Stocks Tumble on Shaky Opening of Earnings Season

Markets

For the week of Monday, October 8, 2012 through Friday, October 12, 2012:

• Standard & Poor’s 500 Index: -2.21%
• Dow Jones Industrial Average: -2.07%
• NASDAQ Composite: -2.94%

The markets took a tumble in the past week. On Monday, U.S. stocks followed overseas markets lower, as investors fretted over a sluggish earnings outlook, debt-laden Europe and China’s slowing economy.  Stocks continued their downward descent after a disheartening economic-growth forecast from the International Monetary Fund on Tuesday, and a disappointing start to corporate earnings season on Wednesday. Downbeat comments from aluminum producer Alcoa and oil giant Chevron set the tone for the day and confirmed what many investors and analysts had feared: The third quarter was weak and the outlook isn’t much better. The markets traded relatively flat late in the week, unable to recoup its losses from earlier.

One of the week’s most talked about economic releases actually came last Friday—the September Employment Situation numbers. The report from the Bureau of labor statistics surprised many, showing 114,000 jobs were added in September, July’s and August’s numbers were revised to show an increase of 181,000 and 142,000, respectively, and most significantly, the unemployment rate fell to 7.8%. The question asked by nearly everyone was “How does adding 114,000 jobs remove 456,000 individuals from the rolls of unemployment?” Looking deeper into the report, we see a mixed bag of data. The labor force participation rate remained steady, with the civilian labor force rising by 418,000 and involuntary part-time workers increased by 600,000. The decline of discouraged workers may be the only reasonable explanation for the decrease in unemployment. About 235,000 fewer discouraged workers were accounted for in September. However, between the revisions and the smaller labor pool, there are still 21,000 jobs unaccounted for in the September report.

Economic Data

• Chain Store Sales Snapshot:
  • The Chain Store Sales Index moved up just 0.2%, similar to the slow movement of the last several weeks.
  • Customer traffic weakened compared to last year, but unlike last week there were positive signs in some areas, such as, department stores, wholesale clubs and drug stores.
  • Year-over-year growth slumped to 2.8%, as the index fell slightly in the comparable week last year.
• MBA Mortgage Applications Survey:
  • The mortgage applications composite index fell by 1.2%, as a result of a 2% decline in the refinance
  • index.
  • Purchase activity was up for the third consecutive week, by 2.4% this week. .
• Wholesale Trade:
  • Wholesale inventories were in line with forecast rising 0.5% in August.
  • The inventories-to-sales ratio moved from 1.21 in July to 1.2 in August.
• Beige Book:
  • The Federal Reserve’s Beige Book report, which covered the period from the middle of August to late
  • September, showed that economic activity generally expanded modestly across most Federal Reserve districts.
  • Signs of slowing or mixed growth were less evident than in the previous report.
• Jobless Claims:
  • Initial claims for unemployment fell 30,000 in the last week, to 339,000, this was more than expected and a post-recession low.
  • The four-week moving average fell from a revised 375,500 to 364,000.

Earnings

• Alcoa, Inc. (NYSE: AA)
  • Alcoa reported earnings that beat estimates, which is generally considered a good sign for the stock market.
    • The aluminum maker reported earnings of $0.03 a share, excluding items, beating expectations.
    • Revenue also topped consensus, at $5.8 billion vs. $5.54 billion analyst expected.
  • Including one-time items, Alcoa posted a loss of $143 million, or $0.13 a share, compared with a year-earlier profit of $172 million, or $0.15 cents a share.
  • Revenue slipped 9.1% to $5.83 billion.
• Yum! Brands, Inc. (NYSE: YUM)
  • Yum Brands’ profit show continued U.S. growth, as they reported a 23% increase in profit.
    • Yum reported a profit of $471 million or $1 a share, compared to $383 million or $0.80 a share, a year ago.
    • Revenue rose to $3.57 billion.
  • After struggling domestically last year, Yum Brands is beginning to showing signs of a comeback in the oversaturated, depressed U.S. marketplace.
    • Taco Bell’s U.S. same-store sales rose 7% in the latest quarter, compared with a 6% increase at Pizza Hut and a 4% boost at KFC.
  • Yum Brands’ China business, which is primarily comprised of KFC and Pizza Hut Casual Dining, has been crucial for the company, contributing nearly half of its total profit.
    • The segment posted 6% higher same-store sales, continuing a recent trend of slower growth in China, which in past quarters reported same-store sales growth of about 20%.

M&A Activity and More:

• Softbank Corp. to buy majority stake in Sprint Nextel Corp.:
  • Japanese mobile carrier Softbank Corp. is in talks to buy at least a two-thirds stake in U.S. wireless carrier Sprint Nextel Corp.
  • This could be the second major acquisition deal in the U.S. telecommunications industry this month.
  • The deal is expected to exceed 1 trillion yen, or roughly $13 billion, in value.

Interest Rates

• Treasury prices remained relatively flat over the last week.
  • The two-year Treasury rate rose one basis point to 0.27%.
  • The five-year Treasury rate also rose just one basis point to 0.69%, remaining below 0.82% hit in August.
  • The 10-year Treasury rate slid two basis points to 1.73%, still above the 6-month average of 1.69%.
  • The 30-year Treasury yield fell four basis points to 2.93%, now in-line with its 2012 average.

Disclosures

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