Morning Update

Earnings Fail to Impress, Markets Digest Week’s Gains

Markets are hovering near the flat line, after earnings reports today failed to impress enough to build on the week’s already robust rally, leaving bulls searching for the next catalyst to move stocks higher. Stocks got a boost earlier this week from strong earnings from JPMorgan Chase and Intel, and results today, while largely better-than-expected, had some disappointments, with General Electric and Google missing revenue estimates and providing cautious commentary. Meanwhile, earnings from Bank of America, Citigroup, IBM and Mattel also beat analyst estimates. CIT Group continues to be in the news, with mid-session reports of the possibility of short-term financing. Strong economic news that housing starts and building permits continue to rise is pressuring Treasuries. Overseas markets were higher, despite a terrorist attack in Indonesia termed the worst since 2005.

At 12:58 p.m. ET, the Dow Jones Industrial Average is nearly unchanged, while the S&P 500 Index and the Nasdaq Composite are falling 0.3%. Crude oil is up by $1.44 at $63.46 per barrel, wholesale gasoline is higher by $0.05 at $1.76 per gallon, while gold is advancing $1.25 to $937.03 per ounce.

CIT Group (CIT $0.80 ¹) is rallying after Reuters is reporting that the company is in talks with JPMorgan and Goldman regarding $2-3 billion in short-term financing. CIT has not commented on the Reuters report.

The company released a statement after markets closed yesterday that the bank is in discussions with potential lenders, and that its board of directors and management are evaluating alternatives to meet the company’s impending liquidity crisis. Separately, the Wall Street Journal reported that a group of CIT’s largest bondholders held a meeting yesterday where they discussed a potential plan to exchange $5 billion of bonds they hold for equity. Meanwhile, White House spokesman Bill Burton responded to questions about why the government had refused to inject capital into the bank, telling reporters that policymakers have decided to set the bar high for granting taxpayer aid to firms needing emergency bailouts. "A lot of that had to do with whether or not they could show themselves to be sustainable in the long term," Burton said. As has been widely reported, CIT could file for bankruptcy as soon as today if the bank cannot put an emergency plan in place to address its imminent liquidity crisis.

Dow member General Electric (GE $12 ¹) reported 2Q earnings ex-items of $0.26 per share, down by nearly half from the level GE earned in 2Q last year, but still above analyst forecasts of $0.24. Sales fell 12% on a currency-adjusted basis to $39.1 billion, which was somewhat disappointing as most analysts had only expected revenues to decline by 10%. CEO Jeff Immelt noted that the environment remains “challenging,” but management continues to “position GE to win in a reset economy.” Earnings were lower in all business units except for the energy infrastructure unit, although GE noted that its global operations continue to contribute strong growth, with industrial sales up 31% in China, 46% in India, and 10% in the Middle East. As for the firm’s finance arm, GE Capital, Immelt announced that it “remains on track to be profitable for the full year.” The stock is lower.

Google (GOOG $428) earned $5.36 per share in 2Q, above the Reuters estimate of $5.09. Revenues increased 3% to $5.52 billion, slightly ahead of the $5.49 billion consensus forecast. CEO Eric Schmidt remarked that business appears to have stabilized, but it is "too early to tell" if a full economic recovery is imminent. Management said YouTube could begin making a substantial profit sometime soon, noting that advertising, such as pre-roll ads on videos were gaining traction. The stock is under moderate pressure.

Bank of America (BAC $13 ¹) said its 2Q EPS fell 25% to $0.33, ahead of analyst predictions of $0.29. Forecasts from analysts varied widely, ranging from a loss of $0.11 to a gain of $0.50, as the bank has undergone drastic changes in the past year. BAC announced that its credit card services division swung to a loss of $1.6 billion during the quarter, from a $582 million profit in the same period last year, as more borrowers fell behind on payments. Meanwhile, net charge-offs rose 25% to $8.7 billion, and nonperforming loans jumped 21% to $31.0 billion. CEO Ken Lewis warned that "Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010." The stock is trading down modestly.

Citigroup (C $3) announced 2Q EPS of $4.3 billion, or $0.49 per share, although a gain of $6.7 billion from selling control of its Smith Barney brokerage business added to results. Citigroup did not provide comparable figures, but excluding that gain, Citi had an operating loss of approximately $0.27 per share, which was better than the loss of $0.33 per share that was the average analyst estimate. The operating loss from Citigroup contrasts with positive quarterly earnings reported from Bank of America, Goldman Sachs (GS $157), and JPMorgan Chase (JPM $37), three of the other five largest banks in the country, as Citigroup continues to be particularly hard hit by the credit crisis. Citigroup aggressively cut costs during the quarter, resulting in operating expenses falling 21%, with CEO Vikram Pandit reassuring investors, "we remain optimistic that our turnaround of Citi will gain speed." Pandit, who took the company’s reigns in 2007 following the ousting of Chuck Prince, said in a speech earlier this week that he expects slow US economic growth in coming years as Americans are now saving more and borrowing less. Shares are higher this morning, although still down more than 80% over the past year.

Dow member International Business Machines (IBM $114) released 2Q earnings, showing the technology bellwether earned $2.32 per share, compared to the Street forecast of $2.02. Sales fell 13% to $23.5 billion, roughly in line with analyst expectations. Management is now guiding to full-year earnings per share of "at least $9.70," compared to its previous forecast of $9.20. "We are well ahead of pace for our 2010 roadmap of $10 to $11 per share," CEO Samuel Palmisano said. IBM is gaining after the report.

Mattel (MAT $17), the world’s number one toymaker, announced that its earnings nearly doubled to $21.5 million, or $0.06 per share, much better than the average analyst forecast of $0.01. Sales slipped 19% to $898 million, with US sales off 12%, and international sales declining 26%, including unfavorable exchange rates that knocked 10 percentage points off of growth. CEO Robert Eckert noted that the results “met our expectations.” The stock is up over 5%.

Surprising jump in housing starts gives investors hope the sector is stabilizing

Housing starts and building permits (chart) came in today stronger than expected, adding to investor hopes that the struggling sector may finally be stabilizing. Housing starts peaked at an annualized level of more than two million homes back in January 2006, and have since plummeted by almost 75% before starting to level off at last this spring. This morning’s report showed that builders broke ground at an annualized rate of 582,000 homes in June, which was higher than economists’ expectation of 530,000. At the same time, May figures were revised up to 562,000. Importantly, the single-family homes component of the index showed a 14% increase. Single-family homes constitute almost three-fourths of the index, but the smaller multi-family home market can oftentimes account for most of the fluctuations in the data, due to its more volatile nature. Both overall starts and single-family starts have now increased for two consecutive months, increasing the likelihood that demand has at last leveled-off, after starts hit a record low level of 479,000 in April, in one of the worst housing markets in US history. Take note though, that June’s better-than-expected figure is still almost 50% lower than the same period last year, so conditions in the industry remain severe.

At the same time, building permits, the more forward-looking indicator of future home construction, increased 9% to an annual rate of 563,000, again comfortably above the forecasted level of 524,000. The building permits index also appears to have stabilized, rising each of the past two months after reaching a record low level of 498,000 in April. That brings the index back to the level of December, but still almost 50% lower than the level seen in June 2008. Treasuries fell following the reports, after starting the morning higher.

Fading US pessimism lifts European shares

Stocks in Europe rose as earnings season in the US has brought few of the negative surprises that some investors had feared. The UK’s FTSE 100 Index was boosted by a gain in British Airways (BABWF $2) as the London-based carrier announced plans to improve its balance sheet. Europe’s third-largest airline will look to boost the cash on its balance sheet by approximately 600 million pounds ($979 million), with CEO Willie Walsh stating that “trade conditions are very difficult.” Chairman Martin Broughton had said earlier this week that the airline was looking to do something about its balance sheet as the recession meant the firm “would be stretching” for cash reserves. Today’s announced financing deal would make BA one of the most well-capitalized airlines in the industry. “Relative to any of our competitors, that puts us in a very, very strong position,” Walsh said.