5-Day Rally Interrupted by Possible QE2 Headwinds

Barely eking out a gain yesterday, the index is now up 5 straight days heading into today’s session. Even though it has been nearly a straight ride up for the markets over the last 2 months, the S&P’s current winning streak is its longest since July, when it was up 6 straight days.

Stocks have been clearly riding the QE II wave the last couple of months, with the S&P 500 gaining 13 percent since August 30.

But stocks are taking a step back this morning as futures are indicating a lower open after the Wall Street Journal reported that the Fed’s next round of monetary stimulus (i.e., QE II) will be more “measured”—likely consisting of “a few hundred billion dollars over several months” compared to the $1.7 trillion program implemented in the wake of the financial crisis.

That report is also helping the dollar, which is up 2 days in a row, and now at a one week high, while commodities fall 1 percent in early trade, putting some pressure on metal stocks.

On the earnings front, the key theme traders are looking at is the recurring concern over recent rising commodity costs.(see Kimberly Clark , Masco , Sherwin Williams earnings reports from yesterday).

Just like yesterday, this morning, a number of companies are citing concerns of higher costs in their latest quarter. In the wake of those higher raw materials prices, companies are having mixed results on passing on those higher costs to their customers without negatively impacting demand for their products. Price hikes have been challenging for many companies in this struggling economy as customers—whether they be companies or consumers—continue to spend conservatively.

In fact, as we’ve seen with some of the consumer companies of late, promotional activity remains heavy to help spur sales. Regardless, the ability to pass on higher materials costs is quite clearly having an impact (and will continue to do so) in the some of the bigger earnings reports this morning. Take a look at some of the successes and failures:

a) Whirlpool beat estimates ($2.22 vs. $1.76 consensus) as cost controls offset lower margins due to price cuts and higher material prices. Revenues were slightly higher than expected despite a 3 percent decline in U.S. shipments.

The appliance maker reaffirms full-year guidance of $9.56-$10.06 vs. $9.21 consensus, but now sees shipments growing just 3 percent, down from a prior expectation of 5 percent growth.

b) Proctor & Gamble Q2 earnings topped estimates ($1.02 vs. $1.00 consensus). Revenues were short of expectations on lower pricing, but organic sales grew 4 percent as volumes rose 8 percent. Margins were pressured in the quarter by higher commodity costs—a trend that the consumer goods company expects will continue in the current quarter. Guidance for the current quarter of $1.05-$1.11 falls mostly below estimates of $1.11 due to higher commodity costs and promotional activity.

c) International Paper earnings soared past estimates ($0.91 vs. $0.79 consensus). Revenues grew a strong 13.5 percent, more than expected as the packaging materials maker was able to raise prices and still realize higher volumes, particularly in its consumer packaging division.

d) Dr. Pepper Snapple reported earnings of $0.60 as revenues were just about inline with estimates. Although the beverage maker was able to raise prices and still increase volumes (carbonated drinks up 1 percent, non-carbonated beverages up 5 percent), those benefits were offset by greater promotional activity costs.

Guidance for the full year remains very conservative however. Earnings are expected between $2.30-2.38 vs. $2.37 consensus on sales growth of just 1 percent-2 percent vs. 2.2 percent consensus.

Bookmark CNBC Data Pages:



Questions? Comments? tradertalk@cnbc.com