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From Briefing.com: 4:49 pm Weekly Wrap

The S&P 500 declined 7.0% over a span of four weeks leading up to this past week. Now, stop for a moment and let this next thought sink in: over the span of the first four days of the past week, the S&P 500 gained 7.0%.

To be sure, nobody can say the second quarter earnings reporting period didn't start with a bang. It was about as good as it could get with nearly every company of note that reported earnings in the past week exceeding consensus earnings estimates.

There were some big names on the reporting roster this week, too. Names like CSX Corp. (CSX), Goldman Sachs (GS), Johnson & Johnson (JNJ), Intel (INTC), YUM! Brands (YUM), Harley-Davidson (HOG), JPMorgan Chase (JPM), Marriott (MAR), Nokia (NOK), Google (GOOG), IBM (IBM), General Electric (GE), Mattel (MAT), Bank of America (BAC) and Citigroup (C).

By most accounts, these companies and others that joined them followed the primary rule of medicine: first, do no harm.

The earnings reports -- Intel's in particular -- proved to be just what the ailing stock market needed.

The bullish tone for the week was set Monday, however, when earnings news was inconsequential. The trendsetter, if you will, was influential analyst Meredith Whitney who raised her rating on Goldman Sachs (GS) ahead of its earnings report to Buy from Neutral and took the occasion to suggest that she felt it was possible the financial sector could put together a rally of 15% or so in the short-term.

Whitney has been off the mark so far. The financial sector gained only 9.4% this week.

Taking our tongue out of our cheek, we'll note that Goldman had a banner report, blowing past estimates and raising the bar for peer companies to a level that couldn't be reached. Still, most of the financials easily topped consensus estimates. The banks, however, weren't exactly pounding the table on the outlook for credit quality and neither was Harley-Davidson, which has a financing business.

The market worked through those issues, though, preferring to trade the line yet again that the overall earnings news wasn't as bad as feared. This approach caught plenty of people leaning in the wrong direction and presumably prompted a wave of short covering that augmented this week's gains.

By and large, the market seemed to have a one-track mind as it keyed off the headlines trumpeting positive earnings surprises while ignoring a slate of qualitative comments that suggested the economic outlook still isn't as bright as the market wants to believe it is.

Railroad operator CSX Corp., for example, said volumes continued to decline across the board and that the rate of decline in the coal market accelerated in the quarter. Marriott, meanwhile, said it is still too early to say the company is seeing green shoots.

Separately, financing company CIT Group (CIT) was rumored to be on the verge of filing for bankruptcy if it couldn't get bailed out by private investors after the government took a rescue pass.

The week's economic data took a backseat to the earnings reports, but it didn't do any harm either.

Inflation readings provided by the PPI and CPI reports were higher than expected due largely to rising energy prices, but the core rate of consumer inflation, which excludes food and energy, was still within the Fed's comfort zone, up 1.7% on a year-over-year basis. More importantly perhaps, the inflation data helped dampen deflation concerns for the time being.

The Retail Sales and Industrial Production reports both showed end demand remains generally weak. Granted total retail sales were up 0.6% versus May, but when gasoline, autos, and building materials sales were excluded, they were down for the fourth straight month. That is notable because this core retail sales figure is used by the government in computing GDP.

Industrial production declined -0.4% in June. That was the 17th decline in the last 18 months, but since it was the smallest rate of decline since last July, the market put a positive spin on it, thinking it was a sign of better numbers to come. One would hope so given that it was also reported that total capacity utilization and manufacturing capacity utilization hit their lowest level -- 68.0% and 64.7%, respectively -- since records have been kept.

These weak capacity utilization numbers should help dampen inflation expectations as they are a clear reminder that there is plenty of slack on both the production and labor resource side of things to keep wage demands in check.

Initial claims fell noticeably for the second straight week while continuing claims plunged by 642,000 to 6.273 million. That marked the biggest drop ever in continuing claims. In fact, it was so big that few people (including us) believed it. Nonetheless, the headlines themselves didn't hurt at all the way the market behaved in the past week.

Housing starts and building permits data were also stronger than expected and provided some added cover for the Federal Reserve, which raised its central tendency projections for real GDP for 2009, 2010 and 2011. The market found that out by way of the minutes from the June 23-24 FOMC meeting that were released Wednesday.

In conjunction with the raised GDP outlook, the Fed also boosted its projections for the unemployment rate for 2009, 2010 and 2011 to levels that are higher than the White House's current assumptions. We suspect the White House will have to revise its estimates upward in due time.

The White House was a focal point throughout the week for a different reason, as President Obama continued to press the urgency of passing a health care reform act.

The Democrats in the House stepped forward with some draft legislation that would impose a surtax on American families making over $350,000 ($280,000 for individuals) to help pay for the reform effort. The Senate was still throwing around various proposals. The lack of any perceived agreement there we think helped the market move past the House headlines, seemingly resigned not to get caught up in the bouncing headlines until there is an actual compromise bill between the two chambers to debate.

With that, we'll come back to the earnings discussion. The heavyweights that reported in the past week did what they are expected to do at an economic time like this -- put up results that were generally better than expected and extol efforts at picking up market share.

These industry leaders helped smooth things over after an anxious 4-week trading period ahead of the reporting season. Where the market goes from here in the near-term will likely hinge on whether the smaller players in their industries can provide the same calming effect with their earnings results.

The bar of expectations has risen, along with our concerns that the peloton of smaller companies that have yet to report won't be able to keep up with the lead pack. Accordingly, we wouldn't be chasing this rally just yet.

--Patrick J. O'Hare, Briefing.com

 
 Index        Started Week  Ended Week  Change % Change   YTD  
 DJIA 	        8146.52     8743.94 	597.42   7.3 % 	-0.4 % 
 Nasdaq 	        1756.03     1886.61 	130.58   7.4 % 	19.6 % 
 S&P 500 	 879.13      940.38 	 61.25   7.0 % 	 4.1 % 
 Russell 2000 	 480.98      519.22 	 38.24 	 8.0 % 	 4.0 %

4:05PM Tessera Tech receives PTO office action in '627 patent re-exam (TSRA) 28.79 +0.10 : The co announces that it has received a Final Office Action, dated July 14, 2009, from the U.S. Patent and Trademark Office (PTO) addressing the ongoing ex parte reexamination of Tessera's U.S. Patent No. 6,133,627 ('627 patent). The office action rejected certain claims subject to reexamination and confirmed certain other claims as patentable and valid over the prior art. In confirming certain claims added in reexamination as patentable, the PTO Examiner considered claim language based on claim constructions that have been applied in Tessera's litigations involving the '627 patent, including Investigation No. 337-TA-630 (DRAM ITC action).

10:42 am General Electric (GE)

General Electric (GE 11.86, -0.54) reported second quarter earnings that topped expectations but profit fell sharply from last year.

GE reported second quarter earnings of $0.26 per share, including a $0.02 transaction gain and $0.07 in restructuring and impairments. The results may not be comparable to the First Call consensus estimate of $0.23 per share. GE's earnings from continuing operations were $2.9 billion, down 47% from the second quarter of 2008.

Revenues fell 16.6% year-over-year to $39.08 billion, short of the $42.16 billion consensus.

GE said 13% growth at Energy Infrastructure was more than offset by an 80% decline at Capital Finance and a 41% decrease at NBC Universal.

"Our service businesses had positive order and earnings growth in the first half of 2009, and we see this strength carrying over to the second half," said CEO Jeff Immelt. "Global growth continued to be strong: second-quarter industrial revenues grew 31% in China; 46% in India; and 10% in the Middle East."

Immelt said the company is targeting stimulus projects across the globe. "While we have only realized limited revenue to date," he said, "we believe that activity will increase in the second half of 2009."

10:24 am Google (GOOG)

Google (GOOG 428.10, -14.50) reported second quarter earnings that beat consensus, while revenue met expectations.

For the second quarter, the company reported earnings per share of $5.36, excluding nonrecurring items, $0.27 better than the First Call consensus of $5.09.

Revenue (after deducting traffic acquisition costs ) rose 4.5% year-over-year to $4.07 billion vs. the $4.06 billion consensus. Revenues from outside the U.S. totaled $2.91 billion, representing 53% of total revenues in the second quarter of 2009, compared to 52% in the first quarter of 2009 and second quarter of 2008.

Google reported aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of its AdSense partners, increased approximately 15% over the second quarter of 2008 and decreased approximately 2% over the first quarter of 2009.

The company reported GAAP operating income in the second quarter of 2009 was $1.87 billion, or 34% of revenues. This compares to GAAP operating income of $1.58 billion, or 29% of revenues, in the second quarter of 2008. Non-GAAP operating income in the second quarter of 2009 was $2.17 billion, or 39% of revenues, which compares to non-GAAP operating income of $1.85 billion, or 34% of revenues, in the second quarter of 2008.

"These results highlight the enduring strength of our business model and our responsible efforts to manage expenses in a way that puts us in a good position for the economic upturn, when it occurs," said CEO Eric Schmidt.

10:10 am Citigroup (C)

Citigroup (C 3.13, +0.10) reported second quarter earnings of $0.49 per share, which included a gain from the Smith Barney sale and is not comparable to the First Call consensus that called for a loss of $0.37 per share.

Managed revenue, excluding Smith Barney gain on sale, was $22.02 billion vs. the $22.36 billion consensus.

Second quarter net income of $4.3 billion, includes an $11.1 billion pretax ($6.7 billion after-tax) gain associated with the Morgan Stanley Smith Barney joint venture transaction, which closed on June 1, 2009.

Total revenues were $30.0 billion, up $12.4 billion from the second quarter of 2008, due primarily to the Smith Barney gain on sale and favorable net write-ups and gains relative to the prior year period in Citi Holdings, partially offset by the impact of foreign exchange and declines in Regional Consumer Banking revenues, primarily in Cards.

The company reported that its Tier 1 capital ratio rose to approximately 12.7%.

Credit costs increased to $12.4 billion, including an addition of $3.9 billion to loan loss reserves, bringing the total allowance for loan losses to 5.6% of total loans.

Operating expenses were $7.8 billion, down 21% from the prior year period, primarily due to re-engineering initiatives, the impact of foreign exchange and reduced marketing.

Credit costs were $2.8 billion, up 57% from the second quarter of 2008, reflecting $1.6 billion of net credit losses and a $1.2 billion reserve build.

09:50 am Bank of America (BAC)

Bank of America (BAC 13.32, +0.15) reported second quarter earnings that beat consensus estimates but revenues fell short of expectations.

The company reported second quarter earnings of $0.33 per share, which was $0.05 better than the First Call consensus of $0.28. Revenue rose 60.6% year-over-year to $32.77 billion, below the $33.1 billion consensus.

The company reported a Tier 1 Capital ratio of 11.93% and said it holds a leading liquidity position among global banks. Also, the company said the Merrill Lynch integration is on track and meeting expected goals.

For 2009, Bank of America expects to achieve in excess of 40% of the previously announced goal of approximately $7 billion in cost savings, ahead of the original goal of 25% for the year. The company also noted that the Countrywide transition and related cost savings are on track.

BofA noted that credit quality deteriorated further as the economic environment weakened. The company said that consumers remained under significant stress as unemployment and underemployment increased and individuals spent longer periods without work, which led to higher losses in almost all consumer portfolios compared with the prior quarter. The provision for credit losses was $13.4 billion, flat with the first quarter.

Bank of American reported credit losses were higher than the prior quarter and reserves, which were increased by $4.7 billion, were added across most consumer portfolios and the commercial portfolio, reflecting the impact of the weak economy. Nonperforming assets were $31.0 billion compared with $25.6 billion at March 31, 2009, reflecting the continued deterioration in economic conditions, while Global Card Services swung to a net loss of $1.6 billion as credit costs rose in the weakening economies in the U.S., Europe and Canada. Managed net revenue declined 2% to $7.3 billion mainly due to lower fee income partially offset by higher net interest income, as lower funding costs outpaced the decline in average managed loans.

08:21 am IBM (IBM)

IBM (IBM 110.64) posted second quarter earnings that easily beat the consensus estimate and issued upside guidance for the full year.

For the second quarter IBM reported earnings of $2.32 per share, $0.30 better than the First Call consensus of $2.02.

Revenues fell 13.3% year-over-year to $23.25 billion, shy of the $23.59 billion consensus. All geographic areas saw revenues dip, with the Americas down 9%, Europe/Middle East/Africa down 20% and Asia-Pacific down 7%.

IBM said its gross profit margin was 45.5% in the quarter compared to 43.2% in the same quarter last year, led by improving margins in services and software.

IBM's results were driven by lower expenses, as the company said its total expense and other income decreased 19% year-over-year to $6.3 billion.

Big Blue issued upside guidance for 2009, saying it expects earnings of "at least $9.70" per share. IBM previously expected $9.20 per share while the consensus estimate currently stands at $9.15.

"We are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers," said CEO Samuel J. Palmisano. "We are well ahead of pace for our 2010 roadmap of $10 to $11 per share."

Shares of IBM are more than 31% higher year-to-date and are about 1.9% higher an hour ahead of Friday's opening bell.