Evening Market Update

Markets Catch Breath From Recent Gains

A mixed bag of earnings reports and economic news kept traders on the fence for most of the day, as better-than-expected results and a positive outlook from Dow member DuPont and an earnings beat from Cummins were offset by a larger-than-anticipated drop in consumer confidence, profit shortfalls from Occidental Petroleum and US Steel and a revenue miss by Office Depot. Also, given the recent gains in the equity markets, the varied data may have prompted some profit-taking on a day void of any major catalyst. Elsewhere, on the corporate front, BP Plc. reported earnings that matched expectations, after excluding charges related to the Gulf of Mexico oil spill, and confirmed that CEO Tony Hayward will step down and be replaced by Robert Dudley. Treasuries finished lower, despite the gauge of consumer confidence, and after separate reports that showed housing prices rose more than forecasted, and the Richmond Fed Manufacturing Index deteriorated, but to a level that was above expectations.

The Dow Jones Industrial Average rose 12 points (0.1%) to close at 10,538, while the S&P 500 Index edged 1 point (0.1%) lower to finish at 1,114, and the Nasdaq Composite lost 8 points (0.4%) to 2,288. In modest volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $1.48 to $77.50 per barrel, wholesale gasoline lost $0.05 to $2.06 per gallon, and the Bloomberg gold spot price tumbled $22.30 to $1,161.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 82.15.

Dow member DuPont (DD $40) reported 2Q EPS ex-items of $1.17, well above the $0.94 Reuters estimate, with revenues jumping 26% year-over-year (y/y) to $8.6 billion, above the $8.3 billion consensus expectation of analysts. The company said it grew sales across every segment, with several businesses, including electronics and titanium dioxide, delivering results that “far exceeded pre-recession levels.” DD raised its full-year EPS guidance and shares were nicely higher.

Cummins Inc. (CMI $79) announced fiscal 2Q earnings of $1.25 per share, much higher than the $0.89 that the Street was calling for, with revenues advancing 32% y/y to $3.21 billion, compared to the $2.8 billion that was anticipated. The engine maker said the work it has done to strengthen its manufacturing operations during the downturn has resulted in “significant productivity gains,” and it continues to benefit from its leadership position in large and growing international markets such as China, India, and Brazil. CMI finished solidly higher after it raised its full-year 2010 outlook and it boosted its quarterly cash dividend by 50% to $0.2625 per share.

CMI added that its non-US markets continued to perform well, with sales up 51% y/y and sales outside the US accounted for 64% of the company’s revenue in 2Q.

Occidental Petroleum Corp. (OXY $80) posted 2Q EPS of $1.31, which was two cents below that Street’s forecast, but revenues rose 29% y/y to $4.76 billion, above the $4.52 billion that was expected. OXY said its oil and gas earnings jumped about 73% y/y, aided by higher crude oil and natural gas prices and higher volumes, while profits at its chemicals and midstream, marketing and other units posted declines on higher raw material prices and lower margins in its marketing and trading businesses. Shares finished to the downside.

US Steel Corp. (X $46) is solidly lower after the company posted 2Q EPS ex-items of $0.45, well short of the $0.63 that analysts were expecting, but revenues increased 20% y/y to $4.7 billion, roughly inline with expectations. The company said its operating results “improved significantly” from 1Q, benefitting from increased average realized prices and healthy order rates in most of its markets. The company said it expects to report an overall operating profit in 3Q as the US and European economies continue to work their way through a gradual and uneven recovery process.

Office Depot Inc. (ODP $4) reported a narrower-than-forecasted loss of $0.07 per share, compared to the $0.17 per share shortfall that analysts were expecting. However, the office supply chain posted revenues of $2.70 billion, a decline of 4% y/y, and just shy of the $2.74 billion forecast. Shares finished more than 7% in the red.

BP Plc.(BP $38) made multiple headlines today, posting a $17 billion 2Q loss on charges related to the containment and cleanup from the Gulf of Mexico oil spill, while excluding the costs, BP posted an underlying profit that matched expectations. Additionally, BP confirmed that CEO Tony Hayward will step down and be replaced by Robert Dudley, effective October 1st. BP also announced that it plans to sell as much as $30 billion in assets—including the recent sale of $7 billion in assets to Apache Corp.(APA $95)—to help it meet its Gulf oil leak costs. Shares lost ground in US trading.

Home prices rise, consumer confidence and a read on Southeast manufacturing fall

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing an increase in home prices of 4.61% y/y in May, above the increase of 3.85% that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.47% higher, compared to forecasts, which called for a gain of 0.20%. 19 of the 20 cities showed price increases m/m, led by Minneapolis, Atlanta, Los Angeles and San Francisco, while Las Vegas was the lone decliner, posting a new index low as measured by the current housing cycle. Today’s report, although lagging home sales data, is the latest in a recent string of better-than-expected reports on the housing sector, highlighted by yesterday’s surge in new home sales, and last week’s smaller-than-expected decline in existing home sales and a larger-than-expected increase in building permits—one of the leading indicators tracked by the Conference Board—which has helped limit some pessimism toward the sector.

Nonetheless, there are some holes that can and have been poked in the recent reports that has kept the enthusiasm in check, such as the new home sales surge in June was off of record lows and the fact that existing homes sales fell even as they continued to receive support from the homebuyer tax credit. Also, May’s pending home sales—a gauge of the pipeline of existing home sales that make up the lion’s share of total sales—tumbled 30%, and are forecasted to post a solid 5% drop in June. Throwing another wet blanket on the recent housing optimism, foreclosures remain elevated, with 1.65 million properties receiving foreclosure fillings in the first-half of 2010, per RealtyTrac, a decline of 5% from the previous six months, but an 8% increase versus the same period a year ago.

Meanwhile, the Conference Board released its consumer Confidence Index report, which deteriorated to a level below expectations, falling to 50.4 in July, compared to the expectation of a drop to 51.0 from June’s upwardly revised 54.3. The headline number fell as respondents’ gauge of the present economic situation being “bad” increased to offset a slight increase in those saying conditions are “good.” Also, those saying jobs are “hard to get” gained ground, but those saying jobs are “not so plentiful” declined. The report also revealed that expectations of improvement for the next six months in business conditions, employment, and income all decreased and those anticipating worsened conditions rose.

In other economic news, the Richmond Fed Manufacturing Index deteriorated in July to 16 from 23 in June, but the forecast of economists called for a decline to 12, and a reading above zero denotes expansion.

Treasuries finished lower amid the mixed economic data. The yield on the two-year note gained 4 bp to 0.64%, and the yields on both the 10-year note and 30-year bond rose 6 bps to 3.05% and 4.08%, respectively.

Mostly positive economic news overseas

On the economic front across the pond, a reading of German consumer confidence showed that it may increase to a level of 3.9 in August from a revised 3.6 in July, exceeding economists’ forecasts of 3.5, while a separate report showed German import prices rose 0.9% during June, more than the 0.6% forecasted. Elsewhere, retail sales in the UK rose at their fastest pace in over three years, according to the Confederation of British Industry, citing summer discounts, the World Cup and warmer weather as the catalysts. In other economic news in the region, Sweden’s producer prices jumped 1.3% in June, well above the 0.2% increase expected, and euro-zone money supply unexpectedly increased on a year-over-year basis.

The Asian economic calendar had a number of reports worth a mention. A gauge of consumer confidence in South Korea remained at its highest level since January, while Australia’s Leading Index rose in May. Elsewhere, the Chinese Leading Index slipped slightly from May to June, and the Hong Kong trade deficit widened by a larger amount than expected. Rounding out the busy economic day in the region, Taiwan’s Leading Index fell in June after being flat in May, and India’s central bank increased a key interest rate by a larger amount than forecasted.

Durable goods and Fed’s Beige Book next up in the rotation

Durable goods orders will be reported tomorrow, expected to rise 1.0% m/m in June after falling 1.1% in May, while ex-transportation, orders are forecasted to have grown 0.4% m/m, after advancing 0.9% in May. Durable goods orders are volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data. In afternoon trading, the Federal Reserve will release its Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 10, used as an input to the Fed’s decision on whether to make changes in monetary policy.

Growth estimates for the US economy have been revised down over the past month, as retail sales, new home construction, inventory building and net exports have come in weaker than expected and consumer confidence has fallen. However, new home sales beat forecasts and the added dose of transparency from the completion of the European bank stress tests have added to the bullish side of the ledger.

The other release on the US economic calendar is weekly MBA Mortgage Applications.

International economic news releases expected for tomorrow include Japanese small business confidence, as well as German and Australian consumer price indexes.