Morning Update

Rally Pauses for Breath

Stocks are under light pressure in early action as traders continue to weigh 2Q earnings reports and judge if the recent strong rally still has further to go. So far this morning, Honeywell, Verizon, and Corning all either beat or matched forecasts with their earnings reports, while Aetna missed and lowered its outlook for the second time in two months as rising medical costs continue to hamper its results. Meanwhile, Treasuries are under early pressure as traders await another reading on the housing sector that will be released later this morning. Elsewhere, Fed Chairman Ben Bernanke held a town hall style meeting over the weekend where he defended the Fed’s aggressive actions to fight the financial crisis over the past year and repeated his view that the economy will return to growth in the second half of the year, although unemployment will continue to rise. Overseas, stocks are mostly higher.

As of 8:53 a.m. ET, the September S&P 500 Index Globex futures contract is 1 point below fair value, the Nasdaq 100 Index is 4 points below fair value, and the DJIA is 2 points below fair value. Crude oil is up $0.25 at $68.30 per barrel, and gold is up $3.02 at $954.37 per ounce.

Honeywell (HON $34) earned $0.60 per share in 2Q, which matched analyst expectations. Meanwhile, the diversified technology and manufacturing group forecast per share earnings of $2.85 for the full-year, which is at the low end of its previous outlook, but still above the $2.83 average analyst forecast. CEO Dave Cote cautioned that economic conditions “remain challenging and we are not planning for any recovery in 2009."

Corning (GLW $17) released its 2Q earnings report, showing EPS of $0.39, which beat analyst forecasts of $0.32. The world’s biggest maker of LCD glass saw sales fall 18% to $1.4 billion, inline with analyst estimates of $1.36 billion. CEO Wendell Weeks reported that customers began to restock their LCD inventory during the quarter, and the pickup in demand has allowed Corning to restart some of its idled production. CFO James Flaws noted that “we are seeing signs that the impact of the global recession on our businesses may be moderating. That said, questions pertaining to the pace of economic recovery remain,” adding “we don’t expect the global auto industry and U.S. truck market to rebound quickly.”

Aetna (AET $24) announced adjusted 2Q EPS of $0.68, below the Reuters forecast of $0.78. Revenues increased 11% during the quarter to $8.7 billion, slightly above the $8.6 billion analyst estimate. The health insurer also reduced its full-year outlook for the second time in two months, now expecting to earn between $2.75-2.90 per share in 2009, after saying in June it would earn $3.55-3.70. Analysts are expecting earnings of $3.53 for 2009. The explanation for Aetna’s earnings slide continues to be higher commercial medical costs, which it is unable to fully pass on to consumers during the recession. CEO Ronald Williams commented, “this is disappointing, but it can be fixed.”

Dow component Verizon (VZ $32) reported adjusted 2Q earnings of $0.63 per share, slightly above the average analyst expectation of $0.62. Sales rose 11% to $26.9 billion, driven by wireless customer growth of 28%. VZ reported that its retail customer churn rate at 1.01% remains the best in the industry. Management also reported that its integration of Alltel operations remains on schedule.

Housing data on tap

The lone release on today’s economic calendar is new home sales, which will be released later this morning at 10:00 a.m. ET. New home sales are expected to have increased 2.9% in June to an annual rate of 360,000 units, after falling 0.6% in May. New home sales have so far failed to keep up with the pace of existing home sales, due to the discounts afforded by foreclosures.

Last Thursday, existing home sales were shown to have increased for the third-straight month in June, rising 3.6% month-over-month. That better-than-expected result was driven by single-family home sales as steep discounts due to foreclosures drove the median existing-home price down 15.4% year-over-year, enticing bargain hunters to get off of the sidelines. Distressed sales still accounted for 31% of sales in June, although that was lower than the 45% level reported at the start of the year.

Elsewhere, Fed Chairman Ben Bernanke held a town hall style meeting in Kansas City over the weekend, where he defended the government intervention in the economy over the past year. Responding to a question about government bailouts of private companies, Bernanke said "nothing made me more frustrated, more angry, than having to intervene," adding "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." On the economy, Bernanke repeated the Fed view that the economy will start growing again in the second half of the year, although that will not be enough to stop unemployment from rising. When asked about the government’s $787 billion stimulus package, Bernanke pointed out that most of the money will be spent in 2010, so "it might be a little bit early" to judge the plan’s effectiveness.

European rally continues despite negative airline outlook

Stocks in Europe are broadly higher in afternoon action as traders continue to bet that the recession will not be as severe as once feared. Ryanair (RYAAY $30) is under heavy pressure though after the low-cost airline warned that full-year results will be at the low end of its forecast. Ticket prices will be “significantly lower,” which is expected to contribute to the earnings weakness. Meanwhile, consumer confidence in Germany increased for a third-straight month, driven by falling inflation and belief in an improving economy. Economists had not been expecting any improvement in the index. In other equity news, SolarWorld (SRWRF $25), the third largest solar company in Germany, is enjoying a nice day after reporting 2Q earnings grew more than 15%, and confirming all of the firm’s previously-stated targets for 2009.

Nikkei returns to 10,000 level

Japan’s Nikkei 225 Index rose for the ninth-straight day, the longest winning streak in more than 20 years, bringing the index back to the 10,000 level. Generally positive investor sentiment and belief in an economic recovery continue to be the primary drivers of stock prices, sending shares across Asia broadly higher overnight. China’s Shanghai Composite Index was up again, now sitting at the highest level since June 2008, driven by the first IPO of the year. Toll-road operator Sichuan Expressway (SEXHF $0.45) sold shares for the first time in China and the stock more than tripled by the end of the first day of trading. Regulators in China had imposed a moratorium on IPOs that lasted nine months and was lifted in June. Elsewhere, South Korea’s Kospi Index gained more than 1% after a measure of consumer confidence in the region showed continued improvement to the highest level since 2002.