Morning Update

Earnings Struggling to Boost Stocks Further

Stocks are lower in early action despite a string of positive earnings results, including an improved outlook from biotech giant Amgen. Earnings reports from Viacom, Coach, and Masco were all also inline or better than had been expected, but markets are struggling to find momentum to add to the already strong gains over the past two weeks that have pushed stocks to the highest level since last November. Meanwhile, Treasuries are strong as traders are considering this morning’s home price data, which showed prices continue to fall at a 17.1% pace, although the pace of decline has slowed in recent months. Consumer confidence data will also be released later this morning. In overseas action, European stocks have turned lower as Deutsche Bank and BP both gave cautious outlooks, while Asian stocks finished mixed as indexes in China and Hong Kong were able to overcome early weakness to finish in the green once again.

As of 8:53 a.m. ET, the September S&P 500 Index Globex futures contract is 6 points below fair value, the Nasdaq 100 Index is 8 points below fair value, and the DJIA is 47 points below fair value. Crude oil is down $0.70 at $67.68 per barrel, and gold is off $4.21 at $949.64 per ounce.

Amgen (AMGN $61) reported 2Q EPS ex-items of $1.29, well above the average analyst estimate of $1.16, while sales at the world’s largest biotech company fell 1% to $3.7 billion. AMGN also announced a deal with GlaxoSmithKline (GSK $39) to sell its bone drug to osteoporosis patients in overseas markets, and raised its full-year guidance to $4.80-4.95, from the previous level of $4.55-4.75. CEO Kevin Sharer reported that “concerns we had about the pressure of the recession on health care have moderated.”

Viacom (VIA $26) announced 2Q adjusted earnings of $0.49 per share, one penny better than the Reuters estimate. Sales at the media conglomerate were down 14% to $3.3 billion, slightly below the $3.5 billion forecast, due to a weak advertising market, video game sales, and box office results. CEO Philippe Dauman said that the economy continues to be a “challenge” for the company, but Viacom hopes to temper the impact of the recession on its results through diversified revenue streams and operational discipline.

Coach (COH $28) said it earned $0.43 per share in 4Q after adjusting for unusual items, inline with the level analysts had been expecting. Revenues at the luxury goods maker slumped 1% to $778 million, just shy of the $783 million forecast, as same-store sales at the firm’s North American locations dipped 6.1%. Management pointed out the significant improvement in its inventory levels during the quarter, and highlighted the fact that it avoided discounting its items in spite of the recessionary pressures it faced. In terms of the future outlook, CEO Lew Frankfort said the company will “plan cautiously until we see concrete evidence of a change in consumer behavior.”

Masco (MAS $12) released 2Q earnings of $0.15 per share, compared to a loss of $0.03 that had been predicted by analysts. Management noted that its results were impacted by pre-tax charges of $22 million and $15 million related to restructuring costs, but it did not detail the impact of those charges on its EPS figures. Meanwhile, revenues at the building product manufacturer declined 23% to $2.0 billion as weak sales of new home construction products weighed on results, although that was partially offset by better sales of paints and stains. Masco also raised its full-year outlook to a loss of $0.05-0.25, compared to its prior guidance of $0.15-0.35, although management still expects housing starts to decline 40% this year.

Bank of America (BAC $13 ¹) is reported to be closing approximately 10% of its 6,100 branches, according to the Wall Street Journal, which cited unnamed sources. The move is reported to be a result of changing customer preferences, with consumers increasingly migrating to online and mobile banking as opposed to visiting physical bank branches. BAC has yet to confirm the report.

Decline in home prices moderates

The economic calendar kicked off this morning with the S&P/Case-Shiller Home Price Index, which showed that prices fell 17.1% year-over-year (y/y) in May, better than the 17.9% expectation and better than the 18.1% fall seen in April. Although recent housing reports such as yesterday’s new home sales data have showed that sales volumes are picking up, home prices continue to fall. The home price index has fallen consistently every month since peaking in 2006, with the overall index falling more than 30% from its peak, although regional differences have been quite large. Some of the worst markets have been Phoenix and Las Vegas – both off more than 50% from their highs – while Dallas has suffered the least but is still down 10%.

The data continues to show a moderation in the rate of decline, although seasonal factors are making comparisons difficult as we are now heading into the seasonally strongest period for home sales. One of the factors weighing most heavily on housing prices is foreclosures, as foreclosed homes typically sell for 20% less than normal sales. RealtyTrac recently reported that foreclosures rose 20% year-over-year in 2Q, and 11% on a quarter-over-quarter basis. Going forward, foreclosures are expected to continue accelerating as foreclosure moratoriums and legislative mandated delays come to an end, and as unemployment levels continue to increase.
Later today, the Consumer Confidence Index will be released at 10:00am ET, and is forecast to decline slightly, falling to 49.0 in July from June's disappointing slide to 49.3, which followed back-to-back strong monthly gains. Separately, the Richmond Fed Manufacturing Index will be reported at the same time.

Deutsche Bank, BP forecasts weighing on Europe

Stocks in Europe have turned lower in afternoon action as traders are reviewing cautious outlooks from some of the region’s biggest companies today. Deutsche Bank (DB $74), Germany’s largest bank, reported that 2Q profit rose 68%, aided by strong performance in the bank’s trading department. However, DB shares are under pressure as the bank had to increase its provisioning for bad debts by approximately 1 billion euros – much more than analysts had been expecting. CEO Josef Ackermann told shareholders he remains “cautious” on the outlook, and the bank expects private and corporate insolvencies to increase going forward. Meanwhile BP PLC (BP $51), Europe’s second-largest oil company, is trading lower after the company reported 2Q earnings down 53% to $4.4 billion and warned that the outlook is still negative. CEO Tony Hayward told investors "we see little evidence of any growth in demand and expect the recovery to be long and drawn out." Hayward added, "we are in turbulent times, volatile and uncertain.”

Disappointment from Canon leaves Asia mixed

Stocks in Asia finished mixed, with Japan mostly lower but other markets such as China and Hong Kong in positive territory after recovering early losses late in the day. Mixed earnings reports weighed on Japanese markets – led by Canon Inc (CAJFF $33), the world’s largest maker of office equipment, which saw 2Q earnings slide 86%. Canon also reduced its annual revenue guidance due to “sluggish” demand for printers and copiers. Elsewhere in Japan, brewing company Sapporo Holdings (SOOBF $6) got some support after announcing a smaller-than-expected loss in its first half results. Meanwhile, Indian auto maker Tata Motors, owner of Jaguar Land Rover, gained more than 10% after reporting quarterly profit that beat analyst estimates. Indian stocks were down slightly after the Reserve Bank of India kept its borrowing rate unchanged at 3.25%.