A Week in the Rearview – weeking ending 10/23/09
In the headlines
A look at some of the market movers over the past week:
- Apple reported recession-defying results
- Morgan Stanley agreed to sell its Van Kampen asset management business to Invesco
- The Federal Reserve has begun experimenting with tools to pull cash back out of the economy
- Yahoo! defied critics by reporting a huge profit increase
- Earnings from industrial companies like Caterpillar suggest that business spending is increasing
- Moody’s warned about the U.S.’s AAA credit rating
- The government’s “pay czar” is placing big cuts on compensation at TARP recipients
- eBay’s cautious outlook sunk shares after its earnings report
- Research analyst Richard Bove dropped a bomb on financial stocks by recommending a sell on Wells Fargo
- Microsoft has high hopes for its freshly released Windows 7
- China posted strong GDP growth in the third quarter
- A big jump in third quarter profit fueled a surge in Amazon.com shares
- U.S. leading indicators increased again in September
- Home sales in September jumped by a greater-than-expected 9.4%
Commentary
After a few strong weeks for the market, investors cooled off a bit this week. The S&P 500 lost 0.7% on the week thanks to moderate down days on Tuesday and Wednesday and a 1.2% drop to finish the week. The index is now up 19.5% year-to-date and 60% from its March low.
Outside of earnings reports there were a few notable events impacting financial shares this week. A major announcement came from the government in the form of major pay cuts for the top 25 highest paid employees at seven major TARP recipients. Overall, the cuts slashed compensation by 50% for those targeted. “Pay czar” Kenneth Feinberg also affirmed his ability to “claw back” payment that executives have already received — a power he has already exercised with Bank of America CEO Ken Lewis.
Another financial industry bomb came in the form of a sell recommendation on Wells Fargo by research analyst Richard Bove. Bove has been in the financial services spotlight for his overall bullishness on the sector through the worst times, so the downgrade came as a notable reversal.
Earnings, however, were the main focus for the week. Apple kicked off the week with a strong report that showed a 46% year-over-year jump in earnings. Sales of iPhones, iPods, and Mac computers all contributed to the big quarter for Apple. Caterpillar sounded a positive note for the industrial market by not only beating third quarter expectations, but issuing a fourth quarter forecast that exceeded even the most bullish analyst numbers.
Earnings from Wells Fargo looked good, but as Richard Bove highlighted, a significant portion of the bank’s earnings came from hedging its mortgage servicing rights. Bove characterized this as an unsustainable source of earnings and suggested that it may not persist. Tech giant EMC, meanwhile, beat earnings expectations and raised its fourth quarter outlook, even as earnings fell year-over-year.
Overall, earnings beats dominated the week’s reports with majors like American Express, AT&T, McDonald’s, and UPS also jumping Wall Street’s hurdle. Interestingly, though, these earnings beats weren’t enough to inspire investors to continue supporting the ongoing market rally.
Looking ahead
Earnings will continue to dominate next week. The week kicks off on Monday and Tuesday with Corning, Verizon, Wyeth, BP, Daimler, E*Trade, Honda, Textron, Under Armour, U.S. Steel, Visa, and Wynn. Wednesday continues with Conoco Phillips, Express Scripts, First Solar, General Dynamics, GlaxoSmithKline, Hanesbrands, Hess, Lazard, Level 3 Communications, Qwest Communications, Ryland, SAP, Southern Company, Symantec, Vale, and WellPoint.
Thursday will bring Adaptec, Aetna, AllianceBernstein, Burger King, Colgate-Palmolive, Deutsche Bank, ExxonMobil, Hitachi, Kellogg, McAfee, MetLife, Moody’s, Office Depot, OfficeMax, Procter & Gamble, Sprint Nextel, Taiwan Semiconductor Manufacturing, and Waste Management. Friday will finish the week with Alcatel-Lucent, Chevron, Duke Energy, ICICI Bank, NYSE Euronext, Panasonic, Sanofi-Aventis, Sony, and The Washington Post Company.
There will also be some significant economic announcements in the coming week. Early in the week we’ll see durable orders, the Case-Shiller home price index, consumer confidence, and new home sales. In the later part of the week announcements include an advanced read on third quarter GDP, initial unemployment claims, personal income and spending, and the Chicago Purchasing Manager’s index.
The most notable reports are likely to be the Case-Shiller report, GDP, and initial unemployment claims. The housing market is still seen as a lynchpin in economic recovery, so investors will be looking for better-than-expected housing price performance. GDP, meanwhile, is expected to post a strong 3.2% annualized increase compared to a 0.7% drop in the previous quarter. Initial unemployment claims will be closely watched as the number released this past week was above the market’s expectations.
Potentially the most important thing to watch in the coming week, though, is investor sentiment. At this point in the earnings season it seems we can reasonably expect to see a continued parade of companies that beat the earnings expectations that Wall Street has set. The question, though, is whether investors will overlook these positive surprises and continue to sell.
