Market Updates for the Week Ended 17 January 2014

Edited By Vani Rao

Tech Stocks Close Lower, but Higher Industrial Output Saves the Day

Earnings of major companies points to positive economic outlook

US stocks closed mostly lower on Friday after disappointing results from Intel Corp. and General Electric Co. Investors were also exposed to mixed news regarding economic data. The Dow Jones Industrial Average closed 41.55 points, or 0.25%, higher at 16,458.56. The blue-chip index added 0.1% over the week, its first weekly gain this year. The S&P 500 finished the day down 7.19 points, or 0.39%, to 1,838.70 and was 0.2% lower for the week. The Nasdaq Composite Index shed 21.11 points, or 0.50 %, to 4,197.58, but eked out a 0.6% weekly gain.

Treasuries rose as economic data was largely as expected and as trading volumes were light before a long holiday weekend. The bonds have held in a relatively tight range this week, after a weaker-than-expected employment report last Friday. Ten-year notes were up 7/32 to yield 2.82%. Thirty-year bonds rose 14/32, yielding 3.75%.

The dollar rose, pushing the euro to a seven-week low, after fresh US data supported the view the world’s largest economy is improving enough to keep the Federal Reserve’s stimulus reducing measures on track. The dollar index rose 0.41% to 81.24. The euro was down 0.68% against the dollar to $1.3527. The British pound gained 0.34% to $1.6409. Against the dollar, the yen was down 0.08% at 104.26 yen.

Gold rose as weakness in US equities, strong fund buying, and Asian physical demand lifted the bullion to its fourth consecutive weekly gain. “Generally speaking, our outlook on the US economy is positive and with the strengthening dollar and higher yields, gold prospects are not so positive,” Natixis analyst Bernard Dahdah said. Spot gold was up 0.90% to $1,253.31 an ounce. Gold futures for February delivery were up 1.04 % to $1,253.10 an ounce.

Oil futures closed at a two-week high on Friday, but disappointing data on US consumer sentiment dulled the outlook for energy demand and limited gains for the trading session. Oil prices still scored a gain for the week after data on Wednesday showed a bigger-than-expected decline in US crude inventories. February crude oil added 41 cents, or 0.4%, to settle at $94.37 a barrel on the New York Mercantile Exchange. Prices were 1.8% higher than the week-ago close and settled at their highest since 2 January 2014.

Economic Updates

US industry surge in late 2013

The US industrial output rose at its fastest pace in 3-1/2 years in the fourth quarter as factory activity closed out the year on a strong note. Manufacturing production rose by a stronger-than-expected 0.4% in December after an outsized 1.0% increase in November 2013, a Federal Reserve report showed. That helped push overall output at the nation’s factories, mines and utilities up 0.3% last month. Ground breaking for new homes dropped 9.8% to a seasonally adjusted annual rate of 999,000-unit pace in December, another report from the US Department of Commerce showed. Permits to build homes fell 3.0% in December to a 986,000-unit pace. A separate report showed the Thomson Reuters/University of Michigan’s preliminary reading on the overall Consumer Sentiment Index slipped to 80.4 early this month from 82.5 in December.

Top News

US FDA approves Medtronic heart valve system

Medtronic’s (NYSE:MDT) minimally invasive system for replacing diseased heart valves won US approval for use in patients deemed too frail to endure traditional open heart surgery. The Food and Drug Administration (FDA) approved Medtronic’s CoreValve system based on US clinical trials in which it was shown to be safe and effective while demonstrating low rates of stroke and valve leakage, the company said. The company was not expecting the approval decision until April, giving the company a head start on efforts to seize market share from a similar rival product sold by Edwards Lifesciences (NYSE:EW).

Lenovo in Talks to Buy IBM Server Business

China’s Lenovo Group is in talks to buy International Business Machines Corp.’s (NYSE:IBM) low-end server business, reviving negotiations that fell apart last year over valuation. For IBM, selling the low-margin hardware business would help it focus more on software and services. Lenovo, which last year overtook Hewlett-Packard Co. as the world’s largest PC maker, is still a minor player in servers. Hence, a deal with IBM would create a new source of growth amid weak global demand for desktop and laptop PCs. Lenovo said in a statement to the Hong Kong Stock Exchange on Tuesday that it was in preliminary talks about a potential acquisition, without saying whether the talks involved the server business.

Lenovo bought IBM’s loss-making PC unit in 2005 and turned it into a profitable business. Still, there could be hurdles to any deal between Lenovo and IBM. Any foreign investment by a Chinese company in a US company tied to critical technology or national security could come under the scanner by US regulators. Lenovo’s 2005 acquisition of IBM’s PC unit came under scrutiny by the US Congress and the US Committee on Foreign Investment before the deal was approved.

Earnings Season

Citi profit disappoints on drop in bond trading revenue

Citigroup (NYSE:C) posted weaker-than-expected quarterly results as lacklustre bond-trading results weighed on overall revenue. The company said its fixed-income revenue fell 15% to $2.33 billion in the fourth quarter as compared to the year-ago period. Citigroup’s fourth-quarter adjusted net income rose to $2.60 billion, or 82 cents per share, from $2.15 billion, or 69 cents per share, a year earlier, the bank said. Unadjusted net income rose to $2.69 billion, or 85 cents per share, from $1.20 billion, or 38 cents per share, a year earlier.

Goldman Sachs Q4 profit hit by lower bond trading revenue

Goldman Sachs (NYSE:GS) reported a 21% drop in quarterly profit as revenue from fixed-income trading fell in what Chief Executive Lloyd C. Blank Fein described as “a somewhat challenging environment.” The bank’s bond trading revenue slid 11%, adjusted for an accounting charge, and was greater than those of competitors that have already posted fourth-quarter results. Goldman reported net income fell to $2.25 billion, or $4.60 per share, in the fourth quarter, from $2.83 billion, or $5.60 per share, in the same quarter of 2012. Analysts expected earnings of $4.22 per share. Total revenue including the adjustment fell 5% to $8.78 billion from last year.

American Express profit doubles on US holiday season

American Express’s (NYSE:AXP) quarterly profit more than doubled as customers spent more in the holiday season in the US, its core market. American Express said worldwide spending on its cards rose 8% in the quarter ended December 31, the biggest jump in four quarters. Net income rose to $1.31 billion, or $1.21 per share, in the fourth quarter from $637 million, or 56 cents per share, a year earlier. Total revenue, net of interest expense, increased 5% to $8.55 billion. Revenue of the company’s US card services unit rose 8% in the quarter.

Intel gives lukewarm revenue forecast

Intel’s (NASDAQ:INTC) earnings missed expectations by a mere penny in the fourth quarter and the chipmaker gave a lukewarm forecast for first-quarter revenue, sending its shares lower after-hours as investors continued to worry about a slow PC industry. Intel posted fourth-quarter net earnings of $2.6 billion, or 51 cents a share, compared with $2.5 billion, or 48 cents a share, in the year-ago quarter. Wall Street had expected 52 cents a share on an average. Fourth-quarter revenue was at $13.8 billion, compared with $12.5 billion in the year-ago quarter, Intel said in a statement. Intel forecasts revenue of $12.8 billion, plus or minus $500 million, for the first quarter, which ends in March. Analysts had expected $13.72 billion in revenue for the fourth quarter and $12.79 billion for the normally slower first quarter. The shares of the company closed down 0.49%.

BlackRock profit jumps on strong markets

BlackRock (NYSE:BLK) reported higher-than-expected quarterly profits benefiting from strong markets and a flow of new money into its exchange-traded funds and retail business. The company ended the fourth quarter through December 31 with $4.3 trillion in assets, including new money and market gains, surpassing the $4-trillion mark for the first time last year. That asset growth, a 14% raise from the end of 2012, helped drive BlackRock’s 24% jump in quarterly profit to $841 million, or $4.86 per share, up from $690 million, or $3.93 per share, a year earlier. The company said its board had approved a 15% increase in its quarterly cash dividend to $1.93 per common share, payable in March 2014. Excluding long-term compensation expenses and other items, earnings were $4.92 a share, above analysts’ average forecast of $4.33. Revenue grew 9% to $2.8 billion.

GE revenue rises; falls short on profit margins

General Electric’s (NYSE:GE) revenue rose 3.1% to $40.38 billion, about $160 million ahead of analysts’ target. However, it posted disappointing 2013 profit margins, hurt by delayed wind turbine deliveries and poor energy management results, offsetting a 5% rise in quarterly earnings. Strength from sales of oil pumps and jet engines helped the US conglomerate match Wall Street expectations with fourth-quarter profit of 53 cents per share, excluding items. GE expanded its operating margin for its industrials businesses by 0.66%, below its full-year target of a 0.7% age point improvement. The diversified manufacturer said its quarterly net earnings rose to $4.2 billion, or 41 cents per share, from $4.01 billion, or 38 cents a share, a year earlier. Its 53 cents per share quarterly profit, excluding items, was in line with the average expectation of analysts.

Morgan Stanley profit beats estimate; raises margin target

Morgan Stanley (NYSE:MS) posted stronger-than-expected fourth-quarter results, as its retail brokerage and asset management businesses won more assets from clients and benefited from rising stock markets. The bank’s retail brokerage business reached the company’s pretax profit margin target, and Morgan Stanley raised that target for the coming year. Net income for common shareholders in the fourth quarter fell to $133 million, or 7 cents a share, from $568 million, or 29 cents, in the same quarter in 2012. Excluding items such as $1.2 billion in legal expenses, the bank earned 50 cents per share, beating the average analyst estimate of 45 cents. The retail brokerage business generated $3.73 billion in revenue in the quarter, up from $3.33 billion a year earlier. Revenue at Morgan Stanley’s investment management unit jumped 41% to $842 million.

Schlumberger profit surges, helped by Middle East & Asia

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, posted better-than-expected fourth-quarter profit as robust international activity offset stiff competition in North America. Lucrative services for oil producers across most of the Middle East, Asia, and Latin America helped the company’s profit top analysts’ estimates for the ninth straight quarter. Schlumberger’s net income rose to $1.66 billion, or $1.26 per share, in the fourth quarter, from $1.36 billion, or $1.02 per share, a year earlier. Excluding items, profit from continuing operations was $1.35 per share. Revenue rose about 7% to $11.91 billion. Analysts on average had expected earnings of $1.32 per share on revenue of $12.01 billion.

BNY Mellon’s profit shows modest gain

BNY Mellon (NYSE: BK) said its fourth-quarter profit rose slightly, meeting Wall Street expectations, but higher staff expenses weighed on results even as a buoyant stock market lifted investment management and performance fees. In addition, the long-term net inflows into the bank’s mutual funds totalled $2 billion in the fourth quarter, its weakest showing in the past five quarters. Excluding a one-time item the bank earned $628 million, or 54 cents a share, compared with $622 million, or 53 cents a share, a year earlier. Net income was $513 million, or 44 cents a share. Pre-tax operating margin was 20% in the quarter, including the hit from an equity investment, compared with 24% a year ago. BNY Mellon ended 2013 with $27.6 trillion in assets under custody and administration, a 5% gain over 2012.

Earnings coming up in next 24 hours

Results from Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), the second- and third-largest US oilfield service companies, will highlight the margin gap between them due to the contrast in robust international drilling and sluggish natural-gas directed activity in North America. Unlike Baker Hughes, Halliburton generates a large part of its revenue from the growing offshore and international markets. While Baker Hughes is also scaling up exposure to this business, it has warned that fourth-quarter profit would be hurt by disruptions at its Iraq operations.

Texas Instruments (NASDAQ:TXN) would be reporting its fourth-quarter results after the bell. The results will provide a highlight on signals and implications for the global mobile device market.

Johnson & Johnson (NYSE:JNJ) is expected to report higher sales and earnings in fourth-quarter, as growing sales of its prescription medicines, including new cancer treatments, offset weak trends for medical devices and consumer products.

Delta Air Lines (NYSE:DAL) is expected to post higher fourth-quarter earnings, aided by lower fuel costs and revenue gains from seat and food upgrades.

Verizon Communications (NYSE:VZ) is expected to lead the industry in fourth-quarter wireless growth when it reports results but the company may show signs of pressure from upstart rival TMobile US (NYSE:PCS).

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