Evening Update

Yesterday’s Losses Erased

Bulls regained all of yesterday’s losses and then some, pushing stocks to another yearly high as markets are back to the highest level since last November. The rally pushed the Nasdaq near the 2,000 level, while the S&P 500 takes aim at 1,000, and the Dow is on pace for its best July since 1939. All three major indices are currently up between 8-9% for the month. Basic materials stocks saw the strongest gains today, as commodity prices rallied sharply, while every sector of the S&P 500 finished in the green in a generally broad-based rally. Better-than-expected earnings reports again greeted investors this morning, led by Dow Chemical, Motorola, Colgate-Palmolive, Cigna, MasterCard, and Visa. Two Dow members did come up short, as Exxon Mobil and Travelers Companies missed Street estimates, although Travelers raised its full-year target and the rally in oil prices caused traders to overlook Exxon’s shortfall. Meanwhile, bond markets began the day in the red with cautious trading ahead of a large auction of 7-year notes, but the offering drew stronger-than-expected interest, causing a late-day rally in Treasuries to finish mixed. In economic news, continuing jobless claims continue to fall.

The Dow Jones Industrial Average rose 84 points (0.9%) to close at 9,154, the S&P 500 Index gained 12 points (1.2%) to finish at 987, while the Nasdaq Composite rose 17 points (0.8%) to 1,976. In moderately-heavy volume, 1.4 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil gained $3.59 to $66.94 per barrel, wholesale gasoline increased $0.14 to $1.99 per gallon, and gold climbed $3.20 to $933.20 per ounce.

Dow member Exxon Mobil (XOM $71) announced net income fell from $11.68 billion last year to $3.95 billion, resulting in 2Q EPS ex-items of $0.84, which missed the Reuters estimate of $1.02. But revenues of $74.5 billion came in above the $72.7 billion that the Street was looking for. "Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products," CEO Rex Tillerson told investors. Other global energy giants such as BP PLC (BP $50), Royal Dutch Shell (RYDBF $24), and ConocoPhillips (COP $43) have all seen their quarterly profits fall by more than half as the global recession has hampered demand and crude oil and natural gas prices have fallen sharply. XOM shares were modestly lower.

Newly appointed Dow component Travelers Companies (TRV $42) was lower after announcing 2Q EPS of $1.25, which was two cents below the Street's forecast, as net premiums at the insurer were flat versus last year at $5.4 billion, mostly matching expectations. The company said all of its operating dynamics were strong for the quarter and it was successful in achieving rate increases, offsetting lower coverage demands from existing policyholders due to the economic downturn. TRV also raised its full-year EPS guidance from $4.55-4.95 to $4.80-5.05 following the report. Management noted that it is seeing "attractive" opportunities at present, as the credit crisis has weakened its competitors in the insurance sector. TRV has seen its stock decline by less than 5% over the last 12 months, while rivals such as Allstate Corp (ALL $26), and Progressive Corp (PGR $16) have fallen more than 20% in the same period.

Dow Chemical (DOW $22 ¹) was up sharply after posting an unexpected 2Q profit ex-items of $0.05, versus the Reuters estimate, which called for the company to post a $0.08 per share loss. Revenues fell 31% compared to last year to a level of $11.3 billion, which missed the $13.3 billion average analyst forecast, but net sales were 5% higher versus last quarter. The chemical firm said its better-than-expected earnings were driven by favorable volume trends, management's accelerated cost interventions and its ability to maintain prices from the prior quarter. CEO Andrew Liveris told analysts the economic outlook “appears to be stabilizing,” with strong growth in Asia, particularly China “"where domestic stimulus programs have created demand." Regarding the US economy, Livens believes it "has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending."

Motorola (MOT $7) reported a 2Q net loss ex-items of $0.01 per share, which was narrower than the Street's forecast of a $0.04 per share net loss, as revenues came in at $5.5 billion, which was below the $5.6 billion forecast by analysts. MOT said its broadband mobility solutions continued to lead in key markets and delivered solid results in a very challenging economic environment. MOT moved solidly higher.

Colgate-Palmolive (CL $72) earned $1.07 in 2Q, topping the analyst estimate of $1.05, although sales fell 6% to $3.75 billion which fell short of the $3.81 billion forecast. CL raised its prices by 8% during the quarter, which helped to offset a decrease in the volume of products sold. By geography, the North American division saw 4.0% organic sales growth, while Latin America was up 16.5%, the Europe/South Pacific division slipped 1.5%, and the Asia/Africa segment increased 8.0%. The stock was under pressure today, despite CEO Ian Cook’s assurance that he is “comfortable with external profit expectations for both the third quarter and the year."

Cigna Corp. (CI $28) reported adjusted 2Q EPS of $1.14, above the $0.96 estimate that the Street was looking for, while revenues of $4.5 billion came in below the Reuters estimate of $4.8 billion. Although the company's main healthcare unit earnings fell slightly, as a 7% drop in premiums and fees were partially offset by favorable operating expenses, the firm's disability and life unit's profit jumped over 20% and its international segment surged 31% to help drive the results. CI raised its adjusted EPS outlook to a level above analysts' expectations. Shares were nicely higher.

Credit card processors reported their quarterly results, led by MasterCard (MA $194), which was up after reporting 2Q EPS ex-items of $2.67, topping the $2.43 estimate of analysts, as revenues rose 2.7% to $1.3 billion, also above the Street's forecast. The company said pricing changes—adding 8 percentage points of revenue growth—a 7.9% increase in transactions processed, and a 5.8% decrease in rebates and incentives drove the company's results. But it pointed out that the gross dollar volume declined to partially offset the aforementioned contributors to its 2Q revenue growth. Meanwhile, fellow payment processor Visa (V $67) was also higher after it posted fiscal 3Q EPS ex-items of $0.67, three cents ahead of average analyst estimates, as revenues rose 2% to $1.6 billion, slightly above expectations.

The increase in credit card transactions, leading to the upbeat results from MasterCard and Visa may be reflecting the adverse impact on consumers from the dismal unemployment picture, which may be forcing consumers to use their cards to pay for everyday living expenses instead of discretionary spending. The unemployment rate has risen sharply to 9.5% in June, and the Fed said last week that the jobless rate will likely remain elevated at the end of 2011.

PennyMac Mortgage Investment Trust (PMT $19) saw its shares fall almost 5% in its first day of trading, after its IPO fell short of initial expectations. PMT, which is run by former Countrywide Financial executives and hopes to buy distressed housing loans, raised approximately $320 million at a price of $20 per share, 20% below the $400 million that management had hoped to raise.

General Electric (GE $13) was the largest gainer on the Dow, rising over 7% after comments from Congressman Barney Frank, who chairs the House Financial Services Committee, that manufacturers should be allowed to keep their finance units. "To break up GE at this point, I think, would be a mistake," Frank said.

Akamai Technologies (AKAM $17) fell the most in the S&P 500 Index, losing almost 20% after the software maker’s 2Q results disappointed investors. Adjusted EPS fell 2% to $0.40, slightly below the $0.41 expectation, while sales were down 3% to $204.6 million, also below the average forecast of $211 million. Following the results, management guided to negative sequential sales growth, with Q3 sales expected in a range of $195-203 million and adjusted EPS expected to be $0.33-0.36 for 3Q, below the average analyst forecast of $0.41, according to Bloomberg.

Report showed jobless claims rose, but multi-week improvements in key components

Weekly initial jobless claims (chart) increased 25,000 to 584,000, versus last week's figure that was upwardly revised by 5,000 to 559,000. The Bloomberg consensus called for claims to reach 575,000. The four-week moving average declined for a fifth-straight week, falling by 8,250 to 559,000, to reach the lowest level since late January. Continuing claims declined for a third-consecutive week, dropping by 54,000 to 6,197,000, versus the forecast of 6,300,000. Seasonality factors may have recently skewed the data, as the massive layoffs and plant shutdowns in the automotive sector have made forecasting the weekly report difficult.

Treasuries rallied sharply in late-day trading to finish mixed. Government bonds were weak for most of the session, as traders were cautious ahead of a large auction of 7-year bonds. The debt sale drew stronger-than-expected investor interest though, reversing a negative trend as offerings of 5-year and 2-year notes earlier in the week were disappointing. In the end, the yield on the 2-year note rose 1 bp to 1.17%, while the yield on the 10-year note decreased 5 bps to 3.61%, and the yield on the 30-year bond retreated 9 bps to 4.42%.

First reading on 2Q GDP tomorrow

Advance Gross Domestic Product (GDP) for 2Q, the first reading on the broadest measure of economic output, and considered a proxy for corporate profits, will be released tomorrow, and is expected to have fallen an annualized 1.5%, after dropping 5.5% in 1Q. Personal consumption is expected to have fallen 0.5% after rising 1.4% in 1Q and the GDP Price Index is expected to rise 1.0%, with the core PCE Index, which excludes food and energy, increasing 2.3%. While the report is backward looking, due to its comprehensive nature and impact on monetary policy, it is closely watched.

GDP is the combined total of consumption, government spending, investments (residential and nonresidential), and net exports (exports less imports). While declining consumer spending, the largest component of GDP, has been widely discussed, business investment has plunged, falling at a 49% annualized rate in 1Q, which subtracted 8.2% from 1Q GDP. Within business investment, a record inventory drawdown of an $87 billion annual rate negatively affected 1Q GDP by 2.2%, and postponement of purchases of equipment and software subtracted 2.1%. The consensus by economists is that GDP could turn positive in 3Q, forecasted to grow 1.0% in 3Q and 2.0% in 4Q.

Simply put, businesses slashed spending indiscriminately during the crisis, cutting expenses at a faster pace than typically seen during a recession in an effort to conserve cash for the “worse-case” scenario. This was illustrated in the better-than-expected 2Q earnings reports, characterized by across the board cost-cutting. However, at some point, cuts in costs, production and layoffs, become unsustainable. Economic data can improve just by eliminating the subtractions to growth.