Weekly Comment

July 21, 2014

Overview

Disquieting geopolitical news just does not seem to have the same impact it used to have.  In a week when a passenger jet was shot down in Ukraine, escalating tensions with Russia, and Israel invaded Gaza, risking a major escalation of hostilities in a region already in turmoil, the Dow Jones Industrial Average rose 156.37 points (0.92 percent), the S&P 500 Index advanced 10.71 points (0.54 percent), and the Nasdaq Composite gained 16.66 points (0.38 percent) as Thursday's weakness was quickly reversed.  Small capitalization stocks lagged with the Russell 2000 slipping (0.72 percent). In sum, it appeared investors believed that "the worst case scenarios" were unlikely to happen and allowed stocks to continue down the path of least resistance...up.  Economic data releases were mixed with retail sales, industrial production, housing starts, building permits, leading indicators, and University of Michigan Consumer Sentiment coming in below expectations while the Empire Manufacturing, NAHB Housing Market Index, Weekly Initial Jobless Claims, and Philadelphia Fed Index reports were upbeat. Fed Chair Janet Yellen reiterated in Congressional testimony that the timing of any hike in interest rates would be data-dependent so the mixed figures actually reassured investors that that day was still far off. 

 

In the News

General Electric (GE-26.46) Not Electrifying

            General Electric reported second-quarter EPS of $0.39 (versus $0.36 in the year-earlier period), matching expectations as strength in its energy and aviation units offset weakness elsewhere. However, while revenue edged up 3 percent to $36.2 billion, the figure fell slightly short of the average estimate of $36.3 billion. Moreover, the quarter was not particularly "clean," and at the end of all the puts and takes on gains and tax rate and other differences, it looks like the Company came in about penny below the forecast.  Also, there was an equipment order decline in the second quarter and pressure in pricing for that order book outside of Aviation.  General Electric also said it would seek to complete the IPO of its North American consumer finance division, soon to be called Synchrony Financial, by the end of the month and it once again indicated an interest in selling its consumer appliance business. While the Company seems on track in its transformation into a capital goods company with dominant positions in its markets, investors appeared to focus on the near-term short-fall, modest as it was, and the stock slipped 0.3 percent during an up week for the overall market. 

Advanced Micro Devices (AMD-3.83) Chip Shot

             Advanced Micro Devices reported second-quarter adjusted EPS of $0.02 compared with a loss of $0.09 per share in the year-earlier period. The consensus estimate had been for EPS of $0.03. For the current quarter, the Company expects revenue to range from 1 percent lower than the second quarter to 5 percent higher. That suggests sales of $1.43 billion to $1.51 billion for the July-September period. The prior consensus forecast had been for revenues of $1.55 billion.  Advanced Micro appears to be suffering from its emphasis on the consumer part of the personal computer market which has deteriorated due to the growing popularity of smartphones.  The tepid outlook sent the shares down 16 percent on Friday. 


The Week Ahead

Assuming geopolitical events do not become even more unsettling, investor focus will likely be on the flood of earnings reports scheduled for the coming week. While earnings for the S&P 500 have been estimated at up only 2.9 percent for the quarter, that would be an improvement to the 1.3 percent gain in the first quarter. Analysts generally are forecasting an acceleration in earnings growth with increases of about 6 percent then 11 percent in the coming two quarters. It should be noted that when the second quarter began the consensus expectation was for earnings growth of about 5 percent.


Economic Indicators       

  Expected

 Last Period

Tues., July 22

June Consumer Price Index

+0.3 percent

+0.4 percent

June Existing Home Sales

5.00 million

4.89 million

Thurs., July 24

June New Home Sales

475,000

504,000

Fri., July 25

June Durable Orders

+0.3 percent

-0.9 percent

Source: yahoo.com

Selected Corporate Earnings

Period

Estimate

Year Earlier

Mon., July 21

Halliburton

2Q

$0.91

$0.73

Netflix

2Q

$1.15

$0.49

Texas Instruments

2Q

$0.62

$0.42

Tues., July 22

Coca Cola

2Q

$0.63

$0.63

Comcast

2Q

$0.72

$0.65

Discover Financial Srvcs

2Q

$1.30

$1.20

DuPont

2Q

$1.17

$1.28

Ingersoll-Rand

2Q

$1.11

$1.14

Lockheed Martin

2Q

$2.66

$2.64

McDonald's

2Q

$1.44

$1.38

Microsoft

4Q

$0.61

$0.59

United Technologies

2Q

$1.74

$1.65

Verizon

2Q

$0.90

$0.73

Wed., July 23

AT&T

2Q

$0.64

$0.67

Boeing

2Q

$1.99

$1.67

Delta Air Lines

2Q

$1.04

$0.98

Dow Chemical

2Q

$0.72

$0.64

Facebook

2Q

$0.32

$0.19

Freeport-McMoRan

2Q

$0.53

$0.49

Norfolk Southern

2Q

$1.74

$1.46

PepsiCo

2Q

$1.23

$1.31

Thermo Fisher

2Q

$1.63

$1.32

Whirlpool

2Q

$2.91

$2.37

Thurs., July 24

3M

2Q

$1.91

$1.71

Caterpillar

2Q

$1.52

$1.45

Eli Lilly

2Q

$0.65

$1.16

Ford Motor

2Q

$0.37

$0.45

General Motors

2Q

$0.66

$0.84

Union Pacific

2Q

$1.43

$2.37

Chicago Bridge & Iron

2Q

$1.28

$1.04

Starbucks

3Q

$0.66

$0.55

Fri., July 25

American Electric Power

2Q

$0.75

$0.73

Xerox

2Q

$0.26

$0.27

Source: Capital IQ










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