Evening Update

Stock Rally Still Alive

Stocks rose again today, maintaining a multi-session winning streak that has seen markets gain more than 7% as earnings season continues apace. Many of the nation’s largest companies, including Caterpillar, Coca-Cola, DuPont, Merck, and Texas Instruments all posted better-than-expected earnings this morning as the trend of largely-reassuring earnings reports persists. Revenue growth has been lacking for the most part, but companies have so far been able to offset that with cost cutting. Bank stocks weighed on markets today though, with the financial sector of the S&P 500 Index losing almost 1% based on a disappointing earnings report from Regions Financial and an announcement from CIT Group that even its newest rescue package may not be enough to keep it from bankruptcy. Meanwhile, Treasuries rallied sharply as Federal Reserve Chairman Ben Bernanke spoke today and quashed any rumors that the central bank will abandon its accommodative stance anytime soon, and as the CIT Group announcement renewed some investor interest in safe haven investments.

The Dow Jones Industrial Average rose 68 points (0.8%) to close at 8,916, the S&P 500 Index gained 3 points (0.4%) to finish at 955, and the Nasdaq Composite added 7 points (0.4%) to 1,916. In relatively light volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil rose $0.74 to $64.72 per barrel, wholesale gasoline increased $0.02 to $1.81 per gallon, and gold gained $0.16 to $948.85 per ounce.

Dow member Caterpillar (CAT $38 ¹) was up after announcing 2Q EPS ex-items of $0.72, well above the $0.22 estimate of analysts surveyed by Reuters, but revenues fell 41% versus the period a year ago to $8 billion. CEO Jim Owens cautioned that "there is still a great deal of economic uncertainty in the world," but there are early signs of stabilization, adding that, particularly in China, stimulus policies are “beginning to work.” The world’s largest maker of construction and mining equipment also raised its full-year EPS guidance to a range above analysts' estimates.

Coca-Cola (KO $50) reported 2Q comparable EPS of $0.92, down 9% compared to last year, reflecting a negative currency impact, but ahead of the Street's estimate which called for the Dow member to report EPS of $0.89. Revenues fell 9% to $8.3 billion, which came in below the Reuters estimate of $8.6 billion, but the company noted it had strong worldwide unit case volume growth of 4%, as a 1% volume decline in North America was offset by a 14% increase in China, and a 33% gain in India. KO was lower.

Dow member DuPont (DD $28) announced 2Q EPS ex-items of $0.61, above the $0.53 estimate that the Street had forecast, as consolidated net sales fell 22% to $6.9 billion, principally reflecting 19% lower volume. DD said its aggressive actions to improve productivity and cut costs across the company are paying off as it contends with continued weak demand in key segments. The company reaffirmed its full-year EPS guidance. Shares were unchanged.

Merck & Co. (MRK $30) was higher after reporting 2Q EPS ex-items of $0.83, topping the $0.77 Reuters estimate, and worldwide revenues declined 3% to $5.9 billion. The Dow component said its results were driven by solid growth from some of its largest drugs, including treatments for asthma, diabetes, and cholesterol, although that was offset by weakness in Merck’s cervical cancer vaccine, which saw sales fall 18%. MRK reaffirmed its full-year EPS guidance, and noted that its announced merger with Schering–Plough (SGP $26) is progressing as planned.

Texas Instruments (TXN $23) reported 2Q EPS ex-items of $0.25, two cents above the Street's forecast, as revenues of $2.5 billion also topped analysts' estimates of $2.4 billion. The company said its analog segment was the biggest driver of sequential growth this quarter and after sharp inventory corrections in its markets during the prior two quarters, its revenue levels are beginning to more closely reflect end demand. TXN offered 3Q EPS guidance that topped analysts' expectations. Nonetheless, TXN finished lower.

Dow member United Technologies (UTX $54) posted 2Q EPS of $1.05, one penny ahead of the Street's forecast, as revenues fell 17% to $13.2 billion. The aerospace and building technology company said benefits from cost reduction actions accelerated in the quarter and substantially offset the impact of a $2.7 billion revenue decline. UTX lowered its full-year revenue guidance and the high end of its previous EPS forecast. Shares were lower.

Lexmark International (LXK $15) was down sharply after reporting 2Q EPS ex-items of $0.55, five cents short of the Street's forecast, as revenues fell 21% to $905 million, also shy of analysts' estimates which called for the company to post $916 million in sales. The printer maker said global economic conditions continue to negatively impact the company and the overall distributed printing market. LXK issued guidance below the Street's forecast.

Airlines are reporting quarterly results today, led by UAL Corp (UAUA $4)—the parent of United Airlines—which traded higher after it posted a 2Q loss of $2.23 per share, a smaller-than-expected shortfall than the $2.56 per share loss that analysts had anticipated. Elsewhere, Southwest Airlines (LUV $7) reported 2Q EPS ex-items of $0.08, one cent ahead of expectations but shares were lower as it said due to weak travel demand and fuel price volatility, it cannot predict a profitable 3Q. And shares of Continental Airlines (CAL $9) were also under pressure after it reported a $1.36 per share loss for 2Q, which was slightly smaller than the $1.37 per share loss that was expected.

Regions Financial (RF $3) was down approximately 15% after the bailed-out lender reported a loss during 2Q of $0.28 per share, which was worse than the average analyst forecast, which called for a loss of just $0.20 per share. RF reported that its total loan book was down approximately 1% as non-performing loans increased by $977 million to a total of $2.6 billion, while net loan charge-offs increased to an annualized level of 2.1%. Management added that the $2.5 billion government loan it received helped improve balance sheet strength, with the bank’s Tier 1 capital ratio increasing to 12.2% during the quarter.

Outside of the earnings front, CIT Group (CIT $1 ¹) confirmed that it reached an agreement with bondholders for $3 billion in rescue financing, but the company warned today in its regulatory filing that it could still be forced to file for bankruptcy unless it can further restructure its future balance sheet obligations. CIT reported that it still does not have enough liquidity available to fully cover the approximately $1 billion in variable-rate bonds due August 17. Instead, management has proposed a cash tender offer, offering bondholders 82.5 cents on the dollar. "The disruptions in the credit markets that began in 2007... have materially worsened in the first and second quarters of 2009," the company said, adding “we will require significant additional funding during the remainder of 2009 and beyond to operate our business.”

Bernanke testifies on Capitol Hill

With the economic calendar void of any key economic releases, Treasuries began the day lower but later rallied to strong gains as traders listened to Federal Reserve Chairman Ben Bernanke's semi-annual monetary policy report before the House Financial Services Committee. The yield on the 2-year note fell 7 bps to 0.91%, the yield on the 10-year note dropped 14 bps to 3.47%, and the yield on the 30-year bond lost 14 bps to 4.38%.

Bernanke’s testimony reiterated that the pace of the economic decline appears to have slowed significantly, and consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009. He added that the labor market, however, has continued to weaken.

The Fed's exit strategy from the massive amounts of stimulus measures deployed to try to stem the global recession seems to be the main focus of the Street and Bernanke offered comments regarding where the Federal Open Market Committee stands. He affirmed that the FOMC believes a highly accommodative stance will be appropriate for an extended period. "However, we also believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation," the Fed Chief told the House Financial Services Committee.

Bernanke added that the Committee is confident that it has the necessary tools to implement that strategy when appropriate, reiterating comments he made this morning in a Wall Street Journal article. Bernanke said, to some extent, Fed policy measures will unwind automatically as the economy recovers, but should economic conditions warrant a tightening of monetary policy before this process of unwinding is complete, there are a number of tools available that will enable it to raise market interest rates as needed. He outlined some of the tools, such as raising interest rates on balances held at the Fed by depository institutions, reverse repurchase agreements to drain liquidity from the system, and if necessary, outright sales of Fed holdings of longer-term securities.

Tomorrow’s economic calendar is also free of major economic reports, with Thursday’s existing home sales report being the central focus for traders this week.