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Tuesday, July 26, 2016

Apple Bites

Financial Review

Apple Bites


DOW – 19 = 18,473
SPX + 0.7 = 2169
NAS + 12 = 5110
10 Y – .01 = 1.56%
OIL – .49 = 42.64
GOLD + 4.40 = 1320.70

The S&P CoreLogic Case-Shiller 20-city composite saw a 0.9% gain in May to stretch the 12-month advance to 5.2%. Phoenix resale home prices were up 0.6% in May, and 5.4% over the past 12 months. Portland had the hottest housing market, New York the weakest. From the 2006 peak, the 20-city composite is down 8.8%; it’s up 40.4% from the trough in 2012.

The Commerce Department reports new home sales increased 3.5 percent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008. Sales were up 25.4 percent from a year ago. At June’s sales pace it would take 4.9 months to clear the supply of houses on the market, down from 5.1 months in May. The median price for a new home rose 6.1 percent from a year ago to $306,700.

The Conference Board’s consumer confidence index was little changed this month, finishing at 97.3 compared to revised 97.4 in July. Consumers were slightly more positive about current business and labor market conditions. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly.

The Federal Reserve has begun a two-day FOMC meeting on interest rate policy. The Fed is all but certain to keep interest rates on hold, acknowledging improved economic prospects, but offering few hints about its next move. Central to the debate will be how to reconcile upbeat economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory. The inflation measure the Fed prefers to track is currently at 1.6 percent, and oil prices have just moved to three-month lows.

Threats to America’s financial stability rose after the U.K. voted in June to leave the European Union but remain moderate, according to a report from the Office of Financial Research, the research arm of the Financial Stability Oversight Council. The vote could usher in “months or years of uncertainty” over rules tied to the U.K.’s investment, financing and trade relations with Europe and the rest of the world. Despite the ability of U.S. markets to recover from the initial shock of a market selloff, persistent concerns remain as the U.K. decides “if, how and when” to leave the EU. Possible spillover effects could jolt the broader financial system, including U.S. banks and nonbanks such as life insurers and broker-dealers.

The Bank of England’s Martin Weale
 has changed his mind and now supports immediate stimulus for the U.K. economy at next week’s policy meeting. The pivot follows a series of negative business reports, culminating in last week’s poor PMI data. Only a week ago, the widely-followed policymaker called on the central bank to wait for “firmer evidence” before implementing more monetary easing.

Just two months before the yuan is to be included in the IMF’s Special Drawing Rights basket for the first time, the fund’s board has adopted a new methodology for calculating the amounts of its global reserve currencies. New weightings of the dollar, euro, yen and pound will be set on Sept. 30 and fixed for five years, pushing the yuan a step closer to being freely usable internationally.

Specialist Italian pension funds are considering a government request to pour money into a bank rescue fund, days before European stress tests are expected to show the country’s third-largest lender, Banca Monte dei Paschi, is in urgent need of capital. Italy is looking for ways to support struggling lenders without breaking EU state aid rules, but a deeper financial crisis could further undermine confidence in the eurozone’s fourth-largest banking sector.

Here’s a rundown of some of the earnings reports today:
3M
 posted earnings that beat by one cent a share, on revenue a touch below estimates. The firm lowered its guidance for 2016 sales growth.

Caterpillar reported earnings that beat on both the top and bottom line.

DuPont posted earnings that beat on both the top and bottom line, and raised its full-year forecast.

McDonald’s reported a lower-than-expected rise in U.S. same-store sales. Quarterly earnings, ex-items, did beat expectations.

United Technologies raised full-year guidance and posted quarterly earnings that beat on both the top and bottom line.

Verizon reported quarterly earnings that topped expectations on revenue that missed. The telecommunications giant said a seven-week workers’ strike hurt results.

As the first oil major to report Q2 results, BP announced a loss that missed estimates due to lower refining margins and a multibillion-dollar charge relating to its 2010 oil spill.

Twitter’s stock is crashing, down 10% in after-hours trading, after delivering a revenue forecast that fell well short of expectations.

Also, negative earnings results from Reynolds American, Starwood, KeyCorp, Nielsen, Gilead Sciences and Under Armour.

Positive earnings news from Corelogic (along with higher 2016 guidance), and Texas Instruments beat estimates. Also good reports from Centene, Waters Corp, Avery Denison, Baxter, and Valero.

Of course the big earnings report today came after the closing bell. Apple reported iPhone sales fell for the second straight quarter, although the 15 percent drop was less than feared. The company’s total revenue dropped 14.6 percent in the third-quarter ended June 25, also declining for the second quarter in a row. Apple said it sold 40.4 million iPhones in the third quarter, more than the average analyst forecast of 40.02 million. Apple’s quarterly net profit fell 27 percent to $7.8 billion, while revenue of $42.36 billion beat analyst’s estimates. Phone sales in China dropped 33%.

Apple’s services business, which includes the App Store, Apple Pay, iCloud and other services generated nearly $6 billion in revenue, up 18.9 percent from the previous year. The stock was trading toward the low end of its 52-week historical price range – down 8.5% year-to-date –  and at the bottom of the range for mega-cap tech stocks. In after-hours trade Apple was up about 6%, topping $101 per share.

Annheuser-Busch InBev raised its offer for SABMiller by 2.3% to 79 billion pounds to account for the Brexit-related plunge in sterling.

Switzerland said it plans to give information to U.S. tax authorities about accounts at HSBC Holdings’ Swiss private bank, as part of a U.S. investigation into tax evasion. HSBC’s Swiss unit has already paid tens of millions of dollars in fines after admitting substandard compliance on tax evasion and other issues. The Swiss government said it made the announcement to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the IRS.

Fiat Chrysler Automobiles said it has revised the way it counts monthly sales figures of new cars and trucks and now says its impressive sales streak of 75 months of consecutive sales gains actually ended in September, 2013. It said that under the revisions, there were three months in which it had reported sales gains but now will report them as declines.

Volkswagen’s settlement plans to get 482,000 diesel-cheating cars off U.S. roads won a preliminary go-ahead from a federal judge. The plan for buybacks and a possible fix covers car owners, the U.S. government and 44 states and will cost the company about $15.3 billion if the agreements are fully adopted. The settlement includes $10 billion for buybacks, as well as $4.7 billion in government penalties and remediation. With or without a fix, car owners who don’t like the buyback option may be able to keep driving the polluting cars in some states.

The pact eats up almost all of the $17.8 billion the company had set aside to cover the cost of the scandal worldwide. In addition to investor class actions in the U.S. and lawsuits in Germany and South Korea, the company faces criminal probes in all three countries. VW took a 2.2 billion-euro charge in the second quarter, chiefly related to legal risks in the U.S. The company will report full earnings figures on Thursday.

Amazon is partnering with the U.K. government to significantly expand drone testing, a move that could let the devices deliver packages to British homes far earlier than in the US. Amazon will work with British regulators to test drones that fly beyond the line of sight of operators in rural and suburban areas. It will also test whether a single operator can safely command multiple drones at once, as well as technology that lets the machines automatically detect and avoid other planes, buildings and people.

Tesla has doubled the labor force working on its $5 billion battery factory in the Nevada desert, aiming to meet demand for its coming Model 3. Now, 1,000 workers build seven days a week on two shifts in an effort to start churning out lithium-ion cells by late 2016. Elon Musk is set to inaugurate the Gigafactory with a media briefing today, followed by an exclusive tour and party for Tesla customers on Friday.

Have you noticed the changes to Google Maps? For its more than 1 billion users, Google announced a design update to Google Maps yesterday, July 25. Embracing a “cleaner look,” the new reduced interface for mobile and desktop is focused on discovery and socializing, instead of turn-by-turn directions. Areas of interest like restaurants, bars, and shops are now shaded in a light shade of orange, allowing users to learn about new venues around their destination.

The first round-the-world solar powered flight has been completed, after the Solar Impulse aircraft touched down in Abu Dhabi and finished a journey that began over a year ago. The ABB-engineered plane is no heavier than a car, but has the wingspan of a Boeing 747. It’s powered by 17,248 solar cells, runs on battery power at night and has an average airspeed of 46 mph.

Stocks Mixed Ahead of Fed Meeting

Charles Schwab: On the Market
Posted: 7/26/2016 4:15 PM ET

Stocks Mixed Ahead of Fed Meeting

U.S. stocks finished the trading session mixed and near the flat line amid a slew of economic and earnings data, and some noticeable caution ahead of tomorrow's conclusion to the Fed's monetary policy meeting. Treasuries were modestly higher, crude oil prices were mixed, while the U.S. dollar was slightly lower and gold gained ground.

The Dow Jones Industrial Average (DJIA) declined 19 points (0.1%) to 18,474, while the S&P 500 Index gained nearly 1 point to 2,169 and the Nasdaq Composite closed 12 points (0.2%) higher to 5,110. In moderate volume, 810 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was $0.21 lower at $42.92 per barrel, wholesale gasoline gained $0.01 to $1.34 per gallon and the Bloomberg gold spot price increased $4.26 to $1,319.86 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.13.

Dow member Verizon Communications Inc. (VZ $55) reported 2Q earnings-per-share (EPS) ex-items of $0.94, besting the FactSet consensus estimate by $0.02, while revenues fell just shy of forecasts and decreased 5.4% year-over-year (y/y) to approximately $30.5 billion. Additionally, yesterday VZ announced it has entered into a definitive agreement to acquire the operating business of Yahoo! Inc. (YHOO $39). Shares of VZ were lower. 

Dow component McDonald's Corp. (MCD $122) announced 2Q EPS of $1.25, falling short of the $1.39 Factset consensus estimate, while revenues declined 3.6% y/y to approximately $6.3 billion to roughly match expectations. Shares of VZ were lower. 

Dow constituent 3M Company (MMM $178) reported 2Q EPS of $2.08, one penny north of forecasts, while revenues were roughly flat y/y at approximately $7.7 billion, meeting expectations. MMM traded lower.

Dow member United Technologies Corp. (UTX $108) was nicely higher after the company declared 2Q EPS ex-items of $1.82, surpassing the $1.68 FactSet estimate, while revenues also beat estimates rising 1.3% y/y to $14.9 billion.

Dow participant DuPont (DD $69) announced adjusted 2Q EPS of $1.24, beating the FactSet estimate of $1.10, while revenues declined nearly 1% y/y to $7.1 billion, exceeding estimates. DD was higher

Dow component Caterpillar Inc. (CAT $83) announced 2Q earnings of $1.09 per share, above the $0.96 FactSet consensus estimate, while revenues came in at $659 million, a decrease of 3.8% y/y, which the company noted was primarily due to a $15 million unfavorable impact from lower average earning assets. Shares of CAT finished higher.

Eli Lilly and Company (LLY $82) reported 2Q EPS ex-items of $0.86, matching the FactSet consensus estimate, while revenues beat forecasts, jumping 12.6% y/y to $5.4 billion. LLY is ticking higher.

After the closing bell yesterday, Texas Instruments Inc. (TXN $71) reported 2Q EPS of $0.76, north of the $0.72 FactSet estimate, while revenues increased 1.3% y/y to $3.3 billion topping expectations. TXN was higher.

Services sector read unexpectedly declined, regional manufacturing data jumps higher

The preliminary Markit U.S. Services PMI Index for July ticked lower to 50.9 from June's final reading of 51.4, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

The Consumer Confidence Index (chart) ticked slightly lower to 97.3 in July from the downwardly revised 97.4 level in June and compared to the estimated decline to 96.0. The sentiment towards the present situation continued to rise after two months ago registering the lowest level since November, while expectations of business conditions moved lower. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 0.7 from the -0.5 posted in June.

The Richmond Fed Manufacturing Activity Index unexpectedly jumped into expansion territory (a reading above zero), surging to 10 in July from the -7 posted in June, while economists had anticipated the index to remain in contraction territory, forecasting a reading of -5.

New home sales (chart) increased 3.5% month-over-month (m/m) in June to an annual rate of 592,000 units and compared to forecasts of 560,000 units. The median home price rose 6.1% y/y to $306,700. The supply of new home inventory decreased to 4.9 months at the current sales pace as sales declined m/m in the Northeast and South and rose in the West and Midwest. New home sales are based on contract signings instead of closings.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.2% y/y in May, just shy of expectations for a 5.5% rise. Month/month (m/m), home prices were down by 0.05% on a seasonally adjusted basis for May, below forecasts of a 0.1% increase.

Treasuries were modestly hgier, as the yields on the 2-year and the 10-year note fell 2 basis points (bps) to 0.75% and 1.56%, respectively, while the 30-year bond rate ticked 1 bp lower to 2.28%. Bond yields have rebounded a bit as of late from record lows on some favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year. For analysis see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the headlining event will likely be the conclusion of the Federal Open Market Committee's (FOMC) two-day monetary policy meeting, where it is widely expected that the FOMC will keep its stance unchanged. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting this week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In addition to the FOMC, the economic calendar will hold the preliminary durable goods orders report, forecasted to show a 1.4% m/m decline for June, while ex-transportation, orders are expected to have increased 0.3% m/m. As well, pending home sales will be reported, expected to have risen 1.2% m/m in June, while MBA Mortgage Applications will round out the day's docket.

European equities mostly higher, Asia mixed as Japan falls and China rallies

European equites pared earlier declines and finished mostly higher in late-afternoon action with gains in commodity listings helping to ease losses in energy and bank issues. Traders may have exercised some caution ahead of this week's monetary policy decisions from the U.S. Federal Reserve and Bank of Japan and as more than 200 companies listed on the Stoxx Europe 600 Index are reporting earnings this week. The British pound continued its decline versus most of its peers today after a Bank of England policy maker said he's begun to favor immediate stimulus for the U.K. economy. Euro-area bonds finished lower as some early support from speculation that the European Central Bank (ECB) will extend stimulus measures in September faded. The ECB made no changes to its policy stance at last week's meeting. German 10-year bunds dipped to halt a three-day advance, ahead of the key central bank meetings later this week, while the euro lost ground versus the U.S. dollar. Meanwhile, it's been just over a month since the U.K. voted in favor of Brexit and Schwab's experts inform us in the most recent Schwab Market Perspective: New Records…Same Skepticism, that the Brexit aftermath on a global basis has been better than many had been expecting, leading to improved optimism that some of the more dire scenarios being painted won’t come to fruition. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks trading in Asia were mixed as Japanese shares declined on some fresh strength in the yen, while Chinese issues were nicely higher amid some economic optimism in the country. Japan's markets dropped on the heels of yesterday's decline for U.S. equities and as a read for producer price inflation came in slightly hotter than expected. Export related issues were among the worst performers as the yen rallied to extend gains from Monday ahead of Friday's conclusion to the Bank of Japan's two-day monetary policy meeting with the current majority of market participants expecting the central bank to ease monetary policy further. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the use of helicopter money—a term coined in 1969 by economist Milton Friedman to make a hypothetical point about inflation--being discussed by policy makers in Japan in order to boost growth and work their way out of Japan’s enormous debt load that stands at more than double the size of the economy, in his article, What investors need to know about helicopter money, at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in China were the top performers in the region, led by consumer companies, while a 10-day volatility gauge dropped to a two-year low yesterday. Securities traded Hong Kong joined the advance, as casino stocks rallied following some upbeat earnings releases from the gambling sector. Australian listings ticked higher and speculation of a rate cut by the Reserve Bank of Australia hasn't deterred traders from doubling long positions on the country's dollar as they are wagering that the Reserve Bank of New Zealand may drop rates by a wider margin. Stocks in India declined, while separately the nation's market regulator announced a desire to slow down high frequency trading in the next three months. Lastly, South Korean equities rallied

Tomorrow's international economic calendar will offer inflation data from Australia, consumer sentiment from South Korea, PPI from France, consumer confidence from Germany, housing prices and GDP data from the U.K., and confidence measures from Italy.