Jacobs Engineering Group (JEC), the second-largest publicly traded U.S. engineering company, reported a 13% decline in earnings as the global recession weighed on demand. Jacob’s also lowered the top end of 2009 earnings guidance, which was already reduced just three months ago.
Revenue declined 7.3% to $2.7 billion and operating margins declined 40 basis points from a year ago. Weaker margins reflect the current weaker pricing environment for engineering and construction services, especially relative to the very robust spending environment one year ago.
Jacob’s backlog finished the quarter at $15.8 billion, a 5% decline. The bulk of the $665 million removed from the company’s backlog was due to an upstream project cancellation. With 75% of sales in North America, Jacob’s results will continue to be pressured by weaker engineering and construction spending, particularly in the oil and gas industries.
JEC shares finished the day -7.21%
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Peter J. Lazaroff, Investment Analyst
Tuesday, July 28, 2009
Amgen (AMGN) profit rises 40%
Amgen (AMGN) had a fantastic quarter, beating both top and bottom line projections by cutting R&D expense and increasing sales of its arthritis drug Enbrel. The company upped full-year guidance in anticipation of continued strength in the second half of 2009.
The world’s largest biotechnology company recorded $3.7 billion in revenue, which is 1% less than a year ago, but represents a 12% increase from the first quarter 2009. Weighing on the revenue number was a 16% drop in sales of Aranesp, a treatment for anemia that was once Amgen’s top-selling drug, and unfavorable foreign currency exchange.
More importantly, Amgen continues to generate impressive levels of free cash flow, reaching $1.54 billion in the second quarter, or 41% of sales.
In addition to a strong quarter, Amgen announced an ex-U.S. denosumab partnership with GlaxoSmithKline (GSK). The deal is receiving praise from many analysts since GSK has great experience and the terms of the deal were favorable.
Going forward, investors will be eyeing the FDA advisory committee meeting for denosumab in August, and expectations are very high. Also of note, new data for Vectibix could bring big upside for the stock if the drug yields strong data in the first and second-line colorectal cancer.
AMGN shares finished the day +2.72%
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Peter J. Lazaroff, Investment Analyst
The world’s largest biotechnology company recorded $3.7 billion in revenue, which is 1% less than a year ago, but represents a 12% increase from the first quarter 2009. Weighing on the revenue number was a 16% drop in sales of Aranesp, a treatment for anemia that was once Amgen’s top-selling drug, and unfavorable foreign currency exchange.
More importantly, Amgen continues to generate impressive levels of free cash flow, reaching $1.54 billion in the second quarter, or 41% of sales.
In addition to a strong quarter, Amgen announced an ex-U.S. denosumab partnership with GlaxoSmithKline (GSK). The deal is receiving praise from many analysts since GSK has great experience and the terms of the deal were favorable.
Going forward, investors will be eyeing the FDA advisory committee meeting for denosumab in August, and expectations are very high. Also of note, new data for Vectibix could bring big upside for the stock if the drug yields strong data in the first and second-line colorectal cancer.
AMGN shares finished the day +2.72%
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Peter J. Lazaroff, Investment Analyst
Daily Insight
U.S. stocks spent nearly the entire session lower on Monday as disappointing earnings results from Verizon, and to a lesser extent Aetna, appeared to offset the biggest jump in new home sales in eight years. But it’s tough to keep a good market down, the major indices rallied in the final minutes of trading to close higher.
Verizon’s results received a lot of attention yesterday and seemed to be the main reason stocks spent much of the day below the cut line. Between the company’s enterprise business (illustrating the business community remains in caution mode) and phone line (showing the troubled nature of both households and business) segments, the results weren’t helpful for the more optimistic of economic outlooks.
Financials, industrials, material and energy stocks led the way – material stocks got a boost from another big day for Dr. Copper; the metal continues to suggest reflation is in the works; energy caught a bid as oil extended its winning streak to nine sessions. Our dear dollar, down again.
Information technology, utility and consumer staple shares struggled. These areas weren’t down by much but were the only three of the major industry groups that failed to show green.
Market Activity for July 27, 2009
Shrinking Loan Activity
An analysis by the Wall Street Journal shows that total loans at the top 15 U.S. banks (which account for 47% of federally insured deposits) fell 2.8% in the second quarter. More than half of the loan volume came from refinancing activity and renewing existing credit lines, not new loans.
This is why we caution taking too much from indicators such as a very steep yield curve – under normal circumstances such a large difference between the rate at which banks borrow and the level at which they loan money would make for a green light in terms of economic activity, but this is not a normal contraction. Another factor leading to lower loan activity is the fact that the demand for loans is also down. Commercial and industrial (C&I) loans are off 14% at an annual rate year-to-date, as measured by the St. Louis Federal Reserve Bank.
Loan activity will eventually rebound of course, but it will take time and in the meantime will put pressure on economic growth.
New Home Sales
The Commerce Department reported that new home sales jumped 11% in June to 384,000 at an annual pace, blowing by the estimate for just 352,000 (although the 36,000 new homes that were sold in the entire country last month was less than the 45,000 foreclosure filings in California alone during June).
This marks the third-straight month of increase, just as existing home sales have recorded, yet the three-month average of 356,000 remains below the December reading of 374,000. (That December reading is a number we’re watching as a level to gauge future sales activity against as the actual low put in on new home sales that occurred in January was due to harsh weather conditions, and the weak results in April and May were likely affected by two months of very rainy conditions, so I view the December figure as the weather-adjusted low).
Sales of new homes are down 21% from the year-ago period, but falling prices (down a huge 5.8% in June) and near record low mortgage rates are now helping to offset high levels of joblessness.
In terms of region, new home sales jumped 43% in the Midwest, 29% in the Northeast (although not much of a player in the new home market) and 23% in the West (the combination of plunging prices and California’s additional $10K tax credit for new home purchases is driving sales in this region). Sales declined 5% in the South, the largest market for new homes.
The median price of a new home fell 12% to $206,200 from $234,300 in June 2008.
The inventory-to-sales ratio remains elevated, but the three-month rally in sales and a huge decline in construction have made very nice progress in pushing this number lower. The inventory-to sales ratio for new homes declined to 8.8 months’ worth, down from 10.2 in May. Let’s hope the labor market has made a significant turn for the better several months out because the housing market will need it when the tax credits expire and very low interest rates are no longer with us.
The new-home sales report kicked off a big week of data.
Today
Case/Shiller Home Price Index (May) – it’s so outdated but gets a lot of attention; C/S should show another month of mild improvement but its heavy exposure to foreclosure-riddled areas will keep it depressed relative to other housing indicators
Conference Board’s Consumer Confidence Survey (July) – expect it to fall after the big June job losses, although rising stock prices should offer some support
Wednesday
Mortgage Applications (w/e July 24)
Durable Goods (June) – expect it to fall after two months of gain, businesses are not yet close to spending and consumer-appliance sales will remain subdued
Thursday
Initial Jobless Claims (w/e July 25) – watch it move higher as firms continue to shed jobs; it will be interesting to see how continuing claims react after two weeks of big declines, a function of benefits expiring?
Friday
GDP (initial estimate for Q2) – expect a decline of 1.5%-2.0%, marking the fourth-straight quarter of decline; prior to this contraction we have not had more than two-straight negative quarters going back to WWII
Chicago Purchasing Managers Index (July) – it should move mildly higher but remain in contraction mode with auto production weak
In addition to this data we’ll get a number of Treasury auctions totaling $200 billion in debt issuance – these auctions are typically non-events but are closely watched now with massive government borrowing and the heavy debt issuance that results. The day that one of these auctions “fail,” people say no to a sub-4% 10-year note, will mark another trouble spot for the equity markets.
Have a great day!
Brent Vondera, Senior Analyst
Verizon’s results received a lot of attention yesterday and seemed to be the main reason stocks spent much of the day below the cut line. Between the company’s enterprise business (illustrating the business community remains in caution mode) and phone line (showing the troubled nature of both households and business) segments, the results weren’t helpful for the more optimistic of economic outlooks.
Financials, industrials, material and energy stocks led the way – material stocks got a boost from another big day for Dr. Copper; the metal continues to suggest reflation is in the works; energy caught a bid as oil extended its winning streak to nine sessions. Our dear dollar, down again.
Information technology, utility and consumer staple shares struggled. These areas weren’t down by much but were the only three of the major industry groups that failed to show green.
Market Activity for July 27, 2009Shrinking Loan ActivityAn analysis by the Wall Street Journal shows that total loans at the top 15 U.S. banks (which account for 47% of federally insured deposits) fell 2.8% in the second quarter. More than half of the loan volume came from refinancing activity and renewing existing credit lines, not new loans.
This is why we caution taking too much from indicators such as a very steep yield curve – under normal circumstances such a large difference between the rate at which banks borrow and the level at which they loan money would make for a green light in terms of economic activity, but this is not a normal contraction. Another factor leading to lower loan activity is the fact that the demand for loans is also down. Commercial and industrial (C&I) loans are off 14% at an annual rate year-to-date, as measured by the St. Louis Federal Reserve Bank.
Loan activity will eventually rebound of course, but it will take time and in the meantime will put pressure on economic growth.
New Home Sales
The Commerce Department reported that new home sales jumped 11% in June to 384,000 at an annual pace, blowing by the estimate for just 352,000 (although the 36,000 new homes that were sold in the entire country last month was less than the 45,000 foreclosure filings in California alone during June).
This marks the third-straight month of increase, just as existing home sales have recorded, yet the three-month average of 356,000 remains below the December reading of 374,000. (That December reading is a number we’re watching as a level to gauge future sales activity against as the actual low put in on new home sales that occurred in January was due to harsh weather conditions, and the weak results in April and May were likely affected by two months of very rainy conditions, so I view the December figure as the weather-adjusted low).
Sales of new homes are down 21% from the year-ago period, but falling prices (down a huge 5.8% in June) and near record low mortgage rates are now helping to offset high levels of joblessness.In terms of region, new home sales jumped 43% in the Midwest, 29% in the Northeast (although not much of a player in the new home market) and 23% in the West (the combination of plunging prices and California’s additional $10K tax credit for new home purchases is driving sales in this region). Sales declined 5% in the South, the largest market for new homes.
The median price of a new home fell 12% to $206,200 from $234,300 in June 2008.
The inventory-to-sales ratio remains elevated, but the three-month rally in sales and a huge decline in construction have made very nice progress in pushing this number lower. The inventory-to sales ratio for new homes declined to 8.8 months’ worth, down from 10.2 in May. Let’s hope the labor market has made a significant turn for the better several months out because the housing market will need it when the tax credits expire and very low interest rates are no longer with us.The new-home sales report kicked off a big week of data.Today
Case/Shiller Home Price Index (May) – it’s so outdated but gets a lot of attention; C/S should show another month of mild improvement but its heavy exposure to foreclosure-riddled areas will keep it depressed relative to other housing indicators
Conference Board’s Consumer Confidence Survey (July) – expect it to fall after the big June job losses, although rising stock prices should offer some support
Wednesday
Mortgage Applications (w/e July 24)
Durable Goods (June) – expect it to fall after two months of gain, businesses are not yet close to spending and consumer-appliance sales will remain subdued
Thursday
Initial Jobless Claims (w/e July 25) – watch it move higher as firms continue to shed jobs; it will be interesting to see how continuing claims react after two weeks of big declines, a function of benefits expiring?
Friday
GDP (initial estimate for Q2) – expect a decline of 1.5%-2.0%, marking the fourth-straight quarter of decline; prior to this contraction we have not had more than two-straight negative quarters going back to WWII
Chicago Purchasing Managers Index (July) – it should move mildly higher but remain in contraction mode with auto production weak
In addition to this data we’ll get a number of Treasury auctions totaling $200 billion in debt issuance – these auctions are typically non-events but are closely watched now with massive government borrowing and the heavy debt issuance that results. The day that one of these auctions “fail,” people say no to a sub-4% 10-year note, will mark another trouble spot for the equity markets.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries sold off yesterday on a stock market that strengthened as the day wore on in addition to some selling in the market on continuing supply concerns. The curve continued its week long steepening trend to +268 bps as stronger demand for shorter term notes continues to buoy that portion of the curve. Foreign central banks are a major buyer of the short end right now, and with 2-, 5- and 7-year notes coming to market over the next three trading sessions the market is just rallying into the auctions. In early Tuesday trading the ten-year has already rallied back to where it was before yesterday’s selloff, the two year has made back half of its 4 basis point skid.
The $6 billion TIPS auction was bid fairly well. The auction was a reopening of the existing 20-year and came in about 5/64 cheaper than where the market was trading at the time. The yield came in at 2.387%, and the bid/cover for the auction was 2.27, higher than the last 20-year TIPS auction in January. Breakevens were mostly unchanged, wider by just 4 bps in afternoon trading.
$42 billion in 2-year notes will be auctioned today, $2 billion more than the last four 2-year auctions. Look for the indirect bid, the group of bidders that includes foreign central banks, to again dominate. Last month’s 2-year auction sent 68.7% of the bonds to indirect bidders – I wouldn’t be surprised if that number is even higher for today’s auction.
Cliff J. Reynolds Jr., Investment Analyst
The $6 billion TIPS auction was bid fairly well. The auction was a reopening of the existing 20-year and came in about 5/64 cheaper than where the market was trading at the time. The yield came in at 2.387%, and the bid/cover for the auction was 2.27, higher than the last 20-year TIPS auction in January. Breakevens were mostly unchanged, wider by just 4 bps in afternoon trading.
$42 billion in 2-year notes will be auctioned today, $2 billion more than the last four 2-year auctions. Look for the indirect bid, the group of bidders that includes foreign central banks, to again dominate. Last month’s 2-year auction sent 68.7% of the bonds to indirect bidders – I wouldn’t be surprised if that number is even higher for today’s auction.
Cliff J. Reynolds Jr., Investment Analyst
Monday, July 27, 2009
Daily Insight
U.S. stocks gained ground again on Friday, pushing the broad market higher by 4.13% for the week. Better-than-expected economic and earnings reports -- existing home sales rose for a third-straight month, the Leading Economic Indicators (LEI) index posted another increase and earnings results show the decline in Q2 profits will decline at a 25%-30% rather than the 35% fall off that was expected – pushed stocks higher for a second week.
We were backing off of the high end of this trading range prior to this latest rally as the broad market fell for four straight weeks, but the 11% surge in the last 10 sessions has put in a new upper level as we are just 2.5% from the Election Day mark of 1005.
The only interruption to last week’s rally was a fractional decline on Wednesday and it doesn’t look like much will get in the way of investors’ desire to push this market higher, we’ve got people worried about missing out and that means new money is likely to keep moving in for a while still. We’ve got a big week ahead of us though and with $200 billion in Treasury issuance – who would have thought we’d be talking about such numbers in one week’s worth of auctions just a year ago? – and these events will be met with heightened anxiety; all it takes is one auction to go bad.
Health-care and utility shares led Friday’s advance – strange for these two areas of safety to lead the way when the bulls are running, maybe the wall the two consequential pieces of legislation ran into last week (health-care and cap & trade) played a role. It may have also been the move lower in the latest consumer sentiment reading that caused a move back to safety – one never knows on a day-to-day basis. Tech shares were the worst performing sector, which pushed the NSADAQ Composite to its first loss in 12 sessions.
Market Activity for July 24, 2009
And speaking of which, on Friday we talked about how the gridlock over the health-care legislation is the best news we’ve seen in a long time. Yes, the leading indicators index is pointing up, 77% of earnings results have beat estimates and home sales and housing starts are on three month upswing.
But hang on, these positives data readings could end up fooling people into a false euphoria – and recall we’ve talked about being aware of a euphoric trend as we begin to see things improve. The problem is we’re very likely headed for a statistical recovery rather than something more sustaining. The leading indicators are being led by interest rate spreads, but this misses the low demand for loans, and housing starts, which one cannot expect to last due to the supply glut, so I would be cautious of this LEI index.
Additionally, the better earnings results (another factor in LEI) are based upon very low-bar hurdles – profits are down 25% from a year ago and revenues have been hammered, which shows the lack of final demand. Let’s not get ahead of ourselves here, stocks are up 47% from their 12-year nadir hit on March 9 and the troubles in consumer-land will pressure growth.
We also have actual home sales looking better over the last three months and it certainly looks like housing has stabilized. But can we count on continued gains with the consumer de-leveraging process far from done and higher tax rates (expectations that after-tax incomes will fall) and a poor job market will not help this situation. Until this works its course, it’s tough to see a sustained housing comeback, just yet.
(We received the latest consumer sentiment reading on Friday, which declined for the first time in four months. The University if Michigan’s Consumer Sentiment survey showed that consumers believe the economic freefall is over but are now focused intensely on a weak job market and the unlikely prospect of income growth. The percentage of respondents reporting income gains was the fewest in the survey’s history, which goes back to 1966. Plans to buy homes, autos and durable goods declined as well. The consumer remains the big issue. Businesses are holding back, delaying spending plans too, but personal consumption makes up 70% of GDP. Until the labor market improves this will be a significant drag on growth. We should see a couple of quarters of good growth in 2010 as nearly a trillion dollars in government spending kicks in. This will likely be able to offset the weak consumer activity but only for a short while.)
But the rebuff on the Obama (actually the Pelosi bill as she’s been more instrumental in writing it) health-care plan is a really good sign and it also looks like gridlock is helping on the other destructive agenda – cap and trade. Now let’s hope the administration doesn’t shift its focus to pushing through another one of their stimulus plans – this will not help the corporate outlook. Businesses know that the more the government spends, especially with regard to the current degree of outlays, that this will have a crowding out effect as capital is sapped from the private sector – the true area of growth.
It appears we may not get the worst some (including myself) had worried about in terms of policy, but even if national health care and C&T are dead we’ll still get massive deficits and debt issuance, higher tax rates across the board, and a regulatory regime not seen since the 1970s. We’re now back to 16 times earnings on the market now – valuations are reflecting that the worst by way of policy may not occur. But from here the market will need real structural economic performance and we are quite a way from there at this point. So my message, as has been the theme since returning to 900 on the S&P 500 on May 4, is to continue to be careful here, don’t increase risk by chasing this rally.
Have a great day!
Brent Vondera, Senior Analyst
We were backing off of the high end of this trading range prior to this latest rally as the broad market fell for four straight weeks, but the 11% surge in the last 10 sessions has put in a new upper level as we are just 2.5% from the Election Day mark of 1005.
The only interruption to last week’s rally was a fractional decline on Wednesday and it doesn’t look like much will get in the way of investors’ desire to push this market higher, we’ve got people worried about missing out and that means new money is likely to keep moving in for a while still. We’ve got a big week ahead of us though and with $200 billion in Treasury issuance – who would have thought we’d be talking about such numbers in one week’s worth of auctions just a year ago? – and these events will be met with heightened anxiety; all it takes is one auction to go bad.
Health-care and utility shares led Friday’s advance – strange for these two areas of safety to lead the way when the bulls are running, maybe the wall the two consequential pieces of legislation ran into last week (health-care and cap & trade) played a role. It may have also been the move lower in the latest consumer sentiment reading that caused a move back to safety – one never knows on a day-to-day basis. Tech shares were the worst performing sector, which pushed the NSADAQ Composite to its first loss in 12 sessions.
Market Activity for July 24, 2009
And speaking of which, on Friday we talked about how the gridlock over the health-care legislation is the best news we’ve seen in a long time. Yes, the leading indicators index is pointing up, 77% of earnings results have beat estimates and home sales and housing starts are on three month upswing.
But hang on, these positives data readings could end up fooling people into a false euphoria – and recall we’ve talked about being aware of a euphoric trend as we begin to see things improve. The problem is we’re very likely headed for a statistical recovery rather than something more sustaining. The leading indicators are being led by interest rate spreads, but this misses the low demand for loans, and housing starts, which one cannot expect to last due to the supply glut, so I would be cautious of this LEI index.
Additionally, the better earnings results (another factor in LEI) are based upon very low-bar hurdles – profits are down 25% from a year ago and revenues have been hammered, which shows the lack of final demand. Let’s not get ahead of ourselves here, stocks are up 47% from their 12-year nadir hit on March 9 and the troubles in consumer-land will pressure growth.
We also have actual home sales looking better over the last three months and it certainly looks like housing has stabilized. But can we count on continued gains with the consumer de-leveraging process far from done and higher tax rates (expectations that after-tax incomes will fall) and a poor job market will not help this situation. Until this works its course, it’s tough to see a sustained housing comeback, just yet.
(We received the latest consumer sentiment reading on Friday, which declined for the first time in four months. The University if Michigan’s Consumer Sentiment survey showed that consumers believe the economic freefall is over but are now focused intensely on a weak job market and the unlikely prospect of income growth. The percentage of respondents reporting income gains was the fewest in the survey’s history, which goes back to 1966. Plans to buy homes, autos and durable goods declined as well. The consumer remains the big issue. Businesses are holding back, delaying spending plans too, but personal consumption makes up 70% of GDP. Until the labor market improves this will be a significant drag on growth. We should see a couple of quarters of good growth in 2010 as nearly a trillion dollars in government spending kicks in. This will likely be able to offset the weak consumer activity but only for a short while.)
But the rebuff on the Obama (actually the Pelosi bill as she’s been more instrumental in writing it) health-care plan is a really good sign and it also looks like gridlock is helping on the other destructive agenda – cap and trade. Now let’s hope the administration doesn’t shift its focus to pushing through another one of their stimulus plans – this will not help the corporate outlook. Businesses know that the more the government spends, especially with regard to the current degree of outlays, that this will have a crowding out effect as capital is sapped from the private sector – the true area of growth.
It appears we may not get the worst some (including myself) had worried about in terms of policy, but even if national health care and C&T are dead we’ll still get massive deficits and debt issuance, higher tax rates across the board, and a regulatory regime not seen since the 1970s. We’re now back to 16 times earnings on the market now – valuations are reflecting that the worst by way of policy may not occur. But from here the market will need real structural economic performance and we are quite a way from there at this point. So my message, as has been the theme since returning to 900 on the S&P 500 on May 4, is to continue to be careful here, don’t increase risk by chasing this rally.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasury supply will weigh on the minds of traders this week. The Treasury plans to auction $115 billion in notes over the next four days, the second time in the last three weeks the Treasury has held four days of auctions in the same week. Including bills, this week’s supply is over $200 billion. The $115 billion number includes a $6 billion 20-year TIPS auction today. The level of success in this week’s auctions will be the primary dictator of rate movement this week.
On Friday, CIT altered its offer to purchase its outstanding floating rate debt due on August 17. Those who agree to tender their bonds before the end of July will still receive the original 82.5 dollar price, but those who sign up after that will only receive 77.5 cents on the dollar. This move may get more bondholders to respond sooner, but in doing so CIT runs the risk of deterring investors from participating altogether. The tender offer is very important to the survival of CIT because they are not allowed to use any of the $3 billion raised last week to pay off the $1 billion in debt that matures in August. If the tender fails to attract enough interest CIT will likely be forced into chapter 11, instead of trying to manage a restructuring outside of bankruptcy court. The bonds were trading in the low $80’s last week, a good sign considering the $82.5 tender price.
Cliff J. Reynolds Jr., Investment Analyst
On Friday, CIT altered its offer to purchase its outstanding floating rate debt due on August 17. Those who agree to tender their bonds before the end of July will still receive the original 82.5 dollar price, but those who sign up after that will only receive 77.5 cents on the dollar. This move may get more bondholders to respond sooner, but in doing so CIT runs the risk of deterring investors from participating altogether. The tender offer is very important to the survival of CIT because they are not allowed to use any of the $3 billion raised last week to pay off the $1 billion in debt that matures in August. If the tender fails to attract enough interest CIT will likely be forced into chapter 11, instead of trying to manage a restructuring outside of bankruptcy court. The bonds were trading in the low $80’s last week, a good sign considering the $82.5 tender price.
Cliff J. Reynolds Jr., Investment Analyst
Friday, July 24, 2009
Earnings wrap-up: IR, ACI, TROW
Ingersoll-Rand (IR) +14.12%
Despite total revenues declining 23% during the second-quarter and missing analysts’ estimates, IR’s cost controls drove better-than-expected productivity improvements and helped the diversified equipment maker deliver earnings that beat analysts’ projections.
The company expects lower demand in most of its major markets for the rest of the year; however, management sees some tentative positive signs in the residential HVAC (heating, ventilation, and air-conditioning) market, North American trailers, and China operations. Still, the nonresidential construction and European markets remain challenging.
Arch Coal (ACI) +7.53%
Arch Coal CEO Steven Leer said the coal market has “reached a bottom” and that there were signs of increased demand in the latter half of the second quarter.
These comments helped investors shrug off a bigger-than-expected loss and a cut to the company’s 2009 sales forecast. Arch Coal is continuing “aggressive efforts to reduce operating costs and capital spending across the organization to ensure profitability despite extremely weak market conditions.
T. Rowe Price Group (TROW) -1.75%
TROW’s earnings fell less than expected thanks to $3.5 billion of investor deposits during the second quarter and the recent market rally boosted the value of assets under management. Revenue fell 25% from a year earlier due to a 27% drop in investment advisory fees.
The amount of money TROW manages for clients dipped 19% from a year earlier to $315.6 billion, but assets rose 17% since March 31. Money poured into the company’s target-date funds to the tune of $1.8 billion, reaching $33.1 billion and 10% of total fund assets.
CEO James Kennedy said, “We’re beyond the panic stage in the market and beyond the worst in the economy. A big question is the consumer, with so much debt and without the capacity to turn to credit cards or home-equity loans.”
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Peter J. Lazaroff, Investment Analyst
Despite total revenues declining 23% during the second-quarter and missing analysts’ estimates, IR’s cost controls drove better-than-expected productivity improvements and helped the diversified equipment maker deliver earnings that beat analysts’ projections.
The company expects lower demand in most of its major markets for the rest of the year; however, management sees some tentative positive signs in the residential HVAC (heating, ventilation, and air-conditioning) market, North American trailers, and China operations. Still, the nonresidential construction and European markets remain challenging.
Arch Coal (ACI) +7.53%
Arch Coal CEO Steven Leer said the coal market has “reached a bottom” and that there were signs of increased demand in the latter half of the second quarter.
These comments helped investors shrug off a bigger-than-expected loss and a cut to the company’s 2009 sales forecast. Arch Coal is continuing “aggressive efforts to reduce operating costs and capital spending across the organization to ensure profitability despite extremely weak market conditions.
T. Rowe Price Group (TROW) -1.75%
TROW’s earnings fell less than expected thanks to $3.5 billion of investor deposits during the second quarter and the recent market rally boosted the value of assets under management. Revenue fell 25% from a year earlier due to a 27% drop in investment advisory fees.
The amount of money TROW manages for clients dipped 19% from a year earlier to $315.6 billion, but assets rose 17% since March 31. Money poured into the company’s target-date funds to the tune of $1.8 billion, reaching $33.1 billion and 10% of total fund assets.
CEO James Kennedy said, “We’re beyond the panic stage in the market and beyond the worst in the economy. A big question is the consumer, with so much debt and without the capacity to turn to credit cards or home-equity loans.”
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Peter J. Lazaroff, Investment Analyst
SunPower shines, up 24% today
SunPower Corp (SPWRA), the second-biggest U.S. solar cell maker, is up 24% today after reporting a second-quarter profit of 26 cents a share, far surpassing the expected loss of 3 cents a share. Even more, SunPower raised the lower-end of sales guidance and boosted 2009 earnings projections to 45 cents to 90 cents, up from 25 cents to 75 cents estimated in April. The company cited “a highly visible pipeline of deals we expect to come through in the third quarter” as the reason for increased guidance.
Despite higher prices, tough credit, and general economic weakness, SunPower almost doubled panel shipments from last quarter and was able to maintain only a 10% quarter-over-quarter price decline despite rapidly falling China panel prices. These solid quarterly results are evidence of the strength of SunPower’s backlog of utility orders.
As the credit crunch reduced rooftop sales that use lower-margin individual panels, SunPower has shifted its focus to large-scale utility solar plants. The company’s vertically-integrated business model has widely been expected to capture significant market share in the U.S. utility scale market.
There were a few exciting aspects from a competitive advantage standpoint. One, there appears to be some brand awareness for SunPower products and SunPower’s Levelized Cost of Electricity (LCOE) proposition is compelling to end-customers. For more on SunPower’s LCOE, click here. Two, and even more exciting, are SunPower’s plans to reduce production costs and enhance economies of scale.
By manufacturing panels in Mexico and Malaysia, the company plans to reduce solar plant assembly costs and enhance economies of scale. That, in addition to cheaper silicon, will help drive costs down to less than $2 per watt by the fourth quarter and $1 per watt by 2014. In other words, SunPower will be as competitive (if not better) than the current cost-leader First Solar (FSLR).
SunPower has always offered the most efficient high-quality product in the solar power industry. Now it appears to be on track to match First Solar’s cost advantage and economies of scale. It also seems that SunPower’s brand name is strengthening. All of this bodes well for SunPower’s long-term competitive advantage.
For more on SunPower and the solar industry, see my initial write up here.
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Peter J. Lazaroff, Investment Analyst
Note: SPWRA finished the day +28.93%
Despite higher prices, tough credit, and general economic weakness, SunPower almost doubled panel shipments from last quarter and was able to maintain only a 10% quarter-over-quarter price decline despite rapidly falling China panel prices. These solid quarterly results are evidence of the strength of SunPower’s backlog of utility orders.
As the credit crunch reduced rooftop sales that use lower-margin individual panels, SunPower has shifted its focus to large-scale utility solar plants. The company’s vertically-integrated business model has widely been expected to capture significant market share in the U.S. utility scale market.
There were a few exciting aspects from a competitive advantage standpoint. One, there appears to be some brand awareness for SunPower products and SunPower’s Levelized Cost of Electricity (LCOE) proposition is compelling to end-customers. For more on SunPower’s LCOE, click here. Two, and even more exciting, are SunPower’s plans to reduce production costs and enhance economies of scale.
By manufacturing panels in Mexico and Malaysia, the company plans to reduce solar plant assembly costs and enhance economies of scale. That, in addition to cheaper silicon, will help drive costs down to less than $2 per watt by the fourth quarter and $1 per watt by 2014. In other words, SunPower will be as competitive (if not better) than the current cost-leader First Solar (FSLR).
SunPower has always offered the most efficient high-quality product in the solar power industry. Now it appears to be on track to match First Solar’s cost advantage and economies of scale. It also seems that SunPower’s brand name is strengthening. All of this bodes well for SunPower’s long-term competitive advantage.
For more on SunPower and the solar industry, see my initial write up here.
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Peter J. Lazaroff, Investment Analyst
Note: SPWRA finished the day +28.93%
Daily Insight
U.S. stocks rallied yesterday, sending the Dow above 9K for the first time since January and the S&P 500 chugged past the 950 handle as the broad market looks ready to test that Election Day mark of 1005.
I think the fact that President Obama is getting rebuffed on his desire to ram the most consequential legislation through Congress is what gave stocks a jolt yesterday. Yes, earnings reports out of AT&T, 3M and Ford were better-than-expected, but as we’ve talked about for a week now, in most cases results only look good compared to very low estimates. The housing data was helpful too but, darn I’m not trying to be a killjoy here, let’s be real the housing market’s issues will remain with the job market in the state it is in.
Delaying the vote until after the August recess increases the possibility that anything other than a very watered down version of government-run health care will be passed – many members of Congress are going to get hammered on this thing when they return to their districts as citizens are finally beginning to pay attention to just how destructive this policy would be to individual choice. This is the best news we’ve seen in quite a while and shows Americans are not willing to roll over and allow a major step toward a European-style system.
Digressing for a moment, for a second day now I’ve seen a headline commenting on how a big Wall Street name sees “a lot of bargains” among U.S. stocks. Funny how you see these stories after the market rallies 45% in a matter of 15 weeks – I don’t recall any headlines like this when the broad market traded at 10 times trailing earnings back in March; now that we’re at 16 times, the “stocks are a screaming buy” remarks begin to fly. It really is amusing to watch.
Basic material shares led the rally and have been on their horse over the last eight sessions, up nearly 18%. The broad market is up 11% over the same period.
Consumer staple and technology share were the laggards, although still up by 1.64% and 1.97%, respectively.
Volume was good relative to recent days, right in line with the three-month average of 1.3 billion shares on the Big Board. Eight stocks rose for every one that fell on the NYSE Composite.
Market Activity for July 23, 2009
The Dollar
It’s not looking good for old green, the USD only rallies when the safety trade rolls – needless to say a horrible sign for its direction looking out over the next year.
As a result, commodity prices have momentum again, illustrated by the CRB Index back above 250 – I’m watching for the 270-275 range to offer a break out scenario in commodity prices. But you don’t really have to watch the entire basket of commodities, only need to watch Dr. Copper – smarter than any PhD when it comes to the early detection of inflationary pressures.
Initial Jobless Claims
Initial jobless claims rose 30,000 in the week ended July 18, but remained below the 600K level, coming in at 554,000. The four-week average, a less volatile figure, fell 19,000 to 566,000.
Continuing claims fell 88,000 to 6.225 million in the week ended July 11 (one-week lag). This is on top of the massive record decline of 591,000 in the week ended July 4 that drove claims off of the all-time high of 6.904 million. My view is that there is either a statistical issue here that is driving the figure lower or the expiration of benefits is playing the role, maybe both. One doesn’t need to be a skeptic to view this decline as strange, if it were a mild move lower I could believe some real improvement was in the making, but a decline of this magnitude does not at all jibe with the realities within the labor market.
There are two ways to confirm this unprecedented decline in continuing claims is actually signaling the labor market is healing in a significant manner.
First, Congress is sending money to states so that they can extend jobless benefits to 59 weeks from 26 weeks. If the decline in continuing claims is for real, then they will keep falling even as the duration of benefits payments is extended – they will at the least flatten out. If they resume the move higher, we’ll know the latest decline is a function of benefits expiring.
Second, the next employment report (due out in a couple of weeks) will show a huge decline in the duration of unemployment. To the contrary, that figure rose at the largest degree since the recession began in the last jobs report, rising from 22.5 weeks to 24.5 weeks. If we don’t see a reversal in the duration number, that will be another sign something is awry with the continuing claims move lower.
Existing Home Sales
The National Association of Realtors reported that home resales rose 3.6% in June for a third-straight month (up 2.4% for single-family only), induced by the $8,000 tax credit, lower borrowing costs in the back-half of the month and foreclosure-driven price declines in certain regions.
Total existing home sales (condos, co-ops and single-fam.) rose to 4.89 million at an annual rate, the highest since October – beating the estimate of 4.84 million. Single-family homes rose to 4.32 million, still very depressed but up nicely from the 12-year lows we were hitting three months back.
The median price for existing single-family homes rose 4% to 181,800 in June, down 15.0% from the year-ago period.
The supply of homes (in months worth of supply at the current sales pace) made additional progress to 8.9 months from 9.1 in May.
June is traditionally one of the strongest months for home sales, so the gain is not a surprise (especially after the latest pending homes sales data). Stocks certainly got a lift from the news, and these rallies are enjoyable, but people shouldn’t get too excited, there are many fundamentals that will weigh on the housing market over the foreseeable future --- the fragile labor market conditions being the preponderant element. Even if rates remain in this low range of 5.00%-5.35%, the level of joblessness and the concern of losing one’s job will be pulling on demand. If rates tick up, which is a reasonable assumption once GDP begins to post positive readings, home-sale activity is likely to stagnate.
Have a great weekend!
Brent Vondera, Senior Analyst
I think the fact that President Obama is getting rebuffed on his desire to ram the most consequential legislation through Congress is what gave stocks a jolt yesterday. Yes, earnings reports out of AT&T, 3M and Ford were better-than-expected, but as we’ve talked about for a week now, in most cases results only look good compared to very low estimates. The housing data was helpful too but, darn I’m not trying to be a killjoy here, let’s be real the housing market’s issues will remain with the job market in the state it is in.
Delaying the vote until after the August recess increases the possibility that anything other than a very watered down version of government-run health care will be passed – many members of Congress are going to get hammered on this thing when they return to their districts as citizens are finally beginning to pay attention to just how destructive this policy would be to individual choice. This is the best news we’ve seen in quite a while and shows Americans are not willing to roll over and allow a major step toward a European-style system.
Digressing for a moment, for a second day now I’ve seen a headline commenting on how a big Wall Street name sees “a lot of bargains” among U.S. stocks. Funny how you see these stories after the market rallies 45% in a matter of 15 weeks – I don’t recall any headlines like this when the broad market traded at 10 times trailing earnings back in March; now that we’re at 16 times, the “stocks are a screaming buy” remarks begin to fly. It really is amusing to watch.
Basic material shares led the rally and have been on their horse over the last eight sessions, up nearly 18%. The broad market is up 11% over the same period.
Consumer staple and technology share were the laggards, although still up by 1.64% and 1.97%, respectively.
Volume was good relative to recent days, right in line with the three-month average of 1.3 billion shares on the Big Board. Eight stocks rose for every one that fell on the NYSE Composite.
Market Activity for July 23, 2009
The DollarIt’s not looking good for old green, the USD only rallies when the safety trade rolls – needless to say a horrible sign for its direction looking out over the next year.
As a result, commodity prices have momentum again, illustrated by the CRB Index back above 250 – I’m watching for the 270-275 range to offer a break out scenario in commodity prices. But you don’t really have to watch the entire basket of commodities, only need to watch Dr. Copper – smarter than any PhD when it comes to the early detection of inflationary pressures.Initial Jobless Claims
Initial jobless claims rose 30,000 in the week ended July 18, but remained below the 600K level, coming in at 554,000. The four-week average, a less volatile figure, fell 19,000 to 566,000.
Continuing claims fell 88,000 to 6.225 million in the week ended July 11 (one-week lag). This is on top of the massive record decline of 591,000 in the week ended July 4 that drove claims off of the all-time high of 6.904 million. My view is that there is either a statistical issue here that is driving the figure lower or the expiration of benefits is playing the role, maybe both. One doesn’t need to be a skeptic to view this decline as strange, if it were a mild move lower I could believe some real improvement was in the making, but a decline of this magnitude does not at all jibe with the realities within the labor market.There are two ways to confirm this unprecedented decline in continuing claims is actually signaling the labor market is healing in a significant manner.First, Congress is sending money to states so that they can extend jobless benefits to 59 weeks from 26 weeks. If the decline in continuing claims is for real, then they will keep falling even as the duration of benefits payments is extended – they will at the least flatten out. If they resume the move higher, we’ll know the latest decline is a function of benefits expiring.
Second, the next employment report (due out in a couple of weeks) will show a huge decline in the duration of unemployment. To the contrary, that figure rose at the largest degree since the recession began in the last jobs report, rising from 22.5 weeks to 24.5 weeks. If we don’t see a reversal in the duration number, that will be another sign something is awry with the continuing claims move lower.
Existing Home Sales
The National Association of Realtors reported that home resales rose 3.6% in June for a third-straight month (up 2.4% for single-family only), induced by the $8,000 tax credit, lower borrowing costs in the back-half of the month and foreclosure-driven price declines in certain regions.
Total existing home sales (condos, co-ops and single-fam.) rose to 4.89 million at an annual rate, the highest since October – beating the estimate of 4.84 million. Single-family homes rose to 4.32 million, still very depressed but up nicely from the 12-year lows we were hitting three months back.
The median price for existing single-family homes rose 4% to 181,800 in June, down 15.0% from the year-ago period.The supply of homes (in months worth of supply at the current sales pace) made additional progress to 8.9 months from 9.1 in May.June is traditionally one of the strongest months for home sales, so the gain is not a surprise (especially after the latest pending homes sales data). Stocks certainly got a lift from the news, and these rallies are enjoyable, but people shouldn’t get too excited, there are many fundamentals that will weigh on the housing market over the foreseeable future --- the fragile labor market conditions being the preponderant element. Even if rates remain in this low range of 5.00%-5.35%, the level of joblessness and the concern of losing one’s job will be pulling on demand. If rates tick up, which is a reasonable assumption once GDP begins to post positive readings, home-sale activity is likely to stagnate.Have a great weekend!
Brent Vondera, Senior Analyst
Thursday, July 23, 2009
KMB, EMC, GR, NOC, LLL earnings
KMB +6.13%
Higher selling prices and lower commodity prices lifted Kimberly’s second-quarter results above projections. The maker of Huggies diapers and Kleenex tissue raised its earnings and revenue forecasts to reflect lower commodity prices, stronger organic growth, and cost savings from job cuts.
EMC +4.09%
The biggest takeaway from EMC’s report was that the company offered guidance for the first time amid the downturn, offering a sign that the tech market is at least returning to more predictable conditions. Management said that IT budgets for EMC’s customers “firmed up quite a bit,” and they now have “better visibility and more confidence in the second half of 2009.”
GR -7.03%
Goodrich, the largest maker of aircraft landing gear, saw profit drop 5.1% and sales slump 8% on weaker demand for spare parts as airlines pared flights and routes in the recession. Aftermarket aircraft parts fell 16%, but the firm expects aftermarket sales to be higher in the third and fourth quarters of 2009. This expectation as well as strength in the defense and space unit led Goodrich to raise the lower end of its full-year forecast, which the firm has reduced twice this year.
NOC -1.85%
Defense company Northrop Grumman (NOC) reported second-quarter profit slipped 20% on pension-related expenses and an adjustment to shipbuilding costs. Revenue increased 3.8% to $8.96 billion, with revenue growth across all business segments except shipbuilding. The aerospace segment led the underlying units, posting 8% sales growth on higher volumes for manned and unmanned aircraft programs. Total backlog fell 8.5% sequentially to $70.4 billion on the termination of the U.S. government’s Kinetic Energy Interceptor program.
LLL +2.82%
Defense contractor L-3’s profit dropped 18%, but still beat expectations and the company raised its full-year forecast. Total revenue increased 6% thanks to increased demand and new business for airborne manned and unmanned platforms. Higher pension expenses contributed to a drop in operating income.
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Peter J. Lazaroff
Higher selling prices and lower commodity prices lifted Kimberly’s second-quarter results above projections. The maker of Huggies diapers and Kleenex tissue raised its earnings and revenue forecasts to reflect lower commodity prices, stronger organic growth, and cost savings from job cuts.
EMC +4.09%
The biggest takeaway from EMC’s report was that the company offered guidance for the first time amid the downturn, offering a sign that the tech market is at least returning to more predictable conditions. Management said that IT budgets for EMC’s customers “firmed up quite a bit,” and they now have “better visibility and more confidence in the second half of 2009.”
GR -7.03%
Goodrich, the largest maker of aircraft landing gear, saw profit drop 5.1% and sales slump 8% on weaker demand for spare parts as airlines pared flights and routes in the recession. Aftermarket aircraft parts fell 16%, but the firm expects aftermarket sales to be higher in the third and fourth quarters of 2009. This expectation as well as strength in the defense and space unit led Goodrich to raise the lower end of its full-year forecast, which the firm has reduced twice this year.
NOC -1.85%
Defense company Northrop Grumman (NOC) reported second-quarter profit slipped 20% on pension-related expenses and an adjustment to shipbuilding costs. Revenue increased 3.8% to $8.96 billion, with revenue growth across all business segments except shipbuilding. The aerospace segment led the underlying units, posting 8% sales growth on higher volumes for manned and unmanned aircraft programs. Total backlog fell 8.5% sequentially to $70.4 billion on the termination of the U.S. government’s Kinetic Energy Interceptor program.
LLL +2.82%
Defense contractor L-3’s profit dropped 18%, but still beat expectations and the company raised its full-year forecast. Total revenue increased 6% thanks to increased demand and new business for airborne manned and unmanned platforms. Higher pension expenses contributed to a drop in operating income.
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Peter J. Lazaroff
Noble (NE) boosted by long-term deepwater contracts
Despite crude oil prices falling during the second quarter, Noble (NE) managed to grow profits 4% thanks to lucrative long-term deepwater contracts. Revenue increased 11% to $898 million and operating margin came in at an impressive 54%, well above the industry average.
Looking ahead, management does not expect any significant changes to the near-term contracting environment despite the gradual recovery in oil prices. CEO David Williams said, “every day that crude prices stay at a reasonable level or continue to improve builds confidence in our future.”
Although they did not materially impact results, it’s also worth mentioning that Noble paid late-delivery penalties to Petrobras. Rig delivery delays not only result in cash penalties, but they also disappoint customers that are often managing time-sensitive drilling programs.
Looking ahead, management does not expect any significant changes to the near-term contracting environment despite the gradual recovery in oil prices. CEO David Williams said, “every day that crude prices stay at a reasonable level or continue to improve builds confidence in our future.”
Although they did not materially impact results, it’s also worth mentioning that Noble paid late-delivery penalties to Petrobras. Rig delivery delays not only result in cash penalties, but they also disappoint customers that are often managing time-sensitive drilling programs.
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Peter J. Lazaroff, Investment Analyst
Raymond James profit tumbles 39%
Raymond James Financial’s (RJF) earnings declined 39% as the economic downturn continues to affect the company, but the results marked a sharp improvement from the previous quarter. CEO Thomas James said “like the rest of corporate America, improved short-term profit results don’t reflect much revenue growth, symptomatic of the continuing deep recession.”
Net revenue fell 16% year-over-year to $624.8 million, which is a 6% improvement sequentially. Most major sources of the firm’s revenues recorded double-digit percentage declines form a year earlier, including 16% in securities commissions and fees to $405.9 mlilion. Revenue from investment banking fell 43% while revenue from investment advisory fees was down 46%.
The company recorded a $29.8 million provision for loan losses, more than double a year ago, but down 60% sequentially. The regional brokerage has suffered along with the rest of the sector from credit deterioration and weak economic conditions. However, the company decided in May to turn down a capital injection from the government.
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Peter J. Lazaroff, Investment Analyst
Net revenue fell 16% year-over-year to $624.8 million, which is a 6% improvement sequentially. Most major sources of the firm’s revenues recorded double-digit percentage declines form a year earlier, including 16% in securities commissions and fees to $405.9 mlilion. Revenue from investment banking fell 43% while revenue from investment advisory fees was down 46%.
The company recorded a $29.8 million provision for loan losses, more than double a year ago, but down 60% sequentially. The regional brokerage has suffered along with the rest of the sector from credit deterioration and weak economic conditions. However, the company decided in May to turn down a capital injection from the government.
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Peter J. Lazaroff, Investment Analyst
AT&T dials up a solid quarter
AT&T’s (T) second-quarter profit fell 15% as growth in wireless business couldn’t offset continued weakness in the wireline segment - still, the firm's results topped estimates.
AT&T increased total subscribers by 1.4 million during the quarter to 79.6 million. Solid customer growth was driven by 2.4 million new iPhone activations, a third of which were new customers. Wireless data-services revenue – what customers pay for Internet browsing and sending emails – jumped 37%.
On the opposite end of the spectrum, demand for traditional phone service is steadily shrinking and business spending remains weak, resulting in a 36% dip in wireline profits on a 6.1% decline in revenue. Margins contracted in the segment, which was expected since the firm took a big chunk of costs out of the business early in the year, making additional improvement difficult.
Despite revenue and margin pressure overall, free cash flow thus far in 2009 is running at more than twice the level of a year ago. A 25% decrease in capital spending has contributed about half the increase in cash flow.
With global handset sales falling at a record pace, AT&T and competitors are expanding their offering to include netbooks, or small laptop computers, in an effort to capture additional data-services revenue. Bloomberg published this story today about telecom betting on netbooks to spur growth.
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Peter J. Lazaroff, Investment Analyst
AT&T increased total subscribers by 1.4 million during the quarter to 79.6 million. Solid customer growth was driven by 2.4 million new iPhone activations, a third of which were new customers. Wireless data-services revenue – what customers pay for Internet browsing and sending emails – jumped 37%.
On the opposite end of the spectrum, demand for traditional phone service is steadily shrinking and business spending remains weak, resulting in a 36% dip in wireline profits on a 6.1% decline in revenue. Margins contracted in the segment, which was expected since the firm took a big chunk of costs out of the business early in the year, making additional improvement difficult.
Despite revenue and margin pressure overall, free cash flow thus far in 2009 is running at more than twice the level of a year ago. A 25% decrease in capital spending has contributed about half the increase in cash flow.
With global handset sales falling at a record pace, AT&T and competitors are expanding their offering to include netbooks, or small laptop computers, in an effort to capture additional data-services revenue. Bloomberg published this story today about telecom betting on netbooks to spur growth.
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Peter J. Lazaroff, Investment Analyst
3M (MMM) earnings impress
3M (MMM), the maker of 55,000 products from Post-It Notes and Scotch tape to electric road signs and power lines, easily topped estimates as the firm cut jobs and benefited from a “tremendous sequential surge” in demand for respiratory masks that protect against the swine flu. The company raised the lower end of its full-year profit guidance and tightened its sales projections.
Revenue fell 15% to $5.6 billion with sales down across all of the company’s major business lines and geographic markets, although sales climb 12.4% sequentially over wider profitability. Healthcare and consumer and office segments were once again the strongest performers. The company saw particular weakness in the automotive, construction, and telecom industries.
CEO George Buckley expressed that there is a risk that recent upticks in orders could be a “false down” caused by an over-correction in inventory levels earlier this year by 3M’s customers rather than a sustainable recovery in demand.
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Peter J. Lazaroff, Investment Analyst
Revenue fell 15% to $5.6 billion with sales down across all of the company’s major business lines and geographic markets, although sales climb 12.4% sequentially over wider profitability. Healthcare and consumer and office segments were once again the strongest performers. The company saw particular weakness in the automotive, construction, and telecom industries.
CEO George Buckley expressed that there is a risk that recent upticks in orders could be a “false down” caused by an over-correction in inventory levels earlier this year by 3M’s customers rather than a sustainable recovery in demand.
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Peter J. Lazaroff, Investment Analyst
Daily Insight
U.S. stocks wavered between gain and loss for the entire session on Wednesday as investors were torn between better-than-expected earnings reports (with the exception of the day’s financial-sector results) and the concern that a new wave of commercial real estate defaults would roil the markets – in the end the broad market closed fractionally lower.
Bernanke, for a second-straight day, addressed the commercial real estate topic stating that the Fed is carefully monitoring the situation. This, along with rising credit-card defaults (which hit a new high of 10.76% in June) are topics we’ve addressed as significant challenges for the financials system. For now, a very positively sloping yield curve (nearly the steepest on record) is helping banks offsets these drags, but I question it will be enough.
Energy was the worst performing sector as the weekly energy report showed a smaller-than-forecast decline in crude inventories. Consumer discretionary and tech shares were the top performers on the session. The NASDAQ Composite, led by those tech shares, rose for an 11th straight day.
Market Activity for July 22, 2009
Federal Housing Finance Agency’s Home-Price Index
The FHFA released its home-price data for May, showing prices rose 0.9% -- down 6.5% over the past year. This gauge shows the degree of decline as much milder than the other home-price figures are showing.
Case/Shiller, for instance, has prices down 18% (although this index is weighed down by areas that had the highest level of speculation during the boom and hence the most foreclosure activity in the bust; the index is also value-weighted so high-end homes have a larger effect – the FHFA index is equally weighted). Existing home sales out of the National Association of Realtors has prices down 16% over the past 12 months. The FHFA figure is a very broad look at the housing market, however it does miss the high-end home market as it does not capture jumbo mortgage properties. Basically, we like to average these three for a clearer picture – doing so results in a 13% decline in home prices, on a 12-month basis.
In terms of region, prices rebounded by the most on the West coast, up 2.7% in May, and New England showed the weakest results, down 2.0%. Home prices rose 1.4% in the Southeast and were up about 0.8% in the Midwest.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage apps index rose for a third-straight week in the period ended July 17, up 2.8% after a 4.3% advance in the previous week.
Purchases rose 1.3% after a 9.4% decline in the week prior, while refinancing activity rose 4.0% – the third-straight increase – even as the rate on the 30-year fixe mortgage rose to 5.31%. Back in April and May when the 30-year fixed rate moved below 5%, refinancing activity jumped; activity would suddenly cease when the rate moved back in the 5% handle. Now, borrowers are more willing to get refis done and the trigger point seems to be something closer to 5.30% now as many probably fear they won’t get a shot at sub-5.00% again.
The average loan size fell to $218,700 from $226,500 in the week prior and is down from $250,000 at the end of last year. Refinancing activity accounted for 55.5% of the index in this latest week.
In other mortgage-related news, the Washington Post reported that Freddie Mac will pick up the closing costs (up to 3.5% of the sale price) on the purchase of foreclosed properties. In addition, as part of their “Smart Buy” program Freddie is offering a two-year warranty on the home’s plumbing, a/c and heating systems, and appliances (water heaters, stoves, washers/dryers and dishwashers). This applies only to primary residencies, and to homes selling out of Freddie’s own foreclosure inventory. Oh, the plan also includes discounts on replacement appliances of up to 30%, and 15% on installation costs.
As we talked about when the agencies upped their refinancing LTV requirement to 125%, stating that this is a sign the government will take it to another level in using Fannie and Freddie to spark home buying and put the taxpayer on the hook for many more costs (as if they need more), it appears the great minds in government are just getting started in sticking it to people who have conducted their lives in a relatively responsible manner. And speaking of great ideas…
Government-Run Health Care
House Majority Leader Steny Hoyer left open the possibility that Congress may wait until after the August recess to vote on health-care legislation, as we briefly touched on yesterday. If they do, it would potentially be a serious positive for longer-term growth. There is opposition building as people learn more about the specifics and waiting certainly decreases the likelihood of passage.
Maybe some do not see the connection between this legislation and the economy.
First off, this additional financial burden (on top of the Social Security and Medicare time bombs) is hardly a necessity even if it were a smart thing to do – the actual number of uninsured Americans is much lower than the scaremongers incessantly state. Of the supposed 45 million uninsured, 10 million are eligible for either Medicaid or SCHIP but do not sign up – doesn’t matter anyway because these programs are available at the point of service so they are covered. Another 17 million live in $50,000-$75,000 households – these are people who can afford catastrophic insurance at a minimum (probably a lot of young people who simply prefer to go without) and half of those within this segment are transitory uninsured, meaning they lose their jobs and their health plan too, until they get a new job. Then you have another 5-8 million who are not even Americans, but the quacks that cause the uproar over the uninsured have to add in illegals to make the number sound scarier. This leaves us with about 12 million truly uninsured, and even these people cannot be refused care. While 12 million is a big number, one has a hard time finding a reason to venture down this government health-care road at the harm of everyone else. (These numbers are according to the 2007 Census Bureau report: “Income, Poverty, and Health Insurance Coverage in the United States.” the Heritage Foundation, and the Kaiser Family Foundation)
Now that that is out of the way, back to the economic harm of it all. To put it simply, our budget is already burdened in a structural way with enormous costs that will be harmful to both economic growth and the value of the dollar. The increase in tax rates alone in order to pay for this monstrosity would be the concrete boots that drown this economy over several years. Not to mention the damage this does to the American principle of self-reliance (however much of it is left anyway) – a principle that in the past has kept government spending at bay in terms of its percentage of GDP. If we add on another several hundred billion to a trillion dollars in government spending, especially via borrowing, you can forget about purchasing power of the dollar moving in the right direction. Let’s hope this thing that even the President admitted on Tuesday he had not read (there are a couple of competing bills), goes the way of the ash heap.
Have a great day!
Brent Vondera
Bernanke, for a second-straight day, addressed the commercial real estate topic stating that the Fed is carefully monitoring the situation. This, along with rising credit-card defaults (which hit a new high of 10.76% in June) are topics we’ve addressed as significant challenges for the financials system. For now, a very positively sloping yield curve (nearly the steepest on record) is helping banks offsets these drags, but I question it will be enough.
Energy was the worst performing sector as the weekly energy report showed a smaller-than-forecast decline in crude inventories. Consumer discretionary and tech shares were the top performers on the session. The NASDAQ Composite, led by those tech shares, rose for an 11th straight day.
Market Activity for July 22, 2009
Federal Housing Finance Agency’s Home-Price IndexThe FHFA released its home-price data for May, showing prices rose 0.9% -- down 6.5% over the past year. This gauge shows the degree of decline as much milder than the other home-price figures are showing.
Case/Shiller, for instance, has prices down 18% (although this index is weighed down by areas that had the highest level of speculation during the boom and hence the most foreclosure activity in the bust; the index is also value-weighted so high-end homes have a larger effect – the FHFA index is equally weighted). Existing home sales out of the National Association of Realtors has prices down 16% over the past 12 months. The FHFA figure is a very broad look at the housing market, however it does miss the high-end home market as it does not capture jumbo mortgage properties. Basically, we like to average these three for a clearer picture – doing so results in a 13% decline in home prices, on a 12-month basis.
In terms of region, prices rebounded by the most on the West coast, up 2.7% in May, and New England showed the weakest results, down 2.0%. Home prices rose 1.4% in the Southeast and were up about 0.8% in the Midwest.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage apps index rose for a third-straight week in the period ended July 17, up 2.8% after a 4.3% advance in the previous week.
Purchases rose 1.3% after a 9.4% decline in the week prior, while refinancing activity rose 4.0% – the third-straight increase – even as the rate on the 30-year fixe mortgage rose to 5.31%. Back in April and May when the 30-year fixed rate moved below 5%, refinancing activity jumped; activity would suddenly cease when the rate moved back in the 5% handle. Now, borrowers are more willing to get refis done and the trigger point seems to be something closer to 5.30% now as many probably fear they won’t get a shot at sub-5.00% again.
The average loan size fell to $218,700 from $226,500 in the week prior and is down from $250,000 at the end of last year. Refinancing activity accounted for 55.5% of the index in this latest week.
In other mortgage-related news, the Washington Post reported that Freddie Mac will pick up the closing costs (up to 3.5% of the sale price) on the purchase of foreclosed properties. In addition, as part of their “Smart Buy” program Freddie is offering a two-year warranty on the home’s plumbing, a/c and heating systems, and appliances (water heaters, stoves, washers/dryers and dishwashers). This applies only to primary residencies, and to homes selling out of Freddie’s own foreclosure inventory. Oh, the plan also includes discounts on replacement appliances of up to 30%, and 15% on installation costs.
As we talked about when the agencies upped their refinancing LTV requirement to 125%, stating that this is a sign the government will take it to another level in using Fannie and Freddie to spark home buying and put the taxpayer on the hook for many more costs (as if they need more), it appears the great minds in government are just getting started in sticking it to people who have conducted their lives in a relatively responsible manner. And speaking of great ideas…
Government-Run Health Care
House Majority Leader Steny Hoyer left open the possibility that Congress may wait until after the August recess to vote on health-care legislation, as we briefly touched on yesterday. If they do, it would potentially be a serious positive for longer-term growth. There is opposition building as people learn more about the specifics and waiting certainly decreases the likelihood of passage.
Maybe some do not see the connection between this legislation and the economy.
First off, this additional financial burden (on top of the Social Security and Medicare time bombs) is hardly a necessity even if it were a smart thing to do – the actual number of uninsured Americans is much lower than the scaremongers incessantly state. Of the supposed 45 million uninsured, 10 million are eligible for either Medicaid or SCHIP but do not sign up – doesn’t matter anyway because these programs are available at the point of service so they are covered. Another 17 million live in $50,000-$75,000 households – these are people who can afford catastrophic insurance at a minimum (probably a lot of young people who simply prefer to go without) and half of those within this segment are transitory uninsured, meaning they lose their jobs and their health plan too, until they get a new job. Then you have another 5-8 million who are not even Americans, but the quacks that cause the uproar over the uninsured have to add in illegals to make the number sound scarier. This leaves us with about 12 million truly uninsured, and even these people cannot be refused care. While 12 million is a big number, one has a hard time finding a reason to venture down this government health-care road at the harm of everyone else. (These numbers are according to the 2007 Census Bureau report: “Income, Poverty, and Health Insurance Coverage in the United States.” the Heritage Foundation, and the Kaiser Family Foundation)
Now that that is out of the way, back to the economic harm of it all. To put it simply, our budget is already burdened in a structural way with enormous costs that will be harmful to both economic growth and the value of the dollar. The increase in tax rates alone in order to pay for this monstrosity would be the concrete boots that drown this economy over several years. Not to mention the damage this does to the American principle of self-reliance (however much of it is left anyway) – a principle that in the past has kept government spending at bay in terms of its percentage of GDP. If we add on another several hundred billion to a trillion dollars in government spending, especially via borrowing, you can forget about purchasing power of the dollar moving in the right direction. Let’s hope this thing that even the President admitted on Tuesday he had not read (there are a couple of competing bills), goes the way of the ash heap.
Have a great day!
Brent Vondera
Wednesday, July 22, 2009
Pfizer's cost cutting ability leads to upside guidance
Pfizer (PFE) reported second quarter profit that beat expectations and boosted its 2009 profit view based on slightly higher revenue expectations and lower cost projections. Pfizer has historically shown great ability to lower costs, which makes me confident they can meet their new earnings goal.
Revenue during the quarter fell 9.4% to $10.98 billion, essentially all due to currency changes. On the operating side, Pfizer was able to reduce COGS, marketing and administrative costs, and R&D as a percentage of total sales. Gross margin improved 290 basis points to 84%.
Pfizer’s $65.64 billion acquisition of rival Wyeth (WYE) remains on track to close this year, but still requires U.S. antitrust approval. Pfizer, like much of the rest of the pharmaceutical industry, is trying to cope with decreasing revenue from patented drugs and difficulties developing new drugs.
Pfizer is acquiring Wyeth to gain access to fast-growing biotechnology drugs and vaccines as the world’s best-selling drug, Lipitor, faces patent expiration in 2011.
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Peter J. Lazaroff
Revenue during the quarter fell 9.4% to $10.98 billion, essentially all due to currency changes. On the operating side, Pfizer was able to reduce COGS, marketing and administrative costs, and R&D as a percentage of total sales. Gross margin improved 290 basis points to 84%.
Pfizer’s $65.64 billion acquisition of rival Wyeth (WYE) remains on track to close this year, but still requires U.S. antitrust approval. Pfizer, like much of the rest of the pharmaceutical industry, is trying to cope with decreasing revenue from patented drugs and difficulties developing new drugs.
Pfizer is acquiring Wyeth to gain access to fast-growing biotechnology drugs and vaccines as the world’s best-selling drug, Lipitor, faces patent expiration in 2011.
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Peter J. Lazaroff
St. Jude's largest segment has abnormal rhythm
St. Jude Medical (STJ) reported profit grew 14% and revenues were up 4%, both in line with the Street’s expectations. The medical-device company tightened the high-end its full-year sales forecast, but held its full-year earnings projection in place.
What really concerned investors today – the stock is down more than 9%– was that St. Jude lowered the top-end of revenue guidance for heart-rhythm devices such as pacemakers and defibrillators. This business segment, which makes up nearly 62% of total revenue, also reported considerably lower revenue growth compared to the last two years.
On the bright side, St. Jude reiterated its profit guidance for the full year, and gave a third-quarter forecast that was in line with estimates. The company also said it authorized a buyback of up to $500 million in stock.
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Peter J. Lazaroff
What really concerned investors today – the stock is down more than 9%– was that St. Jude lowered the top-end of revenue guidance for heart-rhythm devices such as pacemakers and defibrillators. This business segment, which makes up nearly 62% of total revenue, also reported considerably lower revenue growth compared to the last two years.
On the bright side, St. Jude reiterated its profit guidance for the full year, and gave a third-quarter forecast that was in line with estimates. The company also said it authorized a buyback of up to $500 million in stock.
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Peter J. Lazaroff
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