Down Week Rallies on Friday’s Jobs Report

For the week of Monday, July 30, 2012 through Friday, August 3, 2012:

• Standard & Poor’s 500 Index: 0.36%
• Dow Jones Industrial Average: 0.16%
• NASDAQ Composite: 0.33%

Despite ending the prior week with its biggest three-day point gain of the year, the Dow Jones Industrial Average treaded into negative territory on Monday. Tuesday the Dow fell, as investors looked past a host of positive economic signals and ahead to the Federal Reserve’s policy-setting statement. U.S. stocks experienced a tumultuous day of trading Wednesday, as investors were whipsawed by the latest Federal Reserve policy statement and a raft of trading irregularities.

On Thursday, U.S. stocks opened lower, as the European Central Bank’s latest measures to address the eurozone’s debt crisis fell short of expectations. The Dow declined sharply moments after the opening bell. ECB President, Mario Draghi, pledged to draw up a set of unconventional measures to preserve the euro, but his comments disappointed investors looking for more concrete plans. The central bank left key rates unchanged, as expected.

However, on Friday, a better-than-expected jobs report fueled the rally. The Dow was up and had one of its best days in more than a month.

Economic Data

• Chain Store Sales Snapshot:
  • The chain store sales index tumbled 1.7% in the latest week, breaking its six-week run without a decline.
  • Warmer than normal temperatures in the eastern two-thirds of the nation remained a support to sales as gasoline prices rose modestly, undermining sales.
  • Year-over-year growth slowed to 1.8%, the slowest in four weeks.
    • This was well below the year-to-date average.
• Conference Board Consumer Confidence:
  • With an upside surprise the Conference Board Index of Consumer Confidence reported adding 3.2 points to 65.9 from an upwardly revised 62.7.
  • Consumers were noticeably more optimistic about future conditions.
  • Consumers were slightly less confident in present conditions in July.
• Federal Open Market Committee Meeting (FOMC):
  • Although only a small move was expected, the FOMC decided to maintain the current status.
  • There was a strong case for changing the rate guidance, as the Fed’s forecast for growth and inflation already appeared optimistic.
  • The Fed’s statement shows policymakers are not pleased with the recovery.
    • They downplayed some of the improvement in the housing market.
  • The odds of the Fed launching a third round of quantitative easing in September are lower.
• Jobless Claims:
  • Jobless claims rose higher but not as much as expected.
  • The underlying trend has been somewhat difficult to define in recent weeks.
    • The claims data have been obscured by difficult seasonal adjustment from auto plant retooling.
  • Initial claims rose 8,000 to 365,000 for the week ending July 28.
  • The prior week’s data were revised from 353,000 to 357,000.
• Factory Orders:
  • Manufactured goods orders were down 0.5% in June, below expectation.
  • Durable goods orders were revised down to 1.3%.
    • Shipments of durable goods were revised down 0.1%.
    • Unfilled orders grew 0.3%, while inventories rose 0.1%.
  • Core capital goods orders show a 1.7% decrease after a downward revision.
    • Revisions to core capital goods data were negative.
    • Shipments were also revised down, showing 1.0% growth.
  • The report proved weaker than consensus forecast, while the downward revisions to core capital goods data were a weak close to a lackluster second quarter.

Earnings

• Archer Daniels Midland Company (NYSE: ADM)
  • Archer Daniels Midland Co. reported a fourth-quarter profit that missed analysts’ estimates.
  • Net income fell to $284 million, from $381 million, a year earlier.
  • Profit excluding an inventory credit was $0.38 a share, less than the $0.58 estimate average.
  • Profit fell in all three of ADM’s main units.
  • Profit in the agricultural-services segment, which buys, stores and sells crops, dropped 64 percent to $123 million as a result of lower U.S. supplies and exports.
• Coach Inc. (NYSE: COH)
  • Affordable luxury retailer Coach’s stock crashed by roughly 19%, after the disclosure of fiscal fourth quarter 2012 sales results.
    • The decline was a result of its North American comparable sales growth missing market expectations.
    • We believe the increasing competition in the handbags category, particularly from Michael Kors Holdings, and an ill-timed move to eliminate coupons from its U.S. factory stores were the primary reasons behind this decline.
  • Revenue increased 13% to $1.16 billion from $1.03 billion, but fell short of the $1.2 billion that analysts predicted.
  • For the period ended June 30, Coach’s net income rose 24% to $251.4 million, from $202.5 million, a year earlier.
  • The performance topped the Wall Street forecast, with Coach’s full-year earnings climbing to $1.04 billion, or $3.53 per share.
    In the previous year, the company earned $880.8 million, or $2.92 per share.
• Cummins Inc. (NYSE: CMI)
  • Cummins Inc. provided an earnings surprise in its earnings release for the second quarter.
  • CMI reported a profit of $464 million.
    • The reported revenues, even though in line with estimates, fell on a year-over-year basis.
    • Same is the case for profits, which declined by 8.6% year-over-year.
• IntercontinentalExchange Inc. (NYSE: ICE)
  • IntercontinentalExchange Inc., reported second-quarter profits jumped 17.8%, thanks to strong trading volume in its energy futures markets.
  • ICE reported net income of $143.1 million, or $1.95 per share, up from $121.4 million, or $1.64 per share, last year.
  • Revenue increased 8% to $351.2 million from $325.2 million.
  • Analysts expected earnings of $1.93 per share on revenue of $350.3 million.
• Teva Pharmaceutical Industries Ltd. (NYSE: TEVA)
  • Teva Pharmaceutical Industries posted higher quarterly net profit that met expectations.
    • The launch of new generic drugs in the United States and an increase in sales of branded drugs helped the the world’s biggest generic drug maker.
    • Teva earned $1.28 per share, excluding one-time items, compared with $1.10 a year earlier.
    • Revenue rose 19% to $5 billion.

Trading Mishap to Cost Knight Capital $440 Million:

• The Knight Capital Group announced on Thursday that it lost $440 million when it sold all the stocks it accidentally bought Wednesday morning as a result of a computer glitch.
• The losses are threatening the stability of the firm.
• In its statement, Knight Capital said its capital base (money it uses to conduct its business) had been “severely impacted” by the event, and that it was “actively pursuing its strategic and financing alternatives.”
• The losses are greater than the company’s revenue in the second quarter of this year, when it brought in $289 million.

Interest Rates

• Treasury rates came off the previous week’s historical lows, but still remain suppressed.
  • The two-year Treasury rate held flat at 0.22%.
  • The five-year Treasury rate rose three basis points to 0.603%.
  • The 10-year Treasury rate rose almost seven basis points to 1.49%; however, it was still trading below the one-year average.
  • The 30-year Treasury yield rose nine basis points to 2.57%, still near historical lows.

Disclosures

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