Tuesday, July 31, 2012

Morning Update

Yesterday stocks traded in a tight range on exceptionally low volume ahead of a series of central bank meetings this week. NYSE total volume was two standard deviations below average and the lowest volume put in on a non-holiday trading day this year (zerohedge).

Recent consumer confidence data out of Germany, Finland, Austria, and France came in weak, showing that the continent’s banking crisis is beginning to impact consumers in even the strongest European economies. This pessimism indicates that Europe is unlikely to quickly pick up in the coming months (Wall Street Journal). Europeans certainly have plenty to worry about with Euro-zone unemployment at 11.2% with 123,000 jobs being shed in June. This poor data will likely be supportive of ECB intervention in some capacity, which could be announced as early as Thursday.

Reports out of the US this morning were a bit more upbeat: the Case-Shiller home price index rose 0.7%, an unusually large gain and the third monthly gain in a row.

Pfizer reported a Q2 earnings beat this morning with EPS of $0.62 versus $0.54 expected. Global revenue fell 9% but still managed to beat expectations. Earnings growth was driven by better than expected sales of Lipitor coupled with decreases in research spending and administrative costs. The company also announced plans to separate its animal health division into a standalone company so that it can concentrate on its core pharmaceuticals business (Reuters). This stock yields 3.71% and has outperformed the broad market year to date. We remain bullish on the stock going forward, which is likely to see price appreciation due to its yield and earnings stability.

Monday, July 30, 2012

Morning Update

This week traders will be focusing on two main events: the FOMC meeting kicking off Tuesday and ending Wednesday with an announcement from Fed Chairman Ben Bernanke, and Thursday’s ECB policy setting meeting. Last week despite earnings misses and poor economic data US equities rose on expectations of further stimulus from the Fed and ECB. Rounding out the week will be the non-farm payrolls report on Friday.

Some have speculated that the Fed will cut the Fed Funds rate, the rate it pays banks that hold deposits with them from 0.25%. As of July 25th the Fed held $1.49 trillion of reserves, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007 (Bloomberg). The aim in cutting interest rates further would be to give banks an incentive to withdraw excess reserves and lend it, where they can get a higher yield. The Fed has not cut rates since 2008, in part out of fear of destabilizing the money market. However, the results from the ECB’s recent rate cut are encouraging - $321 billion Euros in excess reserves were withdrawn from the ECB. The Fed could also communicate that it will keep rates low past 2014, change its outlook on the discount window rate, or even start another round of bond buying.

Notable earnings after today’s close include Seagate Technologies (STX). The stock popped last week after Western Digital, Seagate’s main competitor, reported strong earnings and surprised investors by raising guidance. Trading at a 6.8 P/E the stock looks cheap here. The company reduced guidance earlier last month and consensus expectations are now for EPS of $2.51. The at-the-money straddle for options expiring this week closed Friday at $2.73, implying that the market is expecting the stock to move about 9% after earnings.

Tomorrow before the market opens BP will report earnings. Earnings are expected to be down Q/Q due to lower crude prices. TNK-BP, Russia’s third-largest oil producer, of which BP owns half, reported Q2 earnings of $808 million, down from $2.2 billion a year ago. BP’s stock yields 5.62% as of Friday’s close, so an earnings miss could set up a good long entry into the stock for investors searching for yield.

Friday, July 27, 2012

Morning Update

Spanish unemployment hits a new high of 24.6%. The silver lining is that job losses totaled only 15,000 versus 870,000 last quarter.

Today the Bundsbank reiterated its opposition of ECB bond purchases to reduce stuggling countries cost of borrowing. This came in response to comments from Mario Draghi yesterday suggesting the ECB was prepared to buy Spanish and Italian debt in order to force their cost of borrowing down. Draghi will be put to the test on August 2nd, the ECB’s next scheduled meeting. Markets will now be expecting bold and decisive action from him. If he disappoints markets are likely to sell off hard; if he follows through on his promises he is likely to alienate the ECB from the Bundsbank. As Carsten Rrzeski, senior economiust at ING Group in Brussels said, “Draghi is damned if he does and damned if he doesn’t.”

On top of high expectations for stimulus from the ECB next week, markets will also be hopefull of talk of QE3 from Ben Bernanke next Tuesday following the FOMC meeting. The Non-farm payrolls report on Friday will also be highly anticipated as another poor reading will drastically increase the likelyhood if more easing from the Fed.

One indicator of trader’s expectations of quantitative easing is gold (GLD). Gold has historically rallied during times of easy money and quantitative easing. Since March the metal has traded down, but in recent days has looked like it could be breaking out of its recent trading range to the upside. This buying pressure is likely in anticipation of Fed action next week.

The third estimate of US Q1 GDP was released this morning, coming in at 1.5% Q/Q versus 1.2% expected. Economy-wide inflation, as measured by the GDP price index, was revised to 2.0% from the prior estimate of 1.7% (Bloomberg). This report, while modestly better than expected, confirms that US economic growth is slowing.

Last night Facebook, Amazon, and Starbucks missed their earnings estimates. Facebook delivered earnings largely in line with expectations, though reported slowing revenue growth and did not provide any guidance going forward. This has sent the shares sharply down to all time lows. Amazon said that they are spending a lot on investments because of the opportunities they see. Amazon’s investment spending has focused around video technology and cloud computing. Investors are hopeful that this spending will begin to pay dividends in the fourth quarter’s holiday season. Starbucks not only missed earnings and revenue expectations but also guided down, stating “We’re dealing with significant global economic and consumer challenges.” The chain showed growth rates higher than its peers, however, suggesting that the problem is a macro one, not Starbucks specific. Starbuck’s management has also been known to be conservative in their guidance.

Thursday, July 26, 2012

Morning Update

Early this morning ECB president Mario Draghi said “Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough”. This implies that the ECB will buy sovereign debt from countries such as Spain and Italy who are struggling to issue debt at reasonable interest rates. This has pushed US futures up sharply and the US Dollar down. Ten-year Spanish government bond yields fell 31 basis points to 7.1 percent, five-year Spanish yields fell below the 7 percent danger mark to 6.82 percent, and two-year bond yields eased 60 basis points to 5.66 percent (Bloomberg). Lower yields indicate improved confidence that Spain will not default on its obligations. The VIX, a measure of fear in US equity markets, will likely be down sharply on this news.

US economic data released this morning came in better than expected, helping to fuel the pre-market rally. Durable goods new orders came in at 1.6% versus 0.6% consensus and new jobless claims were 353,000, 27,000 less than expected. Continuing claims also showed strength, down 35,000. The four-week moving average of new claims fell to 367,250. Because jobless claims can be so volatile the four-week moving average is the best way to determine the overall trend of claims.

Notable earnings yesterday after the close included Visa, Western Digital, and Zynga. Visa posted a loss of $1.8B on an increase in litigation costs (Washington Post). Excluding provisions for litigation net income came to $1.56 per share. Revenue was up 20%. However, Visa did report that the volume of transactions worldwide fell 1% in the US, suggesting consumers are spending less due to economic uncertainty.

In contrast, Zynga delivered a disappointing quarter, missing on EPS and revenue. This has sent social media shares down sharply, including Facebook. Facebook is set to deliver its first quarterly results as a company today after the bell.

3M reported earnings yesterday of $1.66 per share, up $0.06 Y/Y though revenue fell 2% to $7.53B (MSNBC). The company did not revise its previous guidance, but did mention it expects currency appreciation to reduce foreign sales by about 3% this year. We remain bullish on this stock going forward.

Wednesday, July 25, 2012

Morning Update

Yesterday after the close Apple delivered a rare earnings miss, coming short on both revenue and EPS. This is only the second quarter of the past 39 in which the company missed. Apple reported EPS of $9.32 and revenue of $8.8 billion versus the analyst consensus was for EPS of $10.37 and revenue of $37.2 billion. The earnings miss was due to weakening iPhone sales: Apple sold 26 million iPhone this quarter, up 28% Y/Y but down 26% Q/Q. CEO Tim Cooke said that the company “did not detect any ‘obvious economic issue(s)’ in the US and China.” CFO Peter Oppenheimer said “Our weekly iPhone sales have been impacted by rumors and speculation regarding new products” (Wall Street Journal). Considering Apple’s earning miss is an isolated event, it is unclear whether this is a symptom of a global macroeconomic downturn or simply a shift of iPhone demand from the present to future, yet unreleased models.

Caterpillar reported strong earnings this morning, beating analysts’ expectations and guiding up for the rest of the year. EPS were up 67% to $2.54 while revenue increased 22% to $17.37 billion. Construction Industry sales increased across all global regions, with North America leading the way. Caterpillar’s raised guidance to $9.60 per share comes on the back of improving housing numbers and relative strength out of the home builder’s sector. At current market valuations Caterpillar trades at just 8.9 forwards earnings, representing a great value should Caterpillar be able to continue to insulate itself from a slowing Europe and China.

Today Western Digital will report earnings after the close. The company had a very strong report last quarter, beating analyst’s expectations and saying that disruptions from the Thai floods were finally over. The stock’s weekly options are seeing heavy trading with the most open interest in the33 calls. Despite yesterday’s broad market selloff which sent the S&P 500’s (SPY) Put/Call ratio to 1.779 Western Digital’s remained at 0.797, suggesting traders are optimistic about earnings.

Waste Management will report earnings tomorrow pre-market. The stock yields 4.37% currently, and the company has increased revenues the last four quarters. Investor’s will be looking to see if there is appreciable volume growth, as a lack of it in the past has hurt EPS growth. The company has regularly raised its dividend but only by raising its payout ratio, which is unsustainable over the long term. An increase in revenue and EPS on higher volume will reassure investors that the dividend is safe and will continue to rise.

Tuesday, July 24, 2012

Morning Update

Moody’s lowered its outlook on AAA rated Germany, Netherlands, and Luxembourg to negative. Finland, the most financially isolated of the Euro-zone countries, was kept on a stable outlook with an AAA rating.

“The Chinese HSBC Flash PMI for July rose to 49.5 from June's 48.2, and touched the highest level since February. ‘Earlier easing measures are starting to work. That said the below-50 July reading implied demand still remaining weak and employment under increasing pressure. This calls for more easing efforts to support growth and jobs,’ HSBC said” (SeekingAlpha.com).

US PMI Flash came in this morning at 51.8 versus 52.6 consensuses, implying that the US manufacturing sector is growing the slowest in years. The weakest component of the repot is exports, which are struggling due to a stronger dollar and weakening demand in Europe and Asia.

Spanish 10-year bonds hit a Euro-area high yield of 7.5% yesterday. Spain’s market regulator completely banned all short selling on all stocks following a 5% decline in the country’s benchmark stock index. Italy banned short selling of financial stocks for one week.

AT&T, the second largest mobile carrier in the US, reported better than expected earnings this morning of $0.66 versus $0.60 expected. Revenue fell short of expectations however, coming in at $31.6 billion versus the consensus $31.7 billion. This quarter’s strength can be attributed to the company’s wireless business, which saw 320,000 contract customers added and a 45% profit margin before interest, taxes, depreciation, and amortization.

Apple will report earnings after the bell today. Price action in the stock was bullish yesterday; after gapping lower with the broader market nearly 3% the stock clawed its way back to close within pennies of its previous close. The S&P 500, meanwhile, closed down 0.89%. Open interest in the options expiring this week is strongest in the 650 calls and 590 puts; yesterday's Put/Call ratio was 0.634. This suggests traders believe there is greater risk of a strong move to the upside than downside, which has certainly been the case during past earnings announcements. For more commentary on Apple and an earnings trade watch my latest video on CNBC.com.

The S&P 500 (SPY) appears to have significant short term downside support here after yesterday’s bullish price action. The SPY has made a series of high lows on its daily chart since June and bounced off a rising trend line yesterday. Yesterday’s low also coincided with the 50-period simple moving average. The market will likely react to Apple earnings and follow the stock up or down. But the news that will drive the market over the longer term will come later this week end next with GDP, a Fed announcement, and NFP report due out.

Monday, July 23, 2012

Morning Update

This week a troika of international inspectors will come to Athens. The inspectors, from the European Commissions, the IMF, and the ECB will formally appraise Greece’s delayed overhauls implemented since the June 17 elections. Without gaining approval from the troika Greece risks being cut off from aid, the next round of which is due in September.

Domestically the focus of this week’s data will be Friday’s final revision of first quarter GDP. However, next week’s data is likely to rile markets more with both an FOMC meeting and Non-farms payroll report.
This morning McDonalds reported second quarter EPS of $1.32, down from $1.35 a year earlier. Revenue grew $0.01 billion to $6.92 billion year over year. This came against consensus EPS estimates of $1.37 on revenue of $6.94, which had already been revised down $0.08 in the preceding weeks. McDonald's U.S. generated comparable sales growth of 3.6% for the quarter, while the European division delivered comparable sales growth of 3.8% and a 3% decline in operating income.

One of the most anticipated earnings announcements this month will come Tuesday when Apple reports. Consensus estimates are for EPS of $10.38. Apple’s earnings are a significant proportion of the NASDAQ-100’s earnings and even the S&P 500’s, so the broad market is likely to react to the announcement. Analysts are split on whether Apple will be able to deliver another blow-out quarter or will fail to meet expectations. One way to gauge Apple’s earnings is to look to their suppliers earnings. Multi-Fineline Elecontrix, who derives 60% of their business from Apple, reported “strong demand from our customers for our flex assemblies for smart phones and tablets.” Skyworks Solutions is another major Apple supplier who reported a strong earnings beat and revised guidance upwards by 10% despite declaring a “general slowdown” of the smart phone market (SeekingAlpha). Verizon’s recent earnings report showed strong iPhone activation numbers. That said, Toni Sacconaghi of Sanford C. Bernstein & Co., a top-ranked financial computer analyst, saying today there’s a “reasonable probability that Apple will miss consensus revenue expectations due to macroeconomic weakness in China and Europe, a product cycle lull in the iPhone, a later than expected introduction of the new iPad into China, and the late quarter introduction of new Mac notebooks” (tech.fortune.cnn.com). Apple’s weekly options expiring Friday have by far the most open interest in the 620 calls, suggesting some traders may already be positioning for a bullish move in the stock.

Facebook earnings, due Thursday, are also highly anticipated. This will be the firm’s first quarterly earnings report since going public. Investors will be looking to see if the trend of revenue growth deceleration has been reversed and if the company has plans for profiting from their increasingly popular mobile platform.

Friday, July 20, 2012

Morning Update

With no economic news scheduled today markets are likely to be driven primarily by earnings news. Internationally, Germany approved a bailout of Spanish banks, which occurred on the heels of a weak bond auction in Spain. Spanish 10-year bond yields are trading at an unaffordable 7.1%.

Yesterday after the close Microsoft reported its first ever loss as a public company. FQ4 EPS beat consensus estimates, coming in at $0.73 on revenue of $18.6 billion (+7% Y/Y) by $470 million. Enterprise strength drove the earnings: Office division sales were up 7% Y/Y while Server and Tools were up 13% Y/Y. This strength offset at 1% drop in Windows sales. Entertainment and devices sales were up 20% Y/Y. The quarter’s net loss of $492 million occurred due to a one time write-down of Microsoft’s acquisition of aQuantive. We found these earnings to be very strong and expect a bullish tone in Microsoft’s stock leading up to the release of Window’s 8 this fall.

Google also reported earnings after yesterday’s close. Traditionally Google will either beat or miss consensus estimates of its earnings by a large margin, causing its shares to make dramatic moves in the after-hours market and following day. This quarter however, Google’s EPS of $10.12 beat consensus estimates by just $0.08 on revenue of $8.36 billion (+21% Y/Y), which missed consensus estimates of $50 million primarily due to the economic turmoil in Europe and currency volatility. Google’s site revenue jumped 21% Y/Y while ad network revenue increased 20% Y/Y. Ad click prices declined 16% Y/Y but increased 1% Q/Q, halting recent declines. Paid clicks were up 1% Q/Q and up 42% Y/Y. Declining ad click prices show the impact of mobile devices: users are less likely to click on ads when they see them on mobile devices. As more and more internet searches occur on mobile devices, Google’s ability to profit from those ads is diminished. However, Google in combating this by providing intelligent results so that users are only seeing ads they are likely to click on. This strategy is paying off with paid clicks up sharply Y/Y. As expected Motorola’s revenue was $1.25 billion and experienced an operating loss of $39 million. Google did not elaborate on their specific plans for utilizing newly acquired Motorola.

Notable earnings before today’s opening bell include General Electric, which narrowly beat earnings with Q2 EPS coming in at $0.38, a beat of $0.01. Revenue was $2.09 billion (+1.4% Y/Y), a miss by $20 million. Schlumberger and Baker Hughes both beat, showing strength in the oil services sector during a quarter with falling oil and gas prices. Executives at the two companies were “cautiously optimistic” about the future.

Vodafone announced a 7.7% decline in sales, saying on their conference call that “it’s difficult to be optimistic the near-term changes in things.” Vodafone is the world’s second largest mobile phone carrier with the bulk of its business occurring in Europe and emerging markets.

Today we will be watching the trading action in Apple, Visa, Western Digital, Netflix, and UPS as traders begin positioning themselves for their earnings announcements next week.

Thursday, July 19, 2012

Morning Update

Jobless claims for the week of July 14th were 386,000. Initial claims for the week of July 7th were revised down a sharp 26,000 to 350,000. This has brought the four week average of initial jobless claims down 1,500 to 375,500. This week’s increase can partly be attributed to annual auto plant shutdowns for retooling in July.

After yesterday’s close American Express beat earnings but reported lighter than expected revenue, slower than average growth in card member spending. Loan losses have remained at record low levels. American Express’s customers are typically seen as affluent, making American Express earnings a good indicator of the spending habits of wealthier Americans.

IBM missed revenue expectations for the 4th time in a row but still managed to beat on earnings. IBM revised their future earnings outlook upwards, giving trader’s confidence in tech’s resilience.

This morning Verizon reported earnings miss of $0.64 per share, an increase of 12.3% year-over-year. Verizon’s revenues grew 3.7% and cash flow grew 20.1% compared to 2Q2011.

Signs of a Chinese slowdown could be seen in YUM Brand’s earnings, which missed the street consensus of $0.70 per share by $0.03. Same store sales rose 10% in China last quarter but that operating profit at those stores declined 4% before currency translation. In a conference call management attributed declining profit margins to high inflation in China and expects the setback to be short-lived. China is YUM’s largest profit-contributing area.

Today after the close two of tech’s giants will be reporting what are expected to be drastically different earnings reports. Google’s earnings could be record second quarter numbers despite rising competition from Apple and Facebook, along with associated charges with its $12.5 billion acquisition of Motorola Mobility Holdings. Specifically investors will be looking to see how many new Google+ members the company has attracted to gauge its competiveness with Facebook. Last quarter Google+ has 190 million members while Facebook had 901 million.

In stark contrast the optimism surrounding Google’s earnings, Microsoft’s are expected to be a record second quarter loss. This is the result of the company taking a one-time charge of #6.2 billion to write off its 2007 acquisition of aQuantive, an online advertising agency. Microsoft investors are focused on the release of Window’s 8 on October 26, 2012. This will be the main catalyst for earnings growth for the rest of the year.

Wednesday, July 18, 2012

Morning Update

In his semi-annual testimony before the Senate yesterday, Federal Reserve Chairman Ben Bernanke delivered a bleak view of the US economy. The two major near-term risks to America’s financial recovery are the European debt crisis, and the fiscal cliff the US is facing. Bernanke said “We are looking for ways to address the weakness in the economy should more action be needed.” The Fed still has several tools available to it including cutting the Fed Funds rate from 0.25% to zero, buying Treasuries, and even using the discount window to get cheap credit to banks. Bernanke’s term as chairman ends in 2014, making further assurances of low rates ineffective.

This morning Bank of America reported earnings with a beat: 19 cents per share on lower than expected revenue. Notable earnings after today’s close will be from American Express, IBM, Qualcom, and Yum! Brands.

This will be the first quarter that IBM will report earnings with combined results from former Motorola Mobility Holdings Inc. IBM currently derives most of its revenue from outside the US, leading analysts to trim estimates after slowdowns in the BRICS countries. This quarter IBM launched a new initiative dubbed IBM PureSystems, and merges all IBM software and hardware for the user and runs alongside whatever systems were used before. This part of IBM’s recent strategy to move into the growing market for data management and analytics. Analysts are expecting IBM to post a net income of $3.98 billon or $3.42 per share, a 3% gain year over year.

A stock to watch today is Google, which will be reporting earnings after the close on Thursday. The stock routinely moves 5-10% after earnings, making it a popular stock among options traders. As trader’s place their bets on the stock the front month, at-the-money straddle will reveal how much they expect the stock to move. Currently the July 575 straddle trades for $34.80 with an implied volatility of 82%. Following the earnings release, the implied volatility in these options will collapse back to normal levels. Earnings of $10.11 per share on revenue of $8.43 billion are expected.

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