Weekly Comment

April 14, 2014

Overview

Led by weakness aggressively-valued technology, Internet, and biotechnology stocks, the overall market moved broadly lower last week.  The Dow Jones Industrial Average fell 385.96 points (2.35 percent), the S&P 500 Index declined 49.40 points (2.65 percent), and the Nasdaq Composite was off 127.99 points (3.10 percent, its largest weekly loss since the summer of 2012).  There was little specific news to explain the pullback, and market strategists generally characterized the market's drop as a "healthy" correction after an extended advance.  The International Monetary Fund reduced its forecast for emerging markets growth by 0.2 percent to 4.9 percent, citing increases global economic uncertainty due to Russia's Ukraine incursion.  The IMF expects the U.s. economy to grow by 2.8 percent as compared to 2.2 percent for developed countries as a whole.  Greece got some good news as it was able to sell $4 billion of five-year debt at a yield of just 4.95 percent. However, it should be noted that Greece's GDP has shrunk by 24 percent since the beginning of its financial crisis and its unemployment rate remains a depressing 27 percent. 

  


In the News

iShares Nasdaq Biotechnology (IBB-215.45) Motion Sickness

            While last week's 4.4 percent decline for the iShares Nasdaq Biotechnology exchange-traded fund (ETF) seemed part of a general pullback in hard-to-value growth stocks, we would note that this ETF was already down 17.5 percent from its closing high reached on February 25 (which was about double where it was in December 2012).  Biotech stocks have benefited from optimistic growth projections based on prospects for their proprietary drugs.  However, particularly in an environment where the federal government is invested in the need to keep health care costs under control, insurance companies have been increasingly unhappy about the high prices for new drug therapies.

J.P. Morgan Chase (JPM-55.30) No Reward For Playing It Safe

            J.P. Morgan's first-quarter EPS fell to $1.28 from $1.59 in the year-earlier period, falling short of the consensus expectation of $1.40. Total revenue was $22.99 billion, down 8.5 percent and well below the average estimate of $24.53 billion. Trying to put the best face on the disappointing results, management pointed out that the important thing was that it was not lowering its lending standards to chase short-term profits. The bank is consciously trying to limit its new business in areas where profitability is shrinking. For example, JPMorgan made just $17 billion mortgages in the first quarter, down from $52.7 billion in the same quarter last year. That nearly 70 percent drop is steeper than the 57 percent decline that the Mortgage Bankers Association expects for the industry in the first quarter, mainly as a result of the reduced appeal of refinancing because of higher interest rates. Total loans on JPMorgan's books grew less than 1 percent in the first quarter compared with the year-earlier period, and the average rates it earned on its $730 billion of loans fell to 4.49 percent, from 4.78 percent. Fixed income and commodity trading revenue dropped 21 percent. While some were reassured by the bank's conservative posture, the shares were down 7.5 percent for the week.


The Week Ahead

This week's economic news is expected to continue to reflect a spring thaw after this year's difficult winter.  Of particular interest should be Monday's release of March retail sales which is expected to show a healthy 0.8 percent gain aided by strong auto sales. The Federal Reserve releases its beige book of economic conditions on Wednesday. On the other hand, the heavy earnings calendar has a large number of expected flat and down reports (overall S&P 500 earnings are now forecast to come in down 1.2 percent.  The market will also have to deal with heightened tensions in Ukraine. The Treasury auctions scheduled for this week are on Monday: $25 billion three-month bills and $23 billion six-month bills and  Thursday: $18 billion five-year TIPS.  

 

Economic Indicators       

  Expected

 Last Period

Mon., Apr. 14

Mar. Retail Sales

+0.8 percent

+0.3 percent

Feb. Business Inventories

+0.5 percent

+0.4 percent

Tues.,  Apr. 15

Mar. Consumer Price Index

+0.1 percent

+0.1 percent

Wed.,  Apr. 16

Mar. Housing Starts

970,000

907,000

Mar. Industrial Production

+0.5 percent

+0.6 percent

Mar. Capacity Utilization

78.8 percent

78.4 percent

Thurs., Apr. 17

Apr. Philadelphia Fed Survey

10.0

9.0

Source: Bloomberg

Selected Corporate Earnings

Period

Estimate

Year Earlier

Mon., Apr. 14

CitiGroup

1Q

$1.14

$1.29

Kinder Morgan Holdco

1Q

$0.36

$0.13

Tues., Apr. 15

Coca-Cola

1Q

$0.44

$0.46

CSX

1Q

$0.37

$0.45

Intel

1Q

$0.37

$0.40

Schwab (Charles)

1Q

$0.22

$0.15

Yahoo

4Q

$0.37

$0.35

Wed., Apr. 16

Abbott Labs

1Q

$0.36

$0.42

American Express

1Q

$1.30

$1.15

Bank of America

1Q

$0.05

$0.20

Capital One Financial

1Q

$1.68

$1.79

Google

1Q

$6.40

$5.79

Intl. Business Machines

1Q

$2.54

$3.00

PNC Financial Services

1Q

$1.66

$1.78

U.S. Bancorp

1Q

$0.73

$0.73

Thurs., Apr. 17

Baker Hughes

1Q

$0.79

$0.65

BlackRock

1Q

$4.14

$3.65

DuPont

1Q

$1.59

$1.56

General Electric

1Q

$0.32

$0.35

Goldman Sachs

1Q

$3.44

$4.29

Honeywell International

1Q

$1.26

$1.21

Morgan Stanley

1Q

$0.60

$0.61

Pepsico

1Q

$0.75

$0.77

PPG Industries

1Q

$1.97

$1.58

Sherwin-Williams

1Q

$1.10

$1.11

Union Pacific

1Q

$2.37

$2.03

UnitedHealth Group

1Q

$1.09

$1.16

Source: Thomson First Call















This section is to edit the content under the navigation and will be seen under the navigation when the site is live