Evening Market Update

Losses Reversed Even Amid Rocky Revenue Reports

Stocks staged an afternoon rally to finish in the green today, coming back from early weakness on shaky earnings reports and a larger-than-forecasted drop in housing starts. Traders are awaiting testimony from Fed Chairman Ben Bernanke tomorrow, and some rumors swirled around the market that he may announce plans to further stimulate the economy. Revenue misses were the downfall of multiple companies reporting earnings today, including Dow members IBM and Johnson & Johnson, Goldman Sachs Group and Texas Instruments. All four firms beat their bottom line estimates, but missed analysts’ top line projections. Elsewhere on the equity front, PepsiCo matched the Street’s profit projections and managed to post better-than-expected revenue, while UAL Corp posted solid 2Q EPS and growth in a key industry revenue gauge. Treasuries were higher most of the day, but finished mixed.

The Dow Jones Industrial Average rose 76 points (0.7%) to close at 10,230, the S&P 500 Index added 12 points (1.1%) to finish at 1,083, and the Nasdaq Composite gained 24 points (1.1%) to 2,222. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil rose $0.90 to $77.44 per barrel, wholesale gasoline was up $0.02 to $2.08 per gallon, while the Bloomberg gold spot price increased $9.00 to $1,191.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 82.74.

Goldman Sachs Group Inc. (GS $150) reported 2Q EPS ex-items of $2.75, well above the $2.08 Reuters estimate, with revenues coming in at $8.84 billion, down from $13.76 billion a year ago, and short of the $8.96 billion that analysts were expecting. Revenue from trading and principal investments—its largest revenue generator—declined 39%, investment banking revenue slid 36%, and asset-management and securities revenue dropped 11%, contributing to the revenue shortfall. Shares were higher despite the revenue miss. The company said the market environment became more difficult during 2Q and as a result, client activity across its businesses declined.

Dow member International Business Machines (IBM $126) reported 2Q EPS of $2.61, above the $2.58 Reuters estimate, but revenues, which rose 2% year-over-year (y/y) to $23.7 billion, came up short of the $24.2 billion that analysts were expecting. Sales figures were hampered by the company’s services business, where the value of signed contracts fell 12% to $12.3 billion. However, the company said it should be able to boost sales in the second half of the year, citing a solid position in software, growth in consulting and a good pipeline of deals. IBM also raised its full-year EPS guidance. Shares of IBM finished lower.

Fellow Dow member Johnson & Johnson (JNJ $58) posted 2Q earnings ex-items of $1.21 per share, one penny above the consensus estimates, with revenues roughly flat y/y at $15.3 billion, which missed the $15.6 billion that the Street was expecting. The company lowered its full-year EPS outlook, reflecting the impact of voluntary recalls announced earlier this year of certain over-the-counter medicines and the suspension of manufacturing at its McNeil Consumer Healthcare facility as well as unfavorable changes in foreign currency exchange rates. JNJ traded lower.

Texas Instruments Inc. (TXN $25) announced 2Q EPS of $0.62, matching the Street’s forecast, with revenues, although rising 42% y/y to $3.50 billion, coming up just shy of the $3.52 billion that analysts were anticipating. The company benefited from a resurgence in demand for communications gear, industrial equipment and other products, while sales of chips used in cellphones were an area of weakness. TXN issued 3Q guidance that was inline with estimates. Shares of TXN moved lower.

PepsiCo Inc. (PEP $65) achieved 2Q EPS ex-items of $1.09, matching the Street’s forecast, with revenues jumping 40% y/y to $14.8 billion, above the $14.4 billion that analysts were expecting. The company said it was able to generate sustainable growth across its snacks and beverage portfolio despite continued weak macroeconomic conditions. PEP reaffirmed its full-year EPS guidance. Shares were nicely higher.

UAL Corp. (UAUA $22) reported 2Q EPS ex-items of $1.95, above the $1.74 that analysts were anticipating, as revenues increased 28% to $5.16 billion, compared to the $5.12 billion that the Street was forecasting. The parent company of United Airlines said its revenue per available seat mile—a key industry metric—increased about 27%. Shares traded solidly higher.

Housing starts fall more than expected but building permits rise more than anticipated

Housing starts for June fell more than expected, by 5.0%, to an annual rate of 549,000 units, and May was downwardly revised to a decline of 14.9% to 578,000, and compared to economists’ expectations, which called for starts to come in at 577,000. The decline in housing starts came as single-family construction fell 0.7%. Building permits rose more than expected, increasing 2.1% m/m in June, to an annual rate of 586,000, while May was unrevised at a decline of 5.9% to 574,000. The expectation was for permits to be 575,000 units. However, the increase in permits was driven by a 20% increase in multi-family applications, while single-family permits fell 3.4% to the lowest level since April 2009. Treasuries finished mixed with the yield on the two-year note flat at 0.58%, the 10-year note fell 1 bp to 2.95% and the 30-year bond was flat at 3.98%.

Hungary debt auction disappoints, Brazilian CPI falls, Canada raises rates

Euro-area debt concerns were exacerbated by a disappointing debt auction in Hungary, in which the debt-laden nation was unable to raise the amount of capital that was anticipated. The smaller-than-forecasted debt auction came after the International Monetary Fund (IMF) and the European Union (EU) suspended talks over the weekend with the Hungarian government regarding its 20 billion euro ($25.9 billion) bailout package, saying that the debt-laden nation must take tougher measures to cut its budget deficit in order to comply with requirements to receive the rescue capital. However, Spain, Ireland, and Greece were able to raise about 10 billion euros in auctions today. Activity in Europe may be cautious this week ahead of Friday’s release of the results from the European Central Bank’s stress tests of the banking sector. Elsewhere on the European economic front, Germany’s producer prices rose more than expected, Switzerland’s trade surplus expanded, Italian industrial orders rose more than forecasted, and UK money supply came in flat, while a separate report showed UK business optimism unexpectedly fell.

In Asia/Pacific news, the Reserve Bank of Australia released the minutes from its most recent monetary policy meeting, which showed policymakers were weighing the outlook for inflation and what this week’s European stress tests of the financial industry will reveal. Elsewhere in Asia, Taiwan issued a report that showed the nation’s export orders increased more than expected for June, while Japan’s Leading Index was revised slightly lower for May, and Hong Kong’s unemployment rate remained at 4.6%.

Back in the Americas, Brazilian consumer prices unexpectedly fell 0.09% in the June 15 – July 13 period, marking the first decline since 2006. Economists were expecting a 0.02% increase in the CPI index and the 12-month rate fell to 4.74% from 5.06% in mid-June. The surprise decrease has boosted speculation that the Brazilian central bank may slow the pace of interest rate increases when it meets tomorrow, after raising the overnight rate by 0.75% on two different occasions this year. Meanwhile, the Bank of Canada raised interest rates for the second time in less than two months, lifting the overnight rate 25 bps to 0.75%, which was predicted by all economists surveyed by Bloomberg. However, the central bank cut the nation’s growth forecast to 3.5% from 3.7% for the year, and suggested the pace of interest rate increases may slow.

The US economic calendar will be on the light side tomorrow, with the only report being the MBA Mortgage Applications Index. Federal Reserve Chairman Ben Bernanke is also scheduled to testify before the House tomorrow, which will be followed by testimony before the Senate on Thursday.

On the international front, Canada will report wholesale sales for May, Australia will announce its leading index and the central banks of Japan and the UK will release minutes from their most recent monetary policy meetings.