The Big Story Today

Big story today is the June ISM Index...it's the first big read on June, and a reading under 50 (which would indicate contraction) would likely cause a negative reaction in the markets. ISM hasn't been below 50 since July 2009.

Speaking of manufacturing: China's PMI was below expectations at 50.9, the weakest since February 2009. At least rate hikes might be on hold over there.

The people who argued that QE2 ending was a non-event must not be watching the same market I'm watching: the S&P was up over 4 percent in the final four days of the quarter, and bond yields moved up about 30 basis points. Institutional investors likely rebalanced their portfolios to buy stocks and sell bonds.

Because of the rally, there is a lot of tail-chasing going on here...cash does not go up in a rising market, the only ones who owned significant stock going into this week are the ones who went through 7 weeks of pain.

Aside from DSK and the June ISM Index, the key story this morning is about earnings, and the narrative is being described by bulls:

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1) Q2 earnings expectations are low in the trading community , with many traders expecting disappointments due to higher commodity costs and knock-on effects from the Japanese earthquake; 2) analysts have not lowered Q2 earnings estimates, and for once they might be right; 3) most traders are expecting corporations to lower guidance for the second half of the year, but bulls argue that many of those factors that hurt in Q2 (the quake, higher commodity costs) will be less noticeable in the second half.

A key bull argument: growth in the second half will be twice that of the first half. Stronger auto production, lower gasoline prices, a stronger Japan means 3 + percent GDP growth for the second half.

What could go wrong with the bull analysis? Plenty: the Fed is not decreasing their balance sheet, we are moving into Japan-like GDP growth, an eventual Greek default, and several traders raised the possibility of a China banking scandal in which they repatriate capital to bolster their balance sheets, potentially causing a spike in rates here.

Elsewhere:

1) A better Q3 than Q2? That's been the trend recently. Since 2003, Q3 has been the best quarter of the year for the Dow, S&P, and Nasdaq, which have all seen an average Q3 return of 3-4 percent.

2) Darden Restaurants (DRI) falls about 1 percent even as Q4 earnings were inline with estimates. Comps rose 2.5 percent as better-than-expected Red Lobster, Capital Grille, and Longhorn Steakhouse comps offset disappointing sales at its Olive Garden restaurants. The casual dining company also boosted its quarterly dividend by 34 percent to $0.43. Stronger expected sales in the current year will help propel earnings to grow by 12-15 percent, mostly higher than the Street's expectations of 12 percent growth.

Not much on food inflation, but they will certainly address that on the conference call. They had previously guided to cost inflation of 4 to 4.5 percent.

3) Oshkosh jumps 9 percent after a filing revealed that investor Carl Icahn has acquired a 9.5 percent stake in the maker of military, emergency response, and construction vehicles.

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