Corporate Earnings Again Trump Sovereign Debt Fears

By: PaddyPowerTrader

US stocks rose upon hump day, rebounding from the biggest drop since February, as higher-than-estimated earnings and the Federal Reserve’s pledge to keep interest rates at a record low overshadowed a downgrade of Spain’s debt rating. Dow Chemical climbed 5.9% and insulation producer Owens Corning rallied 11% as profits topped average analyst forecasts. Goldman Sachs gained 2.6% after defending its business practices to a Senate panel.

Today’s Market Moving Stories

•No surprises in the FOMC statement. The extended period language was retained (Hoenig was again the lone dissent against it). No mention of the draining operations or asset sales. Indeed, policymakers took out more sentences than they added, leaving us with an extremely plain vanilla statement. Though there was nothing in today’s announcement to suggest the Fed is closer to tightening now than they were in March.
•Back in Europe, “every day counts” as Strauss-Kahn put it when referring to the urgency to act swiftly on the implementation of the Greek bailout package. The latest news is that the aid package for Greece could be topped up to reach €100 – 120bn, providing a concrete commitment beyond the first year. Germany would still have to pass its contribution into law, which the Finance Minister expects to happen possibly by Monday. Officials seem to have sensed the urge to act, but implementation risks still remain.
•The Pain in Spain. The eurozone’s debt crisis continues to hold centre stage for the financial markets. Spain was downgraded late yesterday and it is worth noting that Spain has the largest combined budget and current account deficits (as a percentage of GDP) in the industrialised world. And you thought it was all about Greece.
•Reuters has an interesting story about US economist David Hale has quoted the Bank of England governor as telling him that the next British government will need to launch an austerity drive so tough as to threaten its political survival.
•A UK employment index showed recruitment may outpace job cuts this quarter for the first time since 2008 as companies benefit from the economic recovery. The number of employers planning to increase staff levels in the second quarter exceeded those looking to cut headcount by 5 percentage points, the Chartered Institute of Personnel and Development and KPMG said.
•The US housing market won’t recover for three to five years as mounting foreclosures hold down prices, according to mortgage-bond pioneer Lewis Ranieri. “There’s another big leg down and the question is how long does it stay.”

Is Ireland Next?
Perhaps we should be concerned that Ireland may be ‘next up’, but I note that S&P made supportive comments in recent weeks in regard to the Irish sovereign’s progress in addressing its Fiscal and Banking related challenges. Interestingly I also note a headline from the Lex column in this morning’s FT (not usually a fan of the Emerald Isle): “The injustice of it all! As fears of a Greek default escalate, Ireland’s 10-year borrowing cost rose above 5% on Wednesday, a 2 percentage point premium over German Bunds. Yet Irish finance minister Brian Lenihan has led the way among ailing peripheral eurozone economies in taking the harsh fiscal measures needed to regain investor confidence. He set the example months ago that Athens should follow now, slashing public servants’ salaries, and welfare payments. Investors rewarded him: the yield spread over Bunds narrowed.” Whilst Ireland’s performance in recent days has been very disappointing and the bond market has displayed price action all too similar to Portugal, maybe there is hope and bond market participants may look to distinguish Ireland (again) from other Southern European sovereign bond markets if/when the extreme uncertainty in the market is addressed by policymakers. In the meantime Ireland’s destiny is somewhat outside of its own hands.” And further support for Ireland came from Moody’s rating agency saying that they are taking the right approach.

Company News

•The key takeaway from yesterday’s earnings session remains the same as most firms continue to beat earnings and revenue expectations ignoring the marco mess. A total of 32 Stoxx600 firms reported yesterday, 25 of those topped analysts’ EPS consensus and 6 missed (1 in line). In terms of revenue there were 23 that beat versus 9 that missed. In the US, 49 companies delivered results and the beat:miss split for EPS and revenue were both solid and quite similar at 38:11 and 35:14, respectively.
•Standard Life gained 3.5% after Scotland’s biggest insurer reported a 30% rise in first-quarter revenue to £4.65 billion on higher sales of long- term savings products to U.K. companies. That beat the £3.83 billion median estimate of analysts.
•British Sky Broadcasting climbed 5% after the UK’s biggest pay-television provider said third-quarter operating profit rose 3% to £244 million as it added subscribers to its high-definition TV service.
•Motorola gained 4.5% in early New York trading after posting first-quarter profit, excluding some items, of 2 cents a share. Analysts had predicted a loss of 1 cent on average. The company’s forecast for second-quarter earnings beat analysts’ estimates, signalling demand for models like the Droid is helping to reverse a three-year sales slump.
•Baidu rallied 15% in New York pre-market trading. First-quarter net income rose to $70.4 million.
•E.ON has agreed to sell its US business LG&E to PPL for $7.6bn. This is an attractive price, higher than press reports had been suggesting, and will bring in more than the €4bn that E.ON needed to achieve its €10bn disposal target by the end of 2010.
•Visa said fiscal second-quarter profit increased 33% as U.S. credit-card spending climbed for the first time since 2008. Net income for the three months ended March 31 was $713 million, or 96 cents a share, compared with $536 million, or 71 cents, in the same period a year earlier. The average estimate of 33 analysts surveyed was 91 cents. Net operating revenue rose 19%, beating estimates, and Visa said revenue growth will be at the high end of its previous forecast.
•France Telecom reported a 4.8% drop in first-quarter earnings before interest, taxes, depreciation and amortization, but confirmed its full-year targets. Ebitda fell to €3.76 billion in the three months ended March 31, from €3.96 billion in the same period last year, missing consensus expectations for €3.86 billion.
•Hewlett-Packard has agreed to buy Palm, the money-losing handset maker that was once a Silicon Valley icon, for $1.2 billion to challenge Apple in the smartphone market.
•Apple has agreed to buy mobile-application developer Siri to gain technology that lets users do Web searches from their phones by talking to them. Siri makes a voice-recognition and search program it describes as a virtual personal assistant, and began offering it for the iPhone this year.
•Sprint Nextel reported better-than-expected first-quarter customer numbers, signalling Chief Executive Officer Dan Hesse’s turnaround plan may be taking hold.
•ArcelorMittal, the world’s largest steelmaker by volume and revenue, reported a better-than-expected swing into profit in the first quarter as shipments rose, although average steel prices were lower on the quarter.
•Consumer goods giant Unilever beat expectations with its first-quarter sales growth, and once again increased margins despite spending more on marketing.
•Standard & Poor’s on Wednesday changed its outlook on Ford to positive, indicating its credit rating is more likely to be upgraded, after the car manufacturer posted a quarterly profit and raised its outlook for the year.

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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