Stocks Pop Higher as Earnings Ramp Up

Charles Schwab; On the Market

Posted: 7/22/2016 4:15 PM ET

Stocks Pop Higher as Earnings Ramp Up

U.S. equities finished the regular trading session higher as investors weighed some mixed earnings reports, headlined by upbeat results from Dow member General Electric. In domestic economic news, Markit's preliminary July manufacturing activity read was better than expected. Treasuries were mixed, gold and crude oil prices were lower and the U.S. dollar rallied. Overseas, stocks in Europe were mixed and equities in Asia were mostly lower as global traders hoped for indications of additional stimulus from the European Central Bank and Bank of Japan.

The Dow Jones Industrial Average (DJIA) advanced 54 points (0.3%) to 18,571, the S&P 500 Index added 10 points (0.5%) to 2,175 and the Nasdaq Composite increased 26 points (0.5%) to 5,100. In moderate volume, 741 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.56 lower at $44.19 per barrel, wholesale gasoline was unchanged at $1.36 per gallon and the Bloomberg gold spot price decreased $7.46 to $1,323.97 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.41. Markets were higher for the week, as the DJIA gained 0.3%, the S&P 500 Index increased 0.6% and the Nasdaq Composite advanced 1.4%.

Dow member General Electric Co. (GE $32) reported 2Q earnings-per-share (EPS) ex-items of $0.51, well above the $0.46 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $33.5 billion, versus the expected $31.8 billion. Chief Executive Officer (CEO) Jeffrey Immelt said, “The diversity and scale of our portfolio enabled the company to perform well despite a volatile and slow-growth economy,” adding, “We expect strong organic growth in the second half of the year.” Despite the beat, shares were lower.

Fellow Dow component Boeing Co. (BA $133) warned that it expects to report a $2.1 billion after-tax charge in the 2Q on expenses surrounding its 787 Dreamliner, 787-8 jumbo jet and air tanker for the U.S Air Force. The aircraft manufacturer said it will write off two of the flight-test aircraft at a cost of $847 million. Boeing's CEO said, “These are the right, proactive decisions to strengthen our business going forward." BA traded lower.

AT&T Inc. (T $43) registered 2Q EPS ex-items of $0.72, matching the FactSet estimate, with consolidated revenues, including those from its recent acquisition of DIRECTV, growing 23.0% y/y to $40.5 billion, but below the Street's $40.6 billion forecast. A net loss of 49,000 video subscribers pressured results, as declines in the unit continue to mount as customers are dumping traditional TV packages for lower-cost online-only offerings elsewhere. Shares of T gained ground.

Advanced Micro Devices Inc. (AMD $6) posted a 2Q loss ex-items of $0.05 per share, better than the $0.09 per share shortfall forecasted by analysts, on a 9.0% y/y increase in revenues to $1.0 billion, which topped the Street's $951.3 million estimate. The chip maker said it expects the current quarter to see an 18% y/y rise in sales, plus or minus 3%, as well as growth in the subsequent quarter. AMD closed solidly higher.

Honeywell International Inc. (HON $116) announced 2Q profits ex-items of $1.66 per share, topping the forecasted $1.64, as revenues rose 2.0% y/y to $10.0 billion, mostly in line with estimates. However, shares of HON were under pressure, as the conglomerate said it expects 3Q EPS between $1.67-1.72, compared to analysts' forecasts of $1.72.

Chipotle Mexican Grill Inc. (CMG $442) missed analysts' estimates when it reported 2Q EPS of $0.87, compared to the $0.91 FactSet estimate, as sales at the restaurant chain fell 16.8% y/y to $998.4 million, also shy of the forecasted $1.1 billion, as same-store sales tumbled 23.6%, well below the anticipated 20.6% decline. The company's CEO said, "Our entire company is focused on restoring customer trust and re-establishing customer frequency," adding, "There’s no quick solution to improving our sales and bringing our customers’ trust back." Despite the dismal report, shares finished higher.

Capital One Financial Corp. (COF $67) posted 2Q earnings ex-items of $1.76 per share, ten cents short of the FactSet estimate, as revenues were mostly in line with forecasts calling for $6.3 billion. The company's CEO said it remains well positioned to deliver growth in the future, as well as continue to return capital to shareholders. COF traded lower.

U.S. manufacturing posts better-than-expected increase

The preliminary Markit U.S. Manufacturing PMI Index for July improved to 52.9 from June's downwardly revised 51.3 level, and above the forecasted modest rise to 51.5, with a reading above 50 denoting expansion in activity.

The recent string of upbeat domestic data has helped fuel the recent stock market rally that took the Dow and S&P 500 to all-time highs, as discussed by Liz Ann Sonders in her latest article, 19th Nervous Breakout: Stocks Finally Reach New Highs, at www.schwab.com/marketinsight. As well, you can find the latest Schwab Sector Views: Drilling Down on the Energy Sector by Schwab's Director of Market & Sector Analysis, Brad Sorensen, CFA, where Brad argues the case that the correlation that had emerged between oil prices and stock market performance appears to have started to diminish.

Treasuries were mixed with the yield on the 2-year note up 3 basis points (bps) at 0.70%, the yield on the 10-year note 1 bp higher at 1.57%, while the yield on the 30-year bond was down 1 bp at 2.28%. Bond yields have rebounded as of late from record lows on 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.

Europe mixed, Asia lower

European markets finished mixed, as traders digested a plethora of manufacturing activity reports in the region, as well as yesterday's decision from the European Central Bank (ECB) to leave its monetary policy unchanged where it lacked any clues as to if the ECB will become more aggressive in its stimulus measures following the June vote by the U.K. to leave the European Union (EU), known as a Brexit. Manufacturing data in Germany and the Eurozone as a whole continued to show expansion, despite a slight downtick in the readings, and France saw improvement. However, activity out of the U.K. plunged to a level depicting contraction, further fueling concerns of the economy post-Brexit. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, and gives us Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

In other economic news, Italy's retail sales came in well ahead of forecasts, while industrial sales in the nation fell well short of expectations. The euro and the British pound were slightly lower versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished lower, as hopes of aggressive stimulus measures from the Bank of Japan (BoJ) were tempered following a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—that doused the notion of so-called helicopter money, as well as inaction by the European Central Bank yesterday to offer any hint of further aid. Japanese equities pared a recent rally, as the comments sent the yen sharply higher. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. The tempered sentiment toward central bank easing overshadowed an increase in Japan's manufacturing activity, with Markit's preliminary Manufacturing PMI Index showing a reading of 49.0 for July, up from 48.1 in June, and closing in on the 50 level that indicates the demarcation point between expansion and contraction in activity.

Chinese stocks declined despite action from the People's Bank of China (PBoC) where it pegged the yuan 3% higher versus the greenback and while the country's leaders dictated some clear differences on how to reform the country's state-owned enterprises (SOEs) raising contradicting viewpoints of whether to reinforce the sector or to trim SOEs down. Elsewhere, securities in Australia and South Korea dipped, while Indian equities bucked the regional trend, finishing higher in a somewhat subdued session.

Stocks see another weekly advance

U.S. equities managed gains for the week, as the Dow & S&P 500 indexes continued to chart record-high territory, though the blue-chip benchmark ended a nine day winning streak on Thursday. Earnings season began to heat up with financial heavyweights including Bank of America Corp. (BAC $14) and Morgan Stanley (MS $29) and Dow components Goldman Sachs Group Inc. (GS $160) and American Express Co. (AXP $64) all releasing quarterly results that bested analysts' bottom-line expectations. Some tech titans including Dow members International Business Machines Corp. (IBM $162), Microsoft Corp. (MSFT $57) and Intel Corp. (INTC $35) also announced quarterly results that topped forecasts.

As record-highs continued for the equity markets as a whole, the energy sector was unable to spark significant gains and lagged for the week. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, shares in his recent Schwab Sector Views: Drilling Down on the Energy Sector, that with the market shifting its focus to the Brexit vote and its immediate aftermath, the energy sector may finally be taking a backseat in the minds of investors and while it may not seize the market's attention the way it used to, the energy sector remains important. Much of the global economy depends on access to oil, and also its price. And we've seen oil prices move considerably in the past two years. Read the rest of Brad's refined assessment of crude, as well as his views on all sectors at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Fed set to conclude monetary meeting prior to GDP release next week

Next week's robust domestic economic calendar will likely be headlined by Friday's first look (of three) at 2Q GDP, which will follow the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. Schwab's experts tackle these topics in the latest Schwab Market Perspective: New Records…Same Skepticism, noting that while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting next 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. Separately, they also point out that commentary from second quarter earnings season has so far been relatively cautious, although the results have been better than the relatively low expectations so far. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other reports on next week's U.S. economic calendar include: new home sales, pending home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit's preliminary Services PMI Index, consumer confidence, the Kansas City Fed Manufacturing Activity Index, and the final University of Michigan Consumer Sentiment Index.

Major international economic releases for next week include: Japan—trade data, the Leading Index, CPI, retail sales, industrial production, vehicle production, and the Bank of Japan's monetary policy decision. China—industrial profits. Australia—CPI, PPI, export and import prices and private sector credit. Eurozone—consumer confidence, CPI and 2Q GDP. Germany—CPI, retail sales, import prices, GfK consumer confidence and Ifo business climate survey. U.K.—2Q GDP, GfK consumer confidence, Index of Services and consumer credit.

Financial Review

A Hot One

Sinclair Noe — January 21, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 115 = 15,882
SPX + 9 = 1868
NAS + 0.37 = 4472
10 Y + .04 = 2.02%
OIL + 1.50 = 29.85
GOLD + .20 = 1102.40

The European Central Bank announced today that they will hold interest rates at record lows of 0.3%. Mario Draghi said the European Central Bank may need to provide more stimulus programs as soon as March to address concerns about the euro-area recovery. Draghi said, “Downside risks have increased again amid heightened uncertainties about emerging-market growth prospects. It would therefore be necessary to review and possibly reconsider our monetary-policy stance at our next meeting.” Now remember that the markets just love free money, and that was essentially what Draghi promised.

China’s central bank cranked up cash injections in its money-market operations for the third week in a row, trying to counter capital outflows. The PBOC added $60 billion to the financial system using reverse-repurchase agreements, the most in three years. The Shanghai composite dropped 3.2%.

Brazil’s central bank kept policy on hold. The Central Bank of Brazil held its benchmark rate at 14.25%, surprising the consensus, which was calling for a 50-basis-point hike to 14.75%. The bank has been under pressure from politicians and local businesses to raise rates in an effort to combat inflation that is running at a 12-year high, above 10%.

Oil prices moved higher today. Yesterday the API report showed a U.S. crude inventory build of 4.5 million barrels last week – about double trade expectations. Today the U.S. Energy Information Administration reported crude inventories rose by 4 million barrels for the week ended Jan. 15. Now normally, you might expect prices to drop on news that inventories are growing, but the best explanation I can offer is that oil was a little oversold; even with today’s gain, prices are still under $30 a barrel.

Russia’s ruble fell more than 5% overnight, to hit a new record low of 85.97 per dollar. The country is suffering from the slump in oil prices, which has sparked widespread predictions of a second straight year of recession. Russia’s central bank has indicated it will not intervene to support the currency.

The number of applications for unemployment benefits unexpectedly increased last week to a six-month high. Initial jobless claims climbed by 10,000 to 293,000 in the week ended Jan. 16. The four-week moving average increased to 285,000, the highest since mid-April.

The Philadelphia Fed’s manufacturing index was in negative territory in January for the fifth month in a row. The index rose to negative 3.5 from negative 10.2

The first Friday of each month brings the report on non-farm payrolls, or the shorthand is the Jobs Report; a couple of weeks later we get a state by state breakdown. Today, the Arizona Department of Labor Stats reported Arizona’s seasonally adjusted unemployment rate dropped two-tenths of a percentage point from 6.0% in November to 5.8% in December.

The US seasonally adjusted unemployment rate remained unchanged at 5.0% in December. A year ago, the Arizona seasonally adjusted rate was 6.6% and the U.S. rate was 5.6%. The biggest job gains were found in trade, transportation, and utilities; the biggest job losses were in government and construction. Arizona employment grew by 2.5% (65,700 jobs) over the year ending in December.

January 21, 1970 marks the day of the first commercial flight of a Boeing 747. Today, Boeing announced plans to report a $569 million after-tax accounting loss as it cuts production of the iconic 747 jumbo jet in half. Boeing announced that it would lower its production rate on 747-8 jets to match demand in the cargo market.

In other words, it does not want to overproduce for a market that’s not demanding a lot right now. But demand for flight from the consumer economy are running above their recent trend. And this is really the whole economic story in a nutshell. In short, the outlook for consumers is solid while things are falling apart for manufacturers.

United Continental Holdings’ fourth-quarter profit missed analysts’ estimates as a strong dollar and weak economies in energy-dependent markets hurt demand from travelers. Adjusted earnings were $2.54 a share, missing estimates by 2-cents. Revenue dropped 3%.

Southwest Airlines reported it nearly tripled its profit in the final quarter of the year. The No. 4 U.S. airline by traffic said its fuel and oil expense dropped 37% in the latest quarter. Overall, the company posted a profit of $536 million, or 82 cents a share, up from $190 million or 28 cents a share a year earlier. Revenue was up 7.5%

Verizon Communications added 1.5 million new subscribers and exceeded analysts’ profit estimates even as rivals pushed price cuts and promotions to lure customers away. Fourth-quarter earnings excluding some items were 89 cents a share, a penny better than estimates.

Schlumberger reported better-than-expected fourth-quarter earnings and quarterly sales in line with Wall Street consensus. The company said it earned an adjusted 65 cents a share in the quarter, down from $1.50 a share in the year-ago period. Revenue hit $7.7 billion, down from $12.6 billion in the year-ago period. The company faced a continued decline in rig activity, project delays and cancellations and other problems stemming from lower oil prices. The good news is that it wasn’t worse news.

American Express reported its fourth-quarter earnings fell to $899 million, or 89 cents a share, from $1.45 billion, or $1.39 a share, a year earlier. AmEx beat earnings estimates. Revenue dropped to $8.3 billion from $9 billion a year ago.

Union Pacific Corp. reported quarterly earnings that missed analysts’ estimates for the third time this year as a freight slump accelerated. Net income fell to $1.31 a share, 11 cents less than the average of estimates. Revenue decreased 15 percent to $5.21 billion compared with a forecast of $5.44 billion. It was the biggest miss in at least 10 years. The weakness in rail cargo probably will last this year as coal demand continues to drop and U.S. production lags.

General Motors said it sold 9.8 million vehicles in 2015. The results represent a third consecutive year of record global sales for GM. North American deliveries rose 6% to 3.6 million cars, trucks and crossovers, and it also delivered 3.6 million vehicles in China, an increase of 5% from 2014.

Sharp is leaning toward accepting a rescue by government-backed Innovation Network of Japan over a potentially larger offer from Foxconn Technology. A deal with INCJ would allow the firm to keep its technology within Japan and cooperate more closely with domestic companies. Sharp’s stock climbed as much as 25% in Tokyo after Foxconn offered $5.3 billion to take it over.

The next installment of the Star Wars franchise, originally slated to debut on May 26, 2017, is now scheduled to be released seven months later on Dec. 15, 2017. Disney did not cite specific reasons for the push, but did note the success of Star Wars: The Force Awakens. The film has garnered more than $861 million domestically and $1.9 billion internationally – the third largest global release ever.

If you believe in math and gravity and other such “theories” there appears to be precise evidence of a big, fat planet spinning far beyond the planetoid Pluto.  The clues started piling up when astronomers discovered a mini Pluto (aka, rocky Kuiper Belt object far out in the nether regions of the solar system) with an interesting orbital twist… literally. Astronomers then noticed other objects floating around in distance and in the angle of the orbit relative to the horizon of the solar system. So it was more than coincidence.

Using very sharp pencils two Caltech astronomers Michael Brown and Konstantin Batygin, not only have validated the existence of this mystery planet they’ve referred to as “Planet 9”, they have determined both its mass and exact orbit.  Planet 9 from Outer Space is apparently about 10 times the mass of Earth with an orbit 20 times farther out from the sun than Neptune. The only thing really missing from “9” is a fuzzy picture and a real name.

A blizzard watch has been posted from Virginia to New York, for a storm that threatens to bring high winds and heavy snow starting Friday and lasting through the weekend. The snow should begin falling in Washington before sundown Friday, with heavier amounts arriving overnight. In New York, the heaviest accumulations will come on Saturday, which is when Boston may get some snow as well.

Last year shattered 2014’s record to become the hottest year since reliable record-keeping began, according to separate sets of records kept by NASA and the National Oceanic and Atmospheric Administration; 2015’s sharp spike in temperatures was aided by a strong El Niño weather pattern late in the year that caused ocean waters in the central Pacific to heat up. But the unusual warming started early and steadily gained strength in a year in which 10 of 12 months set records.

NASA reported that 2015 was officially 0.23 degrees Fahrenheit (0.13 degrees Celsius) hotter than 2014, the prior record year. NOAA’s figures showed slightly greater warming, of about 0.29 degrees Fahrenheit (0.16 degrees C) hotter than 2014. A quarter of a degree may not sound like much, but on a planetary scale it’s a huge leap. Most previous records were measured by hundredths of a degree.

The El Niño weather pattern of 2015 produced some of the hottest temperatures ever witnessed across swaths of the equatorial Pacific. Across the globe, El Niño triggered powerful typhoons, spoiled cocoa harvests in Africa, and contributed to vast fires in Indonesia. California is getting pummeled with floods, and residents on the U.S. East Coast are bracing for an El Niño fueled snow dump this weekend. Because a strong El Niño still is in place, 2016 is expected to be an exceptionally warm year, and perhaps even another record.

Financial Review

Easy to Spot Winners

Sinclair Noe — October 22, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 320 = 17,489
SPX + 33 = 2052
NAS + 79 = 4920
10 YR YLD un = 2.03%
OIL + .18 = 45.38
GOLD – .80 = 1166.90
SILV + .16 = 15.94

European Central Bank policymakers are meeting today in Malta. ECB President Mario Draghi announced no change to interest rates or asset purchases, but he warned that emerging markets are hurting Eurozone growth prospects, and he hinted the central bank may lower the deposit rate further or expand its quantitative easing at its December meeting. Markets just love an accommodative central bank.

The European Economics Commission says “Greece has done a certain number of reforms, and we are going to give them money, €3 billion-euro in all,” and in the course of November, December, the commission will deal with the issue of the recapitalization of Greek banks and Greek debt.”

Chinese stocks recovered today as the People’s Bank of China added liquidity to the market. After the close on Wednesday, the PBOC injected $16.6 billion into 11 financial institutions via medium-term lending facilities. Meanwhile, the government’s anti-corruption campaign continues with a crackdown on golf, considered a lavish extravagance. Or in my case, cruel punishment.

New applications for U.S. unemployment benefits inched up by 3,000 to 259,000 in the week ended Oct. 17. This is the first gain after two straight large declines. Claims had fallen by 20,000 in the prior two weeks.

Existing home sales rose 4.7% to a seasonally adjusted annual rate of 5.55 million, the second-highest monthly level since Feb. 2007 and an 8.8% rise from the same month of 2014. The National Association of Realtors attributed the improvement in the housing market to low mortgage rates, an improving jobs environment and a slight thawing in credit availability. There were 2.21 million available homes for sale, down 3% from August. The number of listed properties in August was the second-lowest for that month since 2002.

The White House is making a push to solve the debt crisis in Puerto Rico, pressing Congress to amend bankruptcy code, instate a financial control board and extend tax credits as the commonwealth struggles with $72 billion in debt. On Wednesday, the Government Development Bank, the island’s de facto fiscal authority, ended talks with a group of its bondholders and their advisers after failing to reach a deal on restructuring the debt.

The U.S. Treasury said it will postpone the two-year note auction previously scheduled for Tuesday, as an impasse over the debt limit constrains the nation’s borrowing and inflicts the first ceiling-related auction delay in a decade. The Treasury sent an e-mail saying: “Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2. The five-year note auction on Oct. 28 and the seven-year note auction on Oct. 29 will proceed as planned.

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. Treasury Secretary Jacob Lew said he is concerned that “last-minute brinkmanship” in Congress could lead to a legislative “accident” in which lawmakers would fail to raise the debt ceiling before a Nov. 3 deadline. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004.

And part of the reason why this is noteworthy is because the Treasury markets are supposed to be boring, incredibly boring and completely predictable, regular, and consistent. This consistency has allowed the government, and by extension the US dollar, to become the safe harbor for investors. Predictability translates into decreased borrowing costs for the US, roughly $27 billion in savings over the past 17 years, simply attributed to the predictable, consistent bond market schedule.

Remember the debt ceiling fight of 2011 was behind the credit rating downgrade that stripped the US of AAA rating. And now we are preparing for another fight over the debt ceiling, and the clock is ticking, and the most boring part of the markets just got important.

The median stock in the US has been flat for 2015. That is actually a big improvement from about one month ago when the median stock was down 8%, so we’ve seen a nice rally, but at the current pace we are on track for the worst performance since 2008. And it doesn’t look like stocks are going to rally on earnings news; third quarter reports are coming in and we are on track for a two consecutive quarters of declining earnings, or an earnings recession.

The bad news is that when we have an earnings recession we tend to get a real recession. This is a statistic not lost on the Fed. Historically there has been a very high correlation between changes in the Fed Funds rate and the profit cycle. The Fed traditionally begins a tightening cycle when profits are moving higher and begins easing when profits decelerated. The notion that the Fed would raise rates in a profits recession, well, it has never happened before.

United Auto Workers members have ratified a new 4-year labor contract with Fiat-Chrysler. UAW members sacrificed gains in a 2011 contract and two years earlier made concessions to allow the former Chrysler to go through bankruptcy. The new contract, effective as of next Monday, provides a clearer path to top pay for so-called “second-tier” workers in a two-tier wage system established in 2007, which pays newer workers less than those hired before 2007. The new contract allows newer workers to earn wages more in line with veteran employees. Next up, negotiations with Ford and GM.

A swift plunge in the stock price of Valeant Pharmaceuticals cost some of Wall Street’s top names billions of dollars on Wednesday but Pershing Square’s Bill Ackman took the meltdown as a buying opportunity. Ackman bought 2.1 million additional shares as the company plummeted as much as 40% on a report from Citron Research that alleged it fraudulently inflated revenues. The report goes so far as to call Valeant the “pharmaceutical Enron.” Today, the stock dropped 10% more.

Let’s take a look at earnings reports:
McDonald’s reported quarterly earnings and revenue that topped estimates. Global sales at established restaurants were up a much better-than-expected 4 percent in the third quarter, ending six straight quarters of flat or falling results. McDonald’s share hit an all-time high on the report.

American Express posted quarterly earnings and revenue that missed analysts’ expectations on Wednesday, citing continued headwinds from a stronger U.S. dollar and a rise in marketing spending.

3M, the maker of Scotch tape and Post-it notes, reported disappointing net sales for the third quarter and said it would cut about 1,500 jobs next year, hurt by a strong dollar and a global economic slowdown.

Caterpillar delivered quarterly earnings and revenue that fell short of expectations on Thursday. The company also lower its earnings outlook for this year and sharply increased its estimates on restructuring costs for 2015.

Southwest Airlines posted an 83% jump in third-quarter profit, boosted by lower fuel prices and cost controls.

Daimler, the owner of Mercedes-Benz, reported a net income of $2.7 billion, a 13% drop compared with a year earlier, but Mercedes car sales rose by 18% in the period.

Hyundai reported a 23% fall in net profit to $1.1 billion on falling China sales, missing estimates.

Freeport-McMoRan will further cut copper and molybdenum output as it posted a bigger-than-expected quarterly loss. The Phoenix-based company said it remains confident in the longer-term outlook for copper, but will halve operating rates at its Sierrita mine in Arizona as prices continue to drop. Freeport reported an adjusted loss of $156 million, or 15 cents a share, lagging analysts’ expectation for an 8 cent loss.

Three big earnings reports came out after the closing bell: Microsoft, Amazon, and Google parent Alphabet.

Microsoft reported a profit of $4.6 billion, or 57 cents a share, up from $4.5 billion, or 54 cents a share, a year earlier. Profit beat estimates, despite a decline in earnings. For the first time, Microsoft broke out financial results based on three operating division, including its mobile and cloud business.

Amazon posted a profit, always a bit surprising, a profit of $79 million, or 17 cents a share, compared with a loss of $437 million, or 95 cents, a year earlier. You’ll remember that last year’s results included a big whiff with the Fire phone. In the most recent quarter revenue gained 23 percent to $25.4 billion, pushed by Amazon Prime Day, which was even better than Black Friday.

As Amazon has been transformed from an online bookstore into a vast conglomerate, its video-streaming service competes with Netflix Inc. and its third-party logistics business rivals UPS. Its cloud business, with revenue growing 78%, competes with Google and Microsoft to rent storage and computing power. Meanwhile its core e-commerce business challenges brick-and-mortar chains such as Wal-Mart and Target. It has all worked well for CEO Jeff Bezos; with today’s gains Bezos saw his net worth climb to $55 billion, making him the third richest man in America.

Google parent Alphabet reported better-than-projected sales and profit in the latest quarter. Revenue was up 15% to $15.1 billion. Third-quarter net income was $2.74 billion. Total clicks on ads up 23 percent, even as the average price for an ad fell 16 percent. But Alphabet is now more than an online search engine.  Other initiatives range from computers and fast-Internet services, to projects such as like product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. While the new areas have yet to bring in sales to rival Google’s core operations, they’re being given room to operate as distinct units under a new operating structure.

Financial Review

Remain Buckled Up

Sinclair Noe — August 24, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 588 = 15,871
SPX – 77 = 1893
NAS – 179 = 4526
10 YR YLD – .06 = 2.00%
OIL – 2.30 = 38.06
GOLD – 5.50 = 1155.90
SILV – .56 = 14.89

The “Fasten Your Seat-belt” sign stayed on for the entire trip.

The Dow Jones Industrial Average dropped 1089 points, or 6%, to 15,441 to start the session; that was the largest intraday drop in Dow history. The S&P 500 opened 100 points, or 4.9%, lower at 1,874. The Nasdaq Composite began the day down 360 points, or 7.6%, to 4,349. All three major US market indexes are now in correction territory, a 10% drop from a recent high. The latest round of selling comes on the heels of the worst week for the broad S&P 500 since 2011 that stripped more than $1 trillion in market value from US equities.

Before the market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%. The New York Stock Exchange operator NYSE Group invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile. At the market open, a slew of single stocks and exchange-traded products triggered single-stock circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.

Over the past 5 days the Dow Industrials dropped 2,198 from peak to trough; the Dow lost 1,697 from peak to today’s close; and the Dow was down 1,666 from the open 5 days ago to today’s close. All major trend lines have been violated.

You know things are bad when we start talking about circuit breakers; just to refresh your memory, the New York Stock Exchange said it will halt trading for 15 minutes if the Standard & Poor’s 500 Index drops 7 percent. And just when it looked like the circuit breakers might trip, the market recovered; almost. The Dow bounced back to a loss of only about 100 points; maybe short sellers covered; maybe the Plunge Protection team stepped in; maybe bargain hunters nibbled. Who knows? And then the major indices resumed their slide in the final hour of trade.

A downturn in the stock markets is fairly common; a weekly drop of more than 5 percent has happened 28 other times since 1980. On average, the market is relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks. Also important to note is that 60 percent of the time, the index moves higher the following week.

Some of the standout years include huge drawdowns of more than 20 percent over the next 12 weeks in 1987 and 2008. On the opposite side of the spectrum, there were massive turnarounds in 1998 and 2009. So, just because the markets drop 10%, it doesn’t mean the markets will go into a 20% bear market. Of course, if you are going to a 20% loss, you have to pass by 10% first.

U.S. markets average one 10 percent correction every 20 months. On average, we should expect these declines to take 71 trading days to play out (about three months). These 10% corrections are more common in a secular bear market. We are not in a secular bear market.

World stock markets fell sharply again as panic selling in China picked right back up to start the week. China’s stock markets have now wiped out the gains built up during the year. The Shanghai Composite Index closed down 8.5%. Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. Investors were further rattled today by the lack of fresh steps to stem the selloff over the weekend from Chinese authorities. Taking the cues from Asia, the European markets closed lower across the board.

The Chinese central bank is reportedly ready to flood the banking system with liquidity to increase lending, the latest in a series of measures designed to give the flagging economy a boost. China gave approval for pension funds run by local governments to invest in the stock market. The measure was approved over the weekend by the State Council. State media in China estimate close to $97 billion will be eligible to be invested under the new rule. Analysts also expect the People’s Bank of China to lower the reserve requirement ratio by 50 basis points to 100 basis points in reaction to massive capital outflows.

Of course, the People’s Bank of China has already intervened in markets; by devaluing its currency, freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market; one day it appears to provide relief, the next day (like today) it hits the sidewalk with a thump. This has reportedly set up a power struggle in China. The whole world is waiting for massive action from the Chinese government, an economic bazooka that can blast through all this market madness. The problem is that China doesn’t have one. That’s because China’s growth model is broken, and it can’t be fixed by cash injections or other emergency policy measures. The old fixes won’t work anymore.

The Federal Reserve has been intervening in the US markets for the past 7 years (OK, the past 100 years, but the past 7 for today’s example). And after years of Zero Interest Rate Policy and $4.2 trillion in QE securities added to their balance sheet, we are left to wonder what other tools they have in their toolbox. The Fed has been talking about raising interest rates, and that now appears dead for the September FOMC meeting. Or to put it another way, they wouldn’t raise rates if the meeting were held tomorrow. Who knows where we’ll be in 3 weeks. What the Fed and the PBOC are learning is that the global economies are now inextricably linked. The strong dollar and a slowdown in China hits emerging markets. The US is not an island in the global economy. And maybe monetary policy intervention in the markets just can’t get the job done anymore.

Ten-year Treasury yields dropped below 2 percent for the first time since April. Futures traders cut the probability to 24 percent that the Fed will raise interest rates at its September meeting, from 48 percent on Aug. 14. The chance of a December increase fell to 47 percent from 74 percent.

Oil prices plunged to 6.5-year lows as concerns over demand from China rippled across energy markets. Brent crude is below the $45 per barrel level for the first time since 2009, while WTI crude is back into the $30s. Commodities sank to the lowest in 16 years.

Gas prices in the US remained level over the last two weeks, according to the bi-weekly Lundberg survey. Prices were 22% lower than they were for the two-week period a year ago. Significant cuts in retail prices are expected across the US due to the latest developments in the oil markets.

The euro strengthened to $1.15 and the Japanese yen is also higher with traders discounting a move by the Federal Reserve to raise interest rates next month. The euro is now at its lowest level since last February.

Now, that is all backdrop for today’s market movement. Why did stocks fall? More sellers than buyers; actually the numbers matched but selling was the more compelling storyline for the day. Why did markets fall? Who knows? Still, I have seen the steady parade of economists who predicted 9 of the last 5 recessions, and market pundits who predicted 20 of the past 2 corrections, explaining why we are all going to hell in a handbasket.

We’ve also had the Alfred E. Neuman pundits, saying they’re not worried and the markets will rebound tomorrow and everything is beautiful. Whenever you get involved in stocks, you should know your exit plan, even before you buy. If your exit plan called for you to be out, then you should be out. If your plan called for you to remain at these levels, then you sit and wait it out. If you get emotional about market moves, you should not be in the market.

As global markets convulsed this morning, Apple chief executive Tim Cook dashed off an email to Jim Cramer at CNBC. Cramer read the email live on air. Cook wrote: “I can tell you that we have continued to experience strong growth for our business in China through July and August… Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”

Well, as you might imagine, that calmed the frayed nerves of Apple investors, at least a little. Apple shares started the session down more than 15 then managed to rally into positive territory, finishing down 2.5% for the day. The difference was about $75 billion in market cap. Which raises the questions:  Where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader? And, just how is this not a Regulation Fair Disclosure violation?