Friday, November 16, 2012

Market Week Wrap-Up

Markets maintain cautious tone despite some signs of hope

- Investors opened the week trying to shake of the cob webs of a post-election hangover that enveloped markets late last week. Some early bargain hunting in stocks quickly gave way to headlines on the US 'Fiscal Cliff,' turmoil surrounding the Greek bailout and another escalation of tensions between Israel and Hamas in the Gaza strip weighing on sentiment. By mid-week a clean break below the S&P 500's 200-day moving average spooked many technicians, and the major US indices were testing multi-month lows with the NASDAQ officially in correction territory. Economic data releases did little to stem the tide despite some improvement in Chinese figures that included a better October trade balance and the biggest uptick in industrial production in five months. European economic reports remain unpleasant. Q3 preliminary GDP figures showed the continent officially entered a double dip recession while a declining reading in Germany's November ZEW economic sentiment index suggests problems in the periphery have spilled over to the core economies. In the US, the November Philadelphia Fed reading fell to a 4-month low along with October Advanced Retails Sales figures, while October Industrial Production declined unexpectedly. Weekly initial jobless claims jumped to 439K well above what was expected. Analysts did note that much of the weakness seen in the US data can be explained away by what are likely short term effects from Hurricane Sandy. WTI crude oil futures finished the week up roughly 0.75% percent near $87 while Brent prices declined by less than 0.5%. Natural gas prices rallied more than 8% to close just below $3.80 after technicians noted a bullish break above converging 50 and 200-day moving averages. December gold finished down 1% despite Chinese officials discussing the need to increase gold reserves. The benchmark US 10-year yield declined a handful of basis points and remains just a few ticks from fresh multi-month lows. For the week, the DJIA and Nasdaq each fell 1.8%, while the S&P500 lost 1.5%.

- With the US economy hurtling towards the 'Fiscal Cliff' all eyes turned squarely on Washington this week. On Wednesday, President Obama met with business leaders ahead of a Friday meeting with Congressional leaders from both parties. By mid-week reports circulated that the Administration would ask for $1.6T in additional tax revenue throwing some cold water on hopes both sides could come to an agreement quickly. Ahead of the meeting another press report suggested the White House was in advanced talks on a plan to replace the sequester portion of the Cliff, thus pushing back major deficit reduction talks into 2013. A post meeting press conference on the White House lawn provided some renewed hope. Representatives from both sides of the aisle including Speaker Boehner and Senate majority leader Reid indicated the talks were "constructive" and a deal can be achieved, with revenue remaining on the table as long as it is accompanied by spending cuts. Equity markets rallied hard following the press conference late Friday morning with the Dow rallying more than 100 points off of the session and week low.

- Third quarter earnings season is slowly drawing to a close. A handful of influential technology companies and the majority of big US retailers reported results this week. Cisco systems saw modest growth in earnings and revenue in its Q1 and forecasted flat growth for Q2. The bar was not set very high for the firm after several quarters of declining outlook for IT in general and network hardware in particular. CEO Chambers said that he is seeing a slightly better environment in the US and in Asia, while also warning that Europe would get worse before it got better. Dell missed consensus expectations while Q4 and FY13 guidance disappointed once again. Shares of Sina Corp also came under pressure falling roughly 13% after reporting Q3 gross margins down and providing Q4 guidance below analyst forecasts.

- Retailers posted mixed results with many commenting on the impacts of Hurricane Sandy. WalMart shares fell to the lowest level in three months after reporting revenues a bit below consensus. Along with in-line guidance, the company disclosed an investigation into foreign corrupt practices has expanded to China and India. Target Inc fared better after beating noticeably on the bottom line and guiding Q4 EPS above consensus. Home Depot performed well in its Q3, with earnings and revenue just above expectations on modest y/y growth. After raising its forecast Home Depot said it would see a boost from Hurricane Sandy similar to the one saw from Irene last year, which added $360M in sales in Q3 and Q4 of 2011. Specialty apparel names were particularly strong led by Abercrombie and Fitch. Shares of Abercrombie jumped more than 25% after profit growth widely outpaced expectations. In addition, Abercrombie hiked its full-year guidance and said comps would return to positive growth in Q4. Luxury name Saks came under pressure after Q3 revenue missed expectations. Executives warned that they are seeing lower sales at many of the stores impacted by Sandy, calling the storm a "punch to the stomach." Sears Holding declined more than 15% following Q3 results that saw SSS decline by 1.6%. Management noted particular shortfalls in categories like groceries, and household and consumer electronics.

- Two iconic US technology bellwethers had another tumultuous week. Apple at one point was down another 7% to trade near $500 for the first time since February. Sentiment remains clearly negative with everything from a likely increase in the US capital gains tax rate, to rising input costs in Asia, to continued concerns surrounding the ability to recapture the culture of innovation seen under founder Steve Jobs, seen as potential catalysts for selling Apple shares. Microsoft slid 6% after the executive widely expected to become the firm's next CEO resigned. Steven Sinofsky, head of Microsoft's Windows unit, left the company only two weeks after launching Windows 8. The move was unexpected and neither Microsoft nor Sinofsky gave an explanation, although sources suggest the decision was "mutual" and that Sinofsky would not take a job at another company anytime soon.

- In M&A, the news was relatively light with only a few small to midsize deals getting attention. On Monday Jefferies Group announced at deal to be acquired by Leucadia National for about $3.7B. Jefferies holders would receive 0.81 Leucadia shares per share, implying a deal value of approximately $17.66/share. For Leucadia, known as a "mini Berkshire Hathaway," Jefferies comprises one of their largest current investments. Late last Friday Precision Castparts said it would buy Titanium Metals Corp for $2.9 billion. The all cash offer represented a 44% premium to Friday's closing price and does include a "go shop" provision. Ally Financial is said to have reached a deal to sell its auto financing operations in Europe and Latin America to General Motors for around $4B. Late in the week Hertz confirmed FTC approval for its purchase of Dollar Thrifty.

- For currency traders coming into the week risk aversion maintained a foothold as the Greek situation remained unresolved and worries about the US Fiscal Cliff remained. Monday's Eurogroup meeting proved to be a bit of a disappointment. Discussions continued around just on how to cut the Greek debt burden and in the end only served to highlight the differences between Euro Zone Finance Ministers and the IMF. EU chief Juncker remained optimistic that a decision on the Greek €31.5B aid tranche would be decided at its next gathering on November 20th for the Eurogroup, but other senior officials indicated the final decision could slip to a later date. At 1.2660 EUR/USD began the week at new 2-month lows after the weaker than expected German ZEW survey served as another reminder that the economic crisis was staring to infect core economies. The pair found some support on reports Greece was to receive €44B in aid via one lump payment (€31B plus the 2 tranches that were due in September). The pair later tested various technical levels around 1.2730 after a Greek bill auction raised the bulk of the expected €5B in redemptions that country faced this week, and thus averted any immediate default risk. By Friday, dealers noted that the pair might have the legs to probe back towards the 1.28 handle but stalled just below its 200-day moving average at 1.2808.

- The JPY currency weakened noticeably on mid-week reports that the Japan Cabinet would again downgrade its economic assessment in its upcoming monthly report for the fourth straight time. The JPY weakened further after PM Noda hinted he might dissolve Parliament on Friday, November 16th if LDP opposition pledged to meet certain conditions. The USD/JPY edged towards the 80 handle after Japan LPD (opposition) official Abe was said to have agreed to conditions laid out by PM Noda for snap elections. The LDP looks to be in a position to form the next government, and Abe has favored unlimited easing by the BoJ and would likely seek the central bank cut in the benchmark rate to zero or lower. By Friday USD/JPY broke above the 80.70 level to test the 81 level and 6.5 month highs.