Wall St. Breakfast's Pre-Market Snapshot:
U.S. Futures As of 9:05 AM ET
S&P 500: +9.00; 1489.75
NASDAQ 100: +10.25; 2003.50
Dow: +78.00; 13,489.00
NIKKEI 225: -0.23%; 17,248.89 (-40.41)
HANG SENG: +1.96%; 23,184.94 (+445.04)
SHANGHAI SE COMPOSITE: +0.68%; 4,471.03 (+30.26)
BSE SENSEX 30: +1.90%; 15,550.99 (+290.08)
FTSE 100: +2.39%; 6,354.60 (+148.50)
CAC 40: +1.86%; 5,751.59 (+105.23)
XETRA-DAX: +2.24%; 7,623.12 (+166.81)
Commodity Futures (Reuters/Jefferies CRB)
Oil: +0.64%; $77.32 (+$0.49)
Gold: +0.43%; $679.50 (+$2.90)
Natural Gas: +2.32%; $6.65 (+$0.15)
Silver: +0.83%; $13.01 (+$0.107)
U.S. Breaking News — see today's Wall Street Breakfast for earlier news
Inflation Drops to a Three-Year Low on Consumer Cutbacks
The PCE price index rose 0.1% in June compared to May's 0.5% increase. Net of food and energy costs, core PCE was also up 0.1% for the fourth straight month -- bringing annual core PCE down to a three-year low of 1.9%, the Commerce Department said Tuesday. That brings core PCE within the Federal Reserve's unofficial 'comfort zone' of 1-2%. Personal income increased 0.4%, less than the 0.6% gain expected by economists. Consumer spending increased just 0.1%, following May's 0.6% increase -- its smallest increase in nine months as high gasoline prices forced consumers to curb spending. Separately, the Labor Department said Tuesday U.S. employment costs increased 0.9% in Q2, following an 0.8% gain in the first quarter -- in line with economist forecasts. Global Insight economist Nariman Behravesh summed up the numbers: "Consumer spending is definitely a source of concern, [but] inflation does look very tame."
Sources: PCE press release, Wall Street Journal, MarketWatch
Commentary: 10 Additional Notes on This Market, Aside From Subprime • The Week Ahead - Avoid The Panic Room
Stocks/ETFs to watch: DIA, SPY, AGG
J & J to Slash Workforce
Johnson & Johnson announced Tuesday it will cut its global work force by 3-4% in an effort to generate 2008 pretax savings of $1.3 to $1.6 billion. Many of the cuts will come in its pharmaceutical segment, "which faces significant patent expirations over the next few years," it said. J&J also plans to streamline back-office operations. The cuts amount to as many as 4,820 workers. The firm estimates restructuring charges of $550M to $750M. The company plans to consolidate some pharma operations while continuing to invest in newly launched products: from 2008-2010, J&J plans to apply for 7-10 new compounds with the FDA. Earlier this month, the firm lowered its 2007 sales-growth forecast over safety concerns surrounding its blockbuster anti-anemia drug Procrit and weakening sales of its drug-coated heart stents, which faces increasing competition from Boston Scientific's rival stent, and bare-metal stents made by Medtronic and Abbott Labs. "These actions we are taking to improve our cost structure will enable us to continue investing for future growth and profitability," CEO William C. Weldon said. J&J also reiterated its 2007 earnings guidance of $4.02-4.07/share excluding charges.
Sources: Press release, Wall Street Journal, Bloomberg
Commentary: Johnson & Johnson: A Definite Buy at Current Price Levels • Johnson & Johnson: Keep Your Money Safe • Why Buffett Loves Johnson & Johnson
Stocks/ETFs to watch: JNJ. Competitors: BSX, MDT, ABT, MRK, PG, PFE
Earnings call transcript: Johnson & Johnson Q2 2007
GM Crushes Estimates, Propelling Shares Higher
The world's number one car manufacturer, General Motors, crushed estimates in the second quarter, sending its shares higher by 7.33% Tuesday in pre-market action (as of 7:20 a.m. ET). GM reversed a net loss of $5.98 a share in 2Q06 (net income was -$3.4 billion), reporting net income of $891 million ($1.56 per diluted share), despite sales falling to $46.8 billion in the recent quarter (revenue was $53.9 billion a year ago). Adjusted net income rose to $2.4 billion, good for EPS of $2.48 a share (versus adjusted EPS of $2.03 a year earlier). Both numbers easily topped consensus analyst estimates of adjusted EPS of $1.13 on revenue of $44.45 billion. Despite outselling largest rival Toyota globally in the second quarter (read more), the company's global market share fell 0.4% to 13.3% y/y. GM's market share outside N. America increased from 9.2% to 9.4% y/y. Global net income was $764 million, more than double last year's total, while GM's N. American operations pulled in $78 million net, versus a loss of $94 million a year ago. Auto loan unit GMAC, of which GM retained 49% in a sale last year, added $0.04 more than expected to EPS, according to JPMorgan Chase's Himanshu Patel, with its net income falling less than expected to $293 million from $787 million a year earlier. Remaining vigilant, CEO Rick Wagoner said despite the huge improvements, "our current earnings clearly demonstrate we've got more to do." GM doesn't provide forward guidance. (Check back later today for GM's recent conference call transcript.)
Sources: Press Release, Bloomberg, AP, TheStreet.com, MarketWatch
Commentary: GM, Ford Confuse Investors With The Turnaround Dance • GM Outsells Toyota Globally In Q2 • June U.S. Light Vehicle Sales: Not A Bad Month For Auto Retailers
Stocks/ETFs to watch: GM. Competitors: F, DCX, TM, HMC, NSANY
Conference call transcripts: check back later today for GM's recent conference call transcript • General Motors Q1 2007
CBS 2Q Earnings Fall, Net Beats, Sales Miss
CBS Corp. reported a 48% drop in 2Q net income to $404 million, or $0.55/share, compared to the prior year period in which it had gains from discontinued operations. Adjusted EPS of $0.56 was short of last year's $0.64, but beat analysts' average estimate of $0.51. Revenues were down 3.1% y/y to $3.37b and missed analysts' forecast of $3.42b. CBS blamed the discontinuation of UPN, the timing of the semifinals of the NCAA tournament and the impact of radio and TV divestitures for its decrease in revenues. CBS said it expects full year 2007 earnings to be comparable to 2006, given higher stock-based compensation and asset sales. For the long term, CBS projected growth in the low single-digits for revenues, mid single-digits for operating income and high single-digits for earnings per share. CBS's earnings call is at 8:30 a.m. Check for CBS's earnings call transcript later today. Shares of CBS gained 0.2% to $32.77 on Monday.
Sources: Press release, MarketWatch
Commentary: CBS's Moonves Sees Bleak Future For TV News • Shari Redstone May Leave Viacom After Feud With Father • CBS's Long-Term Strategy Paying Off for Shareholders
Stocks/ETFs to watch: CBS Corp. (CBS), Viacom Inc. (VIA). Competitors: TWX, NWS, DIS, CCU. ETFs: PBS, PEJ
Sirius Narrows Loss and Beats Estimates; CEO Is Still Confident of Merger Approval
Satellite radio provider Sirius said Tuesday its Q2 net loss narrowed from a year ago on an increase in subscribers. Excluding items, the company lost $0.08/share, down from a $0.17/share loss in the previous year -- beating Street estimates of a $0.10/share loss. Net loss improved 44% to $134.1M from a $237.8M loss a year ago. Revenue jumped 51% to $226 million, short of analyst estimates of $228M. Sirius ended the quarter with 7.14 million subscribers, up 52%. It captured 62% of satellite radio growth -- the 7th straight quarter in which it has lead subscriber growth. The company said each new subscriber will cost it almost $100 this year, up from an earlier forecast for about $95. During Q2, subscriber acquisition cost fell to $108 from $131 y/y. Average monthly subscriber churn was 2.3%. During the quarter, Sirius added Jamie Foxx's 'The Foxxhole' and 'SIRIUSLY Sinatra'; it plans to launch a Grateful Dead channel in the summer. In February, Sirius and rival XM Satellite agreed to combine in order to cut expenses. The companies are currently trying to secure regulatory approval. Sirius said today it still expects the merger to go through by year end: "Momentum for the pending merger with XM continues to build," said CEO Mel Karmazin. "Support from our customers, suppliers and other groups representing a diverse cross-section of Americans, clearly demonstrates the public interest benefits and enhanced competition that will come from the merger." See earnings call transcript later today. Shares are up 3.7% in pre-market trading.
Sources: Press release, Reuters, Bloomberg,
Commentary: Can Sirius Draw Attention To Results Rather Than Only The XM Merger? [24/7 Wall St.] • Is This Rehr’s End? Defending the Merits of a Sirius/XM Merger • A Timeline For the Sirius/XM Satellite Radio Merger
Stocks/ETFs to watch: SIRI, XMSR
Earnings call transcript: Sirius Satellite Radio Q1 2007
Alcan 2Q Profit Down on Forex Impact, Misses, Sales Rise 8%
Alcan Inc., which is being acquired by Rio Tinto plc for $38.1 billion, reported 2Q net income fell 3.7% to $438m, or $1.17/share. Forex losses due to a strong Canadian dollar nearly doubled to $193m. Adjusted EPS of $1.62 (+9.5% y/y) missed analysts' average estimate of $1.71. Revenues rose 8.2% to $6.61b, topping analyst expectations of $6.46b. Alcan benefited from higher aluminum realizations, better pricing and mix in the Engineered Products and Bauxite & Alumina businesses and increased volumes across most businesses. Aluminum prices gained 5.8% on the quarter, but profit at its metals unit fell 3.9% due to higher materials and energy costs. In a press release, CEO Dick Evans commented, "At the aluminum industry level, extremely strong Chinese demand growth should underpin ongoing favourable conditions. We continue to expect our financial results to reflect not only these favourable industry conditions, but also Alcan's very strong competitive position." NYSE-listed shares of Alcan gained 0.3% to $96.80 on Monday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Takeout Values For Miners Listed By Desjardins • What Does Rio Tinto's Takeover of Alcan Mean for the Rest of the Industry? • Alcan Acquiesces To Cash Deal With Rio Tinto
Stocks/ETFs to watch: Alcan Inc. (AL), Rio Tinto plc [ADR] (RTP), Alcoa Inc. (AA), BHP Billiton Limited [ADR] (BHP)
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• Fourth-largest U.S. energy company, Marathon Oil Corp. (MRO), reported its net income slipped to $1.55 billion, good for EPS of $2.25, on a fall in output. Consensus estimates were for earnings of $2.13 a share. In other news, the company announced it has agreed to buy Canada's Western Oil Sands Inc. for C$5.8 billion ($5.46 billion). (source: Reuters, Bloomberg)
• Electric utility American Electric Power Company (AEP) reported 2Q profit rose to $180 million, good for EPS of $0.64 after one-time items. Analysts were expecting adjusted EPS of $0.58. Revenue rose 7% to $3.1 billion. The company reaffirmed its full year guidance. (Source: Reuters)
• U.S. luxury retailer Coach, Inc. (COH) raised its FY2008 guidance after reporting across the board sales gains Tuesday, sending shares higher by 3% in pre-market trading. The company upped its EPS guidance to $2.06 for the full year, from a previous prediction of EPS of $1.67. Coach reported earnings in its latest quarter (4Q07) jumped 37%, topping analyst estimates by a penny. (source: AP)
• NYMEX Holdings, Inc. (NMX) reported a rise in earnings on growth in transaction and clearing fees, which were up 33% y/y. Net income came in at $41.7 million, good for EPS of $0.60 excluding one-time fees. Revenue jumped 34% to $163.6 million. Consensus estimates were for adjusted EPS of $0.58 on revenues of $164.3 million. (source: Reuters)
Today's Market (via Sam Collins, ChangeWave.com)
Recap of Yesterday's Action
Some reassuring results from the financial sector resulted in a stock market bounce yesterday following the worst week in more than three years. First, Standard & Poor's upgraded Morgan Stanley's (MS) credit rating, and then GMAC Financial Services reported a Q2 gain of $293 million following a Q1 loss of $308 million. And before the opening HSBC (HBC), Europe's largest bank, reported a 25% profit increase and said that there was little growth in bad debts in its U.S. portfolio compared to last year.
But the news wasn't all positive: Verizon (VZ) met earnings estimates but the stock fell by 1.2%, and American Home Mortgage Corp. (AHM) was downgraded by RBC Capital Markets and that stock dropped 1.5%. However, after the close, Sun Microsystems (SUNW) reported better-than-expected earnings for Q4, and the stock jumped in after market trading.
At the close, the Dow Industrials were up 93 points at 13,358. The S&P 500 gained 15 at 1,474, and the Nasdaq rose by 21 to close at 2,583. The NYSE traded 2 billion shares and the Nasdaq did 2.3 billion; advancers led decliners on the Big Board by 2/1 and by 17/13 on the Nasdaq.
Crude oil (September contracts) fell 19 cents to close at $76.83 a barrel, and the Amex Energy SPDR (XLE) gained $1.25 closing at $69.75. The reversal of the XLE also triggered our proprietary buy signal (CBR), so now the index should next test the high at $74.40. But a continuation of selling with a close under $68.11 would be very negative and could result in a further test of the low at $66.95.
August gold contracts gained $4 closing at $664.10, and the Philadelphia Gold/Silver Index [XAU] rose to $149.76 -- a gain of $4.94 -- bouncing off of the support line at its former breakout at $145 made in early July.
Last week was a rough one for the market, with the Dow Industrials shedding 586 points down 4.2% -- its worst week since March 2003 -- while the S&P 500 was off 4.9%. The Nasdaq fell by 4.7%. Small caps were the worst performers, and the Russell 2000 reflected that by falling 7.0%. Declining issues on the NYSE outnumbered advancing ones by almost 10/1, and volume set new records.
It wasn't economic news that resulted in the sell-off but news from the credit markets. Moody's (MCO) said that up to $1.37 trillion in loans are at serious risk of default. Countrywide Financial (CFC), the largest U.S. mortgage lender, said that delinquencies were rising even among "prime" loans. In the last three weeks, the aversion to risk for any kind of structured agreements has caused an estimated 35 corporate deals to be postponed or cancelled outright.
But following the sell-off, the consensus earnings for the S&P 500 now puts the P/E multiple at just 15.4 times forward, the lowest since 1991.
What the Markets Are Saying
Yesterday's reversal on the Dow Industrials came at just the right moment as it turned north after penetrating the June lows at 13,207. And even though the S&P 500 and the NYSE Composite didn't execute a reversal, they did turn up from Friday's lows, and the S&P bounced from its intermediate trend line which is just above the 200-day moving average.
But a one-day rally doesn't usually reverse a decline, despite the market turnaround we saw on Friday, July 20. What must now occur is a continuation of buying with a strong rally that takes the S&P 500 above 1,500 and then successfully tests yesterday's low at 1,455. In other words, a one-day reversal must be followed by a reversal pattern, the most perfect of which would look like a "W." This will take some time, so we had better prepare for a long hot August.
Today's Trading Landscape
Earnings are expected today from American Capital Strategies (ACAS), Avon Products (AVP), BRE Properties (BRE), Denny's (DENN), Diebold (DBC), Endurance Specialty Holdings (ENH), Entergy (ETR), General Motors (GM) (read above), Hilton Hotels (HLT), Marathon Oil (MRO), Markel (MKL), NCR (NCR), Nalco (NLC), Pilgrim's Pride (PPC), Safeco (SAFC), Sirius Satellite (SIRI) (read above), St. Joe (JOE), Waste Management (WMI) and many others.
Today is a very busy day for economic reports, which include consumer confidence, employment cost index, the June construction spending report, June personal income, personal spending, the July Chicago Purchasing Manager survey and the PCE deflator.
This morning, General Motors (GM) reported much better Q2 earnings than expected (read above). Analysts forecast $1.13, and GM came in with $1.56. The host of economic and earnings reports today should be in the spotlight, but the solid GM earnings should start things off on a positive note.
Asian Headlines (via Bloomberg.com)
• Asian Shares Advance, Posting Longest Monthly Winning Streak in 20 Years Asian stocks rose as higher earnings from Olympus Corp. and Hang Seng Bank Ltd. helped the region's benchmark post its longest monthly winning streak in 20 years.
• India Unexpectedly Increases Bank Reserve Requirements to Curb Inflation India's central bank unexpectedly ordered banks to curb lending and investment for the third time this year to soak up cash and keep a lid on inflation.
• Tokyo Electric Cuts Profit Forecast After Quake Shuts Main Nuclear Plant Tokyo Electric Power Co. (OTCPK:TKECF) said the earthquake that forced it to shut the world's largest nuclear plant will reduce profit by 79 percent because the company will have to burn costlier oil and gas to make up the shortfall.
• Mitsubishi UFJ, Mizuho Profits Drop as Credit Costs Rise, Lending Stagnant Mitsubishi UFJ Financial Group Inc. (MTU) and Mizuho Financial Group Inc. (MFG), Japan's largest banks, reported falling first-quarter profits as credit-related costs mounted.
European Headlines (via Bloomberg.com)
• European, Asian Stocks Rise, U.S. Futures Gain; Aviva, HSBC, UBS Advance European stocks rebounded from a five-day plunge and shares in Asia advanced for a second day on waning concern losses from U.S. subprime mortgages will damp global economic growth.
• European Business, Consumer Confidence Falls for Second Month on Oil, Euro European business and consumer confidence fell more than economists forecast in July on concern that higher oil prices and the euro's gains will curb economic growth.
• Ryanair Doubles Profit Forecast, Cuts Stansted Flights to Increase Demand Ryanair Holdings Plc (RYAAY), Europe's biggest discount airline, doubled its forecast for full-year earnings growth as the carrier slashed flights at London's Stansted airport to increase prices and reduce costs.
• European Corporate Bond Risk Falls by Record, Ending Three-Day Credit Rout The risk of owning European corporate bonds dropped by a record after home lender GMAC LLC (GMA) said subprime mortgage losses narrowed and Citadel Investment Group LLC bought the assets of a failed hedge fund.