Morning Update

More Early Morning Weakness from Stocks

Stocks are again lower in early morning trading, continuing a recent trend that has seen stocks open weakly, although several late-day rallies have helped markets avoid losses in recent trading sessions. Earnings announcements so far today have been mostly positive, led by reports from Time Warner and WellPoint, although Sprint Nextel disappointed investors with a larger-than-expected loss. Yahoo and Microsoft are also attracting attention as the two tech giants have reported an agreement to cooperate in the internet search arena. Elsewhere, Treasuries are higher after mortgage applications fell and durable goods orders dropped, although ex-transportation, orders were higher. Overseas, earnings reports are driving European markets higher, while concerns that China is looking to slow its rapid economic growth weighed on Asian shares.

As of 8:53 a.m. ET, the September S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 49 points below fair value. Crude oil is down $1.27 at $65.96 per barrel, and gold is off $2.70 at $934.80 per ounce.

Yahoo! Inc (YHOO $16) and Microsoft (MSFT $24) revealed that they have signed a deal to form an internet search partnership. The agreement will give Yahoo access to Microsoft’s newly designed Bing search technology, and give Microsoft access to Yahoo’s sales force. A press conference will be held later today to provide more details. MSFT had already offered to acquire all of YHOO last year for $47.5 billion, although Yahoo rejected the offer.

Time Warner Cable (TWC $34) posted 2Q EPS ex-items of $0.45, above the $0.37 estimate of Reuters. Sales dipped 9% to $6.81 billion, below the $6.97 billion forecast as slumping ad revenues continue to hamper results for the media conglomerate. Following the report, TWC reaffirmed its full-year target of $1.98 in EPS, roughly in line with the 2008 earnings level.

Sprint Nextel Corp (S $5), the US’s third-largest wireless provider, reported a 2Q loss ex-items of $0.04 per share, wider than the loss of $0.01 that analysts had forecast. Revenues dropped 10% to $8.14 billion as Sprint lost a net 257,000 subscribers during the quarter, with a loss of 991,000 postpaid customers being partially offset by a gain of 938,000 prepaid customers, with further lost customers coming from wholesale and affiliate subscribers. “We are not satisfied that we lost a quarter of a million customers in the quarter,” CEO Dan Hesse told investors. Yesterday Sprint Nextel announced a deal to acquire Virgin Mobile USA (VM $5) for $483 million, which is expected to improve Sprint’s prepaid business, as competition for the more lucrative postpaid customers has become more intense.

Health insurer WellPoint (WLP $54) announced 2Q adjusted EPS of $1.50, above the $1.43 that analysts had forecast. Revenues fell 2% to $15.41 billion as WLP’s total membership slipped 3% to 34.2 million, and premiums fell 1.5%. Management also reported that they withdrew from some Medicaid programs "for which actuarially sound reimbursement could not be obtained." WellPoint reaffirmed its full-year guidance for earnings of $5.06-5.12 per share, including net investment losses of $0.54 per share.

Durable goods orders fall, mortgage applications drop

Durable goods orders (chart) fell 2.5% in June, below the 0.6% drop that had been forecast and below the 1.3% revised increase seen in May. However, ex-transportation (chart), orders actually increased 1.1%, compared to the forecast of 0.0% growth and the revised 0.8% increase in May. The monthly orders data can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data. When examining the trend in this report though, it appears that the sharpest fall in new orders is now behind us as the economy is beginning to recover from the sharp contraction that began last fall.

The US MBA Mortgage Application Index fell 6.3% last week after rising 2.8% in the previous week, in an index that can be quite volatile on a week-to-week basis. The drop was attributed to the Refinance Index, which fell 11%, while the Purchase Index was little changed. Helping to explain the decline was an increase in the average 30-year mortgage rate to 5.36% from 5.31% the previous week as rates have increased steadily above the record low of 4.61% that was reached at the end of March.

The Federal Reserve Beige Book will be released later today at 2:00 pm ET, in anticipation of the next FOMC policy meeting in two weeks (economic calendar). The report is a summary of anecdotal economic information from all 12 Federal Reserve Districts and the market pays attention to it not just because it will be used by the Fed as it sets monetary policy, but also because it provides a more timely reading of current economic conditions than most other reports. In the last Beige Book, which was released in June, five of the twelve District Banks reported a moderation in the rate of economic decline, although the report noted that credit conditions remain tight and employment conditions are difficult, with wages generally flat or falling. The expectation is that this Beige Book will confirm the view that the economy is gradually recovering although pockets of weakness remain.

Earnings drive Europe

Stocks in Europe are higher in afternoon action as traders pour over a number of earnings reports. Automaker Daimler (DAI $43), reported a quarterly loss of 1.06 billion euros, although that was better than the loss of 1.5 billion euros that analysts surveyed by Reuters had been expecting. Daimler also forecast a “gradual improvement” in its profit in the coming months. Meanwhile, ArcelorMittal (MT $37) announced a larger-than-expected 2Q loss – partly due to a large exceptional pretax charge – but the world’s largest steelmaker gave investors some cause for optimism when it said it expected the first half of the year to be “the bottom of the cycle.” ArcelorMittal’s CEO commented, "In recent weeks we have started to see some initial signs of recovery, as a result of which we are now planning to re-start production at some facilities. Provided there are no further unexpected economic deteriorations, we should see continued gradual improvement throughout the second half of the year, with full recovery remaining slow and progressive.” Economic news is also lending some support to European shares, as the ECB released its bank lending survey, showing that just 21% of European banks tightened credit standards for lending in 2Q, down from 43% in the prior quarter.

China leads Asia lower

Stocks in Asia finished mostly lower, led by China’s Shanghai SE Composite Index which lost 5% of its value. According to domestic media reports, China’s two largest state-owned commercial banks, Industrial and Commercial Bank of China (ICBAF $1.83) and China Construction Bank (CICHF $0.81) have capped their 2009 lending targets. Neither bank confirmed the reports but the expectation that credit growth will slow combined with existing fears that the government will attempt to tighten its monetary policy to spark the sell-off in equity markets. The weakness in China extended to other markets as well, with stocks in India, Thailand, and Vietnam all losing at least 1%. Meanwhile, Japan was one of the few markets in Asia to finish in the green. The Nikkei 225 Index gained 0.3%, led by a forecast from the country’s most visited web portal, Yahoo Japan (YAHOF $315), which said its earnings in the six months ended September 30 will grow by more than 8%.