The Week in Review for the week ending February 8, 2013
The broad averages managed modest gains for the week despite a sharp pullback on Monday. Investors continued to be generally encouraged by earnings reports and economic data.
The technology-oriented Nasdaq Composite fared a bit better than other indexes, as tech shares were driven by better-than-expected profits, new product releases and buyout activity.
Amid this environment the DJIA was down -0.1%, the S&P 500 was up 0.3%, the Russell 2000 was up 0.3%, the MSCI EAFE was down -1.4% and fell -2.1%.
The price of US homes jumped by 8.3% in December, the highest year-over-year pace in six years. Other positive data includes a 1.8% increase in orders for manufactured goods; a rise in the Institute for Supply Management’s manufacturing purchasing managers’ index to 53.1 in January from 50.2 in December; a surprisingly strong January sales report from US retailers; and a drop in the four-week average of initial jobless claims to 350,500, the lowest level since March 2008.
The US trade deficit narrowed by nearly 21% in December. Falling crude oil prices and a decrease in the amount of imported oil were compounded by record-high petroleum exports. However, US nonfarm productivity fell at a 2% annual rate in the fourth quarter of 2012, its sharpest drop in almost two years. The ISM nonmanufacturing PMI slipped to 55.2 in January from 55.7 in December.
The eurozone composite purchasing managers’ index rose in January to a 10-month high of 48.6 from 47.2 in December, indicating less-pronounced contraction. The German composite PMI rose sharply to its highest level since June 2011, while France’s and Italy’s PMIs slipped. Eurozone retail sales fell sharply in December.
A political scandal in Spain and a banking scandal in Italy led to more volatility in those financially struggling markets as well as in European markets in general. Meanwhile, concerns rose over the possible impact of an overvalued euro on the region’s economic prospects.
China issued bullish economic reports that were enhanced by the timing of the week-long Lunar New Year holiday. Exports grew 25% in January, while imports rose 28.8%, causing the country’s trade surplus to narrow modestly. Annual inflation eased to 2% in January from 2.5% the month before. The trade figures were exaggerated by the timing of this year’s holiday, which falls in February rather than January, creating five more business days in January than there were last year. On an adjusted basis, exports rose 12.4%, while imports were 3.4% higher.
Dell made a historic deal to accept a $24 billion leveraged buyout that takes the one-time PC market leader into private hands. Founder and chief executive Michael Dell contributed nearly 16% to the deal. A consortium of buyers includes Microsoft, private equity firm Silver Lake Partners and a group of investment banks. Dell was hurt by tough competition from other PC manufacturers, along with smartphones and tablets, such as Apple’s iPad.
The US Department of Justice filed civil fraud charges against Standard & Poor’s, the largest US credit rating agency, claiming that it knowingly defrauded investors in certain mortgage investments, inflating the ratings of those products, and also claiming that S&P falsely stated that its credit ratings “were objective, independent” and “uninfluenced by any conflicts of interest.” Settlement talks broke down when S&P refused to admit guilt on any count of fraud because it sought to avoid exposure to widespread civil litigation.
BP reported a 72% drop in profit for the fourth quarter on falling oil and gas production as well as the impact of its pretax charge of $4.13 billion related to the Gulf of Mexico oil spill. BP has so far taken a total of $42.2 billion in pretax charges for the oil spill. In the most recent quarter, $3.85 billion covered the settlement of all federal criminal charges related to the Gulf of Mexico disaster.
Swiss bank UBS posted a fourth-quarter net loss as it took charges of 2.08 billion Swiss francs ($2.28 billion) and made provisions for litigation, regulatory and other related costs in settling charges that it manipulated key interest rates in the London Interbank Offered Rate (LIBOR) scandal. Royal Bank of Scotland will pay $612 million to US and British authorities to settle charges that it manipulated LIBOR and other benchmark interest rates. RBS is the third bank to pay fines in the rate fixing scandal. More than a dozen large international banks and brokerage firms are being investigated by regulators in the United States and United Kingdom.
American Airlines parent AMR is reportedly working out details with US Airways Group on a merger agreement that would create the world’s largest airline. The new firm would be valued at more than $10 billion and would carry more traffic than United Continental, currently the largest US airline by traffic. The all-stock deal would take American Airlines out of Chapter 11 bankruptcy protection.
Toyota Motor continues to improve its sales and outlook. It posted a 23% increase in net profit for its most recent quarter and raised its full-year outlook. Toyota’s progress is being driven by a favorable foreign exchange trend, strong North American sales of sedans and SUVs and an uninterrupted flow of production. The firm posted a quarterly operating profit in all regions except North America, where it incurred charges in settling a class-action lawsuit over claims of unintended acceleration in its vehicles.