Greek Drama Set Stage for a Down Week Despite Strong Earnings Stateside

For the week of Monday, October 31, 2011 through Friday, November 4, 2011

• Standard & Poor’s 500 Index: -2.48%
• Dow Jones Industrial Average: -2.03%
• NASDAQ Composite: -1.86%

Making history in the month of October, the Dow Jones Industrial Average finished the month with a gain of 9.5%, despite the market falling 2.3% on the final day of the month. In the 115-year history of the DJIA, only two months have posted larger percentage gains. Causing trouble this week, Greece threatened to hold a referendum vote on the bailout package offered by Euro member nations. The gloves came off, and Greece was given an ultimatum that could have ended with its exit from the eurozone. Greece caved on Thursday, while the European Central Bank cut interest rates by 0.25% to 1.25%. On this side of the Atlantic, markets rebounded Wednesday. The Federal Reserve released notes from the Federal Open Market Committee Meeting. The Fed remains committed to keep rates low for an extended period, and will take necessary steps to encourage growth in the economy. Earnings season continues with strong numbers being reported, with 70% of companies having met or exceeded earnings expectations.

European Financial Crisis

• Greek Prime Minister George Papandreou held both European and world markets hostage this week with political posturing.
• He called for a referendum vote in Greece on whether Greeks would accept the write-down of debt and austerity measures being forced on them by powerful European nations.
  • This caused fear and sell-offs in world markets.
• Greece was countered with an ultimatum: Accept the deal, or leave the eurozone.
• The Greeks caved, and Papandreou admitted that the political move was designed to build support for the bailouts within Greece.
• For a few days, the world was wondering what the fallout would have been if Greece had left the eurozone and defaulted on its debt.
• Hopefully, this will be the beginning of the end of the European financial fiasco, but Italy now comes into question.

Economic Data

• Jobless Claims
  • Initial claims fell to 397,000, a drop of 9,000.
    • We have dipped to less than 400,000, which is an important threshold.
  • Claims from two weeks ago were revised higher from 402,000 to 406,000.
  • ADP reported that the private sector added 110,000 jobs last month.
    • ADP tends to have higher estimates than the actual numbers.
  • Unemployment is expected to remain fairly constant at 9.0 or 9.1%.
• Federal Open Market Committee Minutes
  • The Fed will keep monetary policy unchanged to support economic growth and continue to roll short-term securities into long-term securities to keep long-term rates low.
    • The Fed funds rate will remain unchanged.
  • The Fed believes that high unemployment remains a concern for the economy.
  • However, they feel that inflation is less of a threat and will wane.
  • Again, the Fed sees some downside risk to the economy.
  • There was only one dissenting member this month, who favored a looser monetary policy.

Corporate News/Earnings:

• S&P 500 companies are closing in on the $100 earnings mark, an enormous milestone for the index.
  • Of companies that have reported for the previous quarter:
    • 70% have met or beaten expectations;
    • Analysts expected 11% growth in top-line revenue and 12% growth in earnings, and
    • Reports indicate an average of 12% top-line growth and 18% growth in earnings.
• MF Global Holdings Ltd. (NYSE: MF)
  • MF, run by former New Jersey Governor and Goldman Sachs CEO Jon Corzine, filed for bankruptcy protection on Monday.
  • The company took large positions in European sovereign debt.
    • Those proved disastrous.
  • Shares fell 71% in October, and are down 86% year-to-date.
  • Interactive Brokers Group has a tentative deal to purchase MF assets.
  • An investigation is pending concerning the comingling of client accounts with corporate accounts.
• Honda Motor CO., LTD. (ADR) (NYSE: HMC)
  • HMC has faced an uphill battle since the Japanese earthquake and tsunami.
  • The company was dealt another blow with flooding in Thailand where parts suppliers and assembly lines are located.
    • This is on top of an appreciating yen.
  • For the quarter, profit fell 56% to $788 million.
  • Sales are 16.3% lower than last year, and North American sales fell 22.3%.
  • The only areas with an increase in sales were South America, Africa and the Middle East.
  • Shares fell 8.1% on the news.
• Kraft Foods Inc. (NYSE: KFT)
  • KFT increased profit for the quarter by 22% through price increases, which helped offset higher costs.
  • Earnings were $922 million, or $0.52 per share, beating last years $754 million, or $0.43 per share.
    • Adjusted for costs related to the acquisition of Cadbury, earnings were $0.58 per share.
  • Sales increased 12% to $13.23 billion, which beat estimate of $12.8 billion and $0.55 per share adjusted earnings.
  • Most of the sales growth increases were developing markets, India and Brazil.
  • Outlook for the year has been raised from earnings per share of $2.25 to $2.27.
  • Shares rose 2.5% on Thursday following the release.
• IntercontinentalExchange. Inc (NYSE: ICE)
  • ICE reported a 38% increase in quarterly profit.
  • Net income rose to $133 million from $96.3 million last year.
    • Analysts expected $1.77 per share earnings.
    • Adjusted for acquisition, related costs earnings were $1.87 per share.
  • Over-the-counter trading and futures energy trading led the increases.
  • This coupled with an increase in trading volume of 28% in the London-based ICE Futures Europe fueled the growth.
  • Shares retreated a small 0.5% on the news.
• MasterCard Incorporated (NYSE: MA)
  • Despite an onslaught of financial regulation, MA boosted profit 38% for the quarter.
  • The growth was due to increasing the banks that offer MA debit cards and new overseas transaction processing deals.
  • MasterCard’s net income of $717 million, or $5.63 per share, came as a result of $1.8 billion in revenue.
  • Analysts expected $4.81per share on 1.7 billion in revenue.
  • Shares shot up 7% on the report.

Interest Rates

• The two-year Treasury slid six basis points to 0.23%, reversing slow increases as investors flock to the safety of the dollar and U.S. Treasuries.
• The five-year Treasury fell 21 basis points to 0.92%, undoing the slow upward recent trend.
• The 10-year Treasury plunged 27 basis points to 2.04%, remaining above the lows in September.
• The 30-year Treasury yield dove 29 basis points to 3.08%, another reversal because of safe-haven buying.

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