Evening Market Update

Bulls Chase Stocks Higher on Solid Earnings and Forecasts

Earnings were the name of the game today, as strong profit reports on the domestic front combined with positive economic news abroad to send stocks surging. Sentiment was also sweetened by a smaller-than-expected decline in US existing home sales and a smaller decline in the Index of Leading Economic Indicators than economists were expecting. Highlighting the US earnings front were Dow members AT&T, Caterpillar and 3M, which all topped analysts’ profit projections, while UPS, Xerox and Qualcomm also managed to beat the Street’s expectations. However, Travelers Co lost ground after coming up short of profit forecasts and Netflix traded down due to rising customer costs, while both companies issued a lackluster forecast for the remainder of the year. Elsewhere on the equity front, General Motors announced that it has agreed to acquire auto finance firm AmeriCredit for $3.5 billion. Federal Reserve Chairman Ben Bernanke completed the second day of his semi-annual testimony on Capitol Hill, although his comments had little impact on today’s market movement. Treasuries finished lower on the strength in the equity market and the positive economic news.

The Dow Jones Industrial Average surged 202 points (2.0%) to close at 10,322, the S&P 500 Index gained 24 points (2.3%) to finish at 1,094, and the Nasdaq Composite advanced 59 points (2.7%) to 2,246. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil rose $2.53 to $79.09 per barrel, wholesale gasoline gained $0.07 to $2.14 per gallon, while the Bloomberg gold spot price increased $9.90 to $1,194.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% lower at 82.61.

There were several earnings reports that came from members of the Dow Jones Industrials, beginning with AT&T Corp. (T $26), which posted 2Q EPS ex-items of $0.61, above the Reuters estimate of $0.57, with revenues mostly flat year-over-year (y/y) at $30.8 billion, just shy of the $30.9 billion estimate. AT&T said it expects “strong” EPS growth for the full-year. Shares were higher.

Elsewhere among the blue-chip index components, Caterpillar Inc. (CAT $68 ¹) reported 2Q EPS of $1.09, compared to the $0.85 that analysts were expecting, as revenues rose 31% y/y to $10.4 billion, above the $9.8 billion forecast. CAT said, “Portfolio quality began to show signs of improvement as economic conditions around the world continued to improve.” 3M Co. (MMM $85) achieved 2Q earnings of $1.54 per share, seven cents above the Street’s forecast, with revenues rising 17.7% y/y to $6.7 billion, roughly inline with expectations, and the company increased its full-year guidance. Both companies traded solidly higher.

However, fellow Dow component Travelers Companies Inc. (TRV $49) missed analysts’ forecasts, reporting 2Q EPS ex-items of $1.39, ten pennies short of the consensus estimate, with revenues rising 6% to $5.7 billion, slightly above the $5.5 billion that was expected. The company lowered the top end of its prior full-year EPS guidance. TRV finished lower.

Meanwhile, outside of the Dow, United Parcel Service Inc. (UPS $63 ¹) reported that its 2Q earnings were $0.84 per share, well above the $0.77 that had been forecasted, with revenues increasing 13% y/y to $12.2 billion, above the $12.0 billion that analysts were anticipating. UPS raised its full-year EPS outlook and said on a conference call that it believes the market will continue to grow “gradually.” UPS was nicely higher.

In M&A news, General Motors announced that it has entered into a definitive agreement to acquire auto finance firm AmeriCredit Corp. (ACF $20) for $24.50 per share in cash, in a transaction valued at about $3.5 billion. GM said it made the deal in order to “meet customer demand for leasing and non-prime financing for GM vehicles.” ACF moved solidly higher.

In other earnings news, Xerox Corp. (XRX $9) reported 2Q EPS ex-items of $0.24, three cents above analysts’ estimates, while revenue came in at $5.51 billion, just shy of the $5.53 billion forecasted. The printer and copier maker, with its wide corporate client base that often reflects broad trends in business spending, also raised its 2010 earnings forecast and noted that small and mid-sized businesses as well as companies in emerging markets are showing increased spending on technology. Analysts were also pleased with the 3Q performance of Qualcomm Inc. (QCOM $39), which posted EPS of $0.57 and revenue of $2.71 billion, while estimates were for earnings of $0.54. The world’s largest wireless-chip maker benefited from a strong demand for 3G mobile devices and raised it full-year earnings forecast for the second time this year. Shares of XRX and QCOM were both solidly higher.

However, Starbucks Corp. (SBUX $25) was under pressure as traders expressed disappointment in the coffee maker’s 2011 full-year EPS guidance of between $1.36-1.41, which compared to analysts’ forecasts of $1.41. The outlook is overshadowing the company’s better-than-expected 2Q profit report, its increased 2010 guidance, and the announcement that it increased its quarterly dividend. Meanwhile, shares of Netflix Inc. (NFLX $104) fell over 13% after the online video-rental company reported an increase in subscriber-acquisition costs and 2Q revenue of $519.8 million, which fell short of the Street’s expectations. The company did post EPS of $0.80, but noted that earnings were likely to fall sequentially in the current quarter.

Existing home sales fall less than anticipated, jobless claims rise, Bernanke speaks again

Existing home sales came in better than anticipated, falling 5.1% month-over-month (m/m) in June to an annual rate of 5.37 million units, compared to the drop of 9.9% to 5.10 million units that economists surveyed by Bloomberg had expected. May’s 2.2% drop to 5.66 million units was left unchanged. Sales across all regions fell solidly, but total sales were 9.8% higher than a year ago, and the National Association of Realtors (NAR) noted that the market shows uncharacteristic yet understandable swings as buyers responded to the tax credits, and June’s home sales still reflect the tax credit impact, while noting that some sales that were not closed due to delays will show up in the next two months. The median existing home price was $183,700 in June, 1% higher than a year ago, with distressed homes accounting for 32% of sales.

The report improved sentiment, helping the equity market extend early gains, however, the total inventory of houses rose 2.5% to 3.99 million units, representing an 8.9-month supply at the current sales pace, which may limit some of the enthusiasm.

The upbeat US earnings reports, European economic data, and the favorable US housing data is helping soothe the sting from a larger-than-anticipated increase in weekly initial jobless claims (chart) which rose 37,000 to 464,000, versus last week's figure which was downwardly revised by 2,000 to 427,000. The increase compared to the consensus estimate of economists, which called for claims to rise to 445,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 1,250 to 456,000, while continuing claims fell by 223,000 to 4,487,000, compared to the decline to 4,590,000 that was anticipated by economists.

In other economic news, the Conference Board released the Index of Leading Economic Indicators (LEI) (chart) for June, which declined by 0.2%, compared to the 0.3% decrease that economists forecasted, and May’s 0.4% gain was revised higher to a 0.5% advance. The decrease was paced by negative contributions from the average workweek, pace of deliveries, and stock prices, while positive contributors were money supply and a favorable yield curve.

Finally, Federal Reserve Chairman Ben Bernanke concluded his two-day semi-annual monetary policy testimony on Capitol Hill, testifying in front of the House Financial Services Committee. Bernanke provided a carbon copy of yesterday’s commentary he provided to the Senate, where he reaffirmed the Fed’s view that the fed funds rate is likely to remain “exceptionally low” for an “extended period,” as the progress in reducing unemployment was slower than expected and that financial conditions are somewhat weaker in recent months due to fallout from the European debt crisis. He also noted that the economic outlook remains “unusually uncertain,” and there was little new information provided—which contributed to yesterday’s afternoon sell-off in equities—as well as the considerable amount of prepared text devoted to the “exit strategies” the Fed would use to decrease the size of their balance sheet and normalize the composition of the balance sheet over the “longer term” and eventually reverse easy monetary policy. He reiterated that the Fed continues to assess developments, and remains prepared to take further actions “as needed.” By dedicating so much time to the “exit strategy,” investors believe that the Fed is less likely to be considering a renewed move to add stimulus to the economy. During the Q&A session that followed the Fed Chief’s speech, Bernanke did not provide much new information, and reiterated that the Fed remains prepared to take further actions if needed, but it has not fully done a review of its options to further support the economy and it needs to think about possibilities. Some ideas that the Fed Chief offered for potential economic support include a verbal commitment to keeping the fed funds rate low for an extended period, reinvesting proceeds from some of its prior asset purchases, and cutting the interest rate it pays on reserves that banks hold at the Fed—which could help promote lending.

Treasuries finished lower on the slew of data and despite the larger-than-expected increase in jobless claims, amid an improvement in economic sentiment from solid US and European economic data. The yield on the two-year note gained 1 bp to 0.56%, the yield on the 10-year note rose 5 bps to 2.93% and the yield on the 30-year bond increased 5 bps to 3.94%.

Positive economic data emerges out of Europe ahead of bank stress tests

The European economic calendar helped to sweeten sentiment internationally, highlighted by better-than-expected manufacturing PMI readings for Germany—Europe’s largest economy—and the entire euro-zone for July, according to advance reports. Moreover, a separate report showed euro-zone industrial orders surged, while France posted better-than-forecasted readings of business confidence and consumer confidence, which offset a smaller-than-expected French manufacturing PMI report. Capping off the favorable string of data, UK retail sales rose more than anticipated on both the headline and core rates.

In Asia/Pacific economic news, a report out of Australia showed business confidence fell, Hong Kong announced an increase in consumer prices for June and Taiwan’s unemployment rate came in slightly higher than expected. Back in the Americas, Canada announced that retail sales fell unexpectedly by 0.2% in May, while economists were looking for a 0.4% increase. Also, Brazil’s unemployment rate came in at 7.0%, which was slightly lower than the 7.3% rate expected.

Tomorrow’s focus will again be on earnings, as there are no major releases on the US economic calendar. Traders will also be eagerly awaiting the results of the euro-zone stress tests, which are scheduled to be released at 12 PM EST tomorrow on an aggregate level, while national banking regulators are aiming to publish bank-by-bank breakdowns shortly thereafter.

Other releases internationally include French consumer spending, Italian consumer confidence and retail sales, the German IFO survey of business confidence, and Canadian CPI. Also, the UK will report its 2Q GDP, which economists are expecting to come in at 0.6%.