What’s the Story

by CC August 17, 2012 9:04 am • Commentary


Stock indexes edged lower on Friday, after enjoying its biggest gain in two weeks Thursday, ahead of reports on consumer mindset and a gauge of leading economic indicators.

Investors awaited the Thomson Reuters/University of Michigan surveys’ August preliminary consumer sentiment index, due at 9:55 a.m. ET (1355 GMT). Economists in a Reuters survey expect a reading of 72.4 compared with 72.3 in the final July report.

Shortly thereafter at 10:00 a.m. ET (1400 GMT) the Conference Board releases its report on July leading economic indicators. Economists in a Reuters survey forecast a 0.2 percent rise compared with a 0.3 percent drop in June.


European stocks maintained gains and the euro nudged a little higher against the dollar Friday, on continued hopes that European leaders would stand by the euro project.

German Chancellor Angela Merkel’s comments Thursday that Germany is committed to do what it can to maintain the euro helped to buoy sentiment, lending further weight to European Central Bank President Mario Draghi’s endorsement of the euro on July 26. Mr. Draghi said that the ECB will take any steps within its mandate to preserve the common currency. Since then he has also signaled that the central bank may soon step in to buy government bonds and consider other unconventional measures to help support financially stressed regions such as Spain and Italy.

Unsurprisingly, gains in equity markets were most strongly felt in Spain and Italy. Spain’s IBEX 35 was up 1.7%, while Italy’s FTSE Mib gained 1.5%. Both continued to trade at around four-month highs. Meanwhile, bond yields in southern European economies also eased. Around midday in Europe, Spain’s 10-year government bond had fallen further, down by 0.10 percentage point at 6.42%, while Italy’s respective government bond yield was 0.02 percentage point lower at 5.76%, according to Tradeweb.

Financial markets shrugged off news that bad debts held by Spanish banks had surged to record highs, and instead focused on continued expectations of ECB intervention.


Jefferies analyst Peter Misek on Friday lifted his price target on Apple Inc. AAPL +0.32% to $900 a share from $800 a share on a bullish view of the computer maker’s iPads, iPhones and an expected launch of iTV by the end of the company’s first fiscal quarter next year. Based on checks by Jefferies and other market data, Misek said iPad production has been increased to 25 million units from 18 million for the third quarter.


Recent strategy notes from Goldman Sachs are consistent with my overall view of the US economy – it’s stronger than the recessionistas have long thought.   So the good news is things aren’t yet contracting.  The bad news is the economy is still too weak to substantially bring down the rate of unemployment.  And the good/bad news is that this reduces the likelihood of QE this year.  More from Goldman’s Jan Hatzius (via ZH):

The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months. Tuesday’s data were generally in line with this expectation:

1.    Stronger retail sales. The July retail sales report showed a clear upside surprise, with a 0.9% gain in sales excluding autos, building materials, and gasoline. The month-to-month strength was broad-based, with sizable gains in most core categories, although it mainly served to reverse some of the declines in the prior month.

2.    Slower inventory accumulation. Inventory accumulation has slowed clearly in recent months, with book-value business inventories up just 0.1% in June, down from a peak of 0.8% in January. We believe that this slowdown has been partly responsible for the disappointing performance in manufacturing surveys such as the ISM and Philly Fed. If it is ending, that should help the manufacturing sector over the next few months.

Our proprietary measures of US economic growth have also picked up a bit further. Our Q3 GDP tracking estimate rose to 2.3% from 2.2%, our current activity indicator (CAI) now stands at 1.2% in July after 1.1% in June, and our US-MAP index of US economic data surprises is moving quickly further toward neutral readings on a 60-day exponential moving average basis.”


This rotation out of defensives has been going on for about two weeks now, and it’s indicative of an investor class willing to take on more risk.  As the 10-year Treasury yield has spiked this week, high dividend paying stocks have been hit especially hard.  With such significant rotation out of defensives, the market is at least set up to make another nice leg higher.

The rotation out of defensives can be seen in our sector trading range table below.  As shown, Consumer Staples, Health Care and Telecom are the least overbought of the bunch, while the Utilities sector has actually moved well below its 50-day moving average!


Teen-apparel retailer Aeropostale ARO +0.22%  issued a weaker-than-expected profit forecast for the New York-based company’s third quarter, along with reporting results for the second quarter ended July 28. Sales for the latest quarter rose 4% to $485.3 million, while comparable-store sales fell 1%, as Chief Executive Thomas Johnson noted “significant pricing pressure” that hit Aeropostale’s bottom line. Just two weeks earlier, management had steered Wall Street lower on profit and sales prospects for the July quarter. As for the current quarter, management forecast a profit of 25 cents to 30 cents a share, less than the 38-cent consensus in a survey of analysts by FactSet Research.

Also late Thursday, Ion Geophysical IO +2.37%  vowed to “pursue all available legal options,” including a possible appeal, after a federal jury returned a verdict against the Houston-based company in a patent-infringement case dating from 2009. The jury, Ion said, found that it willfully infringed on patents held by WesternGeco LLC, which brought the case, and awarded damages totaling $105.9 million. The patents at issue involve marine seismic streamer steering devices used in the energy industry. A judgment has not yet been entered in the case, Ion said, adding that it will take “immediate steps” regarding its legal alternatives.

ScanSource Inc. SCSC +0.34%  forecast sequentially lower earnings for the first quarter of fiscal 2013 as it reported results for the fourth quarter ended June 30. The Greenville, S.C.-based distributor of specialty technology products pegged profit in a range of 58 cents to 60 cents a share for the current quarter, on sales of $740 million to $760 million. These would compare with 68 cents a share that ScanSource earned on an adjusted basis, on sales of $754.5 million, for the latest quarter. ScanSource noted that it generated record sales for its business units in security and North American communications during the June quarter.

The board of Plains All American Pipeline LP PAA +0.11%  approved a two-for-one split of the Houston-based partnership’s common units. They will be distributed Oct. 1 to unitholders of record as of Sept. 17. As of Wednesday, Plains All American said, there were nearly 164 million common units outstanding. It marks the first such split for Plains All American since going public nearly 14 years ago.

Gaylord Entertainment Co. GET -0.38%  closed on an underwritten offering of 5.6 million shares of common stock priced at $40 each. The Nashville-based company said it received no proceeds as TRT Holdings Inc., a Texas-based company with interests in the hospitality and leisure industry, sold off its entire position in Gaylord common stock. The move comes after Gaylord recently announced a deal with Marriott International MAR +2.77%  to sell its Gaylord Hotels brand and the rights to manage the company’s four hotels. Gaylord’s on track to reorganize as a real estate investment trust as of 2013, pending stockholder approval.

Ares Capital Corp. ARCC -3.67%  plans to make a public offering of 19 million common shares, the New York-based specialty finance company said. Net proceeds will be used to, among other things, repay outstanding debt. Underwriters will have option to buy up to an additional 15% of Ares common shares if needed to meet investor demand.

PennyMac Mortgage Investment Trust PMT +0.46%  said it will put up for sale 12 million via a secondary public offering. Among other things, net proceeds will go toward funding a portion of the cost of buying a portfolio of residential whole mortgage loans, acquiring additional mortgage loans or other investments, and expanding PennyMac’s correspondent lending business, the Moorpark, Calif.-based company said. Underwriters will have a 30-day option to buy up to 1.8 million additional shares of beneficial interest.

The board of ITC Holdings Corp. ITC +1.49%  approved a 7% increase in the company’s quarterly dividend on common stock, to 37.75 cents a share. It’s payable Sept. 17 to stockholders of record as of Sept. 4. It marks the seventh consecutive year that ITC has raised its dividend, the Novi, Mich.-based company said.

Citing a “soft near-term demand environment,” Marvell Technology Group MRVL +2.85%  reported a profit shortfall for the second quarter ended July 28. Net earnings amounted to $93 million, or 16 cents a share, for the latest three months, down form $192 million, or 31 cents, earned in the year-earlier second quarter. On an adjusted basis, the Santa Clara, Calif.-based company would have earned 24 cents a share for the latest quarter, as revenue fell by 9% to $816.1 million. Analysts, on average, had been looking for adjusted earnings of 27 cents a share on revenue of $851.7 million, according to estimates compiled by FactSet. Marvell bought back about 20 million shares for $250 million in the second quarter, during which it also paid its first quarterly dividend, in the amount of 6 cents a share.