10-Year Treasury Yield Hits Three-Month Low As Investors Seek Safety

For the week of Monday, May 7, 2012 through Friday, May 11, 2012

• Standard & Poor’s 500 Index: -1.15%
• Dow Jones Industrial Average: -1.67%
• NASDAQ Composite: -0.76%

The markets were resilient to European woes on Monday, but took deep tumbles by midweek. The Dow Jones Industrial Average fell for six straight days through Wednesday as concerns about Greece and Spain weighed on investors’ minds. The Dow’s six-day losing streak erased 444 points from the index, and marks the longest slide since the market turmoil from August 2011. Spanish stocks closed at their lowest level since October 2003. Stateside, the 10-year Treasury yield hit a three-month low, as investors sought safety. While Thursday saw investors taking advantage of the bargains the previous six days created, stocks tumbled again on Friday.

With the threat of Greece leaving the eurozone and Spain and Italy facing rising borrowing costs, in addition to several other European countries, investors fear Europe’s crisis could deter the U.S. recovery. Several U.S. based retailers cited weak international sales and currency issues in their earnings reports.

Economic Data

• Chain Store Sales Snapshot:
  • The chain store sales index fell 0.8% in the latest week; however, it has lost very little of its gain from late March.
  • Year-over-year growth dropped to 3.3% from 4.2%.
  • Customer traffic reportedly favored sellers of staples over discretionary items in the week.
• MBA Mortgage Applications Survey:
  • Another week of good purchase applications helped the mortgage applications composite index rise 1.7% in the week ending May 4.
    • The purchase index also rose 3.4%, posting its third week of positive gains.
    • The purchase index has been trending modestly higher over the past couple months.
  • The refinance index also rose 1.3%, the first gain since early April.
• Wholesale Trade:
  • Wholesale inventories rose 0.3% in March.
  • This was below the forecast of 0.6% and the revised 0.9% inventory build from February.
  • The inventory-to-sales ratio was unchanged at 1.17.
• International Trade:
  • A 5.2% gain in imports lead the U.S. trade deficit widening from -$45.4 billion to -$51.8 billion in March, which was more than expected.
  • Exports rose 2.9% in March, its fourth consecutive monthly gain.
  • The February trade deficit is slightly smaller at -$45.4 (previously -$46 billion).
  • The real goods balance widened from -$44.1 to -$48.9 billion for March.
  • The March trade deficit’s implication for first quarter GDP revisions appear to be modest.
• Jobless Claims:
  • A slight improvement in initial claims helped keep numbers near February lows and curb worries the market is backsliding, as jobless claims edged lower, improving in line with expectations for little change.
  • Initial claims fell by 1,000 to 367,000 for the week ending May 5.
    • The prior week’s data were revised from 365,000 to 368,000.
  • Continuing claims also decreased in the prior week.

Earnings

• Cisco Systems, Inc.  (NASDAQ: CSCO):
  • Cisco Systems Inc.’s fiscal third-quarter earnings jumped 20% on higher revenue and margins.
    • For the quarter ended April 28, Cisco posted a profit of $2.17 billion, or $0.40 a share, up from $1.81 billion, or $0.33 a share, a year earlier.
    • Excluding stock-based compensation, restructuring-related impacts and other items, per-share earnings were up to $0.48 from $0.42.
    • Revenue rose 6.6% to $11.59 billion amid particularly strong demand in the data center, wireless and services segments.
  • The network-equipment maker struck a cautious tone about the information-technology spending environment.
    • Worries include Europe and the strength of the global economy, public-sector spending pressures, longer sales cycles, and smaller deal sizes from enterprise customers.
  • The company’s product segment, its biggest top-line contributor, saw revenue rise 5%, while its services segment’s revenue increased 13%.
  • Regionally, top line growth was strongest in the Asia Pacific, Japan and China markets, up 24%, while the Americas grew 3.2% and Europe, the Middle East and Africa increased 4.6%.
• Sysco Corporation (NYSE: SYY):
  • Sysco Corp.’s fiscal third-quarter earnings were similar to a year ago, as higher prices for items like meat and poultry held down the supplier’s sales growth.
  • Sysco said it recorded food cost inflation of 5.5% in the latest period, compared with 5.1% a year earlier, and 6.3% in the prior quarter.
  • For the quarter, the company reported a profit of $259.6 million, compared with a year earlier profit of $258.5 million.
    • Earnings per share were unchanged at $0.44, narrowly beating analysts’ estimates by a penny.
    • Sales rose 7.6% to $10.5 billion.
    • Gross margin narrowed to 17.8% from 18.6%.
• International Flavors and Fragrances Inc. (NYSE: IFF):
  • International Flavors & Fragrances posted a 4% decline in first-quarter profit although adjusted results met analysts’ expectations.
  • IFF earned $81.1 million, or $0.99 per share, for the period down from $84 million, or $1.03 per share, a year ago.
    • IFF’s restructuring charge increased to $1.7 million from $28,000.
    • Revenue for the three months ended March 31 slipped 1% to $710.6 million from $714.3 million in part as a result of unfavorable currency translation.
    • Analyst expected $717.6 million in revenue.
    • Sales of the flavors division climbed 3%, while fragrance sales fell 4%.
    • Cost of goods sold rose to $425.2 million from $416.8 million.
• Fossil, Inc. (NASDAQ: FOSL):
  • Shares of Fossil Inc. were in free fall Tuesday afternoon, losing more than a third of their value, after the watch and accessories company’s profit forecast for the year disappointed investors.
    • Fossil said sales in Europe have been hurt as a result of the weakening economy, as well as changes in its merchandise strategy;
    • The company said growth in Asia improved, despite weakness in South Korea, one of its major markets, and
    • Its North American watch business was doing well.
  • Fossil’s first-quarter net income rose 4% to $58.1 million, or $0.93 per share, from $55.8 million, or $0.86 per share, in the first three months of 2011.
  • Revenue rose 10 percent to $589.5 million from $537 million, but still missed Wall Street’s estimate of $618.1 million.
• Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA):
  • Teva Pharmaceutical Industries Ltd. first-quarter profit rose 13%, although revenue fell short of analyst expectation.
    • Sales growth for branded and generic drugs in the U.S. and emerging markets helped offset Europe’s poor performance.
    • Teva said its recent efforts to restructure its drug distribution agreements in the U.S. and negative currency-exchange rates hurt revenue for the quarter.
  • Teva predicted adjusted full-year earnings of $5.48 to $5.68 per share, excluding various items.
  • For the first quarter, Teva’s profit rose to $859 million, or $0.97 a share, from $761 million, or $0.84 a share, a year earlier.
    • Teva sales rose 25% to $5.1 billion from $4.1 billion a year earlier, falling short of the $5.5 billion analyst estimate.
    • Teva said the renegotiated distribution agreements cut branded-drug revenue by about $180 million for the quarter.
• The Walt Disney Company (NYSE: DIS):
  • Walt Disney Co.’s fiscal second-quarter profit rose 21% as they continue strong earnings, the results of improving revenue from television and higher attendance at its theme parks.
  • Disney shattered box office records over the weekend, with a more-than-$200-million debut for “The Avengers,” validating Disney’s acquisition of Marvel Entertainment in 2009.
  • For the quarter ended March 31, Disney reported a profit of $1.14 billion, or $0.63 cents a share, up from $942 million, or $0.49 a share, a year earlier.
  • Revenue grew 6.1% to $9.63 billion, while analysts expected $9.56 billion in revenue.

M&A Activity and More

• Glaxo takes bid for Human Genome hostile:
  • GlaxoSmithKline will offer investors $13 a share as part of a hostile takeover of Human Genome after being rejected by the biotechnology company last month.
  • The bid is 81% above the company’s closing price on April 18, the day before Glaxo first announced the offer.
• Coty raises bid for Avon (Thurs):
  • Hoping to persuade Avon to come to the negotiating table Coty has raised its bid for Avon Products to $10.7 billion.
  • Coty is demanding that Avon begin the process by Monday or risk losing the offer.
  • The new offer represent a 15% increase to Avon’s Thursday closing price.

Interest Rates

• Treasury prices rose on European fears.
• The Two-year Treasury rate was little changed at 0.26%.
• The Five-year Treasury rate fell five basis points to 0.77%, still above the lows seen in January.
• The 10-year Treasury rate dropped four basis points to 1.89%, continuing its struggle to move above 2%.
• The 30-year Treasury rate fell five basis points to 3.07%, slipping below its six-month average of 3.09%.

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