Apple could provide some juice for the market Wednesday, despite its typically conservative guidance for the current quarter.
The maker of all things "i-" delivered as promised, beating analysts expectations for its fiscal second quarter, with a profit of $3.07 billion, or $3.33 per share on a 49 percent jump in revenues, to $13.5 billion. Apple stock rocketed in the after-hours session Tuesday, hitting a new trading high. Its iPhone was the star, with sales up more than 130 percent from last year.
Apple said it expects earnings in the second quarter of between $2.28 and $2.39 per share, below analysts' expectations of $2.70 per share.
Stocks Tuesday continued to drift higher, with the Dow 25 points higher at 11,117, and the S&P 500, up 9 at 1207. The dollar was mostly lower, and commodities moved higher. Oil gained $2 per barrel to $83.45, while gold gained $3.40 per troy ounce, to $1138.60. Meanwhile, buyers moved into the 10-year Treasury, which sent its yield lower to 3.81 percent.
Wednesday will see another big batch of earnings news, but no new economic reports to sway markets. AT&T, Boeing, McDonald's, Morgan Stanley, United Technologies, Wells Fargo, Altria, AMR, Lockheed Martin, Moody's and EMC report before the bell. Fiat will also release financial data on Chrysler. GM is expected to make news of its own, with an announcement that it is paying back government loans. After the bell, eBay, Starbucks, E*TRADE, Noble, and Amgen report.
As of early Tuesday, 69 S&P 500 companies had reported, and of those, 84 percent beat earnings estimates and 65 percent beat revenue estimates, according to Thomson Reuters.
One of those packing a punch Tuesday was Goldman Sachs , which beat estimates by 38 percent with its report of profits of $3.29 billion or $5.59 per share. Goldman reported its lowest ever compensation ratio, while setting aside $5.5 billion for compensation and benefits.
Goldman officials faced tough questioning on a post-earnings conference call, and the firm drew new scrutiny from foreign officials. The British Financial Services Authority said it started a formal investigation into Goldman Sachs, in relation to the SEC charges. The SEC Friday charged Goldman with fraud for concealing from investors the fact that it structured a complicated mortgage-related product to specifications set forth by hedge fund Paulson and Co, which wanted to short the product.
Goldman says it will defend itself against the SEC case and denied it misled anyone. Some on Wall Street though say the charges smack of politics and are the result of an effort to get Congress in line on regulatory reform.
The Senate, meanwhile, continues to make progress on efforts to draft regulatory reform legislation. Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn. said lawmakers have bipartisan agreement on 80 to 90 percent of new financial reform rules, and Senate Republican Leader Mitch McConnell said he is optimistic that the lack of agreement can be fixed. President Obama will discuss regulatory reform with CNBC's John Harwood Wednesday.
At the same time, the Senate Agriculture Committee will take up legislation to rein in derivatives Wednesday. More tough news for banks could come from the IMF and World Bank spring meeting this weekend. G-20 finance ministers are expected to discuss an international tax on banks.
Goldman Sachs stock slumped and bond spreads widened since it was accused of fraud Friday. The yield on Goldman February 2019 bonds rose to a high of about 5.582 percent after the news, and were back down to 5.5 percent Tuesday afternoon, according to Joel Levington, director of corporate credit at Brookfield Investment Management Inc. The bond was yielding about 5.4 percent before the government's announcement, he said.
"I think people have had some time to put it into context, and there's sentiment around the potential damage in terms of the cash damages that might go with a fine, and since it's a civil suit, not a criminal suit, I think people have had some time to digest that. You look at the implications to that relative to Goldman Sachs and it doesn't seem to be that material," Levington said, noting rating agencies Standard and Poor's and Fitch affirmed Goldman ratings.
Levington said he looks across the sector at Goldman rivals by looking at the credit default swaps, which are a kind of insurance for bond holders. For instance, Morgan Stanley CDS default cost was at 144 Tuesday afternoon, while Goldman was at 126. "If I was placing a dollar on one and all I wanted was safety, you'd still go with Goldman," he said. Those compare to J.P. Morgan's 71. "That's about half the risk," he said. Citigroup, meanwhile, was at 144.
What Else to Watch
Investors Wednesday will be keeping an eye on Greece, which holds meetings with the IMF and European Central Bank on its debt woes.
"Markets don't seem to be trading on it so much outside the credit markets. You see Greek bond spreads to bunds widen, and the Greek CDS blew out to a record wide today, but the euro just can't do anything with the story. While the credit markets tell us things are getting worse for Greece, euro dollar doesn't want to go much below $1.34," said David Gilmore of Foreign Exchange Analytics.
The Canadian dollar was on the move though after signs the Bank of Canada may be ready to move on rates sooner, rather than later. "The markets are pricing in a rate hike for the Bank of Canada June meeting. We're talking about a G-7 country, a relatively large economy, tightening credit, taking back accommodation. Things are going to be a little more difficult in terms of asset prices and upside if it's part of a global effort to withdraw accommodation," he said.
Earnings and Credit
Corporate bonds have been the beneficiaries of investors, who are still fearful of equities, but are looking for more yield than government debt can offer. Levington said earnings season is a good time for bond holders to assess companies. Some industries are at more attractive places than others, and the earnings news is confirming that.
"I don't really get the benefit of a blow out quarter (like) a shareholder. What we're really looking at particularly with corporate spreads at tight levels is where the earnings trajectory is the highest. If you take a step back, everybody's going to benefit from the cyclical trend that's happening. It's the degree of improvement. You're really looking for companies that cut their costs in the last year and are able to sustain that with revenue growth.
You could look at metals and mining where you've had pricing power, and if you're looking at retailers, where retailers were able to control their cost and inventory, they should have pricing power through controlling inventory, and you can look at some of the media companies. As advertising comes back, where advertising goes right to the bottom line, what you're seeing is high operating leverage," he said.
Levington said companies are beating estimates at a hefty pace, as expected. "I think what's interesting is...it's not really a case of earnings not beating expectations. For the dozen earnings calls, I've been on so far virtually everybody is beating expectations. I think it's really how far whisper numbers have gone beyond where the street is at. What you're seeing is companies beating expectations and their stocks are not performing well.. You can go back to Google. That's one of the biggest negatives," said Levington.
A trend among companies now is to expand stock repurchase programs. "It encourages companies at this point in the credit cycle, where liquidity appears to be pretty buoyant to increase their share purchases. You have more cash on the S and P balance sheet than they ever had," he said.
He pointed to Thermo Fisher Scientifics' $750 million bond offering Tuesday. The 10-year portion priced with a yield of 4.70 percent. He said the company also announced a one-year $750 million share repurchase. "The spreads on the new issue from initial talk to pricing actually tightened by 25 basis points," he said. Thermo had been a rumored bidder for Millipore but Millipore since struck a deal with German Merck.
"I think people felt the announcement today was Thermo saying we're not looking at making an acquisition in the near term and as a bond holder you find that attractive. I think the results of the pricing support that," he said.
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