Market Analysis

Beyond the Number

Weakness May Result from European Debt Fears
4/18/2012 9:18 AM

The major U.S. index futures are pointing to a lower opening on Wednesday, with sentiment likely to be impacted by European debt fears, which intensified following the release of a report by Bank of Spain showing a deterioration in bad debts held by domestic banks. U.S. technology earnings received mixed reception from the markets, with the slowdown in revenue growth at bellwethers Intel (INTC) and IBM (IBM) worrying traders despite their earnings beating expectations. Amid these developments, risk aversion in play and could impair market mood.

U.S. stocks advanced on Tuesday, benefiting from a batch of solid earnings reports, a fairly successful Spanish debt auction and a report showing an unexpected increase in German economic sentiment.

The major U.S. averages opened higher and moved steadily higher in the morning before consolidating their gains in the afternoon. The Dow Industrials added 194.13 points or 1.50 percent before closing at 13,116 and the S&P 500 Index closed up 21.21 points or 1.55 percent at 1,391, while the Nasdaq Composite ended at 3,043, up 54.42 points or 1.82 percent.

All thirty of the Dow components closed higher, with Wal-Mart (WMT), Coca-Cola (KO), Kraft Foods (KFT), IBM (IBM), General Electric (GE), Disney (DIS), Chevron (CVX), Cisco Systems (CSCO) and Boeing (BA) among the biggest advancers.

Transportation, biotechnology, financial, resource, retail, housing and semiconductor stocks advanced strongly in the session.

On the economic front, the Commerce Department’s housing starts report was mixed. Housing starts fell a steep 5.8 percent month-over-month in March to a seasonally adjusted annual rate of 654,000 units, dragged down by a 16.9 percent plunge in multi-family starts. Starts are now at their lowest level since October 2011. Meanwhile, building permits unexpectedly jumped 4.5 percent to 747,000, the highest reading since September 2008.

The Federal Reserve’s industrial production report was a disappointment. U.S. industrial output was flat in March compared to the previous month. Manufacturing output fell 0.2 percent, while production by the mining and utilities industries rose 0.2 percent and 1.5 percent, respectively. Capacity utilization edged down slightly to 78.6. Construction supplies, tech equipment and consumer durable output all weakened from the month-ago levels, while motor vehicle and parts production rose 0.6 percent.

Currency, Commodity Markets

Crude oil futures are slipping $0.41 to $103.79 a barrel after advancing $1.27 to $104.20 a barrel on Tuesday.

The weekly inventory report released by the American Petroleum Institute late Tuesday showed that crude oil stockpiles rose by 3.4 million barrels in the week ended April 13th. An ounce of gold is currently fetching $1,642.30, down $8.80 from the previous session’s close of $1,651.10 an ounce. On Tuesday, gold rose $1.40.

Among currencies, the U.S. dollar is trading at 81.34 yen compared to the 80.84 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is currently valued at $1.34 compared to yesterday’s $1.3127.


The Asian markets advanced, tracking the overnight gains on Wall Street and in Europe, as growth fears waned in the wake of some positive economic data and the Spanish debt auction.

Japan’s Nikkei 225 average capitalized on the weakening of the yen in response to the re-ignition of risk appetite and closed notably higher. The index ended up 202.55 points or 2.14 percent at 9,667.

Australia’s All Ordinaries closed at 4,427, up 58.40 points or 1.34 percent, and Hong Kong’s Hang Seng Index ended 218.42 points or 1.06 percent higher at 20,781.

The results of a survey by Westpac and the Melbourne Institute showed that the leading indicator index of economic activity in Australia rose 0.5 points to 284.2 in February. That said, the annualized growth rate came in at 2.4 percent, weaker than the long-term growth trend of 2.9 percent.


The European markets are trading weaker following yesterday’s advance, as traders remain cautious amid the release of corporate earnings, a successfully German debt caution and concerns surrounding the financial health of Spanish banks. The French CAC 40 Index is down 1.77 percent, while the German DAX Index is declining 1.16 percent and the U.K.’ FTSE 100 Index is moving down 0.39 percent.

In corporate news, ASML (ASML) reported a decline in first quarter net income to 282 million euros from 395 million euros last year, as net sales fell about 14 percent to 1.25 billion euros. The company also said it is on track to record sales of 2.4 billion euros for the first half of 2012, as net sales for the second quarter are expected at 1.2 billion euros.

Meanwhile, French luxury retailer LVMH reported a 25 percent increase in its first quarter revenues to 6.6 billion euros. Statoil’s (STO) Statoil Fuel & Retail announced a deal to be sold to Alimentation Couche-Tard for 15.9 billion Norwegian Kroner.

Toeing in line with its peer Rio Tinto, BHP Billiton (BHP) reported a 14 percent sequential drop in metallurgical coal output due to weather impact, while on a year-over-year basis, the output was up 10 percent. Iron ore production also experienced a sequential drop but a year-over-year increase.

Swiss agricultural firm Syngenta reported 9 percent first quarter sales growth to $4.3 billion. U.K. grocer Tesco reported higher profits and 6.8 percent sales growth for the year ended February. The company also announced a 2.1 percent increase in its dividend.

The European Central Bank reported that the current account balance of the eurozone region turned to a deficit of 1.3 billion euros in February from a surplus of 3.7 billion euros in January.

The minutes of the April monetary policy meeting of the Bank of England showed that the status quo decision to hold rates unchanged as well as maintain the size of the bond buying program was adopted by an 8-1 margin. Adam Posen abandoned his calls for an expansion in the bond buying program, adding to the strength of the hawks in the committee.

Meanwhile, a government report showed that U.K. jobless claims rose by a less than expected 3,600 to 1.61 million in March.

U.S. Economic Reports

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended April 13th at 10:30 am ET.

Crude oil inventories rose by 2.8 million barrels to 365.2 million barrels in the week ended April 6th. Inventories were in the upper limit of the average range.

Gasoline stockpiles fell by 4.3 million barrels yet remained in the upper limit of the average range. Meanwhile distillate stockpiles fell by 4 million barrels, dropping to the middle of the average range. Refinery capacity utilization averaged 84 percent over the four weeks ended April 6th compared to 83.8 percent over the previous four weeks.

Stocks in Focus

IBM (IBM) reported first quarter non-GAAP earnings of $2.78 per share compared to $2.41 per share last year. Revenues were flat at $24.7 billion. The quarterly earnings beat expectations, while the revenues were shy of estimates. The company raised its 2012 non-GAAP earnings outlook to at least $15 per share from its earlier estimate of at least $14.85 per share, with the upwardly revised guidance coming in above analyst estimates of $14.93 per share.

Intel (INTC) reported first quarter non-GAAP earnings of 56 cents per share on revenues of $12.9 billion. The earnings exceeded estimates, while revenues were in line. For the second quarter, the company expects revenues of $13.6 billion, plus or minus $500 million. Analysts estimate revenues of $13.43 billion.

Yahoo’s (YHOO) first quarter net earnings rose 38 percent to 23 cents per share and revenues, excluding traffic acquisition costs, were up 1 percent to $1.08 billion. The results were better than expected. For the second quarter, the company expects revenues, excluding traffic acquisition costs, of $1.03 billion to $1.14 billion, with the guidance surrounding the consensus estimate of $1.08 billion.

Linear Technology (LLTC) reported third quarter non-GAAP earnings of 49 cents per share, lower than 69 cents per share last year. Revenues fell 11.6 percent to $312.4 million. The earnings exceeded estimates, while revenues were in line.

Seagate (STX) reported third quarter non-GAAP earnings of $2.64 per share on revenues of $4.45 billion. The results came in ahead of estimates.

Intuitive Surgical (ISRG) reported better than expected first quarter earnings and revenues. United Rental’s (URI) first quarter earnings and revenues were also better than expected. Railroad operator CSX (CSX) also reported above consensus earnings and revenues for its first quarter.

Cree’s (CREE) third quarter earnings trailed expectations and it issued a downbeat outlook for its fourth quarter.

Packaging Corp. of America (PKG) said its first quarter adjusted earnings rose to 42 cents per share from 39 cents per share in the year-ago period. Net sales rose 7 percent to $671 million. The result exceeded estimates. The company currently estimates earnings of 45 cents per share for the second quarter.

East West Bancorp. (EWBC) reported first quarter net income of 45 cents per share, higher than 37 cents per share last year and ahead of the consensus estimate. The company also raised its full year earnings guidance by 4 cents to $1.78-$1.82 per share, yet it was below analysts’ estimates. Meanwhile, Cathay General (CATY) reported first quarter earnings of 32 cents per share compared to 23 cents per share in the year-ago period.

Panera Bread (PNRA) announced the resignation of COO John Maguire, effective May 31st, 2012 and the appointment EVP of development and business development and licensing Charles Chapman to the position of COO.

Oaktree Management stated that it has sent a letter to the board of JAKKS Pacific (JAKKS) highlighting their lack of confidence in the company’s current board and management team.

American Express (AXP), eBay (EBAY), F5 Networks (FFIV), Lam Research (LRCX), Marriott (MAR), Noble Corp. (NE), Plexus (PLXS), Qualcomm (QCOM), SLM Corp. (SLM), Stanley Black & Decker (SWK), Steel Dynamics (STLD), Vmware (VMW) and Yum Brands (YUM) are among the companies due to release their quarterly results after the markets close.
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