November 17, 2009

Mixed Earnings and Economic Reports

Following Monday’s session in which the major stock exchanges advanced by more than 1% each, Tuesday’s trading gave back a fraction of those gains, as investors were perplexed by mixed earnings and economic reports. With the Dollar continually faltering since the spring, the undervalued greenback has helped prop up commodities and stocks since then.

In economic news, the Labor Department announced early Tuesday morning that prices at the wholesale level increased at a slower than expected pace in October. In the report, the Producer Price Index advanced by 0.3% last month, just below the 0.5% increase economists were anticipating, but well ahead of the 0.6% decline in September.

In the past 12 months, the index of producer prices, which tracks the prices of goods before they reach store shelves, has fallen nearly 2%. The decline marks the 11th consecutive month in which prices have receded.

Looking further inside the report, the core index, which excludes the prices of food and energy, increased 0.7% in October, the smallest advance in more than five years. Food prices jumped 1.6%, led by a 24.2% jump in vegetable prices, the most in two years, while energy costs also advanced 1.6%, with gas prices increasing 1.9%.

Coming in just below expectations, the nation’s industrial production advanced marginally in October, edging higher by 0.1%, another sure sign that the country’s economic recovery still has a long road ahead. The less-than-stellar showing was a result of a decline in output at the nation’s factories, despite increased activity at gas and electric utilities.

The 0.1% increase follows a 0.6% gain in September, as well as a substantial jump in production in August. Production at our nation’s factories slipped 0.1% during the month, lagging the 0.8% surge in September. October’s decline was the first since June.

Tuesday’s report also showed that output at mines dropped 0.2%, following a 0.6% increase in September, while production from gas and electric utilities surged 1.6% after a 0.2% decrease in the past month.

Within the housing industry, the overall number of homeowners deemed as delinquent on their mortgage payments hit another record high during the past three months ending September 30, 6.25% of loans were more than 60 days past due. That is up 58% from the 3.96% delinquency rate a year ago. Although the rate was up 7.6% from the 2Q, that is much smaller than the 11.3% jump in the 2Q from the 1Q.

TransUnion, the credit agency responsible for the delinquency report, believes that the rate should rise to nearly 7% in the 4Q, well above the 4.6% in the 4Q of 2008. In the meantime, the average mortgage debt per borrower advanced marginally in the 3Q, from $192,287 last year to $193.121.

On the earnings front, one of world's largest home improvement retailers, Home Depot Inc. (HD) announced prior to the day’s opening bell that profits slipped year-over-year, as the renovation and housing markets remain weakened. For the 3Q, HD recorded a net profit of $689M, or $0.41 per share, compared to the previous year’s 3Q earnings of $756M, or $0.45 per share, a decrease in net income of nearly 9%.

Quarterly sales came in below last year’s results as well, falling from $17.8B to $16.4B, a decrease in overall revenues of almost 8%. On average, analysts within the industry were looking for the home-improvement retailer to post a quarterly profit of $0.36 per share based on $16.27B in sales.

Commenting on the company’s recent results was Frank Blake, Chairman and CEO of Home Depot, "There is still a great deal of pressure in the housing and home improvement markets, though there are some positive signs of stabilization. Our business continues to perform well in a difficult environment. We grew market share in the quarter, continued to transform our business and improved customer service."

By the sound of the closing bell, shares of Home Depot plunged more than 2%, giving up $0.66 to end the session at $26.99 per share. Over the course of a year, the company’s stock price has traded within a relatively narrow range, reaching a high of $28.44 per share, while dipping as low as $17.46 per share.

Operating large-format general merchandise and food discount stores in the U.S., Target Corp. (TGT) revealed before the start of trading on November 17 that the company’s profits surged during the 3Q, benefiting from cost-cutting measures as well as improved credit card business. For the period, Target posted a net profit of $436M, or $0.58 per share, versus last year’s earnings of $369M, or $0.49 per share, an increase in net income of more than 18%.

Revenues during the quarter advanced as well, climbing from $15.11B to $15.28B, an increase in sales of 1.1% year-over-year. Analysts, on average, were looking for the cheap chic retailer to post a quarterly profit of $0.50 per share on $15.25B in revenues.

CEO Gregg Steinhafel commented on Target’s situation, "In light of the current and projected economic environment and expectations for a highly promotional holiday season, Target remains cautious about fourth quarter performance and is planning conservatively in both business segments."

With a less-than-positive outlook, shares of Target dipped 3% by the close of the November 17 trading session, falling $1.52 to end at $48.77 per share. During the past 52 weeks, Target shares have traded as low as $25.00 per share, while reaching a high of $51.77 per share.

Engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings, Covidien PLC (COV) revealed early Tuesday morning that net earnings during the 4Q plummeted, as one-time charges and higher sales and marketing costs devastated the bottom-line. For the quarter, Covidien posted a net profit of $56M, or $0.11 per share, a far cry from last year’s 4Q profit of $409M, or $0.81 per share, a decrease in net income of more than 86% year-over-year.

Revenues were nearly unchanged at $2.7B, up marginally from last year’s tally of $2.69B. Analysts were looking for the drug and medical device maker to record a net profit in the 4Q of $0.70 per share on total revenues of $2.62B.

Quarterly results were greatly affected by the increase in overall expenses, as Covidien witnessed selling, general and administrative costs (SG&A) climbing from $762M to $924M, a 21% jump. The company also incurred a $58M legal charge, as well as $53M to deal with environmental problems. Covidien also reported $44M in restructuring costs, $36M in research and development charges, and an $18M charge to reclassify its specialty chemicals business as a discontinued operation.

Richard Meelia, Chairman, President and CEO, stated, "We finished fiscal 2009 with a solid performance that was in line with our expectations. Our 2009 results were aided by successful new product launches, market share gains and several strategic acquisitions. We significantly increased R&D spending, made several portfolio management moves to strengthen our business and again generated strong cash flow."

Despite the poor quarterly showing, Covidien upwardly revised their 2010 sales forecast. The company now expects annual sales to be up 6% to 9% over 2009’s results.

At the end of Tuesday’s trading session, shares of COV were up more than 2%, adding $1.04, to conclude the day at $45.13 per share. Covidien’s stock has slipped as low as $27.27 per share during the past year, while establishing a new 52-week high during Tuesday’s session at $46.75 per share.

Oil prices inched higher during Tuesday’s trading, despite the Dollar beginning to strengthen, thus keeping the price of crude near the $80 mark. By the sound of the closing bell, the price for a barrel of light, sweet crude for December delivery added $0.24 to settle at $79.14 a barrel. The contract surged $2.55 to settle at $78.90 the day before.

In additional NYMEX trading, heating oil added $0.0265 to $2.0585 a gallon, while gasoline for December delivery gained $0.0181 to $2.0049 a gallon. Natural gas for December delivery was down $0.084 at $4.530 per 1,000 cubic feet.

Inside the Forex markets, the Dollar reversed its downward spiral, following Monday’s descent to a 15-month low versus a basket of six currencies. Heading into the early evening hour, the 16-nation Euro slipped to $1.4868, down from Monday’s price of $1.4987. Meanwhile, the British pound retreated against the greenback as well, buying $1.6813, down from yesterday’s $1.6838.

In additional Forex trading, the Dollar advanced against the Japanese yen, buying 89.33, up from the previous session’s price of 88.98. The greenback also climbed to 1.0509 Canadian dollars from 1.0467 late Monday, and bought 1.0163 Swiss francs from 1.0068 francs.

As the equity markets pulled back on Tuesday, the bond markets flourished. Investors were more inclined to place their capital in the safer, government-backed securities as the sentiment was pushed lower by mixed economic news. By the end of trading, the benchmark 10-year note was up 3/32 to 100 13/32, as its yield slipped to 3.32%, down from the previous session’s rate of 3.33%.

Furthermore, the longer maturing 30-year note was up 10/32 to 101 31/32, as its yield slipped by 0.02% to settle at 4.25%. Lastly, the shorter 2-year note remained unchanged on the day at 100 14/32, while yielding 0.76%.

With the November 17 session in the books, the Dow Jones Industrial average added 30.46 points, or 0.3%, to finish at 10,437.42, while the broader market indicators ended the day in positive ground as well.

The S&P 500 index finished trading up 1.00 point, or 0.1%, at 1,110.30, while the tech-heavy NASDAQ composite index was higher by 5.93 points, or 0.3%, at 2,203.78.

2009 Better Trades Article

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BRIAN MULLIN