Morning Update

Earnings Remain in Focus, But Fail to Soothe Caution

Stocks are in the red in morning action as the Street mulls over another full slate of earnings reports. Financials are under pressure after Morgan Stanley reported a much larger-than-expected loss, which is offsetting Wells Fargo's big beat of its bottom line forecasts. Traders are taking the opportunity to books some profits from the steep rally seen on Wall Street recently, which is overshadowing better-than-expected profit reports from Apple, Boeing, and Pfizer. Elsewhere, Yahoo's 2Q earnings report, which topped expectations is being dampened by its disappointing 3Q EPS outlook. Treasuries are mixed as mortgage applications rose for a third-straight month and as traders await the second-day of testimony on Capitol Hill by Federal Reserve Chairman Ben Bernanke. Overseas, markets are mixed.

As of 8:53 a.m. ET, the September S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 52 points below fair value. Crude oil is down $1.34 at $64.27 per barrel, and gold is down $1.85 at $946.65 per ounce.

Apple (AAPL $152) reported fiscal 3Q EPS of $1.35, well above the Reuters estimate of $1.18, as revenues rose about 12% to $8.3 billion, which also topped the Street's estimate. The company sold 2.6 million Macintosh computers during the quarter, a 4% increase versus a year ago, quarterly iPhone sales surged 626% to 5.2 million units, while sales of iPods fell 7% to 10.2 million units. In typical AAPL fashion, the company issued conservative 4Q revenue and earnings guidance that came in below analysts' expectations.

Dow member Boeing (BA $43 ¹) announced 2Q EPS rose 22% to $1.41, on top of the Street's forecast of $1.21, as revenues rose 1% to $17.2 billion, which was just shy of analysts' expectations. The aerospace firm said results were driven by growth in defense programs and strong performance in defense and commercial airplanes. BA reaffirmed its full-year EPS guidance and said it is still currently assessing schedule and financial implications from the requirement to reinforce an area within the side-of-body joint of its 787 Dreamliner, which led to the company again delaying the first flight of the new plane.

Fellow Dow component Pfizer (PFE $16) reported 2Q EPS ex-items of $0.48, one penny ahead of analysts' estimates, but revenues of $11 billion came in short of the $11.3 billion, which had been forecast. The company said foreign exchange unfavorably impacted revenues by approximately $1.1 billion, as US revenues fell 5% and international revenues decreased 12% versus last year. PFE raised its full-year EPS guidance at the low end of its previous 2009 revenue outlook.

Wells Fargo (WFC $25) posted an 81% increase in net income to $3.2 billion, resulting in 2Q EPS of $0.57, easily topping the Street's forecast of $0.34. Revenue rose 28% from 1Q on an annualized basis to $22.5 billion, with a 19% increase in legacy Wells Fargo revenue to $13.6 billion, while recently-acquired Wachovia contributed 39% of consolidated revenue. The company said it had broad-based revenue contribution from diverse businesses. WFC's net interest margin rose 14 basis points from 1Q to 4.3% and its extended $206 billion of credit to customers during the quarter.

Morgan Stanley (MS $28) is lower after reporting a 2Q loss of $1.37 per share, much larger than the Reuters estimate, which called for the company to post a $0.53 per share loss. Net revenues for the quarter were down about 11.5% to $5.4 billion, which was slightly better than the Street's forecast. MS said it delivered strong results in investment grade and distressed debt trading and achieved solid performance in global wealth management, but revenues were hurt by continued tightening of its credit spreads on certain long-term debt.
Yahoo (YHOO $17) reported 2Q EPS of $0.10, two cents above analysts' expectations, as revenues fell 13% to $1.6 billion. The number two internet search engine issued 3Q earnings guidance that came in below the Street's expectations.

Mortgage applications rise for third-straight week, Bernanke back on the Hill

The US MBA Mortgage Application Index rose for a third-straight week, increasing 2.8% for the week ended July 17, following the prior week's 4.3% growth, in an index that can be quite volatile on a week-to-week basis. The advance was attributed to the Refinance Index, which gained 4.0%, and a 1.3% advance in the Purchase Index. The rise in mortgage applications came despite the Mortgage Bankers Association (MBA) saying the average 30-year mortgage rate rose from 5.05% to just 5.31%, still solidly above the record low of 4.61% that was reached at the end of March. Treasuries are mixed in morning action.

Later today, Federal Reserve Chairman Ben Bernanke will complete his semi-annual monetary policy testimony on Capitol Hill as he will go in front of the Senate Banking Committee at 10 a.m. ET. Bernanke's testimony is expected to be similar to what he said yesterday in front of the House Financial Services Committee where he reiterated that the pace of the economic decline appears to have slowed significantly, and that the labor market has continued to weaken, with unemployment apt to stay uncomfortably high into 2011 and weigh on consumer confidence. The Fed Chief also discussed the exit strategy from the massive amount of stimulus efforts, reassuring traders that the Fed has the tools to successfully rein in the efforts in a timely matter to stave off a spark in inflation, but squashed any rumors that the central bank will abandon its accommodative stance anytime soon.

Profit taking puts European winning streak in jeopardy

Stocks in Europe are under modest pressure and are poised to snap a seven-session winning streak. Traders are taking the opportunity to book profits from recent steep gains in basic materials and other sectors that had benefitted the most in the recent resurfacing economic optimism that stemmed from a relatively favorable start to 2Q earnings season. However, losses are being limited by strength in healthcare issues amid a slew of earnings reports in the industry, highlighted by GlaxoSmithKline's (GSK $38) better-than-expected 2Q earnings report. In other equity news across the pond, shares of Italian automaker, Fiat (FIATY $11), are lower after the company reported a larger-than-expected loss, marking the second-straight quarterly loss on slumping truck sales.

Asia mostly higher but caution limits advance

Stocks in Asia were mostly higher as major earnings reports continue to buoy sentiment, but gains were limited as traders booked some profits, trying to gauge whether there is more fuel left to continue to recent rally. Japan's Nikkei 225 index rose 0.7%, led by semiconductor wafer makers after Shin-Etsu Chemical (SHECY $49) advanced almost 5% after the company said it will start talks with chipmakers to raise prices for silicon wafers. However, some strength in the yen versus the dollar limited the enthusiasm in Japan as the higher currency rate may threaten profits of exporters who rely heavily on sales in the US. Australia's S&P/ASX 200 Index rose 0.4%, led by an advance in BHP Billiton (BHP $60) after the energy giant said 4Q oil production rose 4% from a year earlier, an all-time high per Bloomberg News. But shares of National Australia Bank (NABZY $19) were halted after it said it will raise about $2.2 billion in capital to cushion loan losses and finance potential acquisitions, which weighed on banks in the region to limit the advance in Australia. China's Shanghai Composite Index rose 2.6% on an upbeat analyst earnings forecast for China Petroleum & Chemical (SNP $82), which sent the company also known as Sinopec up about 10%.