A Week in the Rearview – week ending 10/9/09
In the headlines
A look at some of the market movers over the past week:
- A TARP watchdog revealed that government officials may not have been truthful about the health of the U.S. banking system
- Network equipment maker Brocade has put itself up for sale
- HSBC’s CEO warned that a second leg of the downturn could be on the way
- Former Fed Chairman Alan Greenspan warned that the U.S. unemployment rate could top 10%
- Australia became the first G-20 country to raise its interest rates
- U.S. apartment vacancies hit a 23-year high
- Retailers are expecting that holiday sales could fall for a second year in a row
- The Institute of Supply Management’s services index rose into expansionary territory
- Fannie Mae and Freddie Mac launched a new program to help independent mortgage banks
- Bank of America has reportedly narrowed its list of internal CEO candidates to two
- Google sounded a positive note on the U.S. business environment
- Alcoa posted a profit and handily beat earnings expectations to start off third quarter earnings season
- InBev is planning to sell its theme parks business to private equity firm Blackstone
- Citigroup announced the sale of its commodities trading division, Phibro
- General Motors officially reached a deal to sell its Hummer brand to a Chinese manufacturer
Commentary
After a couple of down weeks, stocks charged back this week, tacking on 4.5% by the end of Friday’s trading. Five straight up days, including a near 3% gain by the end of Tuesday, led to the big weekly uptick. The S&P 500 index is now up 18.6% year-to-date and is 58% above the March 9th bottom.
Economic data played a significant part in exciting investors. Though the economic release calendar was somewhat light this past week, many of the reports helped reverse some of the pessimism spawned by the prior week’s data. On Monday, the ISM services index not only came in above expectations, but also moved above 50%, which suggests expansion in the services sector. This was a notable surprise for investors after watching the ISM’s primary index post an unexpected decline the week before.
On the employment front, both initial unemployment claims and continuing claims came in both below estimates and below the prior week’s readings. The preceding week wrapped up with the unemployment rate ticking up to 9.8% and the average work week declining to 33 hours, so many may have seen the unemployment claims data as providing some balance to those worrisome numbers.
The start of earnings season also boosted investor confidence as many of the major companies reporting beat expectations. Alcoa — whose earnings report is considered the official beginning to each earnings season — kicked off third quarter reporting by revealing a surprise $0.08 profit, which was well ahead of analysts’ views. The company also said that it sees worldwide aluminum demand rising 11% in the second half of the year, a forecast that suggests some signs of life in the global economy.
While Costco’s bottom line declined from the prior year, it still managed to jump over the bar set by Wall Street. The retailer also said that while food and necessities are the most popular items with shoppers, nonfood items are starting to move as well. PepsiCo was also able to charge past expectations, as it relied on productivity savings to help combat a slowdown in North American beverage sales.
And while Marriott International’s earnings were clouded by write-downs taken in its timeshare business, the hotel chain also managed to do better than expected. It said that a 35% year-over-year jump in summer leisure travel drove the better-than-expected results.
Looking ahead
Next week will bring a heavier schedule in terms of economic reports. Wednesday’s retail sales figures will likely stand out as the most notable report of the week, as investors continue to watch for signs of consumers either starting to spend again or retrenching further. Other notable reports for the week will be the release of the minutes from the previous Federal Reserve rate-setting meeting, the consumer price index, unemployment claims, and a consumer sentiment reading from the University of Michigan.
More importantly, though, the week ahead will be chock full of very significant earnings reports. Charles Schwab will be the only notable report on Monday, but CSX Corp, Domino’s, Intel, Johnson & Johnson, and Linear Technology will follow on Tuesday. The notables from Wednesday will be Abbott, HDFC Bank, and JPMorgan Chase.
Thursday will be the big day for the week, bringing AMD, Baxter International, Citigroup, Goldman Sachs, Google, Harley-Davidson, IBM, Merck, Nokia, and Southwest Airlines. Friday will follow up with Bank of America, General Electric, Halliburton, and Mattel.
At this early point in the third quarter earnings season we don’t want to overlook any of the major reports. Companies like Intel, IBM, General Electric, and CSX, for instance, will provide significant data on the state of U.S. manufacturing and business in general.
However, the main focus of the next week will likely be on the financial companies. The earnings numbers themselves will likely look very favorable compared to the dismal reports that we saw this time last year, but commentary from the management teams will probably of much more interest to investors as they continue to try and asses the current health of the banking system.
