Morning Update

PMorgan Earnings Ease CIT Group Concerns

Stocks have recovered back to the flat line in early action after JPMorgan, the nation’s second-largest bank, reported strong 2Q earnings. Markets were under pressure earlier after CIT Group announced its talks with the government over another bailout have failed, opening the door to a potential bankruptcy as early as tomorrow. Investors continue to be inundated with earnings reports today as Harley-Davidson results were better-than-expected after adjusting for some extraordinary costs, but the group announced that more layoffs and shipment reductions will be required as the company battles the recession. In other earnings news, Marriott and Cintas both turned in quarterly profits slightly ahead of analyst forecasts. Overseas, Europe is trading ahead despite a lowered outlook from Nokia, while better-than-expected Chinese GDP growth sparked a broad rally in Asian shares. In bond markets, Treasuries are higher after US jobless claims fell again.

As of 8:42 a.m. ET, the S&P 500 Index Globex futures is 1 point below fair value, the Nasdaq 100 Index unchanged, and the DJIA is 3 points above fair value. Crude oil is down $0.61 at $60.93 per barrel, and gold is lower by $0.57 at $938.63 per ounce.

Dow component JPMorgan Chase (JPM $36) beat earnings expectations, as the largest US bank to repay TARP funding earned $0.28 per share in 2Q, compared to the Street forecast of $0.04. That is still down significantly from earnings per share of $0.53 in the same period a year ago. 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.”

101-year old commercial lender CIT Group (CIT $2 ¹) announced 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 had already received over $2.3 billion in TARP funding last December. The US 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.

Harley-Davidson (HOG $17) released 2Q earnings ex-items of $0.45, above the average analyst estimate of $0.25. The motorcycle manufacturer reported net income of $19.8 million, although that was impacted by a $72.7 million credit loss provision and a $28.4 million write-off of goodwill, with both of these one-time charges related to HDFS, the group’s financial services division. Meanwhile, 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 cut costs. “It is obviously a very though environment for us right now,” said CEO Keith Wandell.

Marriott (MAR $22) 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.

Cintas (CTAS $23), which supplies corporate uniforms, announced that its 4Q earnings per share were $0.38, slightly ahead of analyst expectations of $0.37. Sales contracted 13% to $878.9 million. CEO Scott Farmer stated that “the U.S. economy continues to lose employment at a rapid rate, directly impacting our customers and prospects,” while emphasizing that CTAS remains profitable and continues to generate positive cash flow.

Treasuries rise as jobless claims fall again

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. 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 are higher in early action following the report.

Discussion surrounding the American consumer continues to be intense, as the outlook for that segment of the economy will likely go a long way to determining the path to recovery for the overall economy. The unemployment rate continues to move higher, which could compel even those with jobs to be more cautious about their spending. However, all is not gloomy on the consumer front as the government continues to attempt to flood the economy with money, at least some of which will find its way into consumers' pockets. Additionally, Americans have a propensity to spend, which leads us to believe that a sustained severe retrenchment is unlikely at this point.

The Philly Fed’s Business Activity Index is set to be announced at 10:00 a.m. ET. The index is expected to show deterioration in business conditions in the region, from -2.2 in June to -4.8 in July. A reading of zero suggests conditions are neither contracting nor expanding. Yesterday’s Empire Manufacturing Index report showed manufacturing activity in the New York region improved markedly to a level of -0.6, almost to the level of zero that suggests conditions are neither contracting nor expanding. That was much better than both the expected reading of -5.0, and the previous month’s -9.4 level, adding to sentiment that the manufacturing slump could be waning.

Later in the day, the National Association of Home Builders Index of builder confidence will be released at 1:00 p.m. ET, with economists expecting a slight improvement from 15 in June to 16 in July. A reading below 50 means most respondents still view conditions as poor.

US, Asian data aids Europe

European stocks have fluctuated most of the day, before moving more solidly into positive territory following the release of JPMorgan’s better-than-expected earnings report. Stocks were mixed prior to the report as a lowered forecast for market share from Nokia (NOK $16), the world’s largest mobile phone manufacturer, was being offset by accelerating economic growth in China. NOK shares are down sharply after the company beat earnings estimates but said it will not gain market share this year as it had previously predicted, as competition from the iPhone and BlackBerry remains intense. The Finland-based company shipped over 100 million phones during the quarter, at an average price of 62 euros, down from 74 euros a year earlier. Nokia repeated its forecast that the global handset market will likely shrink about 10% this year. In other corporate news, Electrolux (ELUXF $13), the world’s second-biggest appliance manufacturer, rallied after its profit beat forecasts. Most stock indices in Europe are currently up less than 1% following release of the data, with gains being extended recently as investors digest the earnings news in the US.

Chinese GDP growth can’t extend stock market gains

Even a stronger-than-expected gain in the country’s GDP couldn’t extend the Chinese stock market’s already strong gains. The Shanghai SE Index has rallied approximately 75% so far this year, taking shares to new 52-week highs as investors speculated that the country would do better than the rest of the world in the global recession. China has now overtaken Japan as the world’s second-largest stock market by value for the first time in 18 months, despite the fact that China’s economy is about a third smaller than that of Japan’s. Today’s report confirming that China’s economy expanded at a nearly 8% pace in 2Q, making it the fastest growing major economy in the world, spurred a broad rally throughout the rest of the region however, with energy and materials-related stocks leading the way. Japan’s Nikkei 225 Index gained 0.8%, while Hong Kong’s Hang Seng Index advanced 0.6%, and Australia’s S&P/ASX 200 Index rose 1.8% on the back of the report. As mentioned, Chinese stocks failed to advance however, with the Shanghai SE Composite Index down 0.1%.