First Down Week in Nearly Two Months

For the week of Monday, August 20, 2012 through Friday, August 24, 2012:

• Standard & Poor’s 500 Index: -0.50%
• Dow Jones Industrial Average: -0.88%
• NASDAQ Composite: -0.22%

The markets ended the week slightly down. Monday was nearly flat as the S&P shed 0.03 points. Tuesday saw the Dow finish with its biggest decline in nearly three weeks.  By Wednesday, investors hoped that the Federal Reserve may act to stimulate the economy, which resulted in a small gain. The minutes released from the last Fed meeting showed they are carefully weighing the cost benefit trade-off of any action. Thursday stocks fell late in the day only to bounce back Friday. Despite the late week rally, the markets saw their first down week in nearly two months.

Economic Data

• MBA Mortgage Applications Survey:
  • The mortgage applications composite index fell 7.4% in the week ending August 17, because of a drop of 9.2% in the refinance index.
  • The purchase index rose by 0.9% breaking its month of no gains.
• Existing Home Sales:
  • Existing-home sales increased 2.3% to 4.47 million annualized units in July.
    • The expected gain was still below expectations.
  • Home sales remain where they were just a few months ago as July’s gains did not cover the declines of June.
  • Inventory remained stable at 6.4 months of inventory.
    • The available homes for sale number remain unchanged from last month.
    • The number is down 21% from a year ago, likely a result of fewer distressed listings.
  • Median existing-house prices rose 9.4% year-to-year.
• New Home Sales:
  • New single-family home sales rose 3.6% month-over-month in July to 372,000.
    • This was above expectations 368,000.
  • July new-home sales were 25.3% higher over the year.
  • The Census Bureau revised June’s new home sales figure from 350,000 to 359,000.
  • The months of available supply fell to 4.6 and remains historically low.
  • The median single-family house price in July was $224,200, down approximately 2.4% over the year.

Earnings

• Lowe’s Companies Inc. (NYSE: LOW):
  • The nation’s second largest home improvement retailer cut its full-year-earnings and revenue forecasts after reporting second quarter net income fell 10%.
    • Revenue at stores opened at least a year fell 0.4%.
    • Results were hurt, in part, by a timing shift in how the retailer reported the quarter and a charge tied to job cuts.
    • The latest performance shows the company’s efforts to revamp its merchandise and prices aren’t working.
  • Lowe’s earned $747 million, or $0.64 per share, for the period, down from $830 million, or $0.64 per share, a year ago.
    • Removing a charge tied to previously announced job cuts and the affect of the timing shift, earnings were $0.68 per share.
  • Revenue fell 2% to $14.25 billion from $14.54 billion.
    • Analysts expected earnings of $0.70 per share on revenue of $14.44 billion.
• Guess Inc. (NYSE: GES):
  • Guess Inc. said net income fell 29% to $42.9 million for the fiscal second quarter.
    • Earnings were $0.49 per share, falling short of analysts’ expectations of $0.51 per share.
  • Revenue of $635.4 million beat the $629.9 million expected by analysts, but was down 6% compared to a year ago.
    • The biggest weakness was in southern Europe, though North America was also underwhelming.
    • Revenue fell more than 14% in Europe, and 3% in North America retail locations.
    • The company also had to set aside money for a “bad debt provision” related to its Greek distributor.
  • The operating margin also fell, partly because the company had to spend more on advertising and marketing.
  • Guess revised revenue to $2.62 billion to $2.65 billion, down from the May estimate of $2.7 billion to $2.74 billion.
    • Earnings were also revised to, $2.15—$2.30, down from the estimate of $2.50—$2.65.
    • The company also lowered its operating margin expectations.
    • Analysts expect a full-year profit of $2.64 per share and sales of $2.7 billion, on average.

M&A Activity and More

• Aetna Agrees to Coventry Acquisition:
  • In the biggest managed healthcare acquisition, since the Affordable Care Act was signed into law, Aetna announced it would buy Coventry Health Care for about $5.7 billion in cash and stocks.
  • Aetna will pay $27.30 in cash and 0.3885 of a share for each of Coventry’s shares.
    • This amounts to $42.08, a 20% premium over Coventry’s closing price last week.
  • Coventry offers a variety of insurance services, including government-financed programs.
    • It earned $543.1 million last year on revenue of $12.2 billion.
  • Aetna said the deal was expected to close by the middle of next year, and would lead to around $400 million of annual cost savings by 2015.

Interest Rates

• Treasuries extended gains, as Federal Open Market Committee minutes showed many policy makers backed more monetary easing soon.
  • The two-year treasury rate fell three basis points to 0.27%.
  • The five-year treasury rate fell 12 basis points to 0.70%.
  • The 10-year Treasury rate fell 14 basis points to yield 1.70%.
    • This was almost 20 basis points below the three-month high it touched last week.
  • The 30-year Treasury yield fell 14 basis points as well to yield of 2.81%, and is now below the six-month average.

 Disclosures

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