Earning Season Could Potentially Turn the Markets Around

For the week of Monday, July 9, 2012 through Friday, July 13, 2012:

  • Standard & Poor’s 500 Index: 0.16%
  • Dow Jones Industrial Average: 0.04%
  • NASDAQ Composite: -0.98%

The markets ended mixed, after spending much of the week in negative territory. The markets started the week with its third down session, as investors were nervous about Europe’s debt crisis, economic slowdown in China and the onset of domestic earnings season. The Industrials, Technology and Materials sectors were down for the week. Wednesday’s release of the Fed’s minutes from the June policy meeting did not encourage investors, because there were few signs the central bank would take steps toward another round of quantitative easing.  We feel this discourages businesses to spend. Stocks saw a positive day on Friday on optimism of a Chinese stimulus measure, and much larger than expected earnings from J.P. Morgan Chase Co. (NYSE: JPM).

What may move the market will be a stronger than expected earnings season. However, we are not pleased with the few companies that have shocked the market with lower earnings, without lowering their guidance. We feel this is a bad trend, and hope it doesn’t continue.

Economic Data

  • Chain Store Sales Snapshot:
    • The International Council of Shopping Centers’ Chain Store Sales Index rose 2% in the latest week thanks to less stormy weather.
      • For the first time in three weeks the year-over-year growth is up to 3%.
      • Discounters and grocery stores seemed to do well during the week.
  • MBA Mortgage Applications Survey:
    • A 3.4% drop in the refinance index aided a 2.1% decline in the mortgage applications composite index for the week ending July 6.
      • This occurred despite a decline in interest rates.
      • The purchase index gained 3.3%, which was a reversal from the previous week.
  • International Trade:
    • The U.S. trade deficit narrowed $1.9 billion to -$48.7 billion in May, reflecting a 0.2% rise in exports and a 0.7% decline in imports.
    • The reduction is partly as a result of price.
      • The real goods balance improved a modest $700 million to -$48 billion.
    • Even with the narrowing trade deficit, it looks like foreign trade will be a slight drag on growth in the second quarter.
  • Wholesale Trade:
    • Wholesale inventories climbed 0.3% in May, although the forecast was for a 0.4% increase.
      • This is also lower than the 0.5% inventory build in April.
      • The inventory-to-sales ratio climbed from 1.17 to 1.18.
  • Jobless Claims:
    • Jobless claims dropped to their lowest level since March 2008, much more than expected for the week.
    • The gain should be interpreted with caution
      • Seasonal factors are difficult to measure at this time of year because of the July Fourth holiday and variable timing, and
      • The magnitude of auto plant summertime shutdowns.
    • Initial claims decreased by 26,000 to 350,000 for the week ending July 7.
    • The prior week’s data were revised from 374,000 to 376,000.
    • Continuing claims decreased in the prior week.
  • Federal Open Market Committee Minutes:
    • The June 19-20 meeting minutes showed policymakers are nervous, but there were few signs that additional aggressive monetary stimulus easing is imminent.
    • This will disappoint financial markets, but it is important to place the minutes in the context of three weeks ago, as concerns about the severity and duration of the summer slump have intensified.
      • The odds of additional easing are likely higher than the minutes suggest.
      • Incoming data hasn’t been encouraging, giving the Fed’s dovish wing more ammunition.
    • We still expect a third round of quantitative easing this year, and odds are better than ever that it occurs at the next meeting.

Earnings

  • Alcoa Inc.:
    • Alcoa Inc. reported a second quarter loss of $2 million, or less than a penny a share, compared with a year-earlier profit of $322 million, or $0.28 a share.
    • Although shipments of aluminum products rose 2.9%, declining aluminum prices combined with one-time charges hit the company’s bottom line.
    • Alcoa’s results have been hurt in recent quarters as aluminum prices have fallen hard.
    • This is as a result of weak demand in Europe, global uncertainties, excessive production, and higher raw material costs.
    • Analysts expected Alcoa to report a profit of $0.05 per share on revenue of $5.81 billion.
  • Cummins Inc.:
    • Cummins Inc lowered its full-year sales forecast on Tuesday, citing:
      • Weaker U.S. orders of truck and power generation customers;
      • Lighter demand in emerging markets, and
      • A stronger dollar.
    • The company now expects second-quarter sales of about $4.45 billion and full-year sales closer to 2011 rather than the 10 percent forecasted earlier.
    • Analysts expected second-quarter sales of $5.1 billion and 2012 sales of just under $20 billion.

Interest Rates

  • Treasury prices rose higher, as concerns over the strength of the global economy weighed on investors.
    • The two-year Treasury rate fell three basis points to 0.26%.
    • The five-year Treasury rate slid nearly five basis points to yield 0.62%
    • The 10-year Treasury rate tumbled 11 basis points to 1.48% , which is 0.03% above the all time low of 1.45%.
    • The 30-year Treasury yield fell 14 basis points to 2.57%, nearing its 2012 low of 2.52%.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

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