Strong Earnings Balance out an Unstable Europe for a Flat Week

For the week of Monday, November 7, 2011 through Friday, November 11, 2011:

• Standard & Poor’s 500 Index: 0.85%
• Dow Jones Industrial Average: 1.42%
• NASDAQ Composite: -0.28%

The markets ended the week on positive footing, as another chapter of the European debt crisis unfolded. Early this week both the Italian and Greek Prime Ministers resigned, which was seen as positive news. U.S markets were up as earnings season continued, and companies have been posting positive results. However, early Wednesday, interest rates on Italian debt began to rise touching 7.0%, a level that is seen as unsustainable and caused Portugal, Ireland and Spain to seek bailouts. U.S. markets lost just over 3.0% on fears that the European debt crisis was spreading and could drag the world into a recession. The European Central Bank began buying Italian bonds in an effort to push interest rates lower, and so far has been able to control the situation. What remains is for Italy’s new government to take the necessary steps to reign in spending. On Thursday, stock markets rallied, almost erasing Wednesday’s losses. This was due to good news on the home front. Jobless claims fell below 400,000. Cisco posted strong sales that propelled shares and the market higher. As earnings season winds to a close, strong numbers and growth will be needed to maintain the markets’ gains. Hopefully, the employment market continues to improve, so our recovery can gain some steam.

European Financial Crisis

• The Greek and Italian prime ministers both resigned this week.
• Both countries will have to form new consensus governments and pass austerity measures that will help them gradually lower their spending and debt burdens.
• Interest rates on Italian sovereign debt crept up this week, briefly touching 7.0%.
• This sparked fears that contagion has spread from Greece to the world’s eighth largest economy.
  • If Italy cannot pass austerity measures and its economy slows, it could drag Europe, and possibly the world, into a recession.
• The European Central Bank has purchased Italian bonds to control interest rates, but the $2.6 trillion of outstanding Italian debt hangs over Europe.
  • Italy is seen as too big to fail and too big to bail out.
• Hopefully, the new Italian administration can get a hold on the country’s finances.

Jobless Claims

• Initial claims fell to 390,000 from 400,000, which was more than expected.
• Claims from two weeks ago were revised higher to 400,000 from 397,000.
• This is the lowest level since the first quarter that initial claims have fallen below the psychologically important 400,000 level.
• Hopefully, employer confidence has risen enough for companies to retain workers as economic growth continues.
• This is also the quarter where seasonal workers are hired to help with the holidays.
• Next week we will see if consumer confidence has grown, which could bring an increase in demand and economic growth the economy needs

Corporate Earnings:

• Cisco Systems, Inc.  (NASDAQ: CSCO)
  • For the second straight quarter, CSCO posted stronger sales than analysts had expected.
  • Net Income was $1.8 billion, or $0.33 per share; down 8% from $1.9 billion, or $0.34 per share last year.
    • However, excluding certain items, earnings were $0.43 per share, which was $0.03 above expectations.
  • Revenue exceeded expectations by $230 million and grew 5% to $11.3 billion.
  • Revised growth targets are down from 12%-17% to 5%-7%, as a result of changing market conditions.
• Sysco Corporation (NYSE: SYY)
  • Sysco moved slightly higher after reporting earnings for the quarter.
  • The company was able to pass along price increases to consumers and grow income 1.2%.
  • Earnings were $302.7 million or $0.51 per share, beating last year’s $299 million and $0.51 per share.
  • Excluding special costs, earnings were $0.55 per share.
  • Revenue rose to $10.59 billion, a 9% rise.
    • This was mostly due to a 7.3% increase in prices.
• General Motors Company (NYSE: GM)
  • Weak overseas demand in Europe and South America hurt the automaker.
  • Compared to last year, net income was down 15% to $1.7 billion, or $1.03 per share, against $2 billion, or $1.20 per share.
  • GM has continued to remain profitable for the seventh consecutive quarter and managed to beat earnings expectations of $0.94 per share.
  • Shares fell close to 11% on the report.
• Retailers
  • Macy’s (NYSE: M) grew earnings and raised its outlook for the year to $2.70-$2.75, but missed expectations.
    • Online and same-store-sales have helped the retailer grow.
    • However, earnings were $0.08, half of the $0.16 expected.
  • Ralph Lauren (NYSE: RL) reported stronger sales than expected, up 14% for the quarter.
    • Rising material costs and weak consumer confidence have hurt the apparel maker.
    • However, earnings beat estimates of $2.24 per share at $2.46 per share.
    • RL raised forecasts for the year, but missed growth targets for the quarter.
    • Shares dropped on the news.

Interest Rates

• Rates remained flat this week. The biggest move was 2 basis points.
• The two-year Treasury increased one basis point to 0.23%, down roughly 10 basis points this month.
• The five-year Treasury inched up one basis point to 0.89%, down around thirty basis points in the past two weeks.
• The 10-year Treasury dipped one basis point to 2.02%, remaining relatively flat lately.
• The 30-year Treasury yield slipped two basis points to 3.07%, down 0.4% since the beginning of the month.

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