Morning Market Update

Revenue Results Prompt Sales

Although off of the lows for the day, stocks remain below the flatline heading into afternoon action as revenue results from Goldman Sachs, Dow members IBM and Johnson & Johnson, along with Texas Instruments missed the Street’s forecasts. Treasuries are higher amid the disappointing reports, which exacerbated already unnerved economic recovery sentiment, while maintaining gains following a larger-than-forecasted drop in housing starts. However the housing report also showed a bigger-than-expected increase in building permits, but this is having little impact on sentiment. In other earnings news, PepsiCo Inc matched the Street’s profit projections but its revenues topped expectations, while UAL Corp posted strong EPS and growth in a key industry revenue gauge. Overseas, European markets were mostly lower amid some festering euro-area debt concerns on the heels of a smaller-than-anticipated debt sale in Hungary.

At 1:01 p.m. ET, the Dow Jones Industrial Average is down 0.6%, the S&P 500 Index is 0.3% lower, and the Nasdaq Composite is declining 0.6%. Crude oil is up $0.51 at $77.05 per barrel, wholesale gasoline is $0.02 higher at $2.08 per gallon, and the Bloomberg gold spot price is up by $8.40 at $1,191.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 82.75.

Goldman Sachs Group Inc. (GS $147) 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 are 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 $125) 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. IBM raised its full-year EPS guidance. Shares are solidly 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 is trading 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. TXN issued 3Q guidance that was inline with estimates. TXN is under pressure.

PepsiCo Inc. (PEP $64) 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 are 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 are 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 remain above the flatline following the report.

Sales of new homes, considered a timely indicator of the housing market as sales are recorded as contracts are signed, fell to the lowest level since 1963 in May. However, inventory of new homes for sale were at the smallest level since 1970, as the capital-intensive nature of building new homes and the competition from existing home inventory, which has had the impact of foreclosures adding to the supply of homes for sale and steep price declines, has homebuilders lacking the confidence to construct new homes. The tax incentive catalyzed sales in the short-term, but as the National Association of Home Builders noted yesterday, there is a continued “lull in home buying activity” following the expiration of the credit. The data should start to smooth out and indicate continued stabilization in housing as we head into fall, as pricing has stabilized and housing affordability is historically high with mortgage rates near all time lows. Consumer confidence and the job market are two keys for the housing market going forward. While foreclosures are likely to continue, programs to slow down the process and make loan modifications have kept the supply entering the market at a gradual pace. With 60% of mortgage modifications occurring due to loss of income, if employment renews its upward trajectory, foreclosures could slow and consumer confidence will likely improve. Leading indicators of job growth remain positive and most historically reliable indicators still show little chance of a near-term return to recession. However, the outlook will likely remain hazy for the foreseeable future. While investors remain uncertain about what to do going forward, we remind investors to maintain a disciplined, diversified strategy, keeping in mind that investments in equities should be in the context of a three to five year time horizon.

Europe finds some pressure amid continued debt fears and as stress test results near

Stocks in Europe finished lower, after giving up modest early gains as euro-area debt concerns linger, 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. Financials finished flat in some choppy trading, possibly amid some cautiousness in the group ahead of Friday’s release of the results from the European Central Bank’s stress tests of the banking sector.

Telecom issues also came under pressure to weigh on the equity markets as shares of Cable & Wireless Worldwide Plc. finished sharply lower after the company warned that profits will come in near the low end of forecasts, impacted by the UK government’s efforts to rein in spending.

On the economic front across the pond, 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.

The FTSE 100 Index was down 0.2%, France’s CAC-40 Index traded off 0.5%, Germany’s DAX Index declined 0.7%, Italy’s FTSE MIB Index decreased 0.7%, Ireland’s Irish Overall Index dipped 0.1%, and Greece’s Athex Composite Index finished down 2.9%, while Hungary’s Budapest Stock Exchange Index closed 0.5% higher and Spain’s IBEX 35 Index advanced 1.3%.