A Week in the Rearview – week ending 7/16/2010
In the headlines
A look at some of the market movers from the week:
- Aon agreed to purchase Hewitt Associates for $4.9 billion
- BP placed a new cap on the gushing well in the Gulf of Mexico
- The Senate voted through the sweeping financial overhaul bill
- Apple and AT&T are facing a class-action suit alleging the two companies created a monopoly
- Goldman Sachs settled its SEC fraud lawsuit for $550 million
- Moody’s lowered Portugal’s debt rating by two notches
- Regulators subpoenaed 64 issuers of mortgage-backed securities
- A bidding war erupted for Playboy Enterprises after Hugh Hefner made an offer to take the company private
- The U.S. government unveiled a new drilling ban
- Consumer Reports decided to not recommend Apple’s iPhone 4
- Alcoa started off second quarter earnings season on a positive note
- New findings suggest that drivers may have been at fault in some Toyota accidents
- Strong Intel earnings cheered investors
- Carlyle Group agreed to buy NBTY for $3.8 billion
- BP may be locked out of U.S. offshore drilling for seven years
- AIG’s Chairman resigned after butting heads with the company’s CEO
- The Federal Reserve’s outlook for the U.S. dimmed in its most recent meeting
- JPMorgan Chase easily bested earnings estimates
- Google’s earnings fell short of Wall Street’s target
- Earnings from Bank of America and Citigroup disappointed investors
Commentary
Positive momentum early in the week came to an abrupt halt on Friday and the S&P 500 index finished the week with a 1.2% loss. Friday’s 2.9% drop reversed early week gains as economic and earnings concerns hit the markets. The loss brought the S&P’s year-to-date drop to 4.5%.
There was plenty of news to keep investors on their toes during the week, but if there were two defining aspects of the week on Wall Street, they were the meeting minutes from the Federal Reserve and the beginning of second quarter earnings season.
The bears have been beaten back a bit over the past two weeks after a steep drop in the markets over the past few months. The recent glimmer of optimism, however, was challenged by the release of the minutes from the Federal Reserve’s most recent rate-setting meeting. For the most part, the minutes read very much like other recent meetings — that is, the Fed continues to expect a slow, but steady, recovery in the U.S. economy that will be challenged by elevated levels of unemployment as well as weakness in the financial and housing sectors.
At the most recent meeting though, the Fed saw fit to lower its economic growth projections for the U.S. for both 2010 and 2011. The minutes cited concerns over the fiscal and economic problems in Europe, equity market declines, and weak sentiment in the U.S. Though the midpoint of the respective projections still show growth of 3.25% in 2010 and 3.85% for 2011, the directional change caused some concern from investors.
The start of second quarter earnings season delivered a similar mixed bag for investors. The season got off to a strong start with an encouraging string of earnings beats, but some less-than-stellar numbers late in the week tempered investors’ earnings optimism.
Despite the late-week roadblock, there were some positive signs during the week’s releases. Particularly notable were reports from Intel and JPMorgan Chase, both of which easily hopped Wall Street’s bar. Intel’s report suggested that the semiconductor industry could continue to gain steam — which, in turn, portends good things for both the technology sector in general and perhaps the broader economy. Meanwhile, JPMorgan’s earnings beat was driven by declining reserves against loan losses, which could be a sign that Main Street is continuing to recover.
Not to be overlooked in all of the earnings excitement though were a few other very notable happenings. BP continued to battle its demons in the Gulf of Mexico and potentially came closer to stemming the flow of oil from the busted well. The company applied a new cap to the gusher which, pending a pressure test, could cut off the flow completely until the relief well is completed. At the same time, the U.S. government continued to take aim at the oil company and introduced new regulations that could lock BP out of new offshore drilling for seven years.
Goldman Sachs, meanwhile, put some uncertainty behind it as it reached a settlement related to fraud charges from the SEC. The company will pay a $300 million fine to the SEC and distribute $250 million to investors that lost money on the securities in question. Goldman also had to agree to changes in the way it approves certain offerings.
Finally, the much-debated financial reform legislation came one step closer to becoming law as it gathered enough yeas to pass through a Senate vote. The bill will now go to the President to be signed into law.
Looking ahead
The economic calendar will be light next week with initial unemployment claims, housing starts, and existing home sales being the most notable reports. Both housing starts and existing home sales are expected to show declines from May levels.
Not surprisingly, the focus for next week will likely be earnings — and there will be plenty to watch. After a mixed start over the past week, investors will be looking for earnings reports to tip more towards the positive as we head further into the season.
Notable reports in the first part of the week will include Ford, Halliburton, Hasbro, Texas Instruments, Apple, Goldman Sachs, Harley-Davidson, Johnson & Johnson, PepsiCo, UnitedHealth, and Yahoo. On Wednesday, we’ll hear from Abbott, Altria, eBay, EMC, GlaxoSmithKline, Morgan Stanley, Northrop Grumman, Qualcomm, Coca-Cola, and Wells Fargo.
Weighing in during the back half of the week will be 3M, Amazon.com, AT&T, Caterpillar, Eli Lilly, Microsoft, Nokia, UPS, Honeywell, Kimberly-Clark, McDonald’s, Schlumberger, and Verizon.
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