Monthly Archives: February 2015

Market Insights – 2/27/2015 – Friday

Markets Take Breather to Cap Off a Directionless Week

After posting mixed performances throughout the week, U.S. equities finished out Friday on a down note, as a smaller-than-expected downward revision to 4Q GDP coupled with a surprising contraction in regional manufacturing activity to further solidify the lack of direction that appeared to be the week’s theme.

Equity news was light, as J.C. Penney’s results were flat, compared to forecasts of a profit, while Gap beat the Street by a penny and upped its share repurchases and dividend.

Treasuries finished higher following the reports, gold and crude oil prices gained ground, while the U.S. dollar was nearly flat.

The Markets…

The Dow Jones Industrial Average declined 82 points (0.5%) to 18,132

The S&P 500 Index lost 6 points (0.3%) to 2,104, overall momentum was negative with 9 of the 10 S&P 500 sectors lower with Consumer Staples +.40% being the lone sector in the green, while Energy, HealthCare and Industrials were the largest losers.

Small and MidCaps traded along with LargeCaps as the Small Cap 600 gave back .40% and the MidCap 400 lost .39%

The Nasdaq Composite fell 24 points (0.5%) to 4,964

In moderate volume, 836 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.59 to $49.76 per barrel, wholesale gasoline jumped $0.08 to $1.98 per gallon

The Bloomberg gold spot price moved $3.14 higher to $1,212.63 per ounce

Markets were mixed and close to unchanged for the week, as the DJIA was nearly even, the S&P 500 Index declined 0.3%, and the Nasdaq Composite Index gained 0.2%

Downward revision of 4Q GDP smaller than expected, headlining a host of data

The second look (of three) at 4Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 2.2%, revised lower from the 2.6% expansion reported in the first report. This compared to the Bloomberg forecast of a downwardly adjusted 2.0% increase. 3Q GDP expanded by an unrevised 5.0%. Also, personal consumption came in at a 4.2% gain for 4Q—but was still the strongest pace in four years—from the 4.3% increase previously reported, which was where economists had expected it to remain. Personal consumption grew by an unrevised 3.2% in 3Q. The downward revision reflected lower-than-initially-estimated inventory investment and an upward adjustment to imports, partially offset by positive revisions to nonresidential fixed investment and to state and local government spending.

On inflation, the GDP Price Index was upwardly revised to a 0.1% increase, compared to an expected unrevised flat reading posted in the earlier report, while the core PCE Index, which excludes food and energy, matched forecasts of an unadjusted 1.1% gain.

The final University of Michigan Consumer Sentiment Index was revised higher to 95.4 for February from the preliminary level of 93.6, and versus an expected 94.0, but was solidly below the 11-year high of 98.1 posted in January. Both components pertaining to current economic conditions and economic outlook were revised higher, but were down versus January. The 1-year and 5-year inflation projections were mixed, with the former rising and the latter dipping versus the prior month.

The Chicago Purchasing Managers Index showed growth in Midwest activity unexpectedly fell into contraction in February, dropping to 45.8—the first contraction reading (below 50) since April 2013—from the unrevised 59.4 level in January, and versus expectations of a decline to 58.0.

Pending home sales rose 1.7% month-over-month in January, versus the projected 2.0% gain, and following the upwardly revised 1.5% decline registered in December. Y/Y, sales were 6.5% higher last month, versus the 8.7% rise that was anticipated. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell more than expected in January.

Treasuries finished higher, as the yields on the 2-year note and the 30-year bond declined 3 basis points to 0.63% and 2.60%, respectively, while the 10-year notes was 4 bp lower at 2.00%.

Europe shows relative late-day resiliency, Asia mixed to close out the week

The European equity markets showed some modest strength in late-day action to finish mostly higher, with traders digesting a mixed bag of earnings reports in the region, along with the slightly stronger-than-expected read on U.S. 4Q GDP growth. In economic news, French consumer spending unexpectedly rose last month, while preliminary German consumer price inflation came in much hotter than expected for February.

Stocks in Asia finished mixed as traders digested a plethora of economic reports out of Japan, while Chinese stocks extended yesterday’s strong advance amid continued hopes of further stimulus measures, ahead of next week’s annual National People’s Congress meeting. Japanese equities ticked higher, with the yen weakening solidly yesterday versus the dollar following an upbeat read on durable goods orders and hotter-than-expected core consumer price inflation out of the U.S. Japanese economic data was mixed, with industrial production rising more than expected, while household spending fell more than estimated and consumer price inflation, excluding fresh food, came in cooler than projected.

Stocks in Australia traded higher amid some resiliency in mining and banking stocks, and Indian shares jumped ahead of tomorrow’s release of the government’s annual budget, which is expected to deliver business reform efforts.

Weekly ReCap: Stocks barely budge on week but post strong February gains

Stocks finished a stone’s throw from the unchanged mark for the week, though they closed out a strong February, which took the Dow and the S&P 500 to more record highs, while the Nasdaq threatened the 5,000 mark. Greek debt uncertainty continued, despite a four-month conditional extension of its rescue aid. Federal Reserve Chairwoman Janet Yellen delivered her semi-annual Congressional economic and monetary policy testimony, offering no new insight to the time table for the beginning of rate hikes, even as she offered an upbeat assessment of the U.S. economy. The U.S. dollar continued its rally after receiving a boost from an upbeat durable goods orders report and a hotter-than-expected read on core consumer price inflation. .

The week ahead: Labor and manufacturing reports set to take week’s top billing

Next week’s heavy U.S. economic calendar will be book-ended by Monday’s ISM Manufacturing Index and Friday’s February non-farm payroll report. We believe the U.S. economy has entered a period of self-sustaining growth, agreeing with Treasury Secretary Jack Lew, buoyed by still decent growth in manufacturing activity, despite signs of a slight downshift in activity. Our view is reinforced by the persistent strength in the labor market and we believe the consumer is poised to take over leadership within the U.S. economy.

Other reports on next week’s economic docket include: personal income and spending, Markit’s business activity reports, construction spending, monthly auto sales, weekly mortgage applications and jobless claims, the Fed’s Beige Book, 4Q non-farm productivity and unit labor costs, factory orders, the trade balance, and consumer credit.

U.S. 4th Quarter GDP Chopped to 2.2% from 2.6%

Consumers spent a bundle in fourth quarter, fresh government statistics confirm, but the U.S. economy as a whole grew slower than initially reported owing to a smaller buildup in business inventories.

Gross domestic product expanded by a 2.2% annual clip in the final three months of 2014, down from an initial read of 2.6%, the Commerce Department said Friday. That’s a sharp deceleration from a torrid 5% pace in the third quarter that marked the fastest U.S. growth in 11 years.

GDP is the value of all the goods and services the U.S. produces and it’s the best reflection of the nation’s economic health. For all of 2014, the U.S. grew at a 2.4% clip. That’s a small improvement from 2.2% in 2013 and 2.3% in 2012, but still well below the nation’s historic growth rate of 3.3%.

Most economists, however, expect cheaper gasoline and a rapidly improving labor market to boost consumer spending in 2015, with the U.S. potentially topping 3% annual growth for the first time in a decade. Americans have more money to spend because of much lower gasoline prices and the biggest spike in hiring in more than 15 years.

The reduction in fourth-quarter growth was mostly tied to slower restocking of warehouse shelves than the government originally estimated. The increase in inventories, which adds to GDP, was revised down to $88.4 billion from $113.1 billion.

The U.S. trade deficit was also a bit larger in the fourth quarter and that also contributed to the downward revision in GDP. Exports rose 3.2% instead of 2.8%, but imports were revised up to 10.1% from 8.9%. A bigger trade deficit subtracts from the nation’s growth.

The good news is that consumer spending — the largest engine of the economy — was very strong, revised government figures show. Outlays jumped a revised 4.2% in the fourth quarter, down from a preliminary estimate of 4.3%. That was the largest gain since 2010.

In the first quarter, the U.S. is forecast to expand at a 2.9% rate, according to economists polled by MarketWatch. And some analysts say the smaller increase in inventories in the waning months of 2014 suggests companies could do more restocking in the first quarter and give the economy a bit more sizzle.

Still, not all signs are flashing go. The export picture has been clouded by tepid growth around the world and a stronger dollar that makes U.S. goods more costly in global markets.

The outlook on inflation, meanwhile, was little changed. The Federal Reserve’s preferred price gauge known as the PCE index fell at a 0.4% annual rate in the fourth quarter, the result of the collapse in gasoline prices. The core PCE excluding food and energy increased at 1.1% annual pace.

Market Insights 2/26/2015

Equity Indices Divided Over Flatline

The U.S. equity markets closed mixed for the third time this week as stocks are seemingly awaiting a catalyst to decisively drive direction. Treasuries were lower, while the domestic docket boasted an upbeat durable goods orders report and an increase in core consumer price inflation which sparked a rally for the U.S. dollar.

In other economic news, regional manufacturing growth decelerated and weekly initial jobless claims jumped. Lastly, gold was higher and crude oil prices were lower.

The Markets….

The Dow Jones Industrial Average decreased 10 points (0.06%) to 18,214

The S&P 500 Index lost 3 points (0.15%) to 2,111, sector results were mixed with Technology +.63%, HealthCare +.28% and Consumer Staples +.14% and higher and Energy the largest losers giving back 1.85%

Small and MidCaps traded mixed with the SmallCap 600 up .29% and the MidCap 400 down .25%.

The Nasdaq Composite moved 21 points (0.4%) higher to 4,988

In moderate volume, 716 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil dropped $2.82 to $50.99 per barrel, wholesale gasoline lost $0.02 to $1.90 per gallon

The Bloomberg gold spot price increased $3.95 to $1,208.95 per ounce

Durable goods orders rebound, consumer inflation mixed, and jobless claims rise

Durable goods orders rose 2.8% month-over-month in January, compared to the Bloomberg estimate of a 1.6% increase, while December’s 3.4% drop was revised lower to a 3.7% fall. Ex-transportation, orders increased 0.3% m/m, versus the forecast of a 0.5% gain, while December’s figure was revised downward to a 0.9% decrease. Finally, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, increased 0.6%, compared to the projected 0.4% gain, and following the negatively revised 0.7% decline in the month prior.

The Consumer Price Index (CPI) was down 0.7% m/m in January, versus the estimated 0.6% decrease, after December’s upwardly revised 0.3% decline. However, the core rate, which strips out food and energy, rose 0.2%, compared to the projected 0.1% rise, and December’s flat reading was adjusted to a 0.1% gain. Y/Y, prices were 0.1% lower for the headline rate—the first y/y decline since October 2009—matching the forecasted dip, while the core rate was 1.6% higher, inline with expectations. December’s y/y figures showed un-revised gains of 0.8% and 1.6% for the headline and core rates respectively. Low inflation is one of the reasons we believe could keep the pace and magnitude of rate hikes slower and lower than in past cycles.

Weekly initial jobless claims rose 31,000 to 313,000 last week, well above the expected 290,000 level, as the prior week’s figure was revised downward by 1,000 to 282,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 11,500 to 294,500, while continuing claims fell by 21,000 to 2,401,000, north of the forecasted 2,394,000 level.

The Kansas City Fed Manufacturing Activity Index showed growth in the Midwest region unexpectedly decelerated in February, declining to 1 from 3 in January, where economists had expected it to remain, with a reading above zero depicting expansion.

Treasuries were lower, with the yield on the 2-year note rising 5 basis points to 0.65%, while the yields on the 10-year note and the 30-year bond increased 7 bps to 2.04% and 2.64%, respectively.

Tomorrow, the U.S. economic calendar will offer the second look (of three) at 4Q GDP, forecasted to show a 2.0% quarter-over-quarter annualized rate of expansion, down from the 2.6% growth reported in the first release. Personal consumption is expected to have increased 4.3% q/q, while on inflation, the GDP Price Index is anticipated to show no change and the core PCE index, which excludes food and energy, is forecasted to show q/q growth of 1.1%.

Europe higher on upbeat economic data, Asia mixed

The European equity markets finished to the upside, led by some upbeat economic data in the region, while traders digested some mixed earnings reports. German consumer confidence improved more than expected for March and the nation’s unemployment change dropped more than anticipated for this month. Elsewhere, Spain’s 4Q GDP was unrevised at a 2.0% y/y pace of expansion, while that nation’s home lending statistics for December rose solidly. In other economic news, U.K. y/y 4Q GDP growth was unrevised at a 2.7% pace.

Stocks in Asia finished mixed following the subdued session in the U.S. yesterday, while Japanese equities registered a fresh 15-year high, with noticeable strength coming from the oil exploration and production sector on the solid gains for oil prices yesterday. Chinese gains were supported by a solid advance in property-related and financial stocks. After the closing bell, Hong Kong reported stronger-than-expected January export and import growth, though the latter outpaced the former. Australia’s S&P/ASX 200 Index declined on weakness out of the financial sector and as a report showed 4Q capital expenditures fell more than expected. Finally, equity shares in India dropped as the government raised rail freight costs in its annual railway budget, per Bloomberg.

The international economic docket for tomorrow will be dominated by releases from Japan, as the island nation is set to report its jobless rate, CPI, industrial production, retail sales, vehicle production, housing starts and construction orders. Additional releases from across the pond will include GfK Consumer Confidence from the U.K. and national and regional CPI reports from Germany.

Market Insights 2/25/2015

Stocks Lack Direction

The U.S. equity markets closed a choppy trading session near the flatline as Federal Reserve Chairwoman Janet Yellen concluded her two-day testimony on Capitol Hill. Treasuries were mixed as data delivered from the domestic docket showed that January new home sales dipped and weekly mortgage applications declined.

A mixed bag of equity earnings may have aided volatility as Hewlett-Packard, Dollar Tree and Target beat quarterly earnings estimates, but each offered disappointing guidance, while Lowe’s Companies posted favorable 4Q results and Chesapeake Energy cut its spending and production outlook.

Elsewhere, gold and crude oil prices were higher and the U.S. dollar traded lower.

The Markets…

The Dow Jones Industrial Average increased 15 points (0.08%) to 18,225

The S&P 500 Index lost 2 points (0.08%) to 2,114, S&P sectors produced mixed results with 4 up and 6 down. Winners included Consumer Discrentionary +.77% and Energy +.55%, while Utilities -1.64% and Technology -.62% lagged.

Small and MidCaps traded along with larger caps as the MidCap 400 lost .10% and the SmallCap 600 gave back .06%

The Nasdaq Composite moved 1 point lower to 4,967

In moderate volume, 703 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil added $1.71 to $50.99 per barrel, wholesale gasoline jumped $0.10 to $1.92 per gallon

The Bloomberg gold spot price increased $4.13 to $1,204.66 per ounce

New home sales top forecasts, while mortgage applications decline

New home sales dipped 0.2% month-over-month in January, to an annual rate of 481,000 units from December’s upwardly revised 482,000 unit pace, and compared to Bloomberg’s forecast of a 470,000 rate. The median home price rose 9.1% y/y at $294,300, but was down 2.6% m/m. The supply of new home inventory remained at 5.4 months at the current sales pace. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. Regionally, m/m sales in the Midwest were nicely higher, while sales in the Northeast fell sharply.

The MBA Mortgage Application Index declined 3.5% last week, after dropping by 13.2% in the previous week. The decrease came as a 7.5% fall in the Refinance Index more than offset a 4.6% rise for the Purchase Index, with the average 30-year mortgage rate increasing 6 basis points to 3.99%.

Federal Reserve Chairwoman Janet Yellen concluded her semi-annual economic and monetary policy testimony on Capitol Hill in front of the House Financial Services Committee, though her prepared remarks did not differ from what she delivered to the Senate yesterday. Yellen provided an upbeat assessment of the U.S. economy but did not offer any new time frame for the beginning of interest rate hikes. We expect the Fed to hike short-term rates later this year but the pace and magnitude is likely to be slower and lower than in past cycles.

Treasuries finished mixed, with the yield on the 2-year note rising 1 bp to 0.60%, while the yield on the 10-year note declined 2 bps to 1.96% and the 30-year bond rate was 3 bps lower at 2.56%.

Coming off a couple monthly declines, tomorrow’s volatile durable goods orders report is projected to show the headline figure rebounded by 1.6% m/m in January, after falling 3.4% in December. Excluding transportation, orders are anticipated to rise 0.5%, following December’s 0.8% decline, while non-defense capital goods orders excluding aircraft—a gauge of business spending—are estimated to increase 0.3%, on the heels of the prior month’s 0.6% drop.

Additional reports slated for release on tomorrow’s economic calendar include the latest read on the Consumer Price Index (CPI), with economists forecasting a decline of 0.6% for January, following the 0.4% m/m contraction in December, while the core rate, which excludes food and energy, is expected to have inched 0.1% higher m/m, matching its rise the month prior. As well, we will receive the latest weekly initial jobless claims report, expected to increase to a level of 290,000 from the 283,000 registered the week prior. Rounding out the day will be the Kansas City Fed Manufacturing Index, with economists expecting no change from the previous level of 3 for February, with a level above zero denoting expansion in manufacturing activity in the Midwest region.

Europe mostly lower on mixed global earnings reports

The European equity markets traded mostly lower, despite a reprieve from Greek debt concerns after the nation was awarded a conditional extension of its bailout aid yesterday, while traders sifted through some mixed global earnings reports. In economic news, French consumer confidence improved more than expected in February.

The U.K. FTSE 100 Index was down 0.2%, Germany’s DAX Index finished flat, France’s CAC-40 Index, Spain’s IBEX 35 Index and Switzerland’s Swiss Market Index all dipped 0.1%, while Italy’s FTSE MIB Index dropped 1.0%.

Stocks in Asia finished mixed with traders digesting an unchanged stance by U.S. Fed Chair Yellen, while an upbeat Chinese manufacturing report and the approved Greek aid extension failed to spark sentiment. Returning to action following a week-long New Year holiday break, Chinese equities declined despite HSBC’s preliminary Manufacturing PMI Index improving to 50.1 in February, from 49.7 in January, and compared to the 49.5 reading that economists had projected. Stocks in Hong Kong ticked higher after the nation reported 2.3% y/y growth in 4Q GDP, as expected, but a deceleration from the 2.9% expansion posted in the previous year. Japanese equities dipped with the yen gaining some ground against the U.S. dollar as the Fed’s Yellen stayed the course on monetary policy in the U.S., while equity shares in Australia advanced on strength in consumer goods and basic materials holdings and South Korean stocks were led higher by commodity-related issues.

Company Specific News

Hewlett-Packard Co. warned the negative impact of the U.S. dollar’s strength will be significantly greater than anticipated, issuing softer-than-expected 2Q and full-year earnings-per-share (EPS) guidance. For more on the impact of currency fluctuations on global earnings. The outlook came even as its fiscal 1Q EPS of $0.92 topped the FactSet estimate by a penny, while revenues of $26.8 billion fell 5.0% year-over-year (y/y), short of the $27.4 billion expectation.

Target Corp’s 4Q adjusted EPS of $1.50, topped the $1.46 estimate, while revenue growth of 4.1% y/y to $21.8 billion, compared to expectations of $21.7 billion. Same-store sales rose 3.8% y/y, versus the 3.0% growth that was anticipated. 1Q EPS guidance had a midpoint that was below forecasts.

Lowe’s Companies Inc. posted a three-cent 4Q EPS beat of $0.46, on revenues of $12.5 billion, which grew 7.6% y/y and topped the $12.3 billion forecast. Same-store sales rose 7.3%, above the 5.2% expectation. Full-year EPS, revenue and same-store sales guidance also exceeded estimates.

Dollar Tree Inc’s 4Q EPS ex-items of $1.16 exceeded estimates by two cents, while a 10.8% y/y increase in revenues roughly matched expectations, and same-store sales growth of 5.5% topped the estimated 5.0% rise. Full-year EPS guidance missed forecasts, while its revenue guidance was mostly below projections.

Chesapeake Energy Corp. announced 4Q profits ex-items of $0.11 per share, below the $0.23 forecast, though 11.2% higher y/y revenues of $5.1 billion exceeded the $4.6 billion that was anticipated. The oil and natural gas company lowered its capital program and production outlook to “not only to weather the current difficult commodity price environment we face today, but to thrive in it.”

Earnings Update

The Q4 earnings season has effectively come to an end for most of the major sectors, with the Retail sector as the only one that has a significant number of reports still awaited. It has been a lackluster reporting season, with a disconcerting mix of Energy sector weakness, dollar strength and global growth challenges not only weighing on Q4 results but also causing estimates for the current and following quarters to fall at a pace that we haven’t seen in recent periods.

Keep in mind however that while the Q4 reporting cycle is moving towards the finish line for the S&P 500 index, we will still have plenty of ways to go for the small-cap universe of stocks. For the small-cap Russell 2000 index, we the reporting cycle is reaching peak level this week, with 332 index members reporting results, taking the tally by the end of the week to a little over 69% of the index’s total membership.

Retail Sector Scorecard

Retail sector stocks have been strong performers lately, with sector stocks in the S&P 500 handily outperforming the broader index in both the year-to-date and trailing 52-weeks as well as in response to quarterly results. In fact, the Retail sector’s two-day stock price performance around earnings announcements is the best of all 16 Zacks sectors.

As of February 23rd, we have seen Q4 results from 24 retailers in the S&P 500 index (out of the 42 total) that combined account for almost 70% of the sector’s total market cap in the index. Total earnings for these 24 retails are up +2.0% from the period last year, on +5.6% higher revenues, with 66.7% beating EPS estimates and 54.2% coming ahead of top-line expectations.

Combining the Retail sector earnings for the 24 companies that have come out with the 18 still to come, the sector’s total earnings in Q4 are expected to be up +4.1% on 5.1% higher revenues, with margins losing ground. This compares to earnings growth rates of +2.7% on +5.8% revenue gains in Q3. Margins have been an issue for the sector for quite some time, with management teams blaming the ‘overly promotional environment’ for the trend.

The modest improvement in the sector’s results thus far appears inconsistent with the market’s positive reaction to the results thus far. As mentioned earlier, the average two-day price gain around earnings announcement is the highest for retailers at +3.63% (this is the price change from the day before the earnings announcement to the day after). The second last column in the scorecard table below presents this data.

The Q4 Scorecard (as of 2/23/2015)

We have seen Q4 results from 440 S&P 500 members that combined account for 91.5% of the index’s total market capitalization. Total earnings for these companies are up +6.3% from the same period last year, with 68.3% beating EPS estimates. Total revenues are up +1.5% from the same period last year and 55.7% of them are coming ahead with top-line estimates.

While we are quite further along in the reporting cycle for the S&P 500 index, we still have some ways to go for the small-cap indexes. At the end of the write-up, we share the Q4 Scorecard for the Russell 2000 index, where only 53.4% of the companies have reported results already.

The reference to the favorable stock price response of Retail sector companies to the results thus far is evident from the ‘Price Impact’ column in the scorecard table (second last column). As you can see, the average stock price gain for the Retail sector stocks at +3.63% is the highest of all the sectors.

There aren’t that many surprises with respect to earnings and revenue ‘surprises’, with beat ratios broadly tracking in-line with other recent periods even though revenue beat ratios are a tad on the low side. But the growth rates, particularly on the revenue side, are decidedly on the weak side relative to other recent periods.

The ‘Apple Effect’

The growth issues facing the large-cap companies seem to be non-existent for the largest of them all – Apple (AAPL – Analyst Report). As discussed in this space before, Apple’s top and bottom-line growth rates would be the envy of any company, let alone an operator this big. Apple’s revenue and earnings numbers are so big that they have a material bearing on the aggregate growth picture for the S&P 500 index as well. You have to isolate the ‘Apple Effect’ to get a true sense of the Q4 growth pace at this stage in reporting cycle for the index as well as the Tech sector.

The Finance Drag

In fairness to the aggregate growth picture, Apple isn’t the only outsized influence in the results – there is plenty more on the negative side that is dragging the growth rate down. Finance was an early drag, with tough comparisons at Citigroup (C – Analyst Report) and J.P. Morgan (JPM – Analyst Report) restricting the sector’s earnings growth to a decline of -0.5% on +0.6% higher revenues. Excluding the drag from the Finance sector, total earnings for the remaining S&P 500 companies would be up +7.9% on +1.6% higher revenues. The +7.9% ex-Finance earnings growth rate is actually better than what we have been seeing from these companies in other recent quarters, though the revenue growth rate is still on the low side.

Oil – The Biggest Drag

The Energy sector’s travails are well known by now, a function of the extraordinarily sharp drop in oil prices in recent months. With results from 95.9% of the Energy sector’s total market cap in the S&P 500 already, the sector’s earnings are down -18.7% on -14.3% lower revenues. In terms of positive surprises, this is actually better performance from this group of Energy sector companies than has been the case in other recent quarters, but the growth rates are extremely low.

The Composite Q4 Picture

Combining the actual results for the 440 S&P 500 companies that have reported with the 60 still-to-come reports, total Q4 earnings are expected to be up +6.7% on 1.6% higher revenues.

Eight sectors – Transportation, Business Services, Medical, Utilities, Construction, Technology, Autos, and Aerospace –are expected to have double-digit earnings growth in Q4, while two sectors are expected to have lower total earnings this quarter relative to the year-earlier period. The Energy sector has the weakest growth profile for understandable reasons, with total earnings for the sector expected to be down -17.9% on -14.4% lower revenues.

2015 Estimates Falling Sharply

Estimates for the current period (2015 Q1) have come down sharply, with total earnings for the quarter now expected to be down -5.1% from the same period last year, down from the +10.8% growth rate expected in early October. As was the case in Q4, Energy is the biggest driver of this negative revisions trend, but the picture isn’t that inspiring beyond the Energy sector either. While total Q1 earnings for the Energy sector were expected to be down (only) -35.6% in mid-December, they are now expected to be down -62.6% year over year.

Russell 2000 Scorecard (as of February 23rd)

We have seen Q4 results from 1063 Russell 2000 members or 53.4% of the index’s total members. Total earnings for these 1063 companies are up +21.9% from the same period last year on +10.1% higher revenues, with 49.3% beating EPS estimates and 36.6% coming ahead of top-line expectations.

The Bottom Line

As we have stated in this space before, the Q4 earnings season has essentially been a story of three inter-related factors – oil, the U.S. dollar and global economic growth. Oil aside, the other two factors have been at play in other recent quarters as well. But all three came together into their own this earnings season. We saw that play out in actual Q4 results and how estimates for the current and coming periods have unfolded. With no respite on any of those fronts, estimates likely have more to go before stabilizing.

Market Insights 2/24/2015

Equities Push Higher

The U.S. equity markets closed the day mostly higher as traders reacted to Federal Reserve Chairwoman Janet Yellen delivering economic and monetary policy testimony to the Senate Banking Committee.

Treasuries were higher as the domestic docket showed a solid rise in home prices and accelerated growth in services sector activity, though reads on Consumer Confidence and regional manufacturing fell short of expectations.

Gold, crude oil prices, and the U.S. dollar were lower.

The Markets….

The Dow Jones Industrial Average increased 92 points (0.5%) to 18,209

The S&P 500 Index added 6 points (0.3%) to 2,115, 9 of the 10 S&P sectors were higher with Utilities .74%, Consumer Discretionary +.48% and Financials +.40% moving higher while HealthCare took a pause and was the lone sectors in the red -.12%

Small and MidCaps made small gains along with their LargeCap brethren, with the SmallCap 600 higher by .25% and the MidCap 400 higher by .14%

The Nasdaq Composite moved 7 points (0.1%) higher to 4,968

In moderate volume, 714 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil shed $0.17 to $49.28 per barrel, wholesale gasoline was $0.02 lower at $1.82 per gallon

The Bloomberg gold spot price lost $1.54 to $1,200.29 per ounce

Mixed data, while Fed’s Yellen delivers Congressional testimony

The Consumer Confidence Index fell to 96.4 in February from an upwardly revised 103.8 in January and compared to the projected 99.5 level of economists surveyed by Bloomberg. The disappointing confidence figure came amid month-over-month declines for the components pertaining to the present situation and expectations of business conditions. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—deteriorated to -5.7 from -3.9 last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 4.5% y/y in December, above the 4.3% increase that economists had expected. Moreover, m/m, home prices were up by 0.9% on a seasonally adjusted basis for December, exceeding forecasts calling for a 0.6% increase.

The preliminary Markit U.S. Services PMI Index showed growth in the sector accelerated more than expected, rising to 57.0 in February from 54.2 in January, and compared to the modest increase to 54.5 that economists had expected, with a reading above 50 denoting expansion. Markit said services activity growth was the strongest in four months, and payroll numbers marked five years of sustained job growth, while input cost inflation remains only modest. The release is independent and differs from the Institute for Supply Management’s (ISM) non-Manufacturing Index, as it has less historic value and Markit weights its index components differently. Markit’s services sector gauge is the companion to its manufacturing index, which last week unexpectedly improved, rising to 54.3 from 53.9 in January.

The Richmond Fed Manufacturing Activity Index showed growth in the Mid-Atlantic region unexpectedly fell to zero in February—the lowest since March 2014—from 6 in January, where economists had forecasted it to remain. A reading of zero is the demarcation point between expansion and contraction.

Federal Reserve Chairwoman Janet Yellen delivered her semi-annual economic and monetary policy testimony on Capitol Hill in front of the Senate Banking Committee. Yellen noted the overall progress in the U.S. economy, highlighting the improved labor market situation, as well as solid increases in domestic spending and production.

On monetary policy, Yellen restated that the central bank can be “patient” in beginning to raise the fed funds rate, reflecting the fact that inflation continues to run well below its objective and that room for sustainable improvements in labor market conditions still remains. Yellen also clarified the “patient” language as meaning that it is unlikely that economic conditions will warrant an increase in the target range for the fed funds rate “for at least the next couple” meetings. Yellen added that, “Before then, the Committee will change its forward guidance.

It’s important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.”

Obviously, the Fed remains positive on the U.S. economic outlook, while giving a nod toward international concerns. It appears to be on track for raising rates at some point this year, although the timing could be delayed should global drama escalate or the rising dollar become detrimental to the U.S. economy. But investors need not fear, because although the path toward an initial rate hike can have a few potholes, the stock market has historically performed fairly well. And after watching many global central banks walk back recent rate hikes due to unexpected economic weakness, the Fed seems set on a very gradual pace of rate increases assuming the economic data is confirming.

Treasuries were higher, with the yield on the 2-year note declining 5 basis points to 0.55%, the yield on the 10-year note dropping 8 bps to 1.98%, and the 30-year bond rate falling 7 bps to 2.58%.

Tomorrow, the U.S. economic calendar will be light, offering reports on new home sales, forecasted to decline in January to an annual rate of 470,000 units, compared to the 481,000 posted in December, as well as MBA Mortgage Applications.

Europe higher as Greek shares rally

The European equity markets finished higher, as traders focused on today’s economic and monetary policy testimony from U.S. Federal Reserve Chairwoman Janet Yellen. Greek stocks rallied sharply in their return to action following yesterday’s holiday, with the nation submitting its policy plans to its international creditors aimed at securing an extension of its current rescue loan package—which was conditionally agreed upon on Friday—and potentially paving the way for a new debt deal. Eurozone finance ministers approved a four-month extension of Greece’s rescue aid after reviewing its policy plan that included maintaining current state-asset sales, consolidating pension funds to reduce costs and revamping tax collection and administration, per Bloomberg. However, the deal gives Greece until April to show that it is following through on their proposed plans in order to continue to receive aid.

In economic news, Germany’s 4Q GDP growth was unrevised at a 0.7% quarter-over-quarter rate, suggesting a solid rebound from the 0.1% expansion seen in 3Q, as private consumption, capital and construction investment, and exports all boosted output for Europe’s largest economy. Finally, eurozone consumer price inflation fell inline with economists’ expectations for January.

The U.K. FTSE 100 Index and France’s CAC-40 Index rose 0.5%, Germany’s DAX Index and Spain’s IBEX 35 Index advanced 0.7%, Italy’s FTSE MIB Index traded 0.8% higher, Greece’s ASE Athens Index jumped 9.8%, and Switzerland’s Swiss Market Index ticked 0.1% higher.

Stocks in Asia finished mostly to the upside, ahead of today’s monetary policy testimony in the U.S. from Fed Chair Yellen, while traders await details of Greece’s reform plan. Volume remained subdued as markets in mainland China remained closed for one more session due to the New Year holiday. Japan’s Nikkei 225 Index extended its 15-year high, supported by some weakness in the yen. Elsewhere, equities in Australia, South Korea and India closed higher, while the Hong Kong Hang Seng Index bucked the regional trend, bogged down by some weakness in banking stocks.

Company Specific News

Dow member Home Depot Inc. reported 4Q earnings-per-share (EPS) ex-items of $1.00, above the $0.89 consensus estimate of analysts surveyed by FactSet, with revenues growing 8.3% year-over-year (y/y) to $19.2 billion, exceeding the $18.7 billion that the Street had anticipated. The world’s largest home improvement retailer said its 4Q same-store sales—sales at stores open at least a year—rose 7.9% y/y, versus the 5.4% gain that analysts had projected, with U.S. same-store sales increasing 8.9%. HD issued mixed full-year guidance, warning that if currency rates remain where they are today, this would cause a negative impact to fiscal 2015 net sales growth and earnings. Separately, the company raised its quarterly dividend by 26.0% to $0.59 per share and announced an $18.0 billion share repurchase program, which will replace its previous buyback authorization.

Macy’s Inc. posted 4Q EPS ex-items of $2.44, above the $2.39 that the Street had anticipated, as revenues rose 1.8% y/y to $9.4 billion, mostly inline with what analysts had estimated. M said its quarterly same-store sales increased 2.5% y/y, topping the 2.1% growth that analysts had projected. The department store retailer issued a softer-than-expected full-year outlook and shares are trading lower.

Comcast Corp. announced 4Q adjusted earnings of $0.77 per share, one penny below analysts’ forecasts, with revenues increasing 4.8% y/y to $17.7 billion, roughly inline with the Street’s expectations. Separately, the company raised its quarterly dividend by 11.1% to $0.25 per share, and boosted its share repurchase plan authorization to $10.0 billion. Shares are trading higher.

Express Scripts Holding Co. achieved 4Q EPS ex-items of $1.39, one cent north of the Street’s projection, as revenues increased 2.1% y/y to $26.3 billion, above the $25.7 billion that analysts had anticipated. The patient prescription drug manager issued 1Q and full-year EPS guidance that came in mostly below forecasts. ESRX is moving nicely to the upside.

Toll Brothers Inc. reported fiscal 1Q profits of $0.44 per share, well above the $0.29 that analysts had estimated, with revenues rising 33.0% y/y to $854 million, compared to the $780 million that the Street was looking for. The luxury homebuilder raised the low end of its full-year home delivery and average price outlooks. TOL is gaining solid ground.

Yellen Removes Obstacle to an Eventual Rate Hike

Federal Reserve Chairwoman Janet Yellen on Tuesday took another step closer to the first rate hike since 2006. In testimony to the Senate, Yellen signaled to financial markets the Fed would soon drop the word “patient” from its forward guidance. She softened the blow with several dovish comments that suggest no hurry about actually moving.

Markets had expected that when the Fed dropped “patient” from its policy statement that it would mean the a rate hike would follow in the next couple of meetings. That interpretation came from signals Yellen had sent in December.Now, however, Yellen stressed that the Fed wasn’t on automatic pilot and only wanted the flexibility to move “on a meeting-by-meeting basis.”

Several analysts said a June rate hike remained on the table if the Fed decides to drop the word “patient” from its policy statement on March 17-18. Fed officials have said they want to drop “patient” from the Fed’s next policy meeting scheduled in mid-March. Minutes of the January meeting released last week showed Fed officials were concerned with how the market might react if “patient” was dropped.

Economists has said the Fed didn’t want the repeat the “taper tantrum” of the summer of 2013, when interest rates spiked at the first hint from Fed officials that they were going to end their third round of bond buying, commonly known as QE3.

Yellen’s summation of the current economic environment suggests she is in no hurry to raise rates. “Too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective,” despite the falling unemployment rate, she said.

Equity markets at first saw Yellen’s testimony as bearish, but then rallied once they let the “whole thing sunk in” said one floor trader.

Fed watchers remain torn between whether the Fed will hike in June or September. Both camps found language in her testimony to justify their positions.

Chair Janet Yellen’s prepared congressional testimony, which struck a more upbeat tone on labor market conditions and included a detailed discussion of how the forward guidance will be amended, suggests that the Fed is on course to begin raising its policy rate at the June FOMC meeting in our opinion. But, it’s important to note that every piece of economic data will be closely reviewed and highly scrutinized before anything is done to tighten rates.

Senate Democrats urged the Fed not to raise rates prematurely. Sen. Charles Schumer of New York said the central bank shouldn’t move until there were signs of wage growth. While another Senate Republican, Sen. Pat Toomey of Pennsylvania, said the time had long since past for the first tightening move.

Yellen signaled the outlook of inflation will be the deciding factor of when the Fed will hike rates for the first time since 2006.

“Provided that labor market conditions continue to improve and further improvement is expected, the Fed policy committee anticipates that it will be appropriate to raise the target range of the federal funds rate when, on the basis of incoming data, the committee is reasonably confident that inflation will move back over the medium term toward our 2% objective,” Yellen said.

Yellen said inflation continues to run below the Fed’s 2% target in large part due to the drop in oil prices. Core inflation has also moved lower, she said, in part because of declines in the prices of many imported items but also some pass-through of lower energy costs into core consumer prices.

She repeated that the Fed expects inflation to decline further in the near term before rising gradually toward 2%.

Market Insights 2/23/2015

Markets Exhibit Cautionary Tone

U.S. equities finished mixed, with the Dow and S&P 500 moving away from their recent record highs and the Nasdaq continuing its winning streak, amid some disappointing U.S. economic data, while the continued drop in crude oil prices pressured energy stocks.

However, the moves were modest as equities drift from positive to negative in a tight trading range, as traders may have been somewhat cautious ahead of Tuesday and Wednesday’s semi-annual congressional testimony from Fed Chairwoman Janet Yellen. Meanwhile,

Treasuries traded higher, with yields lower, as the domestic economic calendar showed existing home sales fell more than expected and regional manufacturing activity in the Dallas region surprisingly dropped further into contraction territory.

Finally, gold and the U.S. dollar were higher.

The Markets…

The Dow Jones Industrial Average declined 24 points (0.1%) to 18,116

The S&P 500 Index was nearly unchanged at 2,110, results were mixed in the S&P 500 with 4 sectors higher and 6 lower. Utilities +.68%, HealthCare +.46% and Consumer Staples +.28% higher while Energy -.41%, Industrials -.43% and Financials -.25% moved lower.

Small and MidCaps traded along with LargeCaps as the MidCap 400 lost .08% and the SmallCap 600 added a modest .10% by days end.

The Nasdaq Composite inched 5 points (0.6%) higher to 4,961, marking its ninth-straight session in the green

In moderate volume, 733 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.36 to $49.45 per barrel, wholesale gasoline was unchanged at $1.84 per gallon

The Bloomberg gold spot price rose $0.41 to $1,202.35 per ounce

Existing home sales drop more than expected

Existing-home sales in January came in below expectations, falling 4.9% month-over-month to a 4.82 million annual rate and compared to the Bloomberg forecast of a decline to a 4.95 million pace. December’s figure was adjusted modestly higher to a 5.07 million unit pace. All major regions experienced declines in January, with the Northeast and the West seeing the largest. The median existing-home price was higher by 6.2% from a year ago at $199,600. Single-family home sales fell 5.1% m/m, but were 3.9% higher y/y, while multi-family sales were down 3.5% m/m, and were 1.8% lower versus the same period a year ago. The supply of homes available for sale were 0.5% higher m/m to 1.87 million units, but was 0.5% lower y/y, equating to 4.7 months of supply at the current sales pace, up from 4.4 months in December. Lawrence Yun, Chief Economist for the National Association of Realtors (NAR), said, “Although sales cooled in January, home prices continued solid y/y growth.” Yun added that, “The labor market and economy are markedly improved compared to a year ago, which supports stronger buyer demand. The big test for housing will be the impact on affordability once rates rise.”

The U.S. economy appears to be firmly in self-sustaining expansion mode. While welcome, that could make near-term gains in the stock market harder to come by as the expectation bar has been raised. However, one recent bright spot has been housing, with a huge surge in household formation, suggesting demand that may need to be met with increased construction. The Fed remains positive on the U.S. economic outlook, while giving a nod toward international concerns. It appears to be on track for raising rates at some point this year, although the timing could be delayed should global drama escalate or the rising dollar become detrimental to the U.S. economy. But investors need not fear, because although the path toward an initial rate hike can have a few potholes, the stock market has historically performed fairly well. Plus, after watching many global central banks walk back recent rate hikes due to unexpected economic weakness, the Fed seems set on a very gradual pace of rate increases assuming the economic data is confirming.

In regional manufacturing news, the Dallas Fed Manufacturing Index showed the contraction in activity for the region unexpectedly accelerated, falling to -11.2 for February—the lowest since April 2013—from January’s -4.4 level, and compared to the -4.0 figure that was forecasted by economists. A reading below zero denotes contraction.

Treasuries finished higher, as the yield on the 2-year note declined 3 basis points to 0.61%, while the yield on the 10-year note lost 5 bps to 2.06%, and the 30-year bond rate moved 6 bps to the downside to 2.66%.

Other reports slated for release tomorrow include Consumer Confidence, forecasted to decline to a level of 99.5 for February from the 102.9 posted in January, as well as the Richmond Fed Manufacturing Index, with economists expecting a reading of 6 for February, matching that registered in the month prior. Rounding out the day will be Markit’s preliminary Services PMI Index, expected to inch higher to a level of 54.5 for February from the 54.2 announced in January.

Europe and Asia mostly higher following agreement to extend Greece’s rescue program

The European equity markets traded mostly to the upside, with sentiment being supported by Friday’s decision to extend Greece’s rescue aid for four months, while the nation tries to strike a new debt deal with its international creditors from the European Central Bank, International Monetary Fund and European Commission. However, Greece needs to present reform proposals to its international creditors today, while its current bailout agreement was originally set to expire at the end of this month. Meanwhile, traders digested a read on German business sentiment, with the Ifo Business Climate Index—a survey of 7,000 executives— improving slightly to 106.8 in February, the fourth-straight monthly rise, from 106.7 in January. However, the reading came in below the increase to 107.7 that economists had projected. Finally, Greek markets were closed today for a holiday.

Stocks in Asia finished mostly to the upside, with sentiment also finding some support from Friday’s agreement in Europe to extend Greece’s financial rescue program by four months as it tries to strike a new debt agreement with its international creditors. Japanese equities finished higher, extended its 15-year high, despite the minutes from the Bank of Japan’s last policy meeting showing some disagreement among policymakers about the central bank’s ability to meet its inflation target, while South Korea’s market traded higher in its return from a long New Year celebration. Finally, volume remained constrained as several markets remained closed for the Chinese New Year celebration, including mainland China.

Set for release on tomorrow’s international economic calendar include the following items: Japan’s Services PMI, GDP from Germany, business confidence from France, and the eurozone’s CPI.

Market Insights 2/20/2014 – Happy Friday

Greek Agreement Buoys Domestic Markets

U.S. equities bounced off the lows of the day to finish solidly higher after Greece and its European counterparts reached a preliminary deal to grant the ailing nation a four-month extension to its current bailout agreement.

Treasuries reversed course to finish mostly lower, with yields higher, following announcement of the accord, and as the lone report on the domestic docket showed that U.S. manufacturing activity surprisingly accelerated. The U.S. dollar was nearly flat and crude oil prices were mixed, while gold was lower.

The Markets…

The Dow Jones Industrial Average increased 155 points (0.86%) to 18,140

The S&P 500 Index added 13 points (0.61%) to 2,110, 9 of the 10 S&P 500 sectors were higher with HealthCare +1.05%, Industrials +.85% and Financials +.74% leading the way higher and Energy -.48% the only sector in the red.

Small and MidCaps traded mixed with the MidCap 400 better by .76% and the SmallCap 600 up .20%

The Nasdaq Composite gained 31 points (0.64%) to 4,956

In moderate volume, 829 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.82 to $50.34 per barrel, wholesale gasoline rose $0.03 to $1.64 per gallon

The Bloomberg gold spot price moved $8.10 lower to $1,199.50 per ounce

Markets were modestly higher on the week, as the DJIA improved 0.7%, the S&P 500 Index increased 0.6% and the Nasdaq Composite Index climbed 1.3%

Manufacturing PMI read reveals slight acceleration

The preliminary Markit U.S. Manufacturing PMI Index for February unexpectedly accelerated to 54.3 from January’s 53.9 level, and compared to the slight decline to 53.6 that economists had expected, with a reading above 50 denoting expansion. Markit’s chief economist Chris Williamson noted, “while still expanding at a solid pace, the U.S. economy has entered a slower growth phase,” and that, “a slowing of new orders growth to the weakest for just over a year looks to have caused employers to take a more cautious approach to hiring.” The release is independent and differs from the Institute for Supply Management’s (ISM) Manufacturing Index, as it has less historic value and Markit weights its index components differently.

Treasuries finished slightly lower, reversing course following news of the Greece agreement, as the yields on the 2-year and the 10-year notes rose 1 basis point to 0.63% and 2.12%, respectively, while the 30-year bond rate was flat at 2.72%.

The timing of the Federal Reserve’s first interest rate hike since 2006 continues to dominate market headlines. While we believe the second half of the year is the most likely timing, recent economic data, specifically the strong employment report, has brought market expectations forward a bit and although we are getting closer to the Fed’s liftoff date, that doesn’t mean we suddenly expect all bond yields to move higher in unison.

Europe and Asia mixed before Greece accord

The European equity markets endured a choppy day of trading, paring losses but closing mixed as investors focused on a possible Greek debt deal as Athens’ Finance Minister met in Brussels with his euro-area counterparts. After the close of the European markets, it was announced that the fledgling nation had reached an accord with European regulators for a four-month extension to its current debt agreement that was set to expire at the end of this month. Greece must present a list of reform initiatives on Monday, of which the Eurogroup will determine is sufficient on Tuesday.

In economic news in the region, the U.K. posted its largest budget surplus in seven years as income tax receipts rose an annual 6.1% in January, though Britain noted that the boost to the government finances was largely due to the timing of bonus payments. In Germany, reports from Markit Economics showed the country’s manufacturing industry continued to expand, while growth in the German services sector accelerated. The Markit Composite PMI for Germany, which combines both the aforementioned sectors, improved more than expected to a seven-month high of 54.3 in February from the 53.5 registered the month prior, where a reading above 50 indicates expansion.

The French economy displayed some strength as Markit reported the services sector grew at the fastest pace in more than three years versus consensus estimates of a slight contraction. Finally, in Italy, industrial production showed some signs that it may grow in the next few months as a report on the country’s industrial orders rose sharply in December, increasing 4.5% month-over-month following the 0.8% decline in November.

Despite the showdown and risk of a financial catastrophe in Greece, the Eurozone is expressing few signs of worry that a crisis may develop. In fact, many of the Eurozone’s economic participants are positively upbeat: surveys of consumer and business confidence in the Eurozone are on the rise, investor sentiment has picked up, and European stocks are rallying.

Stocks in Asia finished mixed on thin volume as traders may have been exercising caution following yesterday’s decision from Germany to reject Greece’s proposal to extend its bailout program. The lighter regional trading volume can be attributed to a plethora of markets, including China, Hong Kong and South Korea remaining closed for the Lunar New Year holiday. Japanese equities advanced, tacking onto its 15-year closing high, as sentiment may have been underpinned by weakness in the yen, though a flash survey from Markit showed growth in the island nation’s manufacturing sector unexpectedly decelerated in February but remained in expansion territory.

Weekly Recap:

Stocks advance modestly on lackluster week

The domestic equity markets finished a shortened and mostly lackluster week modestly higher, as last week’s optimism radiating from hopes of a new debt deal for Greece began to lose its luster following two failed attempts at negotiating with its Eurozone counterparts, and after Germany balked at the nation’s submission of an extension plan, only to come to an agreement for a four-month extension near the end of Friday’s trading session.

The Russia/Ukraine ceasefire appeared to have been far more fragile than initially envisioned, adding another layer of global uncertainty. Crude oil prices, which worked in favor of energy stocks last week, had its own fickleness, capping off Friday’s session with a decline. Meanwhile, the domestic economic calendar was unable to offer any spark, particularly out of the important housing market, with homebuilder sentiment waning, housing starts and building permits coming in south of forecasts, and mortgage applications declining for a second-straight week. As well, manufacturing activity out of the New York and Philadelphia regions slowed, but the preliminary Markit U.S. Manufacturing PMI Index, saw a slight acceleration, while the Federal Reserve’s industrial production report fell short of expectations, and the minutes from its last meeting failed to assuage investor’s trepidations of the timing of its first rate hike.

Finally, earnings season continued to wind down, highlighted by better-than-expected results and from Goodyear Tire & Rubber Co. (GT $27), Waste Management Inc. (WM $54) and Priceline Group Inc. (PCLN $1,218). Thus far this 4Q earnings season, of the 391 companies that have reported from the S&P 500, 77% have topped profit projections, while 58% have posted stronger-than-expected revenues, per data compiled by FactSet.

The Week Ahead:

Heavy economic week on the horizon

Next week, the domestic economic calendar will bring plenty of key reports to digest, highlighted by Thursday’s durable goods orders report, particularly after last month’s surprising drop, and the Consumer Price Index, while Friday will bring the second look (of three) at 4Q Gross Domestic Product. The week will deliver a heavy dose of housing data in the form of existing home sales, new home sales, pending home sales, the S&P Case-Shiller Home Price Index, as well as weekly mortgage applications.

Other economic reports due out next week include: Consumer Confidence, weekly initial jobless claims, the Kansas City Manufacturing Activity Index, the Chicago Purchasing Managers Index, and the final University of Michigan Consumer Sentiment Index.

Market Insights 2/19/2015

Stocks Close Mixed as Greek Proposal Nixed

The U.S. equity markets closed the trading session mixed with uncertainty regarding the Greek debt debacle lingering as Germany rejected a proposition from Athens, stating the request didn’t offer a substantial proposal for a solution, though hope of a deal still remains with eurozone finance ministers set to meet again tomorrow.

Treasuries were lower as the domestic docket showed weekly jobless claims dropped more than expected; however, reads on regional manufacturing activity and Leading Indicators fell short of forecasts. The U.S. dollar was higher, while gold and crude oil prices were lower.

In some of the biggest news on the day, Walmart announced a new initiative on pay and training for U.S. associates, including pay raises in the first half of the current fiscal year for about 500,000 full-time and part-time associates at Walmart U.S. stores and Sam’s Clubs. WMT said current and future associates will benefit from the initiative, which ensures that Walmart hourly associates earn at least $1.75 above today’s federal minimum wage, or $9.00 per hour, in April, and the following year, current associates will earn at least $10.00 per hour.

The Markets….

The Dow Jones Industrial Average fell 44 points (0.24%) to 17,986

The S&P 500 Index lost 2 points (0.11%) to 2,097, 5 sectors in the S & P were higher and 5 lower with Technology .35%, Consumer Discretionary .31% and Materials .27% the largest winners with Utilities -1.13%, Consumer Staples -.64% and Energy -.47% the largest losers.

Small and MidCaps traded along with LargeCaps with the MidCap 400 losing .17% and the SmallCap 600 gives back .11%

The Nasdaq Composite added 18 points (0.37%) to 4,925 and now lies just 75 points from its alltime high of 5,000 reach in March of 2000, yes, 2000.

In moderate volume, 687 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.99 to $51.83 per barrel, wholesale gasoline increased $0.05 to $1.62 per gallon

The Bloomberg gold spot was $5.00 lower at $1,207.42 per ounce

Jobless claims drop, while regional manufacturing and Leading Index releases miss

Weekly initial jobless claims fell by 21,000 to 283,000 last week, below the 290,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was unrevised at 304,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 6,500 to 283,250, while continuing claims rose by 58,000 to 2,425,000, north of forecasts calling for a level of 2,360,000.

The Conference Board’s Index of Leading Economic Indicators increased 0.2% month-over-month in January, below the projected 0.3% growth, while December’s 0.5% gain was revised to a 0.4% rise. The report showed positive contributions from components pertaining to the yield curve, consumer expectations and credit, while stock prices and ISM new orders weighed on the index.

Finally, the Philly Fed Manufacturing Index showed growth for the mid-Atlantic region unexpectedly slowed in February, declining to 5.2—the lowest in a year—from 6.3 in January, and compared to the increase to 9.0 that was forecasted. Readings above zero denote expansion.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond ticking 2 basis points higher to 0.61% and 2.73%, respectively, while the yield on the 10-year note advanced 3 bps to 2.11%.

Tomorrow, the lone report from the U.S. economic calendar will be the preliminary Markit U.S. Manufacturing PMI Index, forecasted to dip slightly to a level of 53.6 for February from the 53.9 registered in January, with 50 the demarcation point between expansion and contraction.

Europe mostly higher despite Greek debt uncertainty, Asia mixed in light trading

The European equity markets finished mostly higher on the heels of Greece asking for an extension of its loan agreement from its international creditors as its current bailout program is set to expire at the end of this month. After two failed negotiations in the past week, Greece’s eurozone counterparts have said there will be no more talks on a new debt deal unless the Greek government requests an extension of its loan programs. However, Germany has rejected Greece’s extension plan, noting that the nation’s offer does not meet the eurozone’s conditions for continuing aid. Per Bloomberg, in an e-mailed statement, German Finance Ministry Spokesman Martin Jaeger said, “The Greek government is trying to agree to bridge-financing without meeting the conditions of its existing rescue program.” The markets were choppy after Germany’s rejection with the euro moving lower versus the U.S. dollar.

The overall European market reaction suggested that hopes remain that a new debt deal can be worked out, with eurozone finance ministers set to hold an emergency meeting on Friday in Brussels. In economic news, Switzerland’s trade surplus unexpectedly widened in January, while a read on eurozone consumer confidence is slated for later today. Finally, for the first time, the European Central Bank (ECB) released an official account of its monetary policy meeting that took place last month, after which it announced that it will embark on a full-fledged quantitative easing (QE) campaign by purchasing government bonds. The ECB’s report showed that the central bank decided to launch a 1.1 trillion-euro QE program because “purchases of sovereign debt appeared to be the only remaining instrument of sufficient scope to provide the necessary monetary policy stimulus.”

The U.K. FTSE 100 Index dipped 0.1%, while Germany’s DAX Index rose 0.4%, France’s CAC-40 Index increased 0.7%, Switzerland’s Swiss Market Index and Greece’s ASE Athens Index gained 1.1%, Spain’s IBEX 35 Index advanced 1.0%, and Italy’s FTSE MIB Index ascended 0.6%.

Stocks in Asia finished mixed on the heels of yesterday’s release of the U.S. Federal Reserve’s minutes, which showed policymakers continue to grapple with the timing of the first interest rate hike. However, volume was lighter than usual with a plethora of markets, including China, Hong Kong and South Korea, closed for the Chinese New Year. Japan’s Nikkei 225 Index closed at the highest level since May 2000, led by strength in banking stocks and following a report showing the nation’s trade deficit came in narrower than anticipated in January, courtesy of a much larger-than-expected increase in exports. Australian equities declined, while stocks in India extended their winning streak to seven sessions, as optimism regarding expedited economic reforms continued to boost sentiment.

Company News:

Wal-Mart Stores reported 4Q earnings-per-share ex-items of $1.61, above the $1.54 consensus estimate of analysts surveyed by FactSet. Revenues at the world’s largest retailer increased 1.4% year-over-year to $131.6 billion, versus the $132.5 billion that the Street had anticipated, with currency exchange rate fluctuations negatively impacting the topline by $2.6 billion. WMT said its 4Q Walmart U.S. same-store sales—sales at stores open at least a year—rose 1.5% y/y, compared the 0.8% increase that analysts had projected.

DIRECTV posted 4Q EPS of $1.53, above the $1.39 that the Street had estimated, with revenues growing 3.8% y/y to $8.9 billion, roughly inline with what analysts had expected. DTV said its 4Q results, although marked by challenging macroeconomic conditions in Latin America and a conscious decision to reinvest in its U.S. business, capped off another strong year of operations. The company’s Chief Executive Officer Mike White added that 2015 will bring additional challenges to its businesses, but given its solid continued operating momentum and the pending merger with Dow member AT&T Inc. (T $34), he is confident that it will continue to drive value for its shareholders for the foreseeable future. DTV is trading modestly lower.

Priceline Group Inc announced 4Q profits ex-items of $10.85 per share, compared to the $10.10 that analysts had forecasted, with revenues increasing 19.4% y/y to $1.8 billion, mostly inline with the Street’s estimates. The travel booking site said it saw solid hotel and rental car unit growth, while its international gross bookings grew solidly, demonstrating the resilience of the business despite an environment of economic uncertainty and foreign exchange volatility. PCLN issued 1Q EPS guidance that came in below expectations, but the company’s board announced an additional authorization to repurchase up to $3.0 billion of its stock. Shares are nicely higher.