Data Helps Bulls Not Look Down While Hanging Off Fiscal Cliff
With President Obama and Congressional leaders set to meet at 3:00 p.m. ET and the House set to reconvene on Sunday, US equity markets are under pressure in late-morning action as hopes of final-hour fiscal cliff deal are waning. Treasuries are moving higher on the budgetary uncertainty. However, stocks are well off of the worst levels of the day following stronger-than expected domestic reports on regional manufacturing activity and pending home sales.
In equity news, Dow member Hewlett-Packard Co announced that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. Gold is lower and crude oil prices are mixed, while the US dollar is gaining modest ground.
Overseas, Asian stocks moved higher on optimism that the final-hour US fiscal cliff negotiations may result in an 11th hour deal, while some disappointing data and US fiscal cliff uneasiness are weighing on European equities.
Company and Earnings News
Dow member Hewlett-Packard Co. (HPQ $14) announced in a regulatory filing that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. HPQ reported an $8.8 billion writedown for its fiscal 4Q last month, attributing about $5 billion of it to a decline in the value of Autonomy due to alleged improper revenue recognition. Autonomy’s former CEO Mike Lynch responded by saying, “It is extremely disappointing that H-P has again failed to provide a detailed calculation of its $5 billion writedown of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.” HPQ is trading solidly lower.
Regional Manufacturing Activity Expands & Pending Home Sales Exceed Expectations
The Chicago Purchasing Managers Index moved further into expansion territory, rising to 51.6 in December—the highest since August—from 50.4 in November, compared to the improvement to 51.0 that economists surveyed by Bloomberg had expected. A reading above 50 depicts expansion in manufacturing activity. The positive report revealed a jump in new orders from 45.3 to 54.0, production remained above the key 50 mark, and prices paid stayed above 60, while employment fell from 55.2 to 45.9.
Meanwhile, pending home sales rose more than expected in November, increasing 1.7% month-over-month, compared to the 1.0% gain that economists had projected, and the 5.2% jump registered in October was revised to a 5.0% m/m rate of growth. Moreover, compared to last year, sales were up 8.9% in November, below the 12.2% increase that was forecasted, and compared to the downwardly revised 17.8% gain—from the initially reported 18.0% increase—posted in October. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected, jumping 5.9% m/m in November.
Treasuries are higher in late-morning action despite the data, as the fiscal cliff uncertainty festers, with the yield on the 2-year note nearly unchanged at 0.26%, while the yields on the 10-year note and the 30-year bond are falling 3 basis points to 1.71% and 2.88%, respectively.
Europe Seeing Red Following Some Lackluster Data
The European equity markets are under some pressure in late-day action, in the wake of some lackluster economic data in the region, while traders are treading cautiously ahead of a final push in the US fiscal cliff negotiations. France’s 3Q GDP was unexpectedly revised lower to a 0.1% quarter-over-quarter (q/q) pace of growth, from the originally-reported 0.2% expansion, where economists expected to nation’s output to remain.
The modest expansion for France’s economy follows the 0.1% q/q contraction seen in 2Q. Meanwhile, Spanish retail sales fell nearly 8% year-over-year in November. On the equity front, shares of Porsche Automobil Holding SE (POAHY $8) are moving nicely higher after a US Appeals Court dismissed a lawsuit against the sportscar maker. Moreover, Atari SA is falling sharply after the videogame maker warned of a “significant’ fiscal-year loss.
The UK FTSE 100 Index is down 0.5%, France’s CAC-40 Index is declining 1.2%, Germany’s DAX Index is trading 0.6% lower, Italy’s FTSE MIB Index is decreasing 0.5%, Spain’s IBEX 35 Index is falling 2.0%, Switzerland’s Swiss Market Index is dipping 0.2%, and Greece’s Athex Composite Index is dropping 1.2%.
Asia Moves Higher As Fiscal Cliff Resolution Hopes Remain
Stocks in Asia finished broadly higher as traders clung to hopes that lawmakers in the US may be able to pull off a final hour fiscal cliff agreement. Japan’s Nikkei 225 Index rose 0.7% to the highest level since March 2011, supported by the continued weakness in the yen versus the US dollar, which sits at the lowest level since August 2010, on growing expectations that the new Japanese leadership will deploy more aggressive monetary policy to try to stoke economic growth and inflation.
More, new leadership on the fiscal and monetary fronts could help growth in the near term, but we believe a more fundamental change to Japanese corporate culture is required before we see lasting and meaningful improvements to the economy. In the meantime, the stock market could rally if the government is able to sustain recent weakness in the yen—but pressure on corporate profits may continue and be a headwind for Japanese stocks. The gains for Japanese stocks came despite some lackluster economic data, as Japan’s Manufacturing PMI Index fell further into contraction for December, industrial production fell more than expected for November, retail sales came in flat last month, and consumer price inflation fell in November.
Elsewhere, South Korea’s Kospi Index rose 0.5% as a report showed the nation’s industrial production increased at a much larger rate than expected for November, while mining issues supported a 0.5% increase for Australia’s S&P/ASX 200 Index as iron ore prices continued to rebound. Meanwhile, India’s BSE Sensex 30 Index rose 0.6%, the Hong Kong Hang Seng Index increased 0.2% and China’s Shanghai Composite Index gained 1.2%.
Markets Mixed in Post Holiday Trading
Despite a lackluster report on holiday retail sales growth and the festering fiscal cliff impasse on Capitol Hill, the US equity markets are moving slightly to the upside in early action, aided by a report showing domestic home prices continued to rise. Treasuries are flat despite the US home price report, ahead of a read on regional manufacturing activity.
In equity news, Netflix Inc reported yesterday that its streaming video service was restored for all customers following an outage on Christmas Eve that denied users to stream videos on computers and other devices. Overseas, action was much lighter than usual, with European stocks closed for the Boxing Day holiday, while Japanese stocks paced an advance in Asia as the yen continued to sell off, while markets in Australia and Hong Kong were closed for holidays.
Company and Earnings News
Netflix Inc. (NFLX $90) reported yesterday that its streaming video service was restored for all customers following an outage on Christmas Eve that denied users to stream videos on computers and other devices. NFLX said the outage was due to technical problems at Amazon.com Inc’s (AMZN $259) Web Services unit. Per the Wall Street Journal, a Netflix spokesman said, “We are investigating the cause and will do what we can to prevent reoccurrence.” AMZN has not commented on the issue.
Meanwhile, the retail sector is in focus as the year nears the finish line, and MasterCard Advisors Spending Pulse reported that sales in the two months before Christmas rose 0.7% year-over-year (y/y), the slowest pace since 2008. According to CNBC, analysts had been expecting growth of 3-4%.
Home Prices Continue To Rise
Just before the opening bell, the 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 4.31% y/y in October, compared to the 4.00% increase that economists surveyed by Bloomberg had expected. Moreover, month-over-month (m/m), home prices were higher by 0.66% on a seasonally adjusted basis for October, compared to forecasts of a 0.48% increase.
Treasuries are nearly unchanged in morning action, with the yields on the 2-year note and the 30-year bond flat at 0.27% and 2.94%, respectively, while the yield on the 10-year note is dipping 1 basis point to 1.77%.
Later this morning, the US economic calendar will yield the release of the Richmond Fed Manufacturing Index, expected to decline slightly to 8 in December from 9 in November, with a reading above zero denoting expansion.
Japanese Stocks Continue to Rally With Most International Markets Remaining Closed
Stocks in Asia closed mostly higher, in light action with markets in Hong Kong and Australia closed for holidays. However, Japanese stocks led to the upside, as the Nikkei 225 Index posted a solid 1.5% increase, with the yen continuing to sell off, reaching the lowest level versus the US dollar since April 2011, helping to lift demand for the nation’s export issues. The yen came under further pressure as both houses of Japan’s parliament confirmed Shinzo Abe as the nation’s seventh Prime Minister in six years, per Bloomberg.
Moreover, Abe, which is expected to implement more aggressive monetary policy easing to try to spark economic growth and inflation, agreed to implement a 2% inflation target, while the Bank of Japan’s minutes from its November meeting suggested members discussed the possibility of open-ended asset purchases. Elsewhere in Asia, China’s Shanghai Composite Index gained 0.3% and India’s BSE Sensex 30 Index rose 0.8%, while South Korea’s Kospi Index finished flat. Finally, European markets remained closed for the Boxing Day holiday.
Vote Cancellation Curbing Fiscal Cliff Resolution Optimism
The US equity markets are moving noticeably to the downside in early action amid waning optimism a fiscal cliff resolution can be reached before the New Year, after a vote in the House on the Republican’s “Plan B” was cancelled due to a lack of support. Treasuries are higher amid the fiscal uneasiness, which is overshadowing favorable reports on US durable goods orders and personal income and spending, ahead of reads on consumer sentiment and regional manufacturing activity.
In equity news, Nike Inc reported stronger-than-expected earnings, while Walgreen Co missed the Street’s quarterly projections. Elsewhere, Research In Motion Ltd reported a smaller-than-expected loss but its shares are seeing some pressure in early trading. Overseas, Asian stocks moved broadly lower on the US fiscal fears, which are weighing on the European equity markets.
Company and Earnings News
Nike Inc. (NKE $99) reported fiscal 2Q earnings of $1.14 per share, above the $1.00 consensus estimate of analysts surveyed by Reuters, as revenues rose 7% year-over-year (y/y) to $6.0 billion, roughly inline with what the Street had anticipated. The athletic footwear and apparel company said it saw growth in all key categories, product types and geographies except Greater China. NKE said its “worldwide futures orders” for its Nike brand products scheduled for delivery from December 2012 through April 2013 are 6% higher than orders reported for the same period last year.
Meanwhile, Research In Motion Ltd. (RIMM $14) reported a 3Q loss ex-items of $0.22 per share, narrower than the $0.35 shortfall that the Street had projected, with revenues dropping 47% y/y to $2.7 billion, mostly matching analysts’ forecasts. The maker of BlackBerry devices said it shipped about 6.9 million smartphones and approximately 255,000 PlayBook tablets.
Elsewhere, Walgreen Co. (WAG $38) reported fiscal 1Q profits ex-items of $0.58 per share, well below the $0.70 that the Street had expected, with revenues declining 4.6% y/y to $17.3 billion, south of the $17.4 billion that analysts had projected. The pharmacy and retailer said its 1Q same-store sales—sales at stores open at least a year—decreased 2.0% y/y.
Durable Goods Orders Top Forecasts; Personal Income & Spending Rise
Durable goods orders rose 0.7% month-over-month in November, compared to the 0.3% increase that was expected by economists surveyed by Bloomberg, and October’s flat m/m reading was revised solidly to the upside to a 1.1% rise. Also, ex-transportation, orders widely exceeded expectations, increasing by 1.6% m/m in November, versus the forecast of a 0.2% decline, and October’s figure was favorably revised to a 1.9% increase from an initial 1.5% rise. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, jumped 2.7% m/m in November, compared to the flat reading that was projected, after rising by an upwardly revised 3.2% in October, versus the initially reported 1.7% increase.
Meanwhile, personal income rose 0.6% month-over-month in November, versus the 0.3% increase that economists had projected, and October’s flat reading was adjusted to a 0.1% gain. Moreover, personal spending advanced 0.4% m/m in November, matching expectations, and October’s 0.2% decline was revised to a 0.1% decrease. The savings rate as a percentage of disposable income rose to 3.6% in November, from the unrevised 3.4% in October.
Treasuries are higher amid the pressure on the equity markets due to the fiscal uneasiness, with the yield on the 2-year note declining 1 basis point to 0.26%, while the yields on the 10-year note and the 30-year bond are falling 6 bps to 1.74% and 2.92%, respectively.
Later this morning, the US economic calendar will yield the releases of the final University of Michigan Consumer Sentiment Index, projected to be revised slightly higher to 75.0 in December, from the preliminary reading of 74.5, as well as the Kansas City Fed Manufacturing Index, expected to improve slightly to -5 this month from -6 in November, but a reading below zero denotes contraction.
Scrapped fiscal cliff vote weighing on European markets
The European equity markets are moving lower in afternoon action, in the wake of the cancelled vote in the US on the Republican’s “Plan B” proposal to try to avert the fiscal cliff, which is fostering a flare-up in uncertainty toward the budgetary conditions in the world’s largest economy. Meanwhile, shares of Aeroports de Paris are moving solidly to the downside after the French airport operator lowered its earnings outlook.
Moreover, ArcelorMittal SA (MT $18) is being pressured after the world’s largest steelmaker, per Bloomberg, announced a sizeable writedown. In economic news in the region, consumer confidence reports out of the UK and Germany both deteriorated to levels below economists’ expectations, French business confidence improved slightly, the UK’s public sector net borrowing came in north of forecasts, and the UK’s 3Q GDP quarter-over-quarter growth rate was revised lower.
The UK FTSE 100 Index is down 0.7%, France’s CAC-40 Index is declining 0.5%, Germany’s DAX Index is decreasing 0.7%, Italy’s FTSE MIB Index is dropping 0.8%, Spain’s IBEX 35 Index is falling 0.4%, and Switzerland’s Swiss Market Index is moving 0.6% lower, while Greece’s Athex Composite Index is rising 0.9%
Asian Equities Find Pressure On Exacerbated US Fiscal Concerns
Stocks in Asia finished broadly lower amid exacerbated US budgetary uneasiness after a vote on a Republican fiscal plan was cancelled on a lack of support. Japan’s Nikkei 225 Index fell 1.0% coming further off of the 8 1/2-month high earlier this week, while China’s Shanghai Composite Index and the Hong Kong Hang Seng Index dropped 0.7%.
Elsewhere, India’s BSE Sensex 30 Index fell 1.1% and Australia’s S&P/ASX 200 Index declined 0.2%. Finally, South Korea’s Kospi Index dropped 1.0% on the fiscal fears out of the US, along with a solid decline in shares of Samsung Electronics Co. Ltd. (SSNLF $1,350) after the European Union announced that it is preparing an antitrust complaint against the smartphone and TV maker, per Bloomberg.
Fiscal Cliff Fears Fostering Flat Action
The US equity markets remain hamstrung in afternoon action, courtesy of festering fiscal cliff uncertainty, which is overshadowing some mostly upbeat data. Treasuries are modestly higher despite upbeat reports on US existing home sales, 3Q GDP, and regional manufacturing activity, while domestic jobless claims rose slightly more than expected and Leading Indicators declined.
Meanwhile, M&A activity is dominating the headlines, highlighted by IntercontinentalExchange Inc agreeing to acquire NYSE Euronext for $8.2 billion and Google Inc announcing the sale of Motorola Mobility’s home business to Arris Group Inc for $2.35 billion. In other US equity news, Bed Bath & Beyond Inc’s stronger-than-expected 3Q earnings are being more than offset by the retailer’s disappointing 4Q EPS guidance, while new order growth concerns are overshadowing KB Home’s better-than-expected quarterly profit and revenues. Gold and crude oil are lower, while the US dollar is flat.
Overseas, the European equity markets finished mixed amid the diverging data on both sides of the pond and the flare-up in US fiscal cliff uncertainty.
Company and Earnings News
IntercontinentalExchange Inc. (ICE $127) announced that it has reached an agreement to acquire NYSE Euronext (NYX $32)—the parent of the New York Stock Exchange—for about $33.12 per share in cash and stock, valued at about $8.2 billion. ICE is moving lower, while NYX is jumping over 30%.
Google Inc. (GOOG $721) announced that it has reached an agreement to sell Motorola Mobility’s home business to Arris Group Inc. (ARRS $15) for $2.35 billion in cash and stock. ARRS is rallying, while GOOG is up modestly.
In earnings news, Bed Bath & Beyond Inc. (BBBY $55) reported 3Q earnings of $1.03 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 15.3% year-over-year (y/y) to $2.7 billion, roughly inline with what the Street had anticipated. The retailer said its 3Q same-store sales—sales at stores open at least a year—rose 1.7% y/y, with Hurricane Sandy reducing its same-store sales by about 0.9%. BBBY announced a new $2.5 billion share repurchase program, but issued 4Q EPS guidance that missed analysts’ forecasts. BBBY is trading solidly to the downside.
Elsewhere on the earnings front, KB Home (KBH $16) posted fiscal 4Q earnings of $0.10 per share, three cents north of what analysts had anticipated, as revenues rose 20% y/y to $578 million, above the $567 million that the Street had projected. The homebuilder noted that its results were driven by an increase in the number of homes delivered and a higher average selling price. However, shares are solidly lower amid concerns about a slowdown in new orders as the y/y growth rate slowed sharply in 4Q from the same period a year ago.
Existing Home Sales Jump, While 3Q GDP Revised Solidly Higher
Existing-home sales rose more than expected, increasing 5.9% month-over-month in November to an annual rate of 5.04 million units, above the 4.90 million units that economists surveyed by Bloomberg had expected. Also, sales are 14.5% above the same period a year ago and are at the highest level since November 2009. November’s figure was revised to a 4.76 million unit pace, from the originally reported 4.79 million unit rate. The median existing-home price rose 10.1% from a year ago to $180,600, the ninth consecutive monthly y/y increase.
The supply of homes available for sale declined 3.8% m/m to 2.03 million units, equating to 4.8 months of supply at the current sales pace—the lowest since September 2005. Single-family home sales rose 5.5% m/m, while multi-family sales jumped 9.1% m/m. Regionally, sales rose in all regions as the National Association of Realtors (NAR) said areas impacted by Hurricane Sandy show storm-related disruptions but overall activity in the Northeast is up, offset by gains in unaffected areas. The NAR added, “Momentum continues to build in the housing market from growing jobs and a bursting out of household formation.” Sales of existing homes are the largest component of total home sales and reflect closings from contracts entered one-to-two months earlier.
There is virtually no doubt the US, regardless of the outcome of the current fiscal cliff negotiations, will undergo some form of fiscal tightening in 2013. The net is that there will be at least some drag on economic growth, but there are always many factors influencing economies and markets that can serve as fiscal tightening offsets. One of the factors that could help offset fiscal tightening is that the housing market appears firmly in recovery mode, with today’s existing home sales data adding credence to improved outlook, and there remains ample pent-up demand that should continue that trend.
Also, the continued recovery in housing should boost economic growth, which we believe is the missing element in many of the ongoing discussions in Washington, despite it being one of the major things that has differentiated the US economy from the rest of the world.
The final look at 3Q Gross Domestic Product, the broadest measure of economic output, showed the quarter-over-quarter annualized rate of expansion of 2.7% reported in the second revision was adjusted to a 3.1% pace of growth, above the 2.8% growth that economists had forecasted. 2Q GDP growth was 1.3%. Moreover, personal consumption was upwardly revised to a gain of 1.6%, from the 1.4% increase reported in the second reading, following the 1.5% increase recorded in 2Q, and versus the unrevised gain that was projected.
On inflation, the GDP Price Index came in at an unrevised 2.7% rise, matching expectations, from the 1.6% advance seen in 2Q, while the core PCE Index, which excludes food and energy was also unadjusted at a 1.1% rise, as anticipated, and compared to the 1.7% growth in 2Q.
Elsewhere, weekly initial jobless claims rose by 17,000 to 361,000 last week, just above the 360,000 level that economists had expected, as the prior week’s figure was upwardly revised by 1,000 to 344,000. However, the four-week moving average, considered a smoother look at the trend in claims, dropped by 13,750 to 367,750, while continuing claims rose 12,000 to 3,225,000, above the forecast of economists, which called for a level of 3,200,000.
Meanwhile, the Philly Fed Manufacturing Index unexpectedly jumped back into expansion territory for December, rising to 8.10—the highest since April—from November’s -10.70 reading, compared to the increase to -3.0 that economists had expected. New orders, shipments, and employment all moved solidly above zero, which is the demarcation point between expansion and contraction.
Finally, the Conference Board’s Index of Leading Economic Indicators declined inline with expectations, decreasing 0.2% m/m in November. However, October’s figure was revised to a 0.3% increase, from the 0.2% gain that was originally reported. The report showed negative contributions from components pertaining to jobless claims, stock prices, and ISM new orders, which more than offset positive reads on building permits and yield curve.
Treasuries are higher in afternoon action despite the mostly favorable economic data, with the yields on the 2-year and 10-year notes dipping 1 basis point to 0.27% and 1.79%, respectively, while the 30-year bond rate is nearly unchanged at 2.98%
Europe Mixed as Traders Grappled w/Diverging Data
The European equity markets finished mixed, as traders grappled with the budgetary bickering in the US, as well as the diverging economic data on both sides of the pond. Meanwhile, shares of Ericsson AB (ERIC $10) were solidly lower after the world’s largest maker of mobile-phone networks, per Bloomberg, announced a 4Q writedown due to its ST-Ericsson wireless chip unit. On the economic front, UK retail sales came in below expectations in November, Italian retail sales unexpectedly fell for October, and Spanish housing permits fell more than 30% y/y for October. Moreover, German producer prices and import prices came in slightly hotter than anticipated for November, while Switzerland’s trade surplus surprisingly widened last month.
The UK FTSE 100 Index declined 0.1%, France’s CAC-40 Index and Germany’s DAX Index traded 0.1% higher, Italy’s FTSE MIB Index advanced 0.4%, Spain’s IBEX 35 Index was nearly unchanged, Switzerland’s Swiss Market Index dropped 0.5%, and Greece’s Athex Composite Index increased 0.3%.