Evening Market Update

Stocks Pause, Anxiously Await Debt Ceiling Resolution

US equities finished the day modestly lower, as enthusiasm from yesterday’s possible breakthrough in the debt ceiling negotiations seemed to fade, with attention shifting to a new budget plan emerging in the Senate. An unexpected drop in US existing home sales did little to help the equity markets, although the report was somewhat offset by a jump in mortgage applications. Corporate earnings continued to dominate the equity front, highlighted by a blow-out report from Apple after yesterday’s close. Additionally, Dow member United Technologies and CSX Corp both beat the expectations of analysts, Yahoo fell short of its earnings forecast, and AMR Corp posted a wider-than-expected loss but announced the largest aircraft order in aviation history. In M&A news, Nalco Holding Company and Ecolab Inc announced a merger agreement worth about $5.4 billion, while investment firm Citadel LLC urged E*Trade Financial Corp to hold a special investor meeting to discuss plans to boost performance, including a possible sale, and the removal of two Board members. Treasuries finished lower.

The Dow Jones Industrial Average fell 16 points (0.1%) to 12,572, the S&P 500 Index declined 1 point (0.1%) to 1,326, and the Nasdaq Composite lost 12 points (0.4%) to 2,814. In moderate volume, 796 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.64 to $98.14 per barrel, wholesale gasoline rose $0.03 higher to $3.14 per gallon, and the Bloomberg gold spot price increased $11.75 to $1,600.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 74.81.

Apple Inc. (AAPL $387) reported fiscal 3Q earnings of $7.79 per share, well above the $5.85 consensus estimate of analysts surveyed by Reuters, with revenues jumping 82% year-over-year (y/y) to $28.6 billion, exceeding the $25.0 billion that the Street had anticipated. The company said iPhone sales spiked 142% y/y to 20.3 million units, iPad sales surged 183% y/y to 9.3 million units, and it sold nearly 4 million Macs, a 14% y/y rise, while iPod sales declined 20% y/y to 7.5 million units. In typical company fashion, AAPL issued 4Q guidance that was below analysts’ expectations. Shares were up solidly. 

Yahoo Inc. (YHOO $13) announced 2Q EPS of $0.18, one penny below the Street’s forecast, with revenues excluding traffic acquisition costs (TAC) declining 5% y/y to $1.1 billion, roughly inline with analysts’ expectations. The world’s second-largest internet search engine issued 3Q guidance that fell short of the Street’s expectations. YHOO traded solidly lower.

Dow member  United Technologies Corp. (UTX $87) posted 2Q profits of $1.45 per share, above the $1.41 that analysts were expecting, with revenues increasing 9% y/y to $15.1 billion, topping the $14.7 billion that the Street had projected. UTX raised its full-year guidance, but shares were under solid pressure.

AMR Corp. (AMR $5) reported a 2Q net loss of $0.85 per share, wider than the $0.78 shortfall that analysts forecasted, as fuel prices increased 31% y/y, with revenues increasing 7.8% y/y to $6.1 billion, matching the Street’s estimates. Separately, the parent of American Airlines announced the largest aircraft order in aviation history, agreeing to acquire 460 narrowbody aircraft from Dow member Boeing Co. (BA $72) and European Aeronautic Defence & Space Co. (EADSY $35)—the parent of the Airbus aircraft—with an option to acquire 465 additional aircraft through 2025. This is the first time in two decades that Airbus will be able to make planes for the US airline, per Bloomberg. Shares of AMR traded lower, while BA and EADSY moved higher.

CSX Corp. (CSX $25) was the first major rail company to report 2Q results, achieving $0.46 per share in profits, two cents above analysts’ estimates, with revenues growing 13% y/y to $3.00 billion, mostly inline with the Street’s view. The company said revenues were driven by volume growth, pricing that reflects the value of freight rail transportation, and recoveries that offset higher fuel prices. Despite the results, shares were lower.

In M&A news, water, energy and air company  Nalco Holding Company (NLC $36) and cleaning, sanitizing, and food safety firm Ecolab Inc. (ECL $51) announced a definitive agreement to merge in a deal worth about $5.4 billion. NLC surged over 20%, while shares of ECL were under solid pressure.

Elsewhere, E*Trade Financial Corp. (ETFC $15) was sharply higher after privately-held investment firm Citadel LLC, which is the online brokerage firm’s largest stakeholder, urged the company to hold a special investor meeting to discuss plans to boost performance, including a possible sale, and the removal of two ETFC Board members. Citadel gained a 9.8% stake in ETFC after investing $2.5 billion in late 2007, possibly helping the company avoid failure amid the financial crisis. Citadel noted in a letter to the company that ETFC’s Board “must take immediate action to consider how best to maximize shareholder value,” as it has seen “stunning losses” for the company, due to its “poor management decisions.” Citadel added that, “We believe a sale of the company could be achieved promptly and generate significantly higher shareholder value.” ETFC has not commented on the letter.

Existing home sales unexpectedly dipped, while mortgage applications jumped

Existing home sales , unexpectedly fell, declining 0.8% month-over-month (m/m) in June to an annual rate of 4.77 million units, compared to the increase to 4.90 million units forecasted by economists surveyed by Bloomberg, and May’s decline to 4.81 million units was unrevised. Existing home sales reflect closings from contracts entered one to two months earlier and the National Association of Realtors (NAR) said the surprising decline in June came amid an unexpected spike in contract cancellations.

The NAR noted that the “underlying reason for elevated cancellations is unclear,” but with problems including tight credit and low appraisals, 16% of NAR members reported a sales contract was cancelled in June, up from 4% in May. Elsewhere in the report, sales were down 8.8% y/y, when sales were boosted by the originally-scheduled June 2010 deadline for the home buyer tax credit. However, the median existing-home price was up 0.8% from a year ago to $184,300, and was 10.7% higher m/m. The supply of homes increased by 3.3% m/m to 3.77 million units, equating to 9.5 months of supply at the current sales pace, up from 9.1 in May. Single-family home sales were unchanged m/m, and multi-family sales fell by 7.0%.

First-time buyers accounted for 31% of sales in June, down from 35% in May, while investors continued to account for 19% of the total, up from 13% a year ago. Also, distressed home sales—homes that are generally sold at deep discounts—accounted for 30% of sales, down from 31% in May. Sales gains in the Midwest and South were offset by declines in the Northwest and West.

In other housing news, the MBA Mortgage Application Index jumped 15.5% last week, after the index that can be quite volatile on a week-to-week basis, fell by 5.1% in the previous week. The solid increase came as a 23.1% surge in the Refinance Index more than offset a 0.1% dip in the Purchase Index. Elsewhere, the average 30-year mortgage rate ticked lower by 1 basis point (bp) to 4.54%.

Treasuries were mostly lower despite the declines in the equity markets and the home sales data, as the yield on the 2-year note was unchanged at 0.38%, the yield on the 10-year note gained 6 bps to 2.94%, and the 30-year bond rate advanced 7 bps to 4.26%.

Europe optimistic ahead of tomorrow’s emergency eurozone summit

European leaders are set to meet tomorrow to discuss the eurozone’s debt crisis and a plan to help Greece get its debt issues under control. However, hopes for a single solution to emerge from the meeting are low, especially after German Chancellor Angela Merkel said that “further steps will be necessary, not just one spectacular event which solves everything.” Meanwhile, a report suggested that euro-area officials were considering steps to boost the capital positions of the region’s banking sector, through the use of credit lines and the enablement of the eurozone’s 440 billion-euro rescue fund, per Bloomberg. Elsewhere on the European economic front, German producer prices came in slightly above economists’ forecasts for June, Italian industrial orders rose more than anticipated for May, and the Bank of England’s (BoE) release of its policy meeting minutes showed members voted 7-2 to keep its benchmark interest rate unchanged.

There were no major economic releases out of the Asia/Pacific region, while back in the Americas, Canada reported a 1.9% increase in wholesale sales in May, compared to the 0.1% rise expected by economists.

Tomorrow’s US economic calendar will yield the Philly Fed Manufacturing Index, expected to rise to 2.0 in July, after unexpectedly plunging to -7.7 in June, with a reading of zero the separating point between expansion and contraction. Additionally, weekly initial jobless claims will be released, with economists looking for an increase to 410,000 from a previous level of 405,000.

Releases on the international front include UK retail sales and consumer confidence, as well as PMI manufacturing and services reports from the eurozone, France and Germany. Additionally, the Brazilian central bank will conclude its monetary policy meeting, with economists expecting a 25 bps increase in the target interest rate to 12.50%.