Lower Open Gives Opportunity

This morning, the market is selling off ue to concerns of a global slowdown (read post below for details).  This decline has created a good opportunity to get into two companies that reported great quarters and are trading much lower than they should be just because the broader market is down big today.  These two companies are Macy's (M) and Disney (DIS).

Macy's (M)- Macy's net income rose to $147 million, or $0.35/share, from $7 million, or $0.02/share, in the year-earlier period, which included $0.18/share in restructuring charges. The company raised its full-year profit outlook to $1.85 to $1.90 a share from a previous forecast of as much as $1.80 a share. Also, and more importantly, Macy's management talked about taking market share from their competitors.  This is huge, and no one seems to be talking about this statement.

Disney (DIS)- Disney reported a net income of $10.0 billion, or $0.67/share vs what analysts expected of $9.34 billion, or $0.59/share.  Disney said the media networks revenue rose 19% to $4.70 billion and studio entertainment revenue rose 30% to $1.6 billion. Also, cable networks revenue rose $561 million to $1.70 billion and parks and resorts revenue rose 3% to $2.80 billion.  This was a great quarter for Disney, and ESPN has shown a huge improvement in ad revenue. 

Company	Symbol	Stock Price	52 wk Range
Macy's	M	20.32	14.01-25.25
Disney	DIS	34.37	24.89-37.98

Market Sharply Lower at Open

U.S. stocks opened sharply lower Wednesday after weak manufacturing data out of China and a gloomier assessment of the economy from the U.S. Federal Reserve.

The Dow Jones Industrial Average (DJIA) was down 200 points, or nearly 2%, at the open, after shedding 0.5 percent in the previous session.  All 30 Dow components were lower at the start, led by DuPont (DD), Disney (DIS), and Cisco (CSCO).

The pace of growth in Chinese investment and factory output slowed in July, raising worries about the nation's economy, which has been expected to drive the global recovery. Retail sales were also softer than expected.  In U.S. economic news, trade deficit widened more than expected to 18.8% in June on a surge of consumer goods from China and other suppliers, while U.S. exports fell, a government report showed on Wednesday.  Mortgage purchase and refinancing applications, meanwhile, rose by less than 1% in the first week of August, even as 30-year loan rates fell to 4.57%, the lowest in 20 years of record keeping by the Mortgage Bankers Association. 

European stocks were down  in morning trade, led lower by banks such as Societe Generale and UBS, while the Nikkei index fell 2.7%, suffering its worst session in nearly a month as a stronger yen deepened worries about the longer-term prospects for Japan's economy. 

The dollar fell to an eight-month low versus the yen on Wednesday as traders pared back on risk following the decision from the Fed to invest proceeds from mortgage backed securities into government debt.

Fed Signals More Easing

The Federal Reserve on Tuesday took fresh steps to lower borrowing costs amid a softening economic recovery, announcing it would use proceeds from its maturing mortgage bonds to buy more government debt.  The decision to reinvest proceeds from the more than $1.3 trillion in mortgage-related debt the Fed holds, an effort to keep market-set borrowing costs down, represents a significant policy shift.  Just a few months ago, the central bank had been avidly debating an exit strategy from the extraordinary stimulus delivered during the financial crisis.

"To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the Fed said in a statement.  The move was somewhat surprising.

Although many analysts and investors had expected the Fed to announce it was reinvesting the mortgage proceeds, most had thought it would buy more mortgage debt instead of government bonds.

Some analysts believe the Fed will end up having to go further in coming months and restart its shuttered program of outright asset purchases.

"The Fed is a step closer to reviving its program, but it will likely take somewhat slower growth to push it off the fence," said Sal Guatieri, senior economist at BMO Capital Markets.  The Fed also left benchmark overnight interest rates steady in a zero to 0.25% range, and renewed its pledge to keep them low for an extended period.

Treasury Yields Continue to Fall

In the latest battle over who does a better job of forecasting market movements, bonds are nearing a strong signal that a bear market for stocks is right around the bend.  Since hitting its most recent high yield of 4.01% on April 5, the 10-year Treasury bond has slid nearly 1.20 percentage points, a metric that signaled in 1990, 2000 and 2007 that a steep drop in stocks was only two months away, according to research from Gluskin Sheff strategist David Rosenberg.

With the 10-year yield at 2.82% in early Tuesday trading and the bond market still red-hot despite continued predictions of its demise, the big bear indicator is looming large.  "Declines of this magnitude very often presage the onset of bear markets and recessions," Rosenberg says.  "Typically, equities and then economists are late to the game...What is key to note is that the bond market is the tail that wags the stock market's dog—it leads."

Whether the bond market again is foretelling a bear market—a 20% drop in stocks from the most recent high—is part of a long-running debate over who does a better job forecasting—stock or bond investors.  Conventional wisdom is that bond investors tend to be more conservative and thus less influenced by fear and greed. That's cited as the reason by some that the bond market does a better job of getting the economy right.  "With all due respect to the stocks guys, the bond guys, when it comes to the economy, tend to sniff things out a little earlier and eventually get things right," says Mike Larson, analyst at Weiss Research. "Bond yield levels have given you key insight into what's going on in the economy. The verdict in my mind is pretty unmistakable."

The concern over what bond market movements portend for the economy come as Wall Street awaits word from the Federal Reserve on what its plans are to juice the economy. The FOMC meets Tuesday to discuss rates and possible future quantitative easing measures, though some think the central bank has become less an influence after three years of aggressive policy moves.

In the meantime, economic signs, particularly in employment and consumer and business sentiment, are progressively weakening, indicating that if deflation is not on the horizon, then strong economic growth is unlikely either.

Productivity Declines- Economy Slows

U.S. non-farm productivity declined for the first time in 1-1/2 years during the second quarter this year and labor costs barely edged up, according to a Labor Department report on Tuesday that underlined a slowing pace of economic recovery.  Productivity declined by an annual rate of 0.9% after rising at a revised 3.9% rate in the first quarter, the first time since the fourth quarter of 2008 that output per worker fell.  Analysts surveyed by Reuters had forecast that productivity, a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it, would expand at a 0.2% annual rate in the second quarter and that unit labor costs would rise 1.3%.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, edged up at a 0.2% annual rate after shrinking at a revised 3.7% rate in the first three months this year.  The weak productivity figure is in line with other broad signs that the economic recovery is losing momentum. The overall economy grew at only a 2.4% annual rate in the second quarter, down from a 3.7% rate in the first quarter.

Fed policymakers were holding a one-day meeting on Tuesday to consider interest-rate policy, but with rates already near zero the speculation was that the U.S. central bank may be mulling other fresh steps to stimulate the economy amid signs that inflation poses little or no current risk.

Tuesday's FOMC Meeting- Much Anticipated

The Fed holds its regular, one-day meeting Tuesday and is expected, as always, to release a statement at around 2:15 p.m. But what it will say in that statement is at the heart of a debate among Wall Street's deeply divided economists over what steps, if any, the Fed will take.  One view is that the Fed will embark on a new quantitative easing program, by reinvesting the proceeds of its maturing mortgage securities in Treasuries, or even more mortgages. Another group does not think the Fed would make such a move unless the economy significantly worsens later on. Yet, they all agree the Fed could give a nod to a weakening economy.

"That's the only story tomorrow," said Knight Equities managing director Peter Kenny of the Fed meeting.

"Earnings season" is winding down, and now the focus is going to revert back to the economy and frankly that's not particularly good," said Kenny. There are a few pieces of economic news ahead of the Fed meeting, including the NFIB small business survey at 7:30 a.m.; productivity and costs, at 8:30 a.m., and wholesale trade at 10 a.m.

Fed Could Downgrade Outlook for US

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.  Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth.

Smaller measures to help the economy could initially take the form of a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank, thereby preventing the Fed’s balance sheet from shrinking naturally.

Investors will also examine closely any changes to the pledge made by the FOMC in June to “employ its policy tools as necessary to promote economic recovery and price stability”, which could be hardened if policymakers choose to signal the potential for more aggressive move to boost the economy in the future.  But even if that happens, most economists believe that it would take several more months of poor data for the Fed to actually begin a new round of asset purchases on the scale of those carried out during the recession. 

In congressional testimony last month, Ben Bernanke noted “unusual uncertainty” in the economic outlook and in a speech last week the Fed chairman warned of a “considerable way to go” before the US achieves a full recovery.  Although Fed policymakers still believe the basic trajectory of the economy remains one of moderate expansion, there may be more attention given to heightened dangers of a sharp slowdown.