Evening Update

Stocks Post Fourth-Straight Gain

After spending the first half of the day near the flat line, stocks ended higher, marking a fourth-straight daily gain. Early trading was dominated by an earnings beat by JPMorgan Chase that was largely previewed after Goldman Sachs announced a blowout quarter on Tuesday, as well as concerns about the possibility that CIT Group may become the next bank to be allowed to fail. In other earnings news, Nokia gave a cautious outlook, while better-than-expected earnings were reported by materials company PPG Industries, Harley-Davidson and Marriott. In economic news, jobless claims fell, but the Labor Department said that seasonal adjustments are impacting the numbers, and the Philly Fed manufacturing survey deteriorated. Treasuries were higher in a safety trade prompted by the CIT Group bankruptcy concerns.

The Dow Jones Industrial Average rose 96 points (1.1%) to close at 8,711, the S&P 500 Index increased 8 points (0.8%) to 941, and the Nasdaq Composite gained 22 points (1.2%) to 1,885. In light volume, 1.2 billion shares were traded on the NYSE, and 2.1 billion shares were traded on the Nasdaq. Crude oil rose $0.50 to $62.04 per barrel, wholesale gasoline was flat at $1.71 per gallon, and gold fell $1.92 to $937.28 per ounce.

Dow component JPMorgan Chase (JPM $36) beat earnings expectations, as the nation’s second-largest bank earned $0.28 per share in 2Q, compared to the Street forecast of $0.04. Revenue was also better than expected, at $28 billion compared with the $25.9 billion forecast by Reuters. 2Q results were hampered by “continued high levels of credit costs in consumer lending and card services,” which management said they expect to “remain elevated for the foreseeable future,” but that was offset by strong performances in the bank’s other divisions, including fixed income, commercial banking, and asset management. Addressing claims that the bank is not lending as it should, CEO Jamie Dimon commented, “we continued to lend, extending approximately $150 billion in new credit to consumer and corporate customers.” Dimon said loan loss reserves are probably "getting pretty close to their peaks," and added that bank is seeing "a little bit of a leveling off of delinquencies," while losses in the Washington Mutual banking units it acquired last fall are inline with its expectations so far. In a midday interview on CNBC, CFO Michael Cavanagh said that they have seen “some signs that maybe we’re getting close to being done with loan loss additions” and that “early bucket mortgage delinquencies,” those with people going late the first or second payment, had stabilized in the last 60-90 days in both dollars and volume. JPM shares ended nearly unchanged.

101-year old commercial lender CIT Group (CIT $0.41 ¹) plunged over 70% after announcing that its frantic discussions with the US government to secure another bailout package have failed, opening the door to a potential bankruptcy if the bank cannot secure another source of funding. "Discussions with government agencies have ceased," CIT said in a statement, with CNBC reporting that CIT could file for bankruptcy as early as tomorrow. According to the Wall Street Journal, the Fed carried out a stress-test of CIT earlier this week and concluded the company would need as much as $4 billion in additional funding, which regulators declined to provide due to concerns the bank lacked a viable business plan. CIT has already received over $2.3 billion in TARP funding last December, an investment the Treasury says it now will likely not recoup. The Treasury released a statement, claiming “even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies.” CIT provides lending to approximately 1 million customers, most of them small businesses, with the National Retail Federation claiming a CIT failure “cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.” CIT had assets of $75.7 billion as of March 31, making it a fraction of the size of Lehman Brothers, the largest bank to fail, which listed assets of $639 billion in its September 15 bankruptcy filing. Bloomberg reported that debt holders were holding calls today to discuss whether to swap some of their claims for equity.

Shares of Nokia (NOK $13) were down over 10% despite reporting 2Q EPS of 0.10 euro that beat the estimate of 0.09 euro, as it said it will not gain market share this year as it had previously predicted, as competition from the iPhone and BlackBerry remains intense. Management repeated its expectation that the global handset market will likely shrink about 10% this year. At the same time, the Finland-based company said its profit margin in the rest of the year will be similar to the 11.3% it showed in the first-half, which is lower than analysts’ consensus expectations of 17.4%.

Materials company PPG Industries (PPG $49) announced 2Q EPS of $0.89, higher than the $0.75 estimate, on revenues of $3.1 billion, lower than the $3.3 billion consensus. The maker of paint, glass and chemicals has struggled as its industrial and automotive customers have been hit hard during the recession. However, PPG said that sales were fairly consistent month-to-month in 2Q, giving a “degree of confidence that most markets have stabilized,” and expected demand to improve mildly in 3Q. The company noted that despite sales and earnings down versus the prior year, “cash generation was up 25%.” Shares rose.

Harley-Davidson (HOG $19) released 2Q earnings ex-items of $0.40, above the average analyst estimate of $0.25. Harley’s worldwide retail sales contracted 30% to $1.15 billion, slightly ahead of analyst forecasts. The company also said it needs to lay off another 1,000 workers and cut shipments. Harley had already announced it would reduce its staff by 1,700-1,800 in 2009 and 2010 in an attempt to reduce costs. “It is obviously a very tough environment for us right now,” said CEO Keith Wandell. As a result of volume reductions and restructuring activities, the company now estimates ongoing annual savings of $140-150 million, $70 million higher than original plans, with ’09 savings estimated to be $70-85 million, up from prior guidance of $20-25 million. Shares rose 8%.

Marriott (MAR $20) said its 2Q earnings fell 46% to $0.23, which was slightly above the average estimate of $0.21 from nine analysts surveyed by Bloomberg. The largest US hotel chain revealed that its sales declined 20% to $2.6 billion during the quarter. Looking ahead, the company said revenue per available room may shrink 20-23%, next quarter, while EPS should be in a range of $0.76-0.86 as the environment remains “difficult” according to CEO J.W. Marriott. The stock was lower in trading today.

Mosaic (MOS $50) gained more than 10% after Brazilian newspaper O Estado de S. Paulo reported that North America’s second-biggest fertilizer producer is the subject of a takeover bid from Brazilian commodity giant Vale S.A. (VALE $18) valued at $25 billion. Neither firm has commented on the report. Mosaic, which is 64% owned by privately-held Cargill Inc. has also been the subject of takeover speculation related to Australian behemoth BHP Billiton (BHPLF $28), according to Bloomberg.

Jobless claims fall, led by seasonal issues, while Philly Fed report is mixed

Weekly initial jobless claims (chart) fell more-than-expected, dipping 47,000 to 522,000, versus last week's figure that was upwardly revised by 4,000 to 569,000. The Bloomberg consensus called for claims to reach 553,000. Meanwhile, continuing claims were also down, plunging a record 642,000 to 6,273,000, versus the forecast of a much-smaller contraction to 6,850,000, possibly due to the end of the extended benefits provided under the stimulus plan in February. The Labor Department cautioned that seasonal issues related to closures at carmakers may have significantly impacted this index in recent weeks, as General Motors and Chrysler both accelerated shutdowns heading into bankruptcy. The four-week moving average, a less volatile measure, fell to 584,500 from 607,000 in the previous week. Treasuries were higher today, with the yield on the 2-year note down 5 bps to 0.96%, the yield on the 10-year note falling 8 bps to 3.53%, and the yield on the 30-year bond declining 6 bps to 4.43%.

The Philly Fed’s Business Activity Index (chart) showed that business conditions in the region deteriorated worse than expected, with the index falling from -2.2 in June to -7.5 in July. Economists surveyed by Bloomberg had predicted a level of -4.5 in the index. However, the index posted a sharp rise in June from -22.6 in May, and July saw a rise in orders to -2.2 from -4.8, soothing some of the disappointment. Regional reports have not been entirely consistent month-to-month during the stabilization period we’ve seen off the lows.

The National Association of Home Builders Index of builder confidence improved to 17 in July from 16 in June, better than the expectation of 15. While a reading below 50 means most respondents still view conditions as poor, builders are noting slightly better sales conditions, but expressed concerns about competing with foreclosed properties and a lack of credit for some potential buyers.

Tomorrow brings the first of a parade of housing data for June

Housing starts and building permits will be released tomorrow morning before the market opens. Housing starts are expected to show builders broke ground at an annualized rate of 530,000 homes in June, which would be roughly inline with the May level. The numbers can be somewhat unpredictable on a month-to-month basis due to erratic changes in weather and the volatile multi-family home market, but it appears that sales have started to stabilize at a low-level after dropping precipitously since January 2006 when the index peaked at an annualized level of more than two million homes.

Meanwhile, building permits, the more forward-looking indicator of future home construction, are expected to have increased 1.4% to an annual rate of 525,000. The building permits index has also shown signs of stabilizing, after reaching a record low level of 511,000 in March.

Economists view this index as an important indicator of future activity, not just in the housing market but in the economy as a whole because of the importance the housing sector has on economic activity. Because of this, the Conference Board uses building permits as one of the 10 statistics in its Index of Leading Economic Indicators (chart). The LEI index rose in both April and May; and all 10 indicators are now either stable or improving. This is one of the reasons we believe the recession may technically already be over, although the combination of the worst financial crisis since the Great Depression and bruised consumers will likely keep a lid on growth in the long term, and could even lead to a double-dip recession like in the early-1980s.