Big declines in Apple and IBM shares could sour stocks Tuesday, as traders watch for earnings from Bank of Americaand other big names, like Goldman Sachs, Coca-Colaand Johnson and Johnson.
Both Apple and IBM took a beating after late day earnings reports, even as their stocks ran up ahead of the reports earlier in the day. Apple reported a 70 percent earnings gain on strong iPhone sales, but the stock sold off as iPad and iPod sales came in short of expectations. Apple earned $4.31 per share on revenues of $20.34 billion. Apple shares fell below $300 in the after hours session after closing at $318.
IBM shares also skidded, even though it beat Wall Street expectations. IBM reported earnings per share of $2.82 and revenues of $24.27 billion, higher than the expected earnings of $2.75 per share and revenues of $24.13 billion. Analysts were disappointed by the sales from IBM's technology services business, which were down 7 percent.
"They're definitely going to hit the tech sector. The S and Ps will come under pressure. The question is will it be different this time, where the pull in isn't shallow," said Scott Redler of T3Live.com.
"IBM had a huge move from $125 to $142. No matter what they came out with, it would have sold off," said Redler, who follows the market's short term technical moves.
There are dozens of earnings reports Tuesday, including Bank of NY Mellon, Lockheed Martin, Occidental Pete, State Street, Peabody Energy, Illinois Toolworks, United Health, Weatherford Internationaland American Electric Power, all expected in the morning. Yahoo,Boston Scientific, Altera, Salle Mae, Stryker andGilead report after the close.
Housing starts at 8:30 a.m. is the only economic report, but there is a parade of Fed speakers Tuesday.
Stocks finished higher Monday after starting the day on a weak note. The Dow was up 80 at 11,142, and the S&P 500 was up 8 at 1184. The S and P financial sector, battered last week, was the best performing sector, gaining 2.3 percent after Citigroup earnings topped expectations.
"It (Citigroup) was a bit firmer than people thought. Bank of America is still the overhang catalyst," said one trader. Bank stocks were hit hard last week by concerns that state investigations into foreclosures will result in losses. Traders are watching banking industry comments closely, as there is a bigger concern that banks will be forced to take back bad mortgage loans if they are proven to have made misrepresentations.
J.P. Morgan fixed income analysts said, in a report, that they believe the foreclosure issues, including "robo-signing," is more of a process issue and can be fixed in the near term. They say the more thorny issue is putback risk from bad mortgages.
The analysts said the putback losses could reach $55 billion to $120 billion when taking into account realized losses, loss reserves and indemnity agreements. They also note that the losses would be spread out over years, making the cost to the industry about $10 to $25 billion annually.
"I don't think it's in the 10s of billions or 100s of billions of dollars," said Paul Jablansky, senior fixed income strategist at RBS, specializing in nonagency mortgage backed securities and consumer asset backed securities.
Jablansky said he's still working up the numbers on the putback losses. "Our working assumption has been that ultimately we'll find somewhere on the order of 1 to 3 percent of the loans have some sort of fatal problems," he said.
He said the secondary mortgage market has so far shown little response to investigations and the freeze in foreclosures. "We saw increased bid list volume but we still saw a high percentage of the bonds trade and not necessarily at much lower prices," he said.
Treasurys regained their footing Monday after last week's sell off. The 10-year was yielding 2.491 percent.
Nomura Treasury Strategist George Goncalves said he thinks bonds are getting pricey and investors should take profits. "A lot of pessimism is out there. The bond market is pricing not just quantitative easing (QE), but also that growth is going to be so lackluster that QE won't work," he said.
The promise of quantitative easing by the Fed has pumped up risk assets, and pushed down the value of the U.S. dollar. The Fed next considers quantitative easing at its Nov. 2 and 3 meeting. Analysts widely expect the Fed to launch a new program, under which it would buy Treasury securities in an effort to pressure lending rates, reflate assets and stimulate growth.
"The positioning around QE2 has become so extreme it's giving a mixed signal on the economic growth prospects of the U.S.," Goncalves said.
Goncalves said the 10-year yield could slip to a low of 2.25 percent, but he thinks it will reverse course soon because bond investors have become overly pessimistic on the U.S. economy. "This is one time where I think the stock market is starting to get it right. The Fed is going to be there all along with easy policy for many quarters. Everyone says the credit channels are broken and what's the point of doing QE...If the S and P is at 1300 a year from now, and that creates wealth effect, that in a way is opening up the credit channels because people will feel better," he said.
The dollar got a lift late afternoon lift from Treasury Secretary Tim Geithner's comment that the U.S. is not devaluing the currency. The Administration has recently been quiet on the dollar's decline, and analysts have noted that Administration officials no longer discuss a strong dollar policy. Geithner also said he expects China to continue letting its currency appreciate against the dollar.
The U.S. Friday put off releasing a seminannual currency report that identifies which countries are manipulating currencies. There was speculation the U.S. could have labeled China a currency manipulator, but that Administration officials did not want to name China and it is holding off the report until G-20 finance ministers meet later this week and the G-20 world leaders meet in November.
Michael Moran, senior foreign exchange strategist at Standard Chartered, said it may be the dollar decline may be getting ready to reverse course. "It's a little overdone, and certainly against the major crosses," he said.
"It would seem it's become the consensus trade and whenever that happens, it's good to start thinking about what is non consensus," he said. The Fed meeting and G20 meetings provide potential event risks for the greenback, he said.
Currency will certainly be a focus at the G-20 finance ministers meetings in Korea later in the week. "I call China a lightning rod here. They will be very much at the forefront of everybody's mind when we talk about currency competitiveness. We don't detect a significant change in stance form the Chinese perspective. We would note that certainly from the dollar /China fix over September, they've been moving their currency," Moran said. "Since the the beginning of September, the fix is down 2.36 percent." In that time, the dollar is down about 10 percent against the euro.
Moran said investors were disappointed with the recent IMF/G7 meeting because officials did not provide a framework for coordinating currency policy. "In the broader forum of G-20, I would have thought the difficulties of reaching consensus is even harder," he said.
The U.S. dollar's slide has coincided with a stampede into emerging market currencies and assets.
On Monday, Brazil took new measures to try to cool the rally in its currency. Finance Minister Guido Mantega announced an increase in the tax on foreign bond purchases to 6 percent form 4 percent, the second increase this month. The move is designed to stem foreign investment in Brazil, which also increased taxes on margin deposits on futures markets to 6 percent.
Interestingly, Mantega has decided not to attend the G20 meeting and is sending other officials in his place, as he stays home to deal with the rising real. Mantega late last month had pledged to take measures to stem the real's gains in response to what he called global "currency wars."
Aminio Fraga, former head of Brazil's central bank, said he didn't know why Mantega is not attending the meeting. "I'm not sure...It's a very important meeting. This whole discussion about currency wars that our minister started is hot.. and so I'm surprised. Well, at home, if you look inside its probably because of the elections. We're going to have a runoff in a couple of weeks and he may be sticking around because of that. I'm not sure, there's a lot going on. for that, we know, said Arminio Fraga, former Central bank of Brazil Chairman. Fraga, BM&F Bovespa chairman, was speaking to Amanda Drury on "Closing Bell" Monday.
Moran said the move by Brazil's finance minister is interesting since he has been so outspoken about the problem his rising currency poses. "Whether this is a veiled issue, and he turns up, I don't know," he said.
Atlanta Fed President Dennis Lockhart starts off the day's string of Fed appearances, with an interview on CNBC at 8 a.m. Then New York Fed president William Dudley speaks to the media at 9:30 a.m. Chicago Fed President Charles Evans speaks at 9:40 a.m. on the economic outlook.
Lockhart gives a speech on the economy at the Southeast U.S. Japan Association Meeting at 11:30 a.m. Dallas Fed President Richard Fisher speaks in New York at 12:50 p.m., and Minneapolis Fed President Narayana Kocherlakota speaks at 1:20 p.m. on the tools of the FOMC.
Fed Chairman Ben Bernanke then makes opening remarks at the Junior Achievement Finance Park in Fairfax, V.a at 4 p.m. Fed Gov. Elizabeth Duke speaks at 7 p.m. to the Money Marketeers of New York University.
- Follow me on Twitter @pattidomm.
Questions? Comments? Email us at email@example.com