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WJR July 2008 Reports

Ron's taking a late-summer break.  He'll be back Monday, August 11th.
 
 
Financial stocks have, over the years, become much more of the backbone of the U.S. market.  Monday, they were hit hard on worries about the big Merrill Lynch writedown.  Yesterday, however, was a big bounce back day.  Late yesterday, the SEC extended its ban on naked short selling of 19 big financials for another through August 12th.  While that sounds like another band-aid solution, it’s widely expected that we’ll see some permanent rules put in place after that, and maybe for a much wider group of stocks.
 
We’ll get news on oil inventories later this morning.  Right now, light sweet crude is flat after another big drop yesterday.  Say what you will about corporate earnings reports, the stock market’s direction remains the inverse of oil prices.  
 
What we can say about corporate earnings is that Corning matched estimates for the quarter gone by, but Comcast’s 18 cent profit missed the mark by a nickel.  Nintendo, blew away analyst estimate, making almost 30 percent more than expected.
 
Monday we plummeted, Tuesday we rocketed.  This morning, we’re hovering. At this point, adjusted for fair value, the S&P 500 futures are down a point and a half, the Dow futures up 15, and the NASDAQ futures are less than a point below fair value.
 
 
Stock prices tanked yesterday on no earth-shattering news yesterday.  However, a lot of the gloom, especially in financial stocks, may have been advance warning of what Merrill Lynch announced after 4 o’clock. 
 
Merrill is raising an additional 8½ billion dollars by selling more securities.  They also unloaded a boatload of collateralized mortgage obligations and will take a 5.7 billion dollar charge.  I believe that brings the total Merrill mortgage related write-downs to over 45 billion dollars.  In a non-meaningful, but interesting comparison, the total market capitalization of General Motors today is just 6 billion dollars.
 
The Conference Board’s reading on July Consumer Confidence is expected to read 50 at 10 o’clock this morning.  That would be down from last month’s level of 50.4.
 
Colgate Palmolive beat earnings estimates this morning.  Alcatel-Lucent reported their sixth consecutive quarterly loss.  Their Chairman and CEO are, as thy say, “pursuing other opportunities.”
 
Overseas markets are mainly lower, especially financial shares in Europe.  London, however is higher on a good earnings report from BP.  Oil is down a buck, and surprise – out futures are up a touch. At this point, adjusted for fair value, the S&P 500 futures up about 6 points, the Dow futures up 55, and the NASDAQ futures are about 11 points above fair value.
 
 
There are still plenty of earnings in the pipeline this week.  But near the end of the week, two big economic numbers are looming.  On Thursday, the first estimate of second quarter Gross Domestic Product is expected to have increased 2.3%, which would throw cold water on the “we’re already in recession” economists.  Then Friday, the June Unemployment Report is expected to show the Unemployment rate ticking up to 5.6 percent.
 
But in front of that, it may be that if people can’t afford steak anymore, they can still afford macaroni and cheese. Earnings out of Kraft beat estimates by 16% this morning and raised their full year guidance.  The stock is indicated higher by a dollar or more. 
 
Verizon, also had a better profit than expected, earnings 67 cents versus the 65 cent estimate.
 
Toyota officially cut their 2008 sales forecast by 350,000 units, down to 9.8 million.
 
Asian markets were mixed overnight, but European markets are a bit lower.  Our futures have improved just a bit over the past hour. At this point, even though they look positive on their >
 
 
American Axle just reported a loss of $12.49 per share for the past quarter which sounds pretty severe for a stock that’s only trading at $6.42, and yes, it is.
 
The big surge of earnings reports is over for the week, and the news has generally been pretty good.  However, that didn’t seem to matter yesterday as the speculators who piled into financial stocks last week started heading for the door with their short-term gains.
 
The selling in financials continued in Europe this morning, not helped by a research report from Citigroup, which warned that the British economy is about to enter recession.   
 
Shoe-maker Crox was the story stock yesterday and the story wasn’t really very good.  Crox cut their second quarter estimated profit to a nickel from 45 cents.  Traders had the stock on the clearance rack, down more than 50% at one point.  It finished the day off 44 percent.
 
Ready for more good news?  Reuters reports that foreclosures are up 121 percent year over year, and that 25 million American households now owe more on their mortgages than their homes are worth.
 
Overseas markets are lower on the order of 1 to 2 percent.  Oil is higher by about 70 cents per barrel. Our futures have been strengthening a little over the past couple of hours and have now turned slightly positive.  At this point, adjusted for fair value, S&P 500 futures are up 3 points, the Dow futures are up 19, and the NASDAQ futures are about 4 points above fair value.
 
 
Another big drop in oil prices yesterday helped stock prices to moderate gains.  But this morning, oil is holding steady, so we’ll have to look to earnings news for direction.
 
So far, the direction is lower, with most of the bad news (big surprise here) coming from the auto industry.
 
Ford Motor reported an 8.7 billion dollar loss for the quarter.  On an operating basis, excluding those “one-time” charge offs that have become annoyingly “un-one-time” of late, it’s a loss of 62 cents versus the expected loss of 27 cents.  Ford stock was trading about 10 percent lower in the pre0market.  Across the pond, Daimler (remember them? They still own a fifth of Chrysler) reported a 25 percent drop in profit and cut their outlook.  Daimler stock traded about 11 percent lower in Europe.
 
Reporting better than expected earnings this morning are L3 Communications, Amazon, Goodrich, Raytheon, 3M and Southwest Airlines.
 
Japan higher, Europe lower.  We’re looking at a mixed, but slightly lower open.  Adjusted for fair value, S&P 500 futures are down 3 points, the Dow futures are down  51, but the NASDAQ futures are actually about 3½ points above fair value.
 
 
As we’ve said many times before, in the long run, stock prices reflect earnings and interest rates.  But there’s no doubt that in the short run, at least nowadays, the price of oil is still the 800 pound gorilla in the room.
 
Yesterday, oil dove again, and it turned an ungly stock market day around.  This morning, oil is off another 2 dollars per barrel and this time, earnings reports are helping out as well.
 
McDonalds, Pfizer, Pepsico, Wyeth, Hershey, EMC and Boeing all reported higher earnings than estimated for the quarter gone by.  AT&T matched estimates but indicated that wireless profits may strengthen.
 
The downer of the morning is a bit of a surprise.  Costco says that 4th quarter results will be significantly worse than expected. They’re blaming accounting adjustments and lower gasoline sales.
 
Overseas markets are nicely higher.  Our futures are pointing higher, they are well below earlier levels and are not quite as much as it appears at first blush. After you adjust for fair value, S&P 500 futures are higher by about 2½ points, the Dow futures are up 15, and the NASDAQ futures are almost 6 points above fair value.
 
 
Earnings reports are pouring in this morning, as almost a third of the S&P 500 companies will report this week alone.  So far, the bad news is outweighing the good.
 
Let’s start with the good stuff.  DuPont, Lockheed Martin and Caterpillar are all reporting better than expected earnings.
 
Unfortunately, a raft of companies will be heading lower than morning on disappointing news.  Wachovia lost $1.27 per share versus the expected loss of 78 cents and pulverized their dividend.  They’ll pay a nickel a share, down from 37 ½ cents.  KeyCorp lost $2.70 per share, which is 13 cents worse than expected.  Apple, American Express, Vodaphone and Texas Instruments were all 10 percent or more lower in Europe this morning after disappointing earnings and/or forecasts.
 
Japanese stocks rose almost 3 percent overnight, but European markets are solidly lower on the earnings news.
 
Our futures are off their worst levels of the morning, but not far off of them.
 
At this point, adjusted for fair value, S&P 500 futures are down 11 points, the Dow futures are off 98, and the NASDAQ futures are a pretty sizable 35 points below fair value.
 
 
The SEC’s new vigilance to prohibit naked short selling of 19 financial stocks kicks in today.   Add to that this morning’s better than expected earnings from Bank of America, and the financial sector should get another shot in the arm.
 
B of A reported 72 cents per share of earnings versus the expected 59 cents.  Revenue was a coupe billion higher than expected. Of course, their loss provision rose about 2 billion or so, but it could have been a lot worse and the stock is looking to open more than 12 percent higher.
 
Merck, Apple, Texas Instruments and American Express also report earnings later today.
 
At 10 o’clock, the June Leading Economic Indicators are expected to slip one-tenth of a percent, after gaining a tenth of a percent last month.
 
Overseas markets are solidly higher the morning. Our futures are well off their best level of the morning, but are still pointing toward higher prices at 9:30.  At this point, adjusted for fair value, S&P 500 futures are up almost 4 points, the Dow futures are up 27, and the NASDAQ futures are 7 points above fair value.
 
 
The futures started the morning in a giant hole, but have rallied substantially on the back of a bunch of good earnings reports.
 
Among them, Honeywell beat estimates by 2 cents per share and raised guidance for the year.  Schlumberger made $1.16 per share versus the $1.12 estimate.  IBM and Mattel also beat expectations.  On the flip side, last night Google disappointed with their report, and Google shares are likely to open 40 dollars per share or so lower this morning, at just under $500 per share.  Microsoft and Merrill Lynch will also open lower after releasing their reports.  Merrill, in fact, lost $4.95 per share versus the expected $1.94.
 
The financials considered their snap-back rally yesterday and even Citigroup’s announcement of another 2 ½ billion dollar write-off this morning was less than feared.
 
Still, the financial coast is not entirely clear. According to the Wall Street Journal, Freddie Mac is considering issuing an additional 10 billion dollars of new equity in their attempt to avoid a government bailout.  Either way, common shareholders are looking at some potentially serious dilution.
 
As I mentioned, the futures have rallied, but even though they look positive on the sur>
 
 
Financial stocks, which have been beaten down relentlessly for the past eight months, staged an impressive rally yesterday.  Maybe it was the SEC’s move to restrict naked short selling of 19 financial stocks.  Maybe it was a big drop in oil prices.  Or maybe we’re starting to see that the financial business model isn’t as “broken” as everyone thought.  No matter, we’ll get plenty of earnings news from the financials before the week is out to help us decide.  Lehman, Morgan Stanley, Merrill Lynch and Citigroup have yet to report.
 
This morning JP Morgan Chase reported a 53 percent drop in profit.  But it was 10 cents per share better than expected.  Bank of New York Mellon and PNC bank also reported better than expected earnings. 
 
Among the non-financials, Coca Cola beat estimates by a nickel per share.  United Technologies came in 2 cents better and they raised their full year guidance.
 
Johnson Controls matches estimates, but lowered their profit outlook for the full year.
 
Markets overseas are up anywhere between 1 and nearly 4 percent after yesterday’s rally here, and we should keep the ball rolling at 9:30.  At this point, adjusted for fair value, S&P 500 futures are up 4 points, the Dow futures are up 49, and the NASDAQ futures are almost 10 points above fair value.
 
 
The press conference at General Motors is overshadowing everything else in these parts this morning.  Expect white collar job cuts, perhaps a dividend cut and other cash-saving moves.  It’s not often that you announce two restructurings within a five-week period, but these are unusual times in Detroit.  GM stock which is down over 40 percent in the last month, rallied sharply after hours on news of this morning’s press conference, but lost those gains later on.
 
Eaton announced adjusted earnings of two dollars and ten cents versus the expected dollar ninety five.  However, Eaton cut its estimated earnings for the full year, and that won’t help the stock.  Johnson & Johnson, on the other hand, beat estimates and raised earnings guidance for the year.
 
Ben Bernanke delivers his semi-annual update on the economy to the Senate Banking Committee this morning.
 
In front of Mr. Bernanke’s comments, financial stocks continue to take it on the chin in the pre-market.  Fannie Mae stock is off another 15 percent, Freddie Mac off 18 percent, Wachovia down 9 percent, AIG is off 6 percent.
 
In just about ten minutes, we’ll get the first monthly inflation reading as the June Producer Price Index is expected to have spiked by 1.3 percent overall, thanks mainly to rising energy prices.  Speaking of which, light sweet crude is up once again and stock futures are decidedly weaker.
 
At this point, adjusted for fair value, S&P 500 futures are down 14 points and the Dow futures are down 127, and the NASDAQ futures are 19½ points below fair value.
 
 
For the besieged mortgage companies Fannie Mae and Freddie Mac, the long-awaited Government cavalry came riding over the horizon yesterday.  It’s not a bailout, but a message.  The message is, “You don’t need us yet, but we’ll be here when you do.”
 
Put another way, that means that the implicit Government guarantee behind Fannie and Freddie has become an explicit guarantee, and as a result, shares of Fannie and Freddie should start the morning about 30 percent higher and the overall market will get off to a pretty good start.
 
However, the next shoe in the mortgage mess will drop shortly. Freddie Mac will be going to market to raise some money this morning as they look to sell 3 billion dollars worth of debt.  We’ll see how hungry the market is for this latest meal.
 
If you like to wash down your meal with a cold Budweiser, you’ll be buying it from a Belgian company soon.  Anheuser Busch is selling out to InBev for 70 dollars per share.  The St. Louis Busch headquarters will become the North American divisional headquarters.
 
Earnings are on the way from Johnson & Johnson, Intel and Eaton today as second quarter reports really start to roll.
 
Asian markets were slightly lower, but Europe is solidly higher.  Our futures are off their best levels of the morning, but are still looking good.
 
At this point, adjusted for fair value, S&P 500 futures are higher by 16 points and the Dow futures are up 121, and the NASDAQ futures are 24 points above fair value.
 
 
We’re setting up for a pretty ugly morning on two familiar fronts. First off, light sweet crude, which was around 135 dollars per barrel a couple of days ago, is north of 145 dollars per barrel this morning.  Having a more direct impact on the major indexes this morning will be the continuing travails of Fannie Mae and Freddie Mac.
 
While everyone agrees that the two quasi-governmental companies won’t go away, the market is now betting that shareholders may be left holding an empty bag in the event of a government bailout.  Freddie Mac shares, which lost 22 percent of their value yesterday, are off another 35% in pre-market bidding this morning.  Fannie Mae, after a 13% drop yesterday, is off another 30% this morning.
 
General Electric, after disappointing the Street last quarter, checked in with earnings that matched expectations on higher than expected revenue.
 
Just before 10 this morning, we’ll get the University of Michigan’s preliminary estimate of July Consumer Sentiment.  Expect a little more slippage with a reading of 55.5 versus last month’s 56.4.
 
Hong Kong and Australia were higher overnight, but everybody else is in the red and we will head lower at 9:30 as well. At this point, adjusted for fair value, S&P 500 futures are down almost 16 points and the Dow futures are down 111, and the NASDAQ futures are about 21 points below fair value.
 
 
Some people thought that those government stimulus checks would be used to pay down mortgages and credit card debt.  Just whom did they think they were dealing with here?  It’s the American consumer!  And boy, are they continuing to consume.  Walmart just reported that same store sales last month, excluding gasoline, rose 5.8 percent.  Analysts had expected a rise of 3.8 percent.  Walmart also raised guidance for the year. Costco reported a 9 percent rise versus an expected 8.2 percent. Pacific Sunwear, Children’s Place, Gap and Hot Topic also reported better-than-expected sales, although Limited Brands and Abercromie & Fitch disappointed.
 
Dow Chemical is picking up specialty chemicals firm Rohm & Hass for 78 dollars per share.  That’s a 15 billion dollar deal and a 74 percent premium to last night’s closing price.  Berkshire Hathaway and the Kuwaiti Investment Authority are chipping in 4 billion of the cost.
 
Overseas stocks are a bit lower after our big sell-off of yesterday, but our futures have been picking up steam most of the morning and are indicating a pretty solid opening bounce for stocks.
 
At this point, adjusted for fair value, S&P 500 futures are up 9 points and the Dow futures are up 68, and the NASDAQ futures are about 14 points above fair value.
 
 
If you’re long the stock market, you could sure use some follow through after the past couple of days.  Oil has dropped 9 bucks a barrel, and some comforting words about Fannie Mae, Freddie Mac and the future of the U.S. economy help touch off a pretty nice rally yesterday.
 
Earnings season also got off to a pretty good start yesterday, as Alcoa beat profit estimates on the strength of higher prices for its products.  This morning Michigan-based Wolverine Worldwide reported quarterly earnings of 33 cents per share versus last year’s 28 cents and the estimated 31 cents.  They also affirmed earnings and revenue guidance for the remainder of the year.
 
Good news, relatively speaking on the housing front.  Mortgage applications rose 7½ percent last week over the prior week – even in the >
 
Overseas markets are a sea of green after our big rally yesterday.  Our futures have picked up over the past hour and have bumped into somewhat positive territory, even though oil is up 2 dollars per barrel.
 
At this point, adjusted for fair value, S&P 500 futures are up 2 ½ points and the Dow futures are up 24, although the NASDAQ futures are still about 3 points below fair value.
 
 
We’re seeing oil prices fall for the second consecutive day – and it seems like a long time since that’s happened.  Unfortunately, stock prices are not following the familiar script of “oil down, stocks up.”  Yesterday, an analyst from Lehman Brothers, which is not exactly the house of financial security, issued a report on the big mortgage giants Fannie Mae and Freddie Mac.  The report speculated that due to proposed accounting rules, Fannie would have to raise 46 billion and Freddie 29 billion of new capital.  Let’s put that in perspective.  $46 billion would be about 3 times Fannie Mae’s current market capitalization.
 
That sent new shivers through the financial stock.  Fannie dropped 16 percent and Freddie lost 18 percent.
 
Add insult to injury, giant mortgage lender IndyMac has been told by regulators to stop issuing new mortgages, and as a result, IndyMac will fire over half of their workforce.
 
So how’s this for a timely speech?  Right now, Ben Bernanke is speaking at an FDIC mortgage-lending forum.  Hopefully, he’ll offer something to reassure confidence to the financials.
 
Alcoa officially kicks off earnings season later today, but ahead of that, we’re looking at markets overseas lower almost across the board and a rough start on Wall Street as well, although the futures have recovered some of their losses since Bernanke started to speak.
 
At this point, adjusted for fair value, S&P 500 futures are down 6 points, the Dow futures are down 55, and the NASDAQ futures are just about 9 points below fair value.
 
 
Call today the “calm before the earnings.”  Stock prices, which absent panic selling or manic buying, reflect anticipated interest rates and corporate earnings.   After June’s market drubbing, stock prices reflect an expected decrease in corporate earnings of about 10 percent year-over-year.  We’ll start to find out how well the market has that >
 
There’s nothing on the economic calendar today, although the San Francisco Fed
President will be speaking on the economy later today.
 
Surprisingly, after the last couple weeks of gloom, there are some good-news stories this morning.  Light sweet crude is almost 2½ dollars per barrel lower.  Japanese stocks rose over night to break a 12 session losing streak that saw the Nikkei index slide 8 ½ percent.  Chinese stock indexes rose about 4 ½ percent as well.   
 
Europe is slightly higher, and our futures picked up a bit within the past hour. Right now, adjusted for fair value, S&P 500 futures are up almost 4 points, the Dow futures are up 20, and the NASDAQ futures are just about 9 points above fair value.
 
 
WJR August 2008 Reports
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