Week in Review: Markets rise on slightly upbeat earnings and economic news

For the week ended January 20, 2012

• U.S. jobless claims down sharply
• U.S. inflation tame
• China shows signs of slowing growth
• German economic sentiment jumps
• Earnings mixed for major financial and technology firms

Markets were positive overall as talks between the Greek government and the Institute of International Finance continued Friday in an effort to cut a deal that would substantially lower Greece’s debt payments to private-sector creditors. U.S. economic news was modestly encouraging, as jobless numbers fell, U.S. price indices stayed fairly flat, and home sales improved somewhat. The Chinese economy showed signs of slowing, while German economic sentiment rebounded.

A steady stream of corporate earnings reports were mixed. Many reflected the challenges faced by large U.S. banks. Others, including earnings results from U.S. technology giants, were more encouraging. Stocks rose overall globally, and U.S. Treasury yields rose as demand for the safe-haven securities eased, reflecting improved investor sentiment.

U.S. and global economic news

Greek debt deal loomsDiscussions between the Greek government and private sector creditors continued for a third day Friday, ahead of efforts to complete a second rescue package for the troubled country. With a potential bailout in the works for next week, time is critically important. A senior delegation from the International Monetary Fund, European Central Bank, and European Union arrived in Athens Friday to discuss the rescue package. Next Monday, European finance ministers will meet in Brussels to work out their portion of the next Greek bailout, forecast at €130 billion.




Weekly U.S. jobless claims drop by 50,000Initial jobless claims fell by 50,000 to a seasonally adjusted 352,000 in the week ending January 21, decreasing the four-week average by 3,500 to 379,000. Both numbers are well below the 400,000 mark, widely viewed as indicative of the U.S. economy adding jobs overall.


U.S. housing market improves slightly, misses expectationsSales of U.S. existing homes rose 5.0% in December from November, the third straight monthly increase, according to the National Association of Realtors. However, the results fell short of a forecast of 5.2% growth. For all of 2011, 1.7% more homes sold than in 2010. Overall, 4.26 million homes were sold last year, down from a peak of more than 7 million in 2005.




Consumer, producer inflation tameReadings on U.S. producer and consumer prices, released by the U.S. Department of Labor, showed little month-to-month change in December. The producer price index fell 0.1% in December from November on lower food and energy costs. However, core prices, stripping of food and energy, rose 0.3%. For the year, producer prices rose 4.8%. The consumer price index was unchanged in December, and increased 3.0% for the year. The core CPI edged up 0.1% for the month and rose 2.2% for all of 2011.




Chinese economy and manufacturing gauge slipChina’s gross domestic product grew 8.9% in the final quarter of 2011 compared with a year earlier, a higher-than-expected growth rate but an indication of a slowdown for the world’s fastest economic engine. On a quarterly basis, China’s GDP growth was 8.2%. A separate report showed that China’s manufacturing purchasing managers index stood at 48.8, just below the threshold of 50 that separates growth from contraction. This was the third straight month of declining manufacturing activity in China.




German economic sentiment index has record riseGermany’s latest ZEW monthly economic sentiment index rose to -21.6 in January from -53.8 in December, the single largest monthly increase since the survey’s inception in 1991. Germany also paid the lowest interest rate ever on two-year Treasury notes Wednesday, 0.17%, as debt downgrades on France and Austria last Friday made German debt more appealing.


Germany cuts growth forecastThe German government cut its economic forecast for 2012 for the second time in recent months. Currently, Germany expects its economy to grow 0.7%, down from 1.0% in October, which was a reduction from its original 1.8% projection for the year.

U.S. and global corporate news

Kodak files for bankruptcyFollowing through on its rumored move, Eastman Kodak filed for bankruptcy protection after running short of cash. The photography icon has secured close to $1 billion in financing from Citigroup to help keep it in business through its bankruptcy proceedings. Kodak is hoping to improve liquidity, sell some of its patent portfolio, and shed some legacy liabilities, including pension and health care obligations.


Goldman-Sachs reported a 58% drop in fourth-quarter profit on a slump in investment-banking revenue and trading activity, as many of the firm’s individual and corporate clients remain leery about investment prospects.


Morgan Stanley swung from a quarterly profit of $871 million a year ago to a loss of $227 million in the fourth quarter of 2011 because of weakness in its institutional securities business as well as a large legal settlement with bond insurer MBIA. Revenue in Morgan Stanley’s institutional business fell by 42%.
Bank of America had better-then-expected results, posting a profit just shy of $2 billion, as weaknesses in trading (profits down 73%) and investment banking (fees 34% lower) were more than offset by large one-time asset sales. These sales included divestiture of a major interest in China Construction Bank and some Canadian credit card operations.


Citigroup’s profit fell 11% from a year earlier, and its revenue slipped by 7%. The global bank is aggressively cutting costs but has been challenged by weak capital markets, as equity underwriting, trading, and advisory revenue fell.


BlackRock’s profit declined 16% as the number-one global money manager by assets saw a shrinkage in assets under management, investment advisory fees, and securities lending revenue. BlackRock’s overall revenue fell 11%.


Wells Fargo, the largest U.S. consumer lender, reported a 20% increase in its fourth-quarter profit on improvements in its consumer loan portfolio and limited exposure to investment banking.


Tech bellwether Intel has strong quarterIntel posted a 5.7% gain in fourth-quarter earnings as the technology bellwether’s business withstood tougher competitive pressures and economic constraints in Europe and China. Intel’s revenue rose 21% on strong demand from a number of its business divisions.


Google’s 7% profit growth disappointsSearch engine giant Google posted weaker-than-expected earnings results despite a 7% profit growth and 25% rise in revenue from its year-earlier period. These numbers were down sharply from its third-quarter results of a 26% profit growth and 33% gain in revenue.


IBM software success offsets hardware weaknessIBM grew its fourth-quarter earnings 4.4% as gains in software and services revenue offset a slowdown in its hardware business.


Microsoft flat profit beats expectationsSoftware giant Microsoft profited from strength in its Office program suite and Xbox gaming system to outweigh weakness in its Windows operating system. For its second fiscal quarter, ended December 31, Microsoft’s overall earnings were down by the slightest margin, to $6.62 billion from $6.63 billion.


GE profit slides 18%General Electric’s fourth-quarter earnings fell 18% on a decline in revenue after it sold its majority stake in NBC Universal. However, GE’s industrial business saw infrastructure orders grow 15% from a year earlier. Revenue shrank 7.9% overall.


Japanese group to pay $7.3 billion for RBS aircraft leasing businessA group of Japanese companies, headed by Sumitomo Mitsui Financial, has agreed to buy the Royal Bank of Scotland’s aircraft leasing business for $7.3 billion, the British bank’s largest divestiture since being bailed out three years ago. The British government holds an 82% interest in RBS.

The week ahead

• McDonald’s and Apple announce their quarterly earnings on Tuesday, January 24.
• Boeing releases its earnings on Wednesday, January 25.
• Germany’s Ifo survey is released on Wednesday, January 25.
• The National Association of Realtors announces its pending home sales on Wednesday, January 25.
• The Conference Board releases its monthly leading economic indicators on Thursday, January 26.
• The U.S. Department of Commerce publishes its durable goods orders report on Thursday, January 26.
• Ford releases its earnings on Thursday, January 26.
• The U.S. Labor Department releases its initial estimate for fourth- quarter GDP on Friday, January 27.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk.

Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.

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