MarketView for October 28

 

 

Summary

 

The S&P 500 closed at another record high on Monday on expectations that the Federal Reserve will keep its stimulus in place when it meets this week. At the same time, the overall market was little changed, with the Dow Jones Industrial Average and the Nasdaq ending the day down slightly.

 

The S&P 500 has chalked up a 6.4 percent gain since October 8, when it hit its lowest point during the government's shutdown and the debate over raising the debt ceiling. The benchmark index is up 23.6 percent for the year so far.

 

Relief over the end of the political impasse and investor expectations that the Fed will keep stimulus measures in place for at least several months because of the 16-day shutdown have propped up prices. Fed policymakers will meet on Tuesday and Wednesday.

 

Shares of Apple rose 0.8 percent to $529.88 ahead of the release of its earnings, expected after the bell. After the bell, Apple's shares fell 5 percent following the iPhone maker's results.

 

Among the latest signs that the economy's momentum may be easing, manufacturing output barely rose in September and contracts to buy previously owned homes recorded their largest drop in nearly 3-1/2 years.

 

Merck fell 2.6 percent to $45.35 and was one of the largest drags on the Dow after the company reported a decline in sales of its Januvia diabetes treatment, raising concerns about growth prospects for its biggest product.

 

Biogen Idec posted a rise in third-quarter earnings and raised its full-year earnings and revenue outlook, sending the Company's stock up 0.9 percent at $254.43.

 

Based on Thomson Reuters’ data, S&P 500 earnings are expected to be up just 3.4 percent in the third quarter over the year-ago period. Of the 249 companies in the S&P 500 that have reported earnings so far, 69.1 percent exceeded Street expectations.

 

Nonetheless, revenue has been lackluster with growth seen at 2.2 percent for the quarter. Just 53.9 percent have beaten sales estimates, below the 61 percent rate since 2002, but above the 49 percent rate for the past four quarters.

 

Mosaic agreed to acquire CF Industries phosphate mining and manufacturing business for $1.2 billion in cash. Shares of CF rose 4.2 percent to $218.36 while Mosaic gained 1.6 percent to $46.67.

 

Economic Data Disappoints

 

Manufacturing output barely rose in September and contracts to buy previously owned homes recorded their largest drop in nearly 3-1/2 years, the latest signs the economy's momentum ebbed as the third quarter ended. More importantly, Monday’s data indicated that the economy was on somewhat of a decline even before the government shutdown and that is expected to weigh on fourth quarter growth.

 

Manufacturing production edged up 0.1 percent last month after advancing 0.5 percent in August, the Federal Reserve said. Factory output was held back by a 0.5 percent drop in computer and electronic goods production. Output of electrical appliances also fell. While automobile output increased 2.0 percent, that was a sharp slowdown from the 5.2 percent rise logged in August.

 

Separately, the National Association of Realtors said its Pending Homes Sales index, based on contracts signed last month, plunged 5.6 percent to the lowest level since December. The decline was the largest since May 2010.

 

The index, which leads home re-sales by a month or two, has now dropped for four straight months. It appears that home re-sales, which dropped in September, peaked in July and August.

 

The reports come on the heels of data last week showing a gauge of business spending tumbled in September. That data, combined with a disappointing reading on hiring released earlier this month, has offered a dull picture of economic activity.

 

Rates on 30-year fixed rate mortgages rose to an average of 4.49 percent in September from an average of 3.54 percent in May, according to Freddie Mac. However, a surprise decision by the central bank in mid-September not to cut its purchases and soft economic data has resulted in lower interest rates.

 

Factory output rose at a 1.2 percent rate in the third quarter, rebounding from a 0.1 percent fall in the prior three months. Economists expect manufacturing slowed in October as the federal government shutdown hurt business confidence.

 

The weak manufacturing data contrasts with fairly upbeat business surveys. For example, a closely watched gauge from the Institute for Supply Management has been pushing higher since contracting in May.

 

Despite the softness in factory output, a rebound in utilities output lifted overall industrial production 0.6 percent, the largest increase since February. Utilities rebounded 4.4 percent in September after five straight months of declines. Mining production rose 0.2 percent, but that was a slowdown from at 0.6 percent increase in August.

 

One very key piece of information released on Monday, was that as of last month the industrial capacity level rose to 78.3 percent, the highest point since July 2008, up from 77.9 percent in August.

 

Apple Meets Expectations

 

 Apple reported on Monday that it sold 33.8 million iPhones last quarter, roughly in line with analyst expectations, and signaled a strong holiday season. The Company said it expected revenue of $55 billion to $58 billion in the crucial October to end-December period. Wall Street was expecting $55.65 billion.

 

The company said it sold 14.1 million iPads during the quarter, up very slightly from 14 million in the year-ago quarter, and sold 4.6 million of its Mac computers, down from 4.9 million a year ago.

 

Overall revenue was $37.5 billion, ahead of Wall Street's average forecast of $36.8 billion, according to Thomson Reuters I/B/E/S.

 

Earnings per share were $8.26, ahead of analysts' average estimate of $7.94.

Apple shares traded down slightly after hours. They closed up 0.7 percent in regular Nasdaq trading.

 

Wall Street had hoped for a stronger beat on quarterly sales after the company predicted in September that its revenue and margins would come in at the high end of its own forecasts. However, Chief Executive Tim Cook predicted a "really great" holiday season: a crucial time for Apple as its new iPads go up against Amazon's Kindle Fire and its new iPhones compete with lower-cost phones made by Samsung Electronics and others using Google's Android software.

 

It is no secret that demand for Apple's $100 cheaper iPhone 5C lagged sales for the top-tier 5S, leading to the conclusion that Apple’s iPhone's market positioning and its ability to compete with a growing profusion of lower-cost rivals may need to be revamped to some extent.

 

The chief concern is that Apple may have missed an opportunity in China with an even more affordable phone. The company has ceded ground steadily to Samsung and homegrown competition like Huawei and Lenovo, but needs to stake out a bigger spot in the world's top cellular market to rekindle growth. Revenue from China, Hong Kong and Taiwan climbed just 6 percent to $5.7 billion in the quarter, despite the 5C and 5S going on sale in September.

 

Sales grew by about 24 percent from the previous quarter, or by about $1.1 billion. But that lagged the roughly $1.4 billion that Apple managed to tack on in the December quarter of 2012.

 

Cook told analysts on a conference call that results from China were "pretty good" but acknowledged room for improvement. "We obviously want to do better," he said. Cook did not address the overall popularity of the 5C on his call with analysts but mentioned there was "a very significant backlog" for the more expensive 5S.

 

Apple indicated on Monday that it expected revenue of $55 billion to $58 billion this quarter, outpacing Wall Street's forecast for about $55.65 billion.

 

Gross profit margin for the fourth quarter ended September was 37 percent, down from 40 percent a year ago as intense competition from the likes of Samsung took a toll. That was roughly level with analysts' average 36.9 percent forecast.

 

Beyond the holiday quarter, some investors still hold out hope that the company that upended the cellphone industry and popularized tablet computing can again dream up a revolutionary device, returning Apple to the stellar growth of past years.

 

The company is increasingly hard-pressed to fend off rivals. Strategy Analytics estimated on Monday that Apple's market share slipped to 13.4 percent in the calendar third quarter from 15.6 percent previously, while Samsung led with 35.2 percent. As growth tapers off, some shareholders have become increasingly aggressive at seeking a bigger return of cash - the company ended the September quarter with $146.8 billion in cash plus short-term and long-term marketable securities.

 

Billionaire Carl Icahn, who owns 4.7 million Apple shares, has led the charge, demanding the company initiate a tender offer to buy back $150 billion of its stock. Cook told analysts the company will continue to seek shareholder input on its capital return program, and will announce any changes in the first part of the new calendar year.