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US markets drop sharply after consumer spending report, Archer Daniels, Pfizer, Coach disappoint

Published: 21:33 02 Aug 2011 BST

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A hotly negotiated deal to raise the debt ceiling easily passed the Senate with a vote of 74-26 and has been signed by President Barack Obama. The legislation was put together in the House Monday night. Passage of the legislation will allow the U.S. to avert defaulting on its loans for the first time in its history.

Wall Street shrugged off the news, focusing instead on a deteriorating economy. Consumer spending declined for the first time in almost two years. The Dow fell for an eighth day, its largest losing streak since October 2008. It is off 150 to 11,982, Nasdaq fell 43 to 2,701, and the S&P 500 is down 19 to 1,268.

The final bill will increase the debt limit by $2.1 trillion with at least that much in federal spending cuts, completed in three stages. The first part will increase the ceiling by $400 million accompanied by $917 billion in deficit reductions. The second step requires the selection of a special committee of six Democrats and six Republicans who will come up with at least $1.2 trillion in additional cuts by November 23. If they fail to do so, a predetermined set of cuts will kick in and the debt ceiling will be raised an additional $1.2 trillion. 

The Bank of Korea announced it had bought 25 metric tons of gold from the global market in June and July, seeking to diversify its large foreign exchange holdings, which stands at over $300 billion. The purchase brings its total gold reserve to 39.4 tons, but represents only 0.7% of foreign exchange reserves. Korea, like many Asian countries, is a major holder of U.S. debt. Its moves come as countries begin to question the dollar’s pre-eminence as the world’s reserve currency. But any change will be gradual as much international trade is conducted with the dollar with little alternatives.  

China is considering further tightening its grip on rare earth exports as high prices have led to an increase in smuggling exports of byproducts not explicitly covered under existing guidelines. Prices have skyrocketed for the 17 rare earth elements since China initiated its quotas; the country currently controls over 90% of the market. New suggestions include bringing more byproducts under export quotas and setting separate limits for light versus heavy rare earth metals.

MetroPCS Communications Inc (NYSE:PCS) saw its stock fall 32% when it reported a slowdown in subscriber growth, and added it expects the trend to continue. The company blamed its poor performance on a sluggish economy and tough competition. It added 198,810 users in the second quarter, below estimates of 225,000. Customer churn increased to 3.9% from 3.3% the previous year. Although average revenue per customer increased 1.6%, per user cost jumped 5.8%. Revenue for the quarter increased 19% to $1.21 billion while profit rose to $84.3 million from $79.9 million in the year-ago quarter.

Pfizer Inc. (NYSE:PFE) shares fell over 3% over worries of future growth. The company reported a 1% decline in revenue to $16.98 billion as earnings increased 5% to $2.61 billion, although sales would have fallen 5% without the benefit of a weak dollar. Sales were boosted by the company’s non-core animal health and nutritional products business while pharmaceutical sales dragged, down 3% for the quarter to $14.64 billion. Pfizer is in the midst of reorganization plans and intends on divesting its non-core businesses to focus on drug development.

Archer Daniels Midland Co. (NYSE:ADM), the world’s largest grain processor said a four-fold increase in its tax bill and rising corn costs sapped fiscal fourth quarter profits. While revenue jumped 45% to $22.87 billion for the quarter ended June 30, profit dropped 15% to $381 million from $446 million. CFO Ray Young said a lot of unique items in this earnings report would not be repeated in 2012. Nevertheless, analysts questioned the transparency of the company’s hedging program. ADM shares traded down 4.5% on the news.

Coach Inc. (NYSE:COH), maker of luxury accessories and handbags reported an 8.5% rise in sales to $1.03 billion in the second quarter, beating analyst forecasts of $1.01 billion. Earnings grew 3.6% to $202.5 million from $195.5 million in the year-ago quarter. Same-store sales rose a brisk 10.1% in North America. However, gross margins fell to 71.8% from 73.3% on “continued sourcing pressure” such as wage inflation in China. Coach said gross margins are unlikely to improve this year, sending its stock tumbling 6.5%.

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