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Tuesday, July 15, 2014

STOCKS END MIXED AFTER YELLEN SPEAKS: Here's What You Need To Know

Closing Bell

July 15, 2014

Stocks were mixed in a session that saw Fed Chair Janet Yellen speak on Capitol Hill, while two major U.S. banks also reported earnings and retail sales for June were a bit below expectations.

First, the scoreboard:

Dow: 17,060.68, +5.2, (+0.03%)
S&P 500: 1,973.28, -3.8, (-0.2%)
Nasdaq: 4,416.39, -24, (-0.5%)

And now, the top stories of the day:

1) Federal Reserve Chair Janet Yellen was on Capitol Hill, giving prepared remarks and answering questions from members of the Senate Banking Committee. Some of the notable commentary out of Yellen's prepared remarks were comments on the labor market, which said that, "significant slack" remains in labor markets, indicated by the slow pace of wage growth. Yellen also noted that low interest rates have provided incentives for some investors to "reach for yield," and that valuations appear stretched in some sectors, such as "lower-rated corporate debt."

2) In a full report delivered to lawmakers, the Federal Reserve singled out, "smaller firms in the social media and biotechnology industries," as pockets of the market where valuations seem, "substantially stretched." The market weakened a bit in late morning trade as investors digested the release from the Fed, but as people began to read Yellen's commentary in the context of the day's broader message, which reiterated that rates will remain lower for longer even after the economy "normalizes," the markets erased some of their early losses. The Nasdaq, which houses many of the social media and biotech names that many saw as the target of Yellen's warnings, was the worst performing index today.

3) Before Yellen's testimony, the Census reported June retail sales that grew 0.2% over last month, missing economists' expectations for sales to grow 0.6%. Excluding autos and gas, however, retail sales grew 0.4%. Economists expected this measure to expand 0.5%. May's retail sales were also revised up to growing 0.5% from a prior reading of 0.3%. Following the report, Ian Shepherdson at Pantheon Macro said, "In one line: Solid. The details are better than the headline... The trend is core sales is solid, with the y/y rate at 4.2% in Q2, but a further acceleration likely will require faster wage gains. They're coming."

4) The July Empire Manufacturing index came in at 25.60 in July, better than 19.28 in June. Economists were expecting the index to decline to 17.0. According to the New York Fed, this was the reading's highest level in over four years. Following the report, Sam Coffin at UBS said, "The Empire State survey has generally appeared consistent with the rebound in growth and rebuilding of inventories that we see for Q2: its average level of 13.2 was the highest since [the first quarter of 2012]."

5) Before the market open, JPMorgan and Goldman Sachs both reported quarterly earnings, with both banks beating on the bottom line. JPMorgan reported Q2 earnings per share, excluding certain items of $1.46. Analysts were expecting earnings of $1.31. JPMorgan's revenue came in at $25.3 billion, and on the company's conference call, CEO Jamie Dimon, who a few weeks ago announced he had curable throat cancer, said he "feels great."

6) Goldman Sachs reported Q2 adjusted earnings per share of $4.10, topping expectations for earnings of $3.09. Revenue was $9.13 billion, also better than the $7.98 billion that was expected. Goldman's revenue in its fixed income, currency and commodities client execution segment were down 10% over last year, while revenues in equities were down 13%.

7) Things are still tough on Wall Street, and these two charts from JPMorgan's earnings presentations showed just how hard things were for traders in the second quarter. JPMorgan's markets revenue down 14% in Q2 (though the bank said in May that it could fall as much as 20%), while mortgage production fell 74% over last year.

8) Tobacco giants Reynolds American and Lorillard announced a $27.4 billion merger deal in which Reynolds would acquire Lorillard, as well as spin off some of its brands to British tobacco company Imperial Tobacco. Following the news, shares of Reynolds closed down nearly 7%, while Lorillard shares fell more than 10%.

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