Better than Expected Earnings and Economic Data to Lift Markets at Open

July 17, 2008 - The markets are set to open higher this morning, extending their rally from yesterday’s session which was sparked by a marked decline in oil prices. Today, oil prices have been softening for the most part of early morning session, but are just turning slightly higher. Stronger-than-expected earnings reports from Coca-cola (NYSE:KO), United Technologies (NYSE:UTX), SunPower (Nasdaq:SPWR) and JP Morgan (NYSE:JPM) are also adding to an overall upbeat mood this morning.

Oil prices are down for the third consecutive day this morning, having fallen more than $10 per barrel in the past couple sessions. Higher reported supplies yesterday, and expectations that a slowing economy will reduce demand are the primary catalysts for the pullback in oil prices. The EIA reported yesterday that U.S. crude supplies rose 3 million barrels last week, which was higher than the 3 million barrel decline that had been expected. Crude oil stocks are at a high on a YTD basis, so this should help near term tightness, but we have seen plenty of times over the past eight months where oil prices had retreated on expectations of slowing demand only to be propelled to new highs by reports of increasing international demand and production disruptions. Regardless, the pullback in oil prices is welcome this morning.

Initial claims came in at 366,000, but below expectations of 380,000 while continuing claims came in lower than expected as well at 3.12 million. Housing starts came in better than expected as well, and the reaction to the numbers in the futures markets has been pretty positive.

On the corporate front,

·         United Technologies reported earnings of $1.32 billion, or $1.32 per share, up from $1.15 billion, or $1.16 per share for the Q2, 2007. Earnings expectations were $1.30 per share. UTX said it expects revenue of more than $60 billion for the FY and earnings per share between $4.80 and $4.95, up from previous guidance of $4.65 to $4.85.

·         Coca-Cola reported a Q2 loss of $3.17 billion, or $6.52 per share, on revenue of $5.94 billion compared with earnings of $260 million, or $0.56 on revenue of about $6 billion. The loss included a $5.3 billion one-time charge to lower the value of a franchise license in North America, so backing that number out, the company would have showed earnings of $0.56 per share for the quarter. Expectations were for a profit of $0.53 per share.

·         JP Morgan Chase reported earnings of $2 billion, or $0.54 per share, down from $4.23 billion or $1.20 last year. It also announced a mark down of $1.1 billion and increased reserves to $13.9 billiion. Expecations were for earnings of $0.44 per share.

·         Johnson Controls (NYSE:JCI) reported that Q3 profit rose to $439 million, or $0.73 per share, up from $396 million, or $0.66 per share last year. Revenue for the quarter was $9.87 billion, compared with $8.91 billion last year. Earnings per share came in-line with expectations.

·         SunPower (Nasdaq:SPWR) reported another stellar quarter, with net income of $0.34 per share, on revenue of $382.8 million, up 40% on a quarter over quarter basis and up 120% Y/Y from $173.8 million in revenue last year.

In terms of what we expect in today’s session, based on a really bullish mood all the way around, it looks like the indices are all set to rally. However, we think the bullish sentiment is probably overdone, due to the fact that there are so many challenges firmly in place to the economy that we have cited so many times before. There remains a lot of uncertainty about the economy’s health and its ability to get back on track in the near term. So we would use this rally as an opportunity to protect long positions with out of the money covered-calls and protective puts (ask your broker about how to use these derivative positions). We certainly don’t think that the markets are going to run away to the upside at this point and likely that we will test recent lows again in the near term.

IDC Reports on PC Shipments

IDC reported this morning that worldwide PC shipments continue to grow at a “healthy” pace through the Q2, 208, up 15.3% Y/Y, more than projected, and up from Q1 shipment growth of 14.9%. Growth was driven by the EMEA region offsetting slower growth in the Asia/Pacific region (excluding Japan).

"Despite the economic headwinds, the PC market continued to show its resilience," said Loren Loverde, director of IDC's Worldwide Quarterly PC Tracker. "Product refreshes, vendor competition for channels, and aggressive pricing add to the ongoing trend toward Portable computing in attracting buyers. The steady growth, despite the pressure on consumer finances, reflects the increasingly important role of PCs within personal technology, and steady improvements in price and design. Nevertheless, economic pressures are mounting and PC market growth is expected to decline over the next year.

The relatively strong PC market in recent quarters does not mean that the sector is immune to the changing economic environment.""As expected, the U.S. market had a sluggish performance, with growth in low single-digits due to budgetary constraints among both consumers and businesses. Despite a tough economic environment, some vendors executed well, in particular Dell with its channel and retail expansion," said David Daoud, research manager, Personal Computing. "Given the current economic fundamentals, demand could remain depressed in the coming quarters if economic pressures continue, even with sustained price decreases."

Fast Facts

·         The national debt is up to $9.51 trillion this morning.

How Your Tax Dollars Are Being Spent

The Senate Appropriations Committee has allocated federal spending among its subcommittees as listed below. (Figures are expressed per U.S. family, at current interest rates, and do not include "mandatory" spending.) How this money is spent on specific programs will be determined in legislation that will soon be introduced.

·         Agriculture, Rural Development, Food and Drug Administration, and Related Agencies - $181.90

·         Commerce, Justice, Science, and Related Agencies - $529.08

·         Defense - $4,465.86

·         Energy and Water Development - $313.77

·         Financial Services and General Government - $208.00

·         Homeland Security - $354.28

·         Interior, Environment, and Related Agencies - $263.97

·         Labor, Health and Human Services, Education, and Related Agencies - $1,450.95*

·         Legislative Branch - $39.39

·         Military Construction, Veterans Affairs, and Related Agencies - $629.48

·         State, Foreign Operations, and Related Programs - $332.93

·         Transportation, Housing and Urban Development, and Related Agencies - $496.46

*"Mandatory" spending, which is not included, is a significant part of Labor/HHS spending.