Positive comments and a better-than-expected earnings report from tech bellwether Intel could capture the imagination of investors, who have been hoping tech will rescue the earnings season.
Intel Tuesday was the first major tech to report, and its results will be used to handicap other tech names ahead of their reports. Wednesday is a quiet day for earnings, but Intel could help set the tone for technology shares. Excluding charges, Intel said its adjusted earnings amounted to $0.18 per share, well above the $0.08 per share expected by analysts.
The company's closely-watched margins slipped to 50.8 percent, but topped street estimates of 46 percent. The company said margins could improve to better than 55 percent in the second half. In a statement, CEO Paul Otellini said the company's results reflect improving conditions in the PC market. He said the company's 12 percent growth was the strongest second quarter sequential growth since 1988. The company also has "clear expectations for a seasonally stronger second half."
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Those are certainly encouraging words for a market that has been obsessed by a lack of guidance and is concerned that the economy's attempts to recover are sputtering. Intel reported a net loss of $398 million, or $0.07 per share, after a $1.45 billion charge, related to a European fine.
On the calendar for Wednesday are the consumer price index, at 8:30 a.m.; business inventories at 9:15 a.m. and the Fed's minutes and economic outlook at 2 p.m.
Goldman Sachs , as predicted, also reported better than expected earnings, ahead of Tuesday's opening bell. Goldman earned $4.93 per share, compared to the $3.39 expected by analysts. The stock market though was lackluster on thin volume, with the Dow up 27 at 8359; S&P 500 up 4 at 905, and the Nasdaq up 6 at 1799.
Financial stocks, which bolted higher Monday on an upgrade of Goldman by bearish analyst Meredith Whitney, were among the worst performers Tuesday. Financials declined 0.3 percent. The best performers were the beneficiaries of the recently popular recovery trade. Consumer discretionary were the top sector, up 1.5 percent, while industrials and energy rose 1.2 percent.
Pete McCorry, who trades bank stocks at Keefe Bruyette, said investors are intentionally staying on the sidelines ahead of the major earnings reports. "The first conversations we've had, even thinking about normalized (bank) earnings were in the past quarter. These are pretty pivotal earnings," he said.
Earnings expected Wednesday include just a few major names, including Abbott Labs, AMR and Gannett. Traders will be looking ahead to the major financial companies reporting toward the end of the week, with JPMorgan Thursday and Citigroup and Bank of America Friday.
Daniel Deming of Stutland Equities said the market's bias could be higher for the rest of the week because of options expirations Friday. "The expectation of the market participants is that the VIX is going to close July somewhere around 25ish. That's the activity we're seeing right now," said Deming, who trades the VIX at the CBOE. The VIX drifted lower Tuesday, on the heels of a sharp move down Monday that paralleled the stock market's rally.
The VIX is the Chicago Board of Options Exchange's volatility index and it is considered a measure of market fear. Deming said the stock market's behavior has been a surprise to traders who thought it would move lower after breaking key technical levels last week. "People were expecting it to pick up steam and sell off . Once it didn't culminate (Monday), we saw the VIX come in 10 percent," he said.
As stocks held gains Tuesday, a selling wave hit the Treasury market. Jefferies Treasury strategist John Spinello said the sell off was stronger than he had expected. The yield on the 10-year edged up to 3.445 percent, its highest yield since July 7.
"You've got the stock-bond trade, where equities just lent to a lower bond market. You had the reverse of safe haven trade," said Spinello.
"I think the acceleration of the bond market move has to do with liquidation from somewhere," he said.
Treasury traders are focusing on the Fed's 2 p.m. release Wednesday to see what FOMC members discussed about quantitative easing at their last meeting. J.P. Morgan U.S. economist Michael Feroli said he expects little on quantitative easing but he does expect the Fed to make a slight upward revision to 2009 and 2010 growth.
"The folks in the bond market are still getting pretty antsy. I would suspect it doesn't sound too friendly on the asset purchase stuff ... not as friendly where they potentially discuss buying more," he said.
"I kind of get the sense they feel this way ... like almost like they think it's a bad mistake..so for that reason, I just kind of expect them to let the whole issue kind of die here and not keep the ball rolling," he said.
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Feroli said he would not be surprised to see the Fed adjust its unemployment forecast. The mid-point in the April projection was 9.4 percent, below the 9.5 percent rate reported for June. Feroli said his forecast is for 10 percent unemployment by the end of the year.
"The harder call is on inflation. We expert a modest upward revision to 2009, mostly on stronger -than-expected April data. In some of the more recent Fed-talk, concerns about deflation seem to be creeping back into the conversation," he wrote in a note. He pointed to a July 8 speech by Chicago Fed President Charles Evans who said his views on inflation went from being balanced to skewed to the downside.
On Tuesday, Kansas City Fed President Thomas Hoenig said in an interview with Reuters that even in this climate, the long term threat of inflation should not be ignored.
The dollar, meanwhile, gained 0.4 percent to $1.3939 against the euro Tuesday. It gained 0.5 percent against the yen. Oil was barely changed ahead of Wednesday morning inventory data.