From Briefing.com: 5:01 pm Weekly Wrap
What a difference a week makes.
Last Friday the market was bemoaning a very disappointing earnings report from General Electric (GE) and fearing the worst in front of this week's busy earnings reporting period. This Friday it exits the week in an upbeat mood, basking in a sense of relief that this week's earnings reports and economic data were better than feared.
The S&P 500 tacked on a cool 4.3%, which is a bigger gain than it registered for all of 2007! It was the Nasdaq, though, that led the action. With a gain of nearly 5.0%, it registered its best one-week showing since August 2006.
Google (GOOG) played a large role in the Nasdaq's outperformance as it soared 20% on Friday after eclipsing the first quarter consensus EPS estimate by $0.32 and reporting 20% growth in paid clicks. Growth in the latter metric shocked investors as third-party data suggested paid click growth would be in the single-digit range.
Google's good news came on the heels of a battery of better than expected earnings reports and outlooks from other tech bellwethers, namely Intel (INTC) and IBM (IBM). All three companies provided reassuring comments on the demand for their products and services and acknowledged the continued strength in international markets.
The takeaway from these reports, and others from the likes of Caterpillar (CAT), CSX Corp. (CSX), Coca-Cola (KO), and WW Grainger (GWW), was that the earnings picture isn't as dour as one might think when viewed from something other than the financial sector prism.
To the latter point, Thomson Financial estimated at the start of the week that first quarter earnings would decline 14.1%; however, when the financial sector is excluded, the growth rate for the remaining nine sectors would be 6.4%.
With respect to the financial sector, we got a reminder this week that business conditions are far from good.
Earnings reports from Wachovia (WB), JPMorgan Chase (JPM), Merrill Lynch (MER) and Citigroup (C) to name a few all showed sharp downturns versus the prior-year period and in each case, with the exception of JPMorgan Chase, losses for the first quarter.
These reports, though, weren't as bad as expected and that realization unleashed a wave of pent-up buying interest that sent the financial sector up 5.2% for the week.
Strikingly, the financial sector wasn't even the second best-performing sector for the week. That distinction belonged to the technology sector, which rallied 6.3%.
The biggest mover on the week was the energy sector, which advanced 7.7%, moving in near lockstep with oil prices, which shot up 6.1% and finished at a new all-time closing high of $116.90 per barrel.
The big move in oil was evident in a wholesale inflation report that showed producer prices rose 1.1% in March. Rising food prices also played a big part in that uptick, but when both food and energy were excluded, the increase in producer prices was a more palatable 0.2%.
Inflation at the consumer level was better contained, as seen in the Consumer Price Index, which increased 0.3% in March and just 0.2% excluding food and energy. That news and a report of a surprising 0.3% increase in March industrial production contributed to a big rally in the market on Wednesday.
It would be remiss not to add that housing starts and building permits both fell to a 17-year low in March, yet that news had little impact on the market which has grown accustomed to the negative reports on the housing front. Similarly, the market didn't pay much attention to a positive retail sales report for March on Monday knowing that rising gas prices were an influential factor behind the 0.2% increase.
This week the emphasis was on the good news or, in many situations, the better-than-feared news. That disposition led to some robust gains for the major indices.
Readers should remain cognizant, though, that there is a distinct difference between rallying on better-than-feared news and rallying on truly good news. Rallies based on the former can swing sentiment for a short period of time and produce some outsized gains, but it is truly good news that makes for longer-lasting upturns.
--Patrick J. O'Hare, Briefing.com
Index Started Week Ended Week Change % Change YTD
DJIA 12325.42 12849.36 523.94 4.3 % -3.1 %
Nasdaq 2290.24 2402.97 112.73 4.9 % -9.4 %
S&P 500 1332.83 1390.33 57.50 4.3 % -5.3 %
Russell 2000 688.16 721.07 32.91 4.8 % -5.9 %
2:57AM On The Wires (WIRES) : IBM (IBM) announces it has acquired Diligent Technologies, a privately held storage "de-duplication" co; financial terms weren't disclosed... FormFactor (FORM) announces the Seoul (Korea) Southern District Court issued an oral ruling dismissing the co's complaint alleging Phicom's infringement of seven claims of FormFactor's Korean Patent No. 252457, and four claims of FormFactor's Korean Patent No. 324064... Ninetowns Internet Technology Group (NINE) announces that in conjunction with its annual testing for the impairment of long-lived assets and goodwill in accordance with relevant accounting standards, the co expects to record a non-cash impairment charge of up to RMB197 mln against its long-lived assets and goodwill.
1:30 pm Citigroup (C)
Continuing a trend seen throughout the week in the financial sector, the first quarter earnings report from banking giant Citigroup (C 25.87, +1.84) wasn't very good. However, the report was better than feared and that consideration has been enough to drive up the price of Citigroup's stock.
The bad news was plain to see. Citigroup posted a net loss of $5.1 billion, or $1.02 per diluted share, for the first quarter on a 48% decline in revenues to $13.2 billion. Citigroup's results included $12.1 billion in write-downs and another $3.1 billion increase in credit costs for its global consumer business.
Of note, Citigroup indicated the higher credit costs in its U.S. consumer business reflected a weakening of leading credit indicators, including higher delinquencies on first and second mortgages, unsecured personal loans, credit cards and auto loans. Altogether Citigroup saw a $1.1 billion increase in net credit losses and an incremental net charge to increase loan loss reserves of $1.2 billion for its U.S. consumer business in the period.
These types of pronouncements don't typically spark a rally in a stock, but the positive response just goes to show how depressed the market's expectations had gotten. If the fear is that Citigroup would take write-downs of as much as $20 billion, then a $12.1 billion write-down looks pretty pleasing on a relative basis.
The overarching view today with respect to the Citigroup report is that it is an indication that the worst of its problems are behind the company. This view has undoubtedly driven some short-covering activity and has fostered some new buying interest led by a favorable risk-reward expectation. Shares of Citigroup have plummeted 55% from the all-time high they hit in December 2006.
With the company's commentary on leading credit indicators, it is still too soon to put out the all-clear signal; Citigroup even said there is always the prospect of more write-downs. Nonetheless, news that is less bad than before can go a long way in feeding a belief that better times lie ahead in both a relative and absolute sense.
Citigroup has taken steps to bolster that view by shedding non-core assets, raising $19.5 billion of capital in January and eliminating jobs.
In looking at Citigroup's stock performance following the quarterly report, one would have to conclude that it is still more of a trading rally than anything else, which implies the stock could back up some from its current level.
Rallying on better than feared news is a different condition than rallying on distinctly good news. The latter is what sustained moves are made of, whereas the former typically invites selling into the strength.
The reaction to Citigroup's bad first quarter report, though, is a hopeful sign that attitudes may be shifting such that the stronger inclination is now to buy on the dip rather than to sell into the strength.
Still, business conditions for the investment banks aren't that good in general, even if we've seen the worst of the write-downs. This understanding could invite an extended period of sideways trading for a stock like Citigroup, so one should still be careful about rushing to buy the stock today.
It is encouraging to see the reaction to Citigroup's bad first quarter report, yet it continues to be a wait-and-see story.
--Patrick J. O'Hare, Briefing.com
09:15 am Caterpillar (CAT)
Dow component Caterpillar (CAT 78.59) posted a record first quarter profit as robust global demand helped offset weakness in the United States.
The farm and construction machinery manufacturer's first quarter earnings rose 18% to $1.45 per share. The results were $0.12 better than the average analyst expectation. Revenues rose 18% to $11.0 billion, which topped the consensus estimate of $10.8 billion.
Like other multinational companies, Caterpillar is benefiting from its international exposure. Revenues outside of North America rose 30%, compared to the 4% rise within North America. The company now receives 58% of its total sales outside of North America, versus 53% one year ago.
The firm said, "even though we're currently weathering a recessionary storm in the United States, we expect the rest of the world to continue to invest in infrastructure growth well into the next decade."
Looking ahead, Caterpillar reaffirmed its full year 2008 earnings guidance of 5% to 10% revenue growth.
The firm's stock is up nearly 4% in premarket trading.
08:39 am Google (GOOG)
In late 2007 it seemed nothing could slow down Google (GOOG 449.54) as the stock spiked near $750. Then sentiment soured, as the stock saw a quick 45% drop on concerns that the company -- which gets 98% of its revenue from advertising -- would not be able to continue its stellar growth in the face of the slowing U.S. economy.
Yesterday after the close, Google put some of these fears to rest. Its shares are soaring 18% in premarket trading after the company's first quarter net income from continuing operations rose 52% from one year ago. In addition, the firm said it has not seen a negative impact from the soft economic environment.
Google earned $4.84 per share, which topped the consensus estimate by $0.32. Compared to last year, its revenues spiked 46% to $3.7 billion, beating the consensus estimate of $3.61 billion.
Possibly as important, its paid clicks -- which are advertiser paid links that were clicked by consumers -- rose 20% over last year, and 4% from the prior quarter. Its paid click growth had been a concern, as many speculated growth would come in between 5% and 7% after comScore data indicated poor growth.
Google benefited from overseas growth, with 51% of total revenue coming from outside the U.S. compared to 47% in the prior year. If it were not for favorable exchange rates, Google would have earned $202 million less.
08:04 am Citigroup (C)
Citigroup (C 24.03) lost $5.1 billion in the first quarter, as the company had roughly $12 billion in write-downs and a $3 billion increase in credit costs due to higher net credit losses and increases to loan loss reserves.
Citi reported a first quarter a loss of $1.02 per share, which is $0.07 worse than the consensus estimate. Revenues fell 48.1% year-over-year to $13.22 billion versus the $12.77 billion consensus estimate.
The results include $6.0 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures. The results also include write-downs of $3.1 billion (net of underwriting fees) on funded and unfunded highly leveraged finance commitments, a downward credit value adjustment of $1.5 billion related to exposure to monoline insurers, write-downs of $1.5 billion on auction rate securities inventory, and a $3.1 billion increase in credit costs in the global consumer segment.
Citi said, "as we move into the second quarter and beyond, we will continue to divest non-strategic assets and allocate capital to the products and regions that will drive increased revenues, enhance the value of our franchise, and ultimately, maximize shareholder value."
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