Friday, October 26, 2012

Market Week Wrap-up

GDP Soars As Earnings Swoon

- The S&P500 fell to seven-week lows on Friday as the disappointing September quarter earnings season rolled on. There were a few standout sectors, such as the aerospace industry, and Facebook finally gained some ground on decent earnings, but by and large the tone out of corporate America was sour and hesitant. Contrast this with the advance Q3 GDP reading of +2.0%, up from the +1.5% pace seen in Q2. Some analysts quibbled that the big contributors to the better number were government spending and residential fixed expenditures, with only a slight pickup in consumer demand. In Asia, China's NDRC was said to be preparing a new round of fiscal stimulus to coincide with the leadership transition next month. In Japan, the cabinet approved a ¥750B stimulus spending package from central and regional governments. The FOMC met and issued a policy statement that was largely a repeat of last month's statement, pledging 'QE-infinity' and "exceptionally low levels at least through mid-2015," albeit with an acknowledgement of inflation picking up and household spending "advancing a bit more quickly." For the week the DJIA fell 1.8%, the S&P500 was down 1.5%, and the tech-heavy Nasdaq lost 0.6% as major tech names reported weak earnings.

- Tech industry darlings Apple, Amazon and Google offered perplexing quarterly results: headline numbers from Google and Apple missed expectations, while Amazon reported its first quarterly loss in years. Apple and Amazon offered very cautious guidance. Apple's weaker margins were a big focus, although the firm said they were mostly due to the large number of product launches and refreshes over recent months. Apple's iPhone shipments met expectations, although iPad shipments were a bit soft. Google saw a big decline in the key "cost per click" metric, indicating falling prices for its advertising. On the flip side, tech industry whipping boy Facebook saw its best single-session advance in its brief history as a publicly traded company post earnings, thanks mostly to the 61% y/y growth seen in the firm's mobile users. There was also enthusiasm for new momentum in the firm's mobile advertising business.

- Microsoft officially launched its new Surface Windows 8 tablet. The new system is a radical rethink of the way that users interact with computers, and there has been both praise and criticism for the approach from tech industry journalists. With the launch, Microsoft is diving head first into the hardware manufacturing segment. Much of Microsoft's thunder was stolen by Apple's new iPad mini product, which was also launched this week, along with an iPad refresh and a new 13" MacBook Pro. Analysts seemed to believe the pricing of the new iPad mini was a bit steep (the device starts at $329, compared to base prices for similar Google and Amazon products around $200).

- AT&T's headline numbers met expectations, however investors were concerned by what they saw in the firm's operating metrics. Net adds were down sharply on a y/y basis and margins were lower. iPhone activations were up, although the well-known supply constraints affecting the iPhone 5 held back the impact of the device's launch; recall iPhone 5 was only available for the last 10 days of the quarter. Sprint's quarterly loss was half the expected amount, although they firm's wireless net adds contracted on y/y basis.

- Caterpillar cut its FY12 forecast for the second time this year in its Q3 report and offered a downbeat look at its initial view of FY13 revenue. Executives warned that lower production and temporary shutdowns would continue until demand rebounded. With regard to 2013, Caterpillar is not expecting rapid growth or a global recession but is taking a pragmatic view. The company said the US business is picking up and China is on the edge of a recovery.

- Aerospace and defense names did very well in Q3, despite the looming battle over the fiscal cliff and budget "sequester." Boeing, Lockheed, Northrop Grumman and United Technologies all had excellent quarters, and all except UTX hiked FY12 guidance. Boeing executives were very upbeat, saying that the strong jet order environment to continue through the year. General Dynamics was the exception, missing targets as profits fell nearly 10% y/y. Generally the firms were cautiously optimistic about a resolution to the fiscal cliff in Washington, though they noted contingency plans were in place. Lockheed noted that its preliminary outlook for 2013 is premised on the assumption that sequestration does not occur, while GD warned that budget uncertainty was affecting government orders in shorter-cycle operations in the September quarter.

- Chemicals and materials names Dupont, Dow and 3M had terrible quarters. DuPont and 3M cut FY12 guidance forecasts. Sales volumes in all of DuPont's major markets fell, and the firm said it would cut around 2% of its workforce as a consequence. Dow announced a 5% workforce reduction to control costs in the midst of persistently slow macroeconomic growth. 3M stated that there were no indications that Q4 would be dramatically different from Q3, with business conditions expected to remain challenging for rest of the year. All three firms faced pricing issues: Dow's profits fell nearly 40% y/y as prices declined 9% y/y, although the company said some units saw double-digit declines.

- Analysts assume that the chances Canada would approve Cnooc's bid to acquire Nexen diminished after the Canadian government rejected the Petronas-Progress Energy deal on a preliminary basis. The government warned that the deal would not provide the "net benefit" for the country required by Canada's foreign investment laws. Analysts warned that the decision bodes ill for Cnooc, while others pointed out that while both Cnooc and Petronas are state-owned, Cnooc at least is more transparent as it is publically traded, and Canada has a foreign investment pact with China.

- EUR/USD remains well within the range seen since mid September, and this week trended from 1.3090 to as low as 1.2880. Spain has not yet requested a sovereign aid package, and there were plenty of concerning headlines out of the country, including a shocking record-high unemployment rate of 25% for the third quarter. Moody's may not have downgraded the Spain's sovereign rating, but they did downgrade the ratings on five of Spain's autonomous regions as they began getting approvals for aid disbursements from the regions bailout fund. Meanwhile the Bank of Spain confirmed what most people already knew, that the 2012 deficit-to-GDP ratio would be as high as 7.2-7.4% versus the 6.3% target. Meanwhile Greece took its negotiations with the Troika down to the wire. Troika officials have given Greece until Sunday night to meet their demands and come up with a plan to secure funding; German Finance Minister Schaeuble commented that there were some doubts that Greece had lived up to its commitments and warned that the nation's future in the eurozone was not a sure thing.

- The major focus in FX trading this week was the ever-weakening yen. The USD/JPY pair continued its two-week long ascent coming into the week, testing three-month highs around 80 handle on Monday following the weaker export component in the Japanese September trade balance. Expectations have been building for the BOJ to launch more easing measures and the Japanese government to announce a new stimulus package, helping to drive yen softness. Verbal intervention was heard from BoJ Gov Shirakawa and Econ Min Maehara. USD/JPY topped out around 80.36 and then turned around on Thursday, after the Japanese cabinet approved a ¥750B stimulus package. By late on Friday, the pair was back below the 80 handle.