of the data at this late stage is questionable.

Netflix saw its share price gain 11 percent in after-hours trading after the release of its earnings report indicating the company added 1.3 million streaming customers in September. Netflix's third quarter net income reached $32 million, up from $8 million a year earlier.

Texas Instruments was up 0.3 percent after the company's earnings beat estimates. Analysts had expected $3.23 billion in third-quarter revenue, but the technology manufacturer reported $3.24 billion. However, McDonald's fell following a weak fourth-quarter outlook. And there was a rally in Apple’s shares after a brokerage ratings upgrade.

McDonald's fell 0.6 percent to $94.59 after it reported revenue that missed estimates and warned global October sales could be relatively flat. Apple rose after Societe Generale lifted its price target on the stock to $575 from $500 and advised clients to buy shares. The stock rose 2.4 percent to $521.30 and was the best performer on the Nasdaq, adding 7.5 points to the index.

Though only a small percentage of S&P 500 stocks have reported earnings thus far, the season has been mixed, with revenue growth especially a concern. Nonetheless, earnings of a number of bellwether companies have exceeded expectations. With 21 percent of S&P companies having reported, 61.5 percent have topped profit expectations, a rate slightly above the historical average. However, only 52 percent have topped expectations on revenue, below the historical average of 61 percent.

Last Friday saw the S&P 500 index chalk up its largest weekly gain in three months on stronger-than-expected earnings from Google and Morgan Stanley, as well as a deal in Washington temporarily resolving a political deadlock over the budget and raising the debt-ceiling. The S&P managed a slight gain to again close at a record high.

S&P sectors were mixed, with healthcare stocks making the biggest decline, down 0.6 percent. More than 25 percent of the S&P 500 components are due to report this week.

Hasbro ended the day up 5.2 percent to a new high as both earnings and sales topped expectations. Solar power companies were among the strongest on Monday, with First Solar up 7.8 percent to $53.88. Trina Solar rose 2.7 percent to end the day at $17.01.

JPMorgan Chase reached a tentative $13 billion deal with the government to settle investigations into bad mortgage loans sold to investors by JPMorgan and the banks it bought during the financial crisis. Its shares ended the day down 0.1 percent at $54.27.

Home Sales Fall

Home re-sales fell in September and prices dropped as higher mortgage rates took the edge off the housing market recovery. The National Association of Realtors reported on Monday that sales of previously owned homes fell 1.9 percent last month to an annual rate of 5.29 million units. At the same time, the median price rose 11.7 percent in September from a year ago to $199,200. While that was the 10th straight month of double-digit gains, it was the smallest increase since April.

The NAR said a combination of high home prices, barely rising salaries and higher mortgage rates was hurting affordability, which hit a five-year low in September according to its gauge. The trade group said sales probably peaked in July and August. August sales were revised to a 5.39 million rate, unchanged from July, well below the 5.48 million rate previously estimated.

Last month's sales drop adds to other indicators, such as pending contracts to buy previously owned homes and home builders' confidence that have suggested a run-up in mortgage rates is starting to slow the housing market recovery.

Interest rates have risen sharply since May on expectations the Federal Reserve would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point. It hit 4.49 percent in September, the highest since July 2011, according to Freddie Mac.

The Fed surprised markets last month by sticking to its $85 billion per month bond-buying pace. In doing so, it cited the increase in mortgage rates. Still, the central bank is widely expected to start tapering its purchases by early next year.

Economists said they expected home re-sales to decline again in October in part because a 16-day partial government shutdown had hurt consumer confidence and likely delayed the processing of mortgages backed by the Federal Housing Administration. Sales in coming months are also expected to be hampered by increases in flood insurance rates.

While home re-sales rose 10.7 percent from a year ago, the increase was the smallest in five months. Homes are also not selling as fast as they did in the summer. A home's median time on the market in September was 50 days. That was up from 43 days in August, but down from more than 70 days a year ago.

First-time buyers accounted for 28 percent of the transactions, far below the 40 percent to 45 percent that economists and real estate professionals view as ideal. Investors, who have been the main drivers of sales, bought 19 percent of the homes in September, with almost three quarters paying in cash.

However, there is a silver lining in the report, when you look at distressed properties.  That end of the market can depress prices because they typically sell at deep discounts. However, they only accounted for 14 percent of sales last month, as compared to 24 percent a year ago.

The number of unsold homes on the market was unchanged at 2.21 million in September, representing a 5 months' supply. That compared to 4.9 months' worth in August. A 6 month's supply is normally considered healthy.