Solid Start to Earnings Season Cannot Shake European Concerns

For the week of Monday, July 16, 2012 through Friday, July 20, 2012:

• Standard & Poor’s 500 Index: 0.43%
• Dow Jones Industrial Average: 0.36%
• NASDAQ Composite: 0.58%

Despite not so hot economic news, earnings provided a pleasant surprise for the market for most of the week. June’s drop in retail sales provided a fresh sign of weakness in the U.S. economy. About 88 companies have reported, and nearly two-thirds have beat expectations. However, while earnings matter, we proceed with caution, as we suspect there will be some bad news. We hope that The Street will have expected worse, and the misses will not affect the little momentum the markets have. Banks also reported that commercial lending is increasing.

While slightly up for the week, the markets closed lower on Friday, following a retreat by European equity markets. Europe remains worried about Spain’s debt levels and the outlook for the global economy. Friday’s selling pared gains won earlier in the week.

Economic Data

• Retail Sales:
  • Retail sales fell 0.5% in June:
    • Excluding autos, sales fell 0.4% for the second consecutive month;
    • Declines were broad based;
    • Gasoline station sales led the decline, and
    • Core sales, excluding gasoline stations and auto dealers, posted the third consecutive monthly decline.
  • The only bright spot was non-store retailers, but even their sales lagged recent trends.
  • Year-over-year growth fell to 3.8%, below 4% for the first time since August 2010.
• Chain Store Sales Snapshot:
  • The chain store sales index was unchanged, sustaining the prior week’s large gain.
    • This maintains five weeks without a decline.
  • Hot weather continued to support sales.
  • Year-over-year growth slowed to 2.6%.
• Consumer Price Index:
  • The consumer price index was unchanged in June.
    • This was the third straight month the index has had no positive change.
  • Lower energy prices dominated another uptick in the food index.
  • The core CPI maintained its 0.2% increase rate from the past several months, but strength was isolated.
• Industrial Production:
  • Industrial production increased 0.4% in June, which was better than expected.
  • Manufacturing and mining output advanced 0.7%.
  • Utilities production dropped 1.9%.
  • Overall manufacturing output slowed to a 1.4% annualized rate in the second quarter, with manufacturing, excluding motor vehicles and parts, registering a scant 0.1% gain.
• MBA Mortgage Applications Survey:
  • The mortgage applications composite index jumped 16.9%, led by a rebound in refinance applications.
  • The refinance index spiked 21.6%, after a three-week long losing streak.
  • Mortgage interest rates declined.
  • The 30-year fixed mortgage rate hit a record low.
• Housing Starts:
  • Housing starts rose 6.9% to 760,000 annualized units in June.
  • May’s housing starts were revised higher to 711,000 annualized units.
  • Leading indicators softened in June, as permits were 755,000 annualized units.
    • This was down 3.7% from May.
  • Completions rose 2.6% between May and June.
  • Residential construction should contribute positively to second quarter growth, but GDP is tracking a paltry 1.3%, annualized.

Earnings

• Citigroup, Inc. (NYSE: C)
  • Citigroup reported earnings of $0.95 a share on $18.6 billion in revenue, or excluding extraordinary items, $1.00 per share on $18.8 billion in revenue.
  • Profits were down 2%, but still exceeded analyst’s expectations of $0.88 per share.
  • Revenue was short of the expectations of $19.6 billion, down 7% from a year ago.
  • Net income was $2.9 billion, 12% below the year ago period.
  • The bank released $984 million in loan loss reserves in the second quarter.
    • This provided a big boost to earnings, but 50% less than the year before.
• Intel Corporation (NASDAQ: INTC)
  • Intel Corp. reported a 4% drop in second-quarter profit and lowered its financial guidance for the year.
    • The company cited a weak demand for personal computers affecting many companies in the technology sector.
  • Net income was $2.83 billion, down from $2.95 billion a year ago.
  • On a per-share basis, earnings were flat at $0.54 on fewer shares outstanding in the most recent period.
  • Revenue rose to $13.5 billion from $13.0 billion.
• EMC Corporation (NYSE: EMC)
  • EMC Corp. pre-announced earnings on Tuesday ahead of its July 24 official release.
  • The company stated that non-GAAP earnings per share were $0.39 per share, up 11% from a year ago.
  • Revenue rose 10% to $5.31 billion.
  • EMC reinforced the guidance of $22 billion in revenue for the year and earnings per share of $1.70.
• PNC Financial Services (NYSE: PNC)
  • PNC said net income fell 40%.
  • Per-share earnings, excluding one-time items other than the mortgage costs, were $1.20.
    • This was $0.02 less than analyst’s estimates.
  • Net income dropped to $546 million, or $0.98 per share, from $912 million, or $1.67 per share, a year earlier.
    • A $438 million pretax provision related to mortgage putbacks contributed to reduced earnings.
  • Total loans jumped 20% to $180.4 billion, led by commercial lending.
• International Business Machines Corp. (NYSE: IBM)
  • IBM sustained its nearly decade-long streak of earnings growth.
  • The company reported earnings per share, excluding one-time items, of $3.51.
    • This was above analyst estimates of $3.42 and up 14% from the year-earlier quarter.
  • Revenue fell 3% to $25.8 billion, short of the $26.3 billion analysts expected.
    • Revenue in Brazil, Russia, India and China, rose 5% over last year.
    • Revenue in its global technology services fell 2% to $10 billion.
  • IBM’s services backlog, a sign of future sales, fell 6% to $136 billion.
  • IBM raised its 2012 earnings per share guidance to at least $15.10 from $15, compared to $13.44 in 2011.
• Qualcomm, Inc. (NASDAQ: QCOM)
  • Despite a disappointing near-term forecast, Qualcomm, Inc. got a boost late Wednesday from investors banking heavily on a recovery in key chipset supplies, as well as high-profile smartphones coming to the market later in the year.
  • QUALCOMM posted $0.69 per share and revenues of $4.63 billion, both below expectations.
    • Analysts were expecting $0.77 cents per share and revenues of $4.68 billion.
  • The company’s net income for the quarter rose 16.6% to $1.21 billion.
  • Fourth-quarter profit should be $0.62 cents to $0.68 cents a share on sales of $4.45 billion to $4.85 billion.
    • Analysts were projecting profit of $0.76 a share and sales of $4.89 billion.
• V.F. Corporation (NYSE: VFC)
  • VF Corporation reported second quarter revenues rose 16% to $2.1 billion, up from $1.8 billion a year ago.
  • Revenues increased to $4.7 billion up 24% for the first half of the year, versus $3.8 billion in the first half of 2011.
  • The increase reflects growth in every division and a contribution of $595 million from Timberland, which VF bought for $2 billion last year.

Interest Rates

• Treasury rates were mixed as yields rose at the longer end of the yield curve and fell to new 2012 lows at the shorter end.
  • The two-year Treasury rate fell four basis points to 0.21%, a new 2012 low.
  • The five-year Treasury rate slid almost three basis points, also reaching a new low for the year at 0.59%.
  • The 10-year Treasury rate ticked up two basis points to 1.49%, but is still near historical lows.
  • The 30-year Treasury yield gained three basis points to 2.56% in the latest week.

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.