It was another day of generally positive economic data for U.S. investors, but today was largely overshadowed by a negative report out of Japan.
On the home front, weekly initial jobless claims fell to a better-than-expected seasonally adjusted rate of 304,000, according to the Bureau of Labor Statistics. By comparison, economists had been forecasting weekly initial jobless claims would come in at a seasonally adjusted rate of 315,000. Without question, the jobs markets is showing significant signs of improvement, and any jobless claims figure hovering around 300,000 would likely be conducive to a steady or falling U.S. unemployment rate.
In addition, the Commerce Department noted that U.S. wholesale inventories for May rose by 0.5%. Although this was a smidgen below the 0.6% consensus estimate on Wall Street, it still signifies that businesses are ramping up their inventory in preparation for stronger sales in the second half of the year.
However, it was practically impossible for the broad-based S&P 500 (^GSPC 1.73%) to escape the dismal May machinery orders that came out of Japan earlier today. While economists were projecting a rise of 0.7% in machinery orders, Japan reported that orders actually tumbled 19.5%! Machinery spending is closely watched as it's a strong determinant of capital spending in Japan, and could signal whether or not Japan will continue to recover. Of particular concern is the fact that that this drop came just a month after sales tax increases took effect in Japan.
With worries that one of the globe's largest economies may be losing its footing, the S&P 500 shed 8.15 points (-0.41%) to close at 1,964.68. Considering that the index was down 20 points earlier this morning, this should be considered a small victory for optimistic investors.
Despite the decisively "red" day, major airline United Continental Holdings (UAL 1.73%) soared 12.7% after reporting its June operational data, and updating its second-quarter forecast. For June, consolidated traffic was basically flat year over year, while consolidated capacity increased by 0.8% from the year-ago period. United Continental noted a 0.3% decline in domestic revenue passenger miles (RPM) in June, while international RPM rose 0.7%.
The real reason United soared was its forecast that its passenger revenue per available seat mile (PRASM), an important measure of airline margins, will rise by 3.5% in the second quarter. Previously, United had forecast PRASM growth of just 1% to 3%. While investors certainly deserve their day in the sun, I'm leery of United's long-term potential given the cyclicality of the airline business model, and the high capital expenses associated with relatively small margins.
Following behind United Continental is auto safety parts manufacturer TRW Automotive (NYSE: TRW), which surged 8.2% after confirming that it had received an unsolicited, non-binding takeover offer from an unnamed suitor. Although TRW chose to keep its potential purchaser a secret, the New York Times opined that it could be German auto parts company ZF Friedrichshafen. TRW announced that its board is analyzing the offer, as well as other strategic alternatives.
I'm never a fan of chasing a stock higher on buyout speculation, but the long-term prospects of TRW Automotive are strong enough to support further upside if it remains independent. There's literally a world of parts-supplying potential in China, India, and a number of other rapidly growing emerging markets that should fuel TRW's bottom line for years to come. At less than 12 times forward earnings, this is still an attractive business.
Lastly, real estate Internet portal SouFun Holdings (SFUN) advanced 6% after announcing that it had entered into cooperation agreements with two of China's four-largest new home agency companies. According to SouFun, its agreement with Shenzhen World Union Properties -- China's No. 1 new home agency -- could result in approximately $120 million in aggregate cash considerations, while its strategic cooperation with Hopefluent -- China's No. 4 -- could yield up to $91 million in cash considerations.
On one hand, there's little denying that China's growth prospects trounce pretty much any other larger nation around the world. This would imply that home-growth potential in China should remain strong as more citizens are entering the middle-class ranks. Conversely, distrust of Chinese financials still remains heightened, meaning SouFun isn't going to trade at a particularly high premium to its peers despite its strong growth prospects. I would suggest that shares are probably fairly valued where they are right now.