With four trading days left before the August 2nd deadline to extend the U.S. debt ceiling expires, things are getting worse, not better for stocks as the specter of a credit rating downgrade for Uncle Sam is suffocating equities. Sentiment was so bearish today that not even gold could muster a positive close, though its tiny loss was far better than the losses of more than 2% suffered by S&P 500 and the Nasdaq. The Dow Jones Industrial Average and the Russell 2000 were also harshly kicked around today.
In economic news, the big report of the day came courtesy of the Commerce Department, which said June durable goods orders slumped 2.1% after a revised 1.9% jump in May. Excluding automobiles and planes, durable goods rose 0.1% last month compared with 0.7% increase in May. For those looking for a silver lining, it should be noted durable goods orders were up 4.7% through the first half of this year. Add to that durable goods prices are higher on an annual basis, which some economists would argue indicates more growth ahead.
That theory would conflict with the recent downward revisions to the U.S. GDP forecast by a host of banks and economic agencies and it can surely be said that the debt ceiling debate on Capitol Hill is not a positive for economic growth.
Durable Goods Chart
Speaking of economic growth, the Federal Reserve's Beige Book survey said U.S. economic activity continued to grow last month, but the pace of that growth slowed in eight of the 12 regions the survey covers. Just four regions showed slower growth in the previous Beige Book update. This puts the Fed in a pickle to some degree. As some analysts and economists have been noting, the economy is not weak enough to justify a third round of quantitative easing. Unfortunately, it is not strong enough for Fed Chairman Ben Bernanke to say outright that there will be no more QE packages in our future.
The Beige Book survey indicated consumer spending grew modestly in most regions, but auto sales tailed off a bit. Friday's second-quarter GDP report, the first look at U.S. economic growth for the previous quarter, is expected to show an anemic increase of 1.8%, the slowest pace in a year, according to Bloomberg News.
Adding to the market's woes today were more international issues, and yes, some came by way of Greece, but I am referring to Brazil. The ''B'' in the BRIC quartet and the largest economy in Latin America was once an emerging markets superstar and it may be again one day. That is not the case in the here and now.
Perhaps even more than its largest trading partner, China, Brazil has been bitten hard by the inflation bug and the country's central bank has engaged in a scorched-earth interest rate increase cycle this year. Brazil's central bank has hiked rates eight times in the past 15 months, but that is not helping dampen inflation there. Policymakers in Brazil seem to think the annual inflation target of 4.5% will not be exceeded this year, but economists are forecasting higher inflation next year.
Brazil's recent inflation picture is not pretty, as the chart below indicates. Nor is the impact this issue has had on Brazilian equities. With Wednesday's tumble, Brazil's benchmark Bovespa index has slid 20% from its November peak. That is a bear market.
Brazil Inflation Chart
Lack of enthusiasm by the consumer when it comes to buying discretionary items such as high-end TVs is weighing on myriad stocks. Today, the obvious candidate was Corning (GLW), the maker of glass for pricey LCD TVs. Echoing sentiments made by Dow component MMM earlier this week, New York-based Corning warned of weakness in the LCD market and said TV makers are not exactly thrilled about the prospects the holiday season will bring.
Corning lowered its forecast for worldwide glass demand to between 3.3 billion and 3.4 billion square feet this year from 3.5 billion to 3.7 billion square feet, Reuters reported. Shares of Corning plunged more than 7% on volume that was more than triple the daily average.
We are now far enough along into the second-quarter earnings season that it is safe to say those reports have been, for the most part, pretty good, but that was expected and in the face of the debt ceiling debate, ''good'' is not good enough. Even big oil stocks are not getting much love this week. Such is life for ConocoPhillips (COP), the third-largest U.S. oil company.
Houston-based Conoco, which recently announced plans to spin-off its downstream operations into a separate company next year, posted a second-quarter profit of $3.4 billion, or $2.41 a share, compared with $4.16 billion, or $2.77, a year earlier. Asset sales helped the figure in the year-earlier period. Analysts were expecting a profit of $2.19 a share and Conoco's exploration and production profit of $2.5 billion also topped the $2.4 billion Wall Street forecast.
Production fell to 1.64 million barrels of oil equivalent per day in the quarter from 1.73 million barrels per day in the second quarter and those declines were attributable to asset sales and lost production in Libya. Conoco forecast 2011 production of 1.625-1.65 million barrels per day. Rival Exxon Mobil (XOM), the largest U.S. oil company, reports tomorrow before the bell and Chevron (CVX), the second-largest U.S. oil company, chimes in on Friday. For more news and commentary on the energy sector, register for a free trial of the OilSlick daily newsletter (HERE).
After the bell today Visa said its fiscal third-quarter profit jumped 40% to $1.5 billion, or $1.43 a share. On an adjusted basis, the company earned $883 million, or $1.26 a share, as revenue climbed 14% to $2.32 billion. Analysts were expecting a profit of $1.23 on revenue of $2.3 billion. International growth was the big driver of Visa's solid results. Credit card and debit card volume rose 25% and 27%, respectively, outside of the U.S., Visa said.
Visa and rival Mastercard (MA) need to grow international revenue in an effort to offset lost profits from the Federal Reserve's plan to cap fees on debit card transactions in the U.S. The Fed capped the fees banks collect from merchants for processing debit purchases at an average of 24 cents, down from the current average of 44 cents starting Oct. 1, according to the Associated Press.
Visa also gave bullish fiscal 2012 guidance, projecting single-to-low double-digit revenue growth and mid-to high-teens EPS growth. Even with that, shares of Visa were only moderately higher in the after-hours session.
Looking at the charts, the S&P 500 had been holding up pretty well until today. Round number support at 1300 held, but the 2% drop took the index below its 50-day moving average, violating support around 1315 in the process. If 1300 does not hold, a return to 1260 may be in the cards. Above 1315, resistance lies in the 1330-1340 area.
S&P 500 Chart
The Dow is in similar trouble as just two components, BA and T, managed to close higher today. Support at 12,400 did not hold and as was the case with the S&P 500, the 50-day line has been broken. From here, there is a plenty of real estate for the Dow to cascade back to 12,000. Below there, we could be discussing 11,750-11,850. The Dow faces two near-term problems. First, earnings from XOM and CVX may not be enough to get the index headed back in the right direction. Second, old support at 12,400 may now be new resistance.
A decent post-earnings performance from AMZN did nothing to help the Nasdaq. In fact, the index is now a mess after blowing past at 2830 and psychological support at 2800. Drop another 10 points and the Nasdaq will be at its 50-day moving average. From there, 2725 and then 2700 are next support. Now the Nasdaq must retake resistance at 2800 and then again at 2840 before addressing an even more firm ceiling at 2860.
It took the Russell 2000 less than a month to rally from the 770 area to 860, nearly challenging the May peak of 868.57. In a comparable amount of time, the index has fallen back to 800. If the Russell does not find support here, it should return to 780 and perhaps back to 770.
Any hopes for a legitimate third-quarter rally have suffered a setback this week. Unfortunately, whether the setback is temporary or longer-lasting is a fate that will be decided by the folks on Capitol Hill. The Treasury Department reiterated that August 2nd is a hard and fast deadline, news that could pressure stocks the rest of this week. That may also be enough to motivate politicians to finally reach a debt ceiling accord over the weekend, setting stocks up for a rally to start August. Keene will be back with you next week.