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US stock market daily report (July 27, 2012, Friday)

Contributed by Millennium Traders

Facebook Inc. (FB) tumbling shares tripped Nasdaq short-sale circuit breakers on Friday after share price dropped more than 10% from previous sessions closing price - short interest positions on Facebook are currently at 13.4%. The short-sale circuit breakers are aimed at shielding stocks from manipulation by short sellers. The Securities and Exchange Commission said when it introduced the short-sale circuit breaker in 2010, “When triggered, it will prevent short selling, including potentially manipulative or abusive short selling, from driving down further the price of a security that has already experienced a significant intra-day price decline, and will facilitate the ability of long sellers to sell first upon such a decline.” Into late afternoon trading on Friday, Facebook shares were off by 12% as investors remain nervous that the company did not provide an outlook. After hours on Thursday, Facebook reported it swung to a Q2 loss of $157 million or 8 cents a share, from a net income of $240 million or 11 cents a share, same quarter in 2011. Adjusted earnings came in at $295 million or 12 cents a share while revenue grew 32% to $1.18 billion. In a conference call following the earnings release, Chief Executive Mark Zuckerberg discussed the important role that mobile plays for Facebook, noting that mobile users engage the site more often than via personal computers. “Mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience,” Zuckerberg said. Other comments during the call from Zuckerberg were "Our largest developers tend to become our largest advertisers,” as they look to increase the visibility on the site. Facebook chief operating officer Sheryl Sandberg said on the call, “Ads in news feeds and sponsored stories are more effective than ads in the right hand column” of a user’s page and called those two initiatives the 'cornerstones' of Facebook’s social ad strategy. When asked on the call to describe how they are rolling out sponsored stories, Sandberg replied, “we look at social context, make sure they’re relevant… we’ve been cautious.” In fact, Facebook has yet to roll out sponsored stories in all the countries in which Facebook has users. Facebook faces a difficult balancing act on how to make money off other people’s content without offending them because if they do offend people, users are likely to take their posts and photos elsewhere. Investors need to take Zuckerberg at his word as he said that the company will put the quality of a user’s experience ahead of profit concerns. Based on the $157 million net loss Facebook just reported, this could be believed. CFO David Ebersman couldn’t have been clearer on the call that Facebook’s operating model is going to get less attractive in the short-term. After revealing that operating expenses were up 60% year-over-year if stock-based compensation costs were excluded, Ebersman said that spending in the second half of 2012 will be up at a 'slightly higher rate' of growth, as the company continues an 'aggressive pace of investment'. Based on Thursday’s conference call, unless Facebook can generate a revenue surge to offset its rising expenses, its net margins are going to remain thin or negative for the rest of this year.

According to the California Department of Justice, McKesson Corp. (MCK) has agreed to pay California and 29 other states a total of $151 million to settle allegations that it inflated prescription drug prices, causing states' Medicaid programs to overpay pharmacy reimbursements by millions of dollars. The payment is in addition to an April settlement that had McKesson paying more than $190 million to the federal government to resolve similar claims. McKesson previously said that it didn't violate any laws or manipulate drug prices. The states alleged that McKesson, a drug wholesaler, deliberately inflated average wholesale drug prices it reported to First Data Bank, a publisher of drug prices, by as much as 25%. McKesson's actions caused the state of California to overpay on branded prescription drugs from August 2001 through December 2009. California's Medicaid program, known as Medi-Cal, sets the reimbursement rates for pharmacies based on reported wholesale drug prices. Along with the District of Columbia, the other 29 states involved in the settlement include New York, Illinois, and Pennsylvania with California's recovery of the settlement at roughly $23.6 million.

University of Michigan-Thomson Reuters final reading of the July consumer sentiment came in slightly stronger than forecast, rising to 72.3 however, still down from a 73.2 reading in June and the worst of the year.

The Commerce Department reported on Friday that, according to a preliminary government estimate, the U.S. economy grew 1.5% in Q2, down from 2% in the prior period, as consumers and businesses spent at a slower rate. Consumer spending climbed 1.5% compared to a 2.4% increase in Q1. Business investment in nonresidential structures rose by 5.3% vs. a 7.5% increase in Q1. Inventory spending rose to an estimated $66.3 billion in Q1 after a $56.9 billion gain. Government spending at all levels fell by a combined 1.4%; exports rose 5.3% while imports climbed 6.0%; real final sales in the U.S. excluding imports and inventories, was halved to a 1.2% increase. As measured by the consumer PCE index, inflation dropped to 1.6% from 2.4%. Excluding food and energy, the index rose 1.8% compared to 1.9% in Q1. Real disposable income rose 3.2% in Q1 and personal savings rate climbed to 4.0%. Growth in Q1 was revised to 2.0% from 1.9% and Q4 of 2011 was revised up to 4.1% from 3.0%.

The White House said Friday that reduced government spending will cut the U.S. budget deficit to $1.21 trillion in 2012 or nearly $116 billion lower than projected in February and down slightly from the $1.30 trillion deficit logged in 2011. The Office of Management and Budget said in its mid-session review of the budget, the reductions in spending were due to delays in enacting some of the job proposals passed in February while some of the spending cuts were offset by a reduction of $27 billion in receipts due to the weaker economy. OMB predicted that the unemployment rate would average 8% in 2012 before inching lower to 7.7% in 2013 and to 7.3% in 2014. The White House forecasts growth will rise by 2.3% this year before increasing to 2.7% in 2013 and 4% in 2014.

In a joint statement on Friday by German Chancellor Angela Merkel and French President Francois Hollande, they stated they are determined to do 'everything possible to protect the euro zone'. The leaders said this requires compliance by member states and European institutions "in their own area of expertise." Germany and France "are deeply committed to the integrity of the euro zone," the statement said. Both countries called for the quick implementation of decisions made at a summit of European leaders in late June.