Companies reporting have not all been beating the estimates but overall the earnings have been better than expected and guidance is good.

Market Statistics

Goldman Sachs (GS) posted its second quarterly loss ever since it went public in 1999. The firm posted a loss of 84-cents or $428 million, which was much worse than analysts had predicted for a 16-cent loss. In Q3-2010 Goldman earnings $1.74 billion or $2.98 per share.

Goldman lost -$2.48 billion in its investing and lending group. That included a $1.05 billion paper loss on its investment in the Industrial and Commercial Bank of China. Revenue declined -60% and Goldman cut compensation allowances, the money set aside for year end bonuses, by -59%. They also reduced the headcount by 04%. Goldman's revenue in fixed income trading, currency and commodities trading for clients declined -36% to $1.73 billion. Equities trading reported $2.3 billion in revenue, up +18%. Underwriting revenue fell -61% to $258 million thanks to the choppy market and economic uncertainty keeping companies on the sidelines.

The bank bought back $2.16 billion of its own shares and the CFO said they wanted to buy back more at its current undervalued level. Goldman ended the quarter with $164 billion in cash and unencumbered securities. One analysts said Goldman remained the best house in a bad neighborhood. I would personally be a buyer of Goldman again after a year of ugly declines. The wildcard here is the new financial regulations including the Volcker rule, which prohibits banks from trading for their own accounts. Goldman has said they may drop their banking status if the final draft of that rule, now under consideration, is too restrictive.

Goldman Chart

Bank of America (BAC) reported net earnings of $6.23 billion or 56-cents per share. That compares to a loss of -$7.3 billion or 77-cents in the year ago quarter. Revenue rose +6% to $28.7 billion. The bank reported better credit quality but gave cautious guidance on mortgages. The mortgage division posted a $1.1 billion loss.

Unfortunately the earnings included numerous one-time gains that would have left BAC with a loss in their absence. They had a $3.6 billion gain from selling a stake in China Construction Bank. They also reported a $1.7 billion gain tied to the changes in the value of the company's debt. They also took a $2.2 billion loss related to private equity investments. Also helping was a decline in the provision for loan losses to $3.4 billion from $5.4 billion.

The challenge with mortgages continues to be chronic unemployment, high foreclosures, distressed sales with mortgage write downs and legal costs associated with the various litigation events in progress.

The bank saw its exposure to the five weakest European nations decline to $14.6 billion from $16.7 billion.

The bank has cut $5 billion in costs and will continue to cut costs over the next two years according to CEO Brian Moynihan. They are also going to add a $5 charge for debit cards to offset the loss of swipe fees in the new set of financial regulations. BAC shares rallied +10% on the earnings report.

BAC Chart

EMC Corp (EMC) reported blowout results with a +28% rise in profits thanks to rapidly increasing demand for storage. Earnings rose to $605.6 million or 27-cents from $472.5 million and 22-cents in the comparison quarter. Excluding items earnings were 37 cents and beat estimates of 36 cents. EMC sales rose +18% to $4.98 billion that exceeded estimates of $4.91 billion. EMC reiterated guidance that was in line with analyst estimates. The said spending by European banks and governments had slowed but spending by private companies and consumers remained strong. EMC shares rose +6% on the news.

EMC Chart

Not all the earnings reports produced rallies in the underlying stocks. Polaris Industries (PII) reported better than expected earnings and sales but the stock was crushed on cautious guidance. Earnings were 95 cents compared to estimates of 84 cents. Revenues rose +26%. The company raised guidance for the full year to a range of $3.10 to $3.16 and sales growth of 30-32% compared to $2.14 in 2010. Where it ran into trouble was a warning that 2012 could see slower growth in the 25-28% range although full year earnings had been predicted to be between $5.03 and $6.05 per share. The CEO said caution over continued high unemployment and the slow growth economy caused them to lower expectations. Shares of Polaris declined -7% on the news.

Polaris Chart

Harley Davidson (HOG) reported earnings that beat the street by two cents with 78 vs 76 cents but cut its full year profit margin predictions citing currency exchange rates and production problems that curbed delivery of high margin bikes. The margin decline was very light from 34-35% to 33.5-34.5% but any comments on weakness have produced dramatic declines in stock prices.

The CEO said restructuring downtime had limited the number of high margin bikes produced. He said the Q4 margin mix would be more favorable but ti was hard to predict how long it would take to recover the lost production. They expect to ship 45,500 to 52,500 motorcycles in Q4. Shares of HOG fell -8%.

Harley Davidson Chart

After the bell there was a serious earnings surprise. Apple (AAPL) reported earnings that MISSED estimates. It was the first quarterly miss since 2004. Apple shocked investors with earnings of $7.05 per share compared to analyst estimates of $7.28. Revenue was $28.3 billion, up +39% compared to estimates of $29.4 billion. That is a billion dollar miss.

The reasons were simple. Buyers were holding off on iPhone purchases in expectations of an iPhone 5 announcement in October. The rumor mill on what might be included as new features in the i5 kept buyers on the sidelines. There is no shortage of demand for Apple products. They sold $2.4 billion in iPhone 4S models over the last four days. Had that product release been in Q3 the earnings story would have been a lot different. Apple said it sold 17.1 million iPhones in Q3 and well below estimates for sales of 20.3 million.

Apple raised its earnings estimates for the current quarter to $9.30 per share on revenue of $37 billion. Apple normally keeps its predictions low but in this case they actually guided higher than analyst estimates at $9.00 and $36.7 billion. Considering their conservative guidance history and the earnings miss for Q3 we have to assume the Q4 guidance is also conservative.

Apple shares sold off hard after the announcement. After closing at $422 they declined -$30 to $392. Many investors may see this as a buying opportunity and they could be correct. However, going into the close Apple shares were up +70 since the October 4th lows. There was a lot of profits in that rebound. I think this is an opportunity to buy Apple but we could see some further weakness. If you buy it on Wednesday just be prepared for some volatility. I don't think there are many investors that don't expect Apple to be trading well over $400 in the not too distant future.

Apple Chart

On the opposite side of the earnings ledger Intel knocked the cover off the ball. Intel posted earnings of 69-cents compared to estimates of 61-cents. Revenue was $14.3 billion compared to estimates of $13.88 billion. The chipmaker raised guidance for Q4 to a range of $14.2 - $15.2 billion and analysts were expecting $14.2 billion.

Despite the earnings beat and raised guidance the CFO described European markets as "pretty subdued" and said overall demand for the quarter was merely "okay." That suggests any real rebound in the global economy and Intel is going to be screaming higher. He said despite uncertainty heading into Q4 the emerging markets were strong as were purchases by corporations. Sales of chips for servers and laptops were strong but PC sales were weak because consumers and businesses were still holding on to older PCs until the economy improves.

Intel boosted its stock buyback program by $10 billion. Intel shares rallied +$1 after the report.

Intel Chart

Yahoo shares rallied after the close when they reported earnings of 21-cents compared to estimates of 17-cents. Net revenue was $1.07 billion. The interim CEO said premium display advertising sales were on target. It was a lackluster earnings report. The company said they had hired investment banking firm Allen & Co to conduct a "strategic review" of its business. That is CEO speak for they are reviewing their offers and options. YHOO shares rallied slightly to resistance at $16 on the news. Investors in Yahoo are not concerned with the earnings. They want to know when somebody is going to make a firm offer so they can take profits and move on the next trade.

Yahoo Chart

Major earnings reports due out on Wednesday are AXP, EBAY, ETFC, MS, USB and UTX.

Earnings Calendar

On the economic front the NAHB Housing Market Index rose to 18 for a gain of +4 points and much better than the +1 point expected. The 18 reading is the highest level since May of 2010. The Western region improved dramatically from 12 to 21 while the Northeast was flat at 15. The Midwest improved by +4 to 15 and the South by +4 to 19.

Potential buyer traffic rose from 11 to 14 thanks to the record low home mortgage rates. Those home buying expectations component for the next six months rose to 24 from 17.

This strong rebound in sentiment is directly related to the Fed's Operation Twist program where they are moving their treasury purchases to the long end of the curve and forcing down mortgage rates. This has forced buyers into the market thanks to the record low rates. This is finally a stimulus program that is working for the housing sector. Now if we could figure out how to put everyone back to work before the decade is out the economy would move back into boom mode.

The Producer Price Index (PPI) for September spiked to +0.8% compared to the flat reading on prices in August. The gain was almost completely due to a +2.3% rise in energy prices. After the headline number averaged a gain of only +0.05% over the prior four months this was kind of a shock. Analysts believe the energy prices will ease. According to analysts energy prices rose because of the hurricane and several other short term factors. I disagree with that but I don't have enough time tonight to explain why. Another factor pushing prices higher was a rise of +8.4% in the gold ore index. That is also a short term event.

There is no real inflation at the Producer level. The consumer report will be out on Wednesday.

The big report due out on Wednesday is the Fed Beige Book, the report on economic conditions in each of the Federal Reserve regions. On Thursday the report to watch is the Philly Fed Survey.

Economic Calendar

On the global economic front China reported Q3 GDP of +9.1% growth compared to the +9.3% rate analysts expected. This was seen as a negative economic event because China's growth had fallen more than expected. However, I still see it as a sign they are not headed for a hard landing just yet. As long as their growth remains over 9% the global economy will continue to be just fine. The 9.1% number means China's regulators can relax their controls designed to slow the economy.

There was another round of downgrades in Europe today. Moody's cut Spain's sovereign debt rating by two notches to A1 on continued vulnerability to market stress and contagion from sovereign debt issues. GDP in Spain is expected to decline to +1.0% from +1.8%.

S&P downgraded 24 Italian banks and financial firms citing renewed market tensions and lower economic growth prospects.

Moody's warned France its Aaa credit rating could be at risk. While France has "very high government financial strength" that strength has been diminished by the current European crisis. With fixing the economic contagion in Europe likely to rest on the shoulders of the French and German governments there is risk of over commitment and increasing liabilities according to Moody's.

The Guardian, a UK news organization, released a story late in the day claiming France and Germany had agreed to raise the EFSF fund to two trillion euros from its current 440 billion. The French and German leaders were hailing the agreement as a comprehensive plan to resolve the sovereign debt crisis. The plan was expected to be ratified at this weekend's EU summit according to the news report. The Dow spiked to +250 on the news but quickly gave back some of those gains after the details of the plan were contradicted by Dow Jones.

As reported in the Guardian the current EFSF fund would be leveraged up to two trillion euros. It would offer first loss guarantees to bond holders both public and private. Secondly the fund would recapitalize EU banks to a 9% capital level that would shore up the 66 banks currently at risk.

The Guardian quoted a 100 billion cost for bank recapitalization but the IMF has put the number closer to 200 billion and some private analysts have said it would be closer to 300 billion. Other reports later in the day questioned the ability to leverage up the current EFSF fund since half of its assets are already committed and that should limit the leverage capability to one trillion or less.

Senior EU officials admitted there were significant details still to be worked out before the EU summit this weekend.

The initial news spiked the U.S. markets but the rebuttal comments from various sources immediately cooled the rally but by day's end the buyers came back. Apparently many traders did not want to be short overnight if there was breaking news in Europe.

The news from Europe spiked the euro and the dollar fell sharply. Commodities rallied on the falling dollar and on hopes there might be an actual solution in progress that would end the sovereign debt virus. Crude prices rallied $2 to close just over $88 after spiking to just over $89 intraday. Gold declined -$50 to $1628 intraday but recovered to close down only -16 at the close.

Crude Oil Chart

The markets opened lower this morning thanks to the $9 loss by Dow component IBM. That equates to about 72 Dow points. The indexes will likely suffer the same fate on Wednesday thanks to Apple. Who would have thought that the two stocks that manage their earnings the best would be the ones to disappoint?

The S&P declined to support at 1190 but quickly rebounded to spike as high as 1233 intraday on the news out of Europe on the potential two trillion euro EFSF. The spike was quickly sold BUT the S&P closed at 1224 again. That is the same place it closed on Friday and right at the top of the 1220-1225 resistance range.

After the Apple earnings the S&P futures dropped -7 points but they have recovered somewhat as the night progresses. I believe we are still in buy the dip mode for Wednesday. I think funds will buy IBM and Apple on the dip and the positive news from Intel.

The news from Europe will continue to be erratic as we approach the summit meeting this weekend but everyone does expect some kind of deal to be cut at the meeting. This should keep positive sentiment in the market. Secondly, despite the random earnings bombs the majority of the earnings and guidance have been good.

I would continue to buy the dip until support at 1190 fails. A move over 1225 will hit the 100-day average at 1235 and then resistance from March at 1250. I doubt anyone will complain if we stall at those levels to allow investors to acclimatize and get ready for a potential move higher.

The risk will arrive after option expiration on Friday. Funds will probably keep pushing prices higher until month end but next week will be the key.

S&P Chart

The Dow volatility is increasing but that is due to the earnings in Dow components. IBM pushed the Dow around on Tuesday and with ten Dow components reporting this week that volatility will continue. Every dollar a Dow stock moves it is worth about eight Dow points. The higher dollar stocks have more impact but you get the idea.

The Dow stalled at 11,650 again on the intraday spike but still posted a very respectable gain of +180 points. Support is 11,400 and a breakout over that 11,650 resistance could be explosive.

Dow Chart

The Nasdaq could have a rough Wednesday. The Nasdaq futures are down -28 points in after hours thanks to the monster decline in shares of Apple. I do believe the Apple dip will be bought but I am not confident it will come at the open. I would personally buy the dip if I saw a rebound begin in Apple. Intel's earnings are the offset to Apple's woes. I think the Apple problem was just timing problems on the announcement and delivery of the iPhone and I believe investors who have been waiting for a buying opportunity will understand this. That said there could be a knee jerk reaction by those interested in protecting existing profits and that could overcome initial buyers.

Nasdaq stocks reporting on Wednesday are AMLN, EBAY, ETFC, CAKE and FWRD to name a few. EBay is the only one that could really move the bar and probably only to the downside. Even strong earnings by EBay would not likely push the stock much higher. Offsetting the Apple declines tonight is ISRG, which beat on earnings and revenue and the stock is up +30. Unfortunately with a market cap of only $15 billion compared to $391 billion at Apple the Apple loss wins.

Resistance on the Nasdaq is 2665 and support at 2600 with the close at 2656. Obviously the -28 point futures decline does not put the Nasdaq even close to the 2600 level. I would buy the dip to 2600 for a trade.

Nasdaq Chart

Russell Chart

Dow Transports

The European mess is going to remain the limiting factor for the U.S. markets but continued positive news leading up to the weekend summit meeting could help the markets breakout of their current range. Obviously the news could also kill the markets so the only sure bet is that volatility will remain high.

I would be looking at buying the dip on tech stocks at the open on Wednesday using the QQQ for a quick trade. I would be cautious long term just in case the weekend summit did not go well. Fund managers will probably try to keep the markets "dressed" into month end simply because that is where their fiscal year-end cuts off. The first week of November could be a challenge as the market looks for direction.

Jim Brown

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