Evening Update

Markets Post a Strong July, Despite Mixed Ending Session

Stocks were mixed in trading today, as traders paused to reflect on a 2Q GDP report that showed a smaller contraction than forecasted, but a larger decline in consumer spending. Earnings reports did little to improve sentiment, with Walt Disney, MetLife and AutoNation posting revenue misses, despite better earnings. Chevron missed earnings estimates but raised its production outlook for 2009, and Las Vegas Sands reported a profit. Despite the muted action today in equity markets, the dollar reacted to the GDP report, falling to the lowest level since September, and Treasuries moved markedly higher. In other economic news, a report on Midwest manufacturing was better than expected and the Employment Cost Index rose.

The Dow Jones Industrial Average rose 17 points (0.2%) to close at 9,172, the S&P 500 Index gained 1 point (0.0%) to finish at 987, while the Nasdaq Composite fell 6 points (0.3%) to 1,979. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $2.51 to $69.45 per barrel, wholesale gasoline increased $0.03 to $2.02 per gallon, and gold climbed $17.50 to $951.90 per ounce. For the week, the DJIA advanced 0.9%, the S&P 500 Index rose 0.8%, and the Nasdaq Composite gained 0.6%.

Dow member Walt Disney Co. (DIS $25) reported fiscal 3Q EPS ex-items of $0.52, one penny ahead of the Reuters estimate, as revenues dropped 7% to $8.6 billion, which was below the $8.8 billion forecast of analysts. The company saw revenue declines across all of its segments compared to the same period last year, with its parks and resorts unit falling 9% to $2.8 billion, media networks dipping 2% to $4.0 billion, and its studio entertainment business dropping 12% to $1.3 billion. The company noted Orlando hotel occupancy of 91%, close to last year’s level, during the quarter, on the back of a buy four days, get three days free promotion, and that room reservations for 4Q were up slightly year-over-year, despite changing to a “dine free” promotion. However, Disney's CEO Robert Iger said a tough global economy impacted its performance in the quarter, but remained encouraged by the relative strength of its business. DIS fell.

Fellow Dow member Chevron (CVX $69) announced 2Q profit fell over 70% to $1.75 billion, resulting in EPS of $0.87, below the consensus estimate of $0.97, as revenues declined over 50% to $40.2 billion, versus the $33.2 billion that was expected. CVX posted a 79% drop in upstream—exploration and production—earnings on lower prices for crude oil and natural gas. During the session, the company held a conference call where it raised full-year 2009 production to a level that represents a 5% increase over 2008 levels. CVX ended higher, overcoming early weakness.

MetLife (MET $34) posted 2Q EPS ex-items of $0.88, well above the Street's forecast of $0.68, as its premiums, fees and other revenues rose 4% to $8.4 billion, which was short of analysts' estimates. The company said it had very strong deposits and positive net cash flows in its US annuity business, its institutional revenue rose 8% versus last year, and its international business continued to perform well. MET added that consistent growth in its core businesses enabled it to achieve noteworthy results despite lower investment income. Shares rose.

Las Vegas Sands (LVS $9) reported an unexpected adjusted 2Q profit of $0.01 per share, versus the Street's forecast which called for the casino operator to post a $0.01 per share loss. LVS posted revenues of $1.1 billion, roughly in line with analysts' expectations. The company said it operating results reflect the challenging economic environment, but it is pleased with the cash flow performance of its Las Vegas and Macau properties, which reflected the relative strength of its diversified, convention-based business. Nonetheless shares were sharply lower.

AutoNation (AN $21) reported adjusted 2Q EPS of $0.29, four cents above the Street's forecast. But the US' largest automotive retailer posted a 30% drop in sales to $2.6 billion, $200 million below analysts' expectations, driven primarily by lower new vehicle sales, which declined 38% compared to last year. AN's CEO said that long-awaited volume stabilization was accomplished, and the industry is now positioned for a "healthy rebound" when macroeconomic conditions—particularly consumer credit—improved. He added that going forward, the company expects a gradual improvement of new vehicle sales beginning in the second half of 2009, and it intends to increase its inventory of vehicles in a disciplined manner to meet demand. But shares are lower despite the upbeat comments on demand, possibly amid some concerns about the funding of the government's "cash for clunkers" sales incentive, which AN's CEO told Reuters attributed to a 36% jump in showroom traffic. He added that consumers are trading in domestics for imports under the “cash for clunkers” program. Shares fell.

Reports surfaced early today that the “cash for clunkers” program may have burned through the $1 billion in funding intended to incent consumers to trade in older vehicles for fuel-efficient cars in just one week. In response, White House spokesman Robert Gibbs told CNN that the program would be in place for anyone planning to make a car purchase this weekend and the House voted to expand the program in today’s session by an additional $2 billion, which will go to the Senate for a vote next week.

2Q GDP contracts at a smaller-than-expected rate, but consumer spending disappoints

Treasuries were higher today, with the yield on the 2-year note falling 6 bps to 1.11%, the yield on the 10-year note dropping 13 bps to 3.48%, and the yield on the 30-year bond declining 12 bps to 4.30%.

Advance Gross Domestic Product (chart) for 2Q, the first reading on the broadest measure of economic output, and considered a proxy for corporate profits, fell at an annualized rate of 1.0%, better than the expectation of -1.5%, and 1Q was revised from -5.5% to -6.4%. The Commerce Department makes comprehensive revisions every five years to improve and modernize its categories, and made revisions going back to 1929. While most revisions were minor, the headline takeaway is that the current recession was worse than previously expected, with real GDP dropping at a 1.9% annual rate compared to the earlier estimate of 0.8% from 4Q 2007 to 4Q 2008. Personal consumption fell 1.2% in 2Q, worse than the expectation of -0.5%, and 1Q was revised from a gain of 1.4% to a smaller gain of 0.6%. The GDP Price Index rose a scant 0.2%, smaller than the 1.0% expectation, and the core PCE Index, which excludes food and energy, increased 2.0% versus the 2.3% forecast. While the report is backward looking, it is closely watched due to its comprehensive nature and impact on monetary policy, and ability to show trends in different areas of the economy.

GDP is the combined total of consumption, government spending, investments (residential and nonresidential), and net exports (exports less imports). Despite being small in dollar figures, investment spending has been the largest negative contribution to the fall in GDP for the past three quarters, plunging at a 50% annualized rate in 1Q, and declining at a 20% rate in 2Q, characterized by a decrease in purchases of equipment and software and plunging inventories.

While consumer spending, which represents roughly 70% of GDP, continues to be weak, strength in net exports were able to outpace the decline in consumption. With imports falling more rapidly than exports, net exports added 1.4% to GDP.

Elsewhere, the Employment Cost Index (chart) for 2Q rose 0.4%, higher than the Bloomberg consensus of 0.3%.

In other economic news, the Chicago PMI (chart) improved from 39.9 in June to 43.4 in July, a larger improvement than the expected figure of 43.0. But a reading below 50 in the PMI signals a continued contraction. New orders jumped from 41.6 to 48.0 and employment conditions improved from 28.9 to 35.3 to help the larger-than-expected improvement in the gauge of manufacturing activity in the Mid-west.

Stocks show resiliency to preserve rally

After the past two weeks, which saw stocks rally sharply on economic enthusiasm fueled by largely better-than-expected profit reports as 2Q earnings season switched into high gear, the possibility of equity markets pausing this week for profit taking did not seem out of the question. A second-straight monthly drop in consumer confidence, a larger-than-expected drop in durable goods orders, lackluster demand displayed in $81 billion worth of two and five-year Treasury notes, and concerns that China may attempt to rein in its stimulus measures offered plenty of opportunity for traders to harvest profits.

However, when the final bell rang on Friday, the major averages posted advances to cap off the month, in which the bulls were spurred by 2Q earnings season to recover losses suffered across the board as the sustainability of the recovery seen since the March lows were put in came into question. Traders were somewhat encouraged by the way stocks ended multiple sessions showing late-day resiliency, overcoming early pressures. A much larger-than-expected increase in new home sales, a rise in durable goods orders after excluding transportation, continued improvements in key aspects of the weekly initial jobless claims report, and earnings that continued to paint a relatively positive picture did little to hurt the afternoon advances.

Focus on the job report in next week’s economic data

The ISM Manufacturing Index will be released Monday, forecasted to improve to 46.5 in July from 44.8 in June. The separation point between contraction and expansion is 50, and while the index is expected to indicate that manufacturing continues to decline, a level above 41.2 is consistent with growth in the overall economy, marking the third-straight month of growth. The production component rose to 52.5 in June, the first month of growth after contracting for nine months, however, orders disappointingly fell to 49.2 from 51.1.

The ISM Non-Manufacturing Index comes out on Wednesday and is expected to rise to 48.0 in July from 47.0 in June. New export orders rose to 54.5 from 47.0, the first time the index indicated growth since September 2008, while import orders were reported at 47.0. The outperform ratings on the industrials and materials sectors depend heavily on emerging market growth, supported at least in part by Chinese government spending.

The ADP Employment Change Report will also be released Wednesday, and while the report has not been a particularly accurate predictor of the government’s labor report, it has gained increased attention as another read on the employment situation. The forecast is that large private sector employers shed 335,000 jobs in July, an improvement from the 473,000 loss in June. The report showed job losses peaked in March, despite a peak in January for the broader labor report.

Nonfarm payrolls will cap off the week, with the Bloomberg survey of economists forecasting payrolls fell 340,000 in July, which would be better than the 467,000 decline seen in June. The unemployment rate is expected to continue to rise to 9.6% in July, up from 9.5% in June. June’s report was disappointing on many fronts, and the market sold off in the following sessions. The report marked a reversal in a trend of smaller job losses, flat average hourly earnings, and a decline in the average workweek, with declines in employment spread across many sectors.

Other reports on the economic calendar include construction spending, personal income and spending, pending home sales, MBA Mortgage Applications, factory orders, initial jobless claims and consumer credit.