Mixed earnings and eurozone jitters derail markets at the end of a positive week

A fairly bullish week driven by relatively positive earnings news from the United States ended with a big sell off on Friday due to renewed concerns about Eurozone debt issues with Spanish bond yields rising to unsustainable levels once again. With many big earnings announcements out from US companies over the last 2 weeks, including the financials and key tech heavyweights like Google and Microsoft, whilst it appears that revenues are on the light side, earnings are consistently beating due to cost containment although the outlook for the remainder of the year is one of uncertainty.

The FTSE 100 fell 62 points to 5,652, down 0.25% on the week. The Dow Jones Industrials dropped 121 points on Friday , to close at 12,823 with a 0.4% gain for the week. The Nasdaq Composite closed at 2,925, up 0.6% for the week. The S&P 500 Index finished at 1,363, up 0.4% for the week. Brent crude closed the week at $107, up 4% on the week.

Despite the approval of the €100 billion Spanish bank rescue package by European finance ministers on Friday, the Spanish Ibex index dropped nearly 6%, its worst day in 2 years with the Valencia region saying it would need central government help to meet its commitments. Spanish bond yields exceed the key 7% danger level which led to the Irish and Greek sovereign bail outs. As well as Spain, Italian problems were also in focus, with the Italian stock market dropping 4.4% yesterday.

The American banks have now reported Q2 earnings and it shows the pressures that financial stocks are having in delivering organic growth.

Goldman Sachs posted revenues of $6.6 billion, 6% higher than expected but a third less than quarter one and 14% lower than the same quarter in 2011. Earnings per share dropped by over half  compared with Q1 2012 to $1.78, and the lowest since 2005.  Revenues from Institutional & Client Services dropped by a third and Investing & Lending dropped 90% compared to the prior quarter. 

JPMorgan Chase beat on revenue expectations by 5% ($22.9 billion versus $21.9 billion) but the $5.8 billion trading loss caused by the “London Whale” meant that earnings came in light at $1.21 per share, 7% down on a year ago.

Well’s Fargo and Co missed revenue and EPS estimates by around 2% but earnings were helped by $596mn in cost savings and the results were much better than quarter 1 and 2011.

Citigroup ‘s revenues came in at $18.6 billion,  1% down on estimates but cost cutting helped to deliver $0.95 in earnings, 7% higher than estimates.

Bank of America reported revenues of $22.4 billion, 1% down on estimates and net income of $2.5 billion or $0.33, up 13% on estimates. It reported a large loss in Q2 2011.

Morgan Stanley was the worst performer of the lot .The bank reported a profit of $591 million, compared with a year-earlier profit of $1.19 billion with revenue falling 24% to $6.95 billion. It reported a profit of 29 cents compared with a loss of 38 cents a year ago. Expectations were for earnings of 43 cents, on revenue of $7.7 billion.

So financials are hardly a picture of health.

In contrast, tech stocks seem to be delivering more or less on investor expectations. After a strong set of numbers from Google earlier in the week, Microsoft confirmed strong demand in its corporate business but confirmed a disastrous write down in its internet operations.

Microsoft dropped nearly 2% yesterday to $30.12 as it reported its first quarterly loss ever since it became a public company in 1986. The reason was the huge write down in the web advertising company, aQuantive, it acquired in 2007, for $6.3 billion and which recorded a goodwill charge of $6.2 billion in the quarter.

The group reported a loss of $492 million, or 6 cents a share, on revenue of $18.06 billion. During the same period a year ago, Microsoft earned $5.9 billion or 69 cents a share on $17.4 billion in sales.

Without the write down and impact of deferred revenues from a Windows 8 offer, Microsoft would have earned $6.93 billion, or 73 cents a share, on $18.6 billion in revenue. Business division sales were particularly strong and rose 7% from the same period in 2011 to $6.3 billion. Server and tools revenue was $5.1 billion, up 13% from a year ago. The entertainment and devices division, rose 20%, to $1.8 billion. All eyes are on the launch of Windows 8 in October and its tablet range in the Autumn. The stocks looks decent value with an undemanding forward PE of around 10 times

Contrarian Investor UK