WSJ : Yellen Cuts Stock Buyers Some Slack

Yellen Cuts Stock Buyers Some Slack

If the economy is nearing the point at which the Federal Reserve should start raising rates, Janet Yellen doesn't see it.

In her testimony before the Senate Tuesday, the Fed Chairwoman struck a dovish tone. She acknowledged the unemployment rate's drop to 6.1% from 7.5% over the past year. But she added that measures such as the share of the population in the labor market suggest there is still a great deal of slack. She noted that inflation has lately picked up, but that it is still below the Fed's target of 2%.

Moreover, Ms. Yellen said that even when inflation nears the Fed's target and the unemployment rate approaches the range of 5.2% to 5.5% several Fed rate setters think the economy can sustain, "economic conditions may, for some time, warrant keeping the federal-funds rate below levels that the committee views as normal in the longer run." That is in addition to the fact that policy makers' view of what the "normal" fed-funds rate will be has fallen to about 3.75% from 4.25% at the beginning of last year.

Ms. Yellen did say that if the job market keeps strengthening more quickly than policy makers expect, the Fed will bring forward the day it raises its fed-funds target—something economists generally expect will happen about a year from now. But that depends on the job market delivering that strength, and probably showing that there is less slack than Ms. Yellen thinks.

For stock investors, the fact that Ms. Yellen doesn't want to tap the brakes until the economy is in much better shape counts as good news. For bond investors, though, her apparent willingness to test the point at which the economy starts generating more inflation could give pause.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: VLO -3.3%, LEDS -2%.

M&A news: LO -6.4% (to be acquired by Reynolds American (RAI) in a cash-and-stock transaction currently valued at $68.88 per LO share, or a total of $27.4 bln, including the assumption of net debt), RAI -3.3% (confirms LO acq), SHPG -1.4% (cont vol on M&A spec).

Other news: OPTT -20.3% (disclosed Victorian Wave Partners, an indirect consolidated subsidiary, intends to terminate the Renewable Energy Demonstration Program Funding Deed),, STEM -6.9% (announces proposed $20 million offering), TRGT -4.5% (late weakness/subsequent halt on alzheimer drug update; Phase 2b clinical trial in Alzheimer's disease does not show superiority of TC-1735 over donepezil ), ADHD -1.8% (filed for $100 mln offering of ordinary shares), IRT -1.7% ( announces public offering of 6 mln shares of common stock ), BH -1.6% (filed for $85 mln common stock and rights offering), APOL -1.1% (informed by the U.S. Department of Education that the Department intends to conduct an ordinary course program review of University of Phoenix's administration of federal student financial aid (Title IV) programs).

Analyst comments: KORS -2.4% (Hearing several analysts out cautious this morning -- including Citigroup lowering target, Barlcays reits Underweight rating ), CPB -1.9% (downgraded to Sell from Neutral at Goldman), LXK -1% (downgraded to Underperform from Mkt Perform at Bernstein), K -0.9% (downgraded to Sell from Neutral at Goldman), MXIM -0.6% (downgraded to Equal Weight from Overweight at Barclays).

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: CMA +7.8%, WWW +4.3%, JPM +2.6%, PPHM +2.3%, GS +1.8%, SABA +0.8%.

Select financial related names showing strength: IBN +2.8%, RBS +2.2%, DB +2%, MS +1.7%, BCS +1.6%, BAC +1.3%, C +0.9%.

Select metals/mining stocks trading higher: SQM +5.5%, ZQK +2.6%, AUY +1.3%, GOLD +1.1%, GOLD +1.1%.

Other news: CDXS +87.9% (announces technology collaboration and license agreement with GSK), LJPC +11.5% (announces positive pre-clinical data for oral galectin-3 inhibitor in nonalcoholic steatohepatitis), CBMX +10.9% (Pediatric Development disorders analysis test granted conditional approval from New York State Department of Health), ANTH +5.9% (following acquisition of therapy Sollpura from Eli Lilly (LLY)), FCEL +5.1% (may be attributed to PLUG initiation at FBR), GRH +4.4% (following yesterday's ~30% move higher), LGF +3.7% (co and Alibaba (BABA) form strategic collaboration to offer Lionsgate Entertainment World Service in China), YGE +2.4% (signs a EPC contract with Senelec for a 2 MW project), APC +1.3% (provided a financial update, including the establishment of a new unsecured five-year credit facility, the issuance of senior notes, and the sale of Western Gas Equity Partners (WGP) common units), SAVE +0.8% (Lone Pine Capital discloses 6.0% passive stake in 13G filing).

Analyst comments: PLUG +13.6% (initiated with a Outperform at FBR Capital), GPRO +4.6% (initiated with a Mkt Outperform at JMP Securities), GLUU +3.4% (target raised to $9 from $7.50 at Northland Capital), PHH +1.5% (upgraded to Outperform at Oppenheimer), WDC +0.8% (initiated with a Positive at Susquehanna), SSRI +0.8% (upgraded to Outperform from Mkt Perform at BMO Capital Mkts)

>>> Johnson & Johnson beats by $0.11, beats on revs; raises FY14 EPS guidance, i

Johnson & Johnson beats by $0.11, beats on revs; raises FY14 EPS guidance, in-line (105.38)
Reports Q2 (Jun) earnings of $1.66 per share, excluding non-recurring items, $0.11 better than the Capital IQ Consensus Estimate of $1.55; revenues rose 9.1% year/year to $19.5 bln vs the $18.96 bln consensus.
  • Operational results increased 9.4% and the negative impact of currency was 0.3%. Domestic sales increased 14.9%. International sales increased 4.4%, reflecting operational growth of 5.0% and a negative currency impact of 0.6%.
Co issues in-line guidance for FY14, raises adj. EPS to $5.85-5.92 from $5.80-5.90 vs. $5.90 Capital IQ Consensus.

By segment:
  • Worldwide Consumer sales of $3.7 billion for the second quarter represented an increase of 2.4% versus the prior year consisting of an operational increase of 3.6% and a negative impact from currency of 1.2%. Domestic sales decreased 0.5% primarily reflecting the divestiture of the sanitary protection business. International sales increased 3.9%, which reflected an operational increase of 5.8% and a negative currency impact of 1.9%. Positive contributors to operational results were sales of TYLENOL and MOTRIN analgesics; over-the-counter upper respiratory medicines as well as anti-smoking aids; NEUTROGENA and AVEENO skin care products; baby care products; and international sales of LISTERINE mouthwash and feminine protection products.
  • Worldwide Pharmaceutical sales of $8.5 billion for the second quarter represented an increase of 21.1% versus the prior year on a total and operational basis. Domestic sales increased 36.6%. International sales increased 6.8% which reflected an operational increase of 6.9% and a negative currency impact of 0.1%.
  • Worldwide Medical Devices and Diagnostics sales of $7.2 billion for the second quarter represented an increase of 0.7% versus the prior year consisting of an operational increase of 0.9% and a negative currency impact of 0.2%. Domestic sales decreased 1.4%. International sales increased 2.3%, which reflected an operational increase of 2.6% and a negative currency impact of 0.3%. Primary contributors to operational growth were hip and trauma products in the Orthopaedics business, Biosense Webster's electrophysiology products in the Cardiovascular Care business, and sales of energy products in the Specialty Surgery business. Sales results in the U.S. Diabetes Care business were negatively impacted by price declines associated with the implementation of Medicare competitive bidding in mail order and retail effective July 1, 2013.

>>> Goldman Sachs beats by $1.04, beats on revs (167.00)

Goldman Sachs beats by $1.04, beats on revs (167.00)
Reports Q2 (Jun) earnings of $4.10 per share, $1.04 better than the Capital IQ Consensus Estimate of $3.06; revenues rose 6.0% year/year to $9.13 bln vs the $7.96 bln consensus.
  • Book value per common share and tangible book value per common share both increased approximately 2% during the quarter to $158.21 and $148.45, respectively.
Investment Banking
  • Net revenues in Investment Banking were $1.78 billion for Q2, 15% higher y/y and essentially unchanged q/q.
  • Net revenues in Financial Advisory were $506 million, slightly higher y/y.
  • Net revenues in Underwriting were $1.28 billion, 20% higher y/y, primarily due to significantly higher net revenues in equity underwriting, reflecting an increase in industry-wide activity.
  • Net revenues in debt underwriting were slightly higher y/y.
Institutional Client Services
  • Net revenues in Institutional Client Services were $3.83 billion for Q2, 11% lower y/y and 14% lower q/q.
  • Net revenues in Fixed Income, Currency and Commodities Client Execution were $2.22 billion, 10% lower y/y, due to significantly lower net revenues in currencies and, to a lesser extent, commodities. In addition, net revenues in credit products were slightly lower. These results were partially offset by higher net revenues in mortgages and interest rate products compared with the second quarter of 2013.
  • Net revenues in Equities were $1.61 billion, 13% lower y/y. Excluding net revenues related to the firm's Americas reinsurance business, which was sold in the second quarter of 2013, net revenues in Equities were 9% lower than the second quarter of 2013, reflecting significantly lower net revenues in derivatives and lower commissions and fees. The decrease in commissions and fees primarily reflected generally lower volumes, particularly in the United States and Asia.
Investing & Lending
  • Net revenues in Investing & Lending were $2.07 billion for Q2, 46% higher y/y and 36% higher q/q. Results for the second quarter of 2014 included net gains of $1.25 billion from investments in equities, primarily in private equities, driven by company-specific events and strong corporate performance.
Investment Management
  • Net revenues in Investment Management were $1.44 billion for Q2, 8% higher y/y and 8% lower q/q. The increase in net revenues compared with the second quarter of 2013 was due to higher management and other fees, reflecting higher average assets under supervision.
Expenses
  • Operating expenses were $6.30 billion, 6% higher y/y and essentially unchanged q/q.
  • Compensation and Benefits was $3.92 billion for Q2, 6% higher y/y, reflecting an increase in net revenues. The ratio of compensation and benefits to net revenues for the first half of 2014 was 43.0%, consistent with the first half of 2013.
  • Non-Compensation Expenses were $2.38 billion, 5% higher y/y and 4% higher q/q. The increase compared with the second quarter of 2013 reflected higher other expenses, due to higher net provisions for litigation and regulatory proceedings, and an increase in depreciation and amortization expenses, reflecting impairment charges in the second quarter of 2014 related to consolidated investments. Net provisions for litigation and regulatory proceedings for the second quarter of 2014 were $284 million compared with $149 million for the second quarter of 2013.
Capital
  • Book value per common share was $158.21 and tangible book value per common share was $148.45, both approximately 2% higher compared with the end of the first quarter of 2014.