The morning dip to Dow 10,000, a -148 point drop was deep enough to scare weak holders out and provide a buying opportunity for earnings bulls.

Market Stats Table

The morning started off grim with a -148 point drop at the open thanks to earnings disappointments by IBM, TXN and Goldman Sachs. Dow component IBM started the bloodbath with a -$6.30 drop at the open. Goldman added a -$5 drop and Texas Instruments a -$1.50 (-6%) decline.

Equities were under pressure from earnings disappointments and from negative economic news. The major economic report out this morning was New Residential Construction. The headline number fell to an annualized rate of 549,000 compared to consensus estimates of 580,000 and last months major drop to 578,000. This is down from the 679,000 rate in April when the home buyer tax credit was still in force. Housing starts are the lowest in more than a year and given the expiring selling season the number of new starts is likely to continue to decline.

Housing completions soared +26% in June to 886,000 as builders raced to complete homes in time for the June 30th closing date for the tax credit. With a decline in new construction it will push buyers into the resale market and help soak up some of those excess inventories from foreclosures. There is some talk about another tax credit scheme but some analysts believe this talk will keep real buyers on the sidelines in hopes it comes true. This talk could actually hurt sales by encouraging procrastination.

Housing Starts

There are no major economic reports on Wednesday. Existing home sales on Thursday is the next report that could move the markets.

Two Federal Reserve banks were pressing for a rate hike when the Fed's Washington board met in June. The Dallas Fed and the Kansas City Fed wanted to raise the discount rate from .75% to 1.0%. The discount rate is the rate the Fed charges banks for emergency loans from what is called the discount window. These are short-term bridge loans when banks run short of cash due to timing issues. The regular Fed funds rate is still 0% to .25%

Ben Bernanke is expected to shed some more light on the matter on Wednesday and Thursday when he goes to Capitol Hill to deliver testimony on the central bank's semi-annul policy report. This will be must see TV since the Fed outlook on the economy changed in the last FOMC minutes.

There was a rumor on Tuesday that the Fed would announce a new stimulus plan where they would quit paying banks interest on their excess reserves. The Fed pays the banks .25% on excess reserves. If the Fed quit paying interest then banks would more likely make loans using some of those reserves and that would stimulate business. Bernanke will undoubtedly be questioned by lawmakers on this rumor. Bernanke has made a lot of outside the box moves to rescue the economy during the financial crisis and this is one that has been discussed on the news shows several times in the last couple of weeks. Another topic has been a new mortgage-buying program to push rates even lower.

The big news this week is still earnings. IBM reported Monday night and was crushed after reporting a decline in services contracts of -12% to $12.3 billion and outsourcing contracts fell -19% to $6.5 billion. They beat the street on earnings despite a $500 million loss from currency translation problems. They raised their guidance slightly but the drop in revenue caused the -$6.30 drop in their stock price at the open. That drop was halved by the close.

Texas Instruments reported profits that tripled but revenue was below expectations due to weaker sales to cell phone makers. TXN raised its guidance for Q3 but did not avoid a -6% drop at the open today.

The big blow to the markets this morning was a sharp drop in earnings by Goldman Sachs. Goldman's earnings declined -82% because of a trading slump and the $550 million payment to the SEC. There was also a $600 million "bonus tax" to the City of London. The drop in trading profits worried investors that maybe the firm was losing its edge and the ability to outsmart the competition. Goldman has normally bucked the trends in the investment banking sector but appeared to be hurt by those trends in Q2. Revenue fell -36% to $8.84 billion and equity trading fell -62% to $1.2 billion as Goldman and others were hurt by the extreme volatility. On the positive side employee compensation was cut by 42% to $3.8 billion. Goldman pays bonuses on profits so fewer profits mean smaller bonuses. Goldman shares dropped $5 at the open but roared back as bargain hunters bought the dip. Now that the SEC problem has been solved Goldman is seen as a strong buy once again.

Goldman Chart

Whirlpool (WHR) reported profits that more than doubled to $2.82 per share from $1.04 in the comparison quarter. Estimates were for a profit of $2.09 per share. The shares lost -3% on the news. WHR said their business was stronger because of the appliance tax credit that expires this year and analysts feared a sharp decline in sales without the tax credit.

After the bell Apple reported earnings that spiked +78% to $3.25 billion or $3.51 per share. Revenue rose +61% to $15.7 billion. Analysts were expecting $3.11 per share and $14.7 billion. For the quarter Apple sold 8.4 million iPhones and 3.3 million iPads. Both devices have been out of stock for weeks with buyers forced to make a reservation for a new device to be shipped later. On the call Apple officials were asked if the company intentionally restricted production to create the shortage and the associated market buzz. They of course said no, we are making them as fast as we can.

MAC sales jumped +33% to 3.5 million. Apple said it was expecting to earn $3.44 per share in the current quarter with analysts expecting $3.83. Apple historically severely underestimates future earnings. Apple said it will wait until Q4 to take a $175 million charge for the iPhone 4 free cases to fix the antenna problem. Apple shares jumped from the $252 close to $263 initially after the news was released but then declined to $258 before trading ended.

Apple is getting a lot of heat from other phone makers for their antenna video but it did not hurt their stock today. In regular trading Apple shares were up +$6.31 before the announcement. Counting the after hours move Apple shares are up about $20 from Monday's lows at $239.60.

Apple Chart

Yahoo also reported earnings tonight that beat the street but the stock was crushed with a -7% loss in after hours. Yahoo reported 15-cents compared to analyst estimates for 14 cents. Revenue was $1.13 billion and analysts were expecting $1.157 billion. Yahoo, CFO Tim Morse, said Yahoo experienced "big customer weakness" among its display advertisers in the U.S. toward the end of June. Some large orders were pushed out into July. However, spending in the first three weeks of July appeared to suggest things were back to normal but the move forced Yahoo to be more cautious with guidance.

Harley Davidson (HOG) gained +13% after reporting earnings of 59-cents compared to estimates of 41-cents. Harley said revenue was flat at $1.14 billion and that was still slightly ahead of estimates. Harley started a restructuring in 2009 to address the impact of the recession on its high dollar products. Harley shed some brands and models and said it would ship 5% to 10% fewer motorcycles to dealers in 2010. Harley begins negotiations with its union in Wisconsin next week and says it is "not flexible" in its demands. If the union does not agree to some substantial concessions Harley will move its production facility out of Wisconsin.

Harley Davidson Chart

Polaris (PII) reported profits that rose +47% and the company raised its estimates for the full year. Off-road vehicle sales spiked +33% and sales in Europe rose +32%. Earnings per share were 75-cents compared to estimates of 68-cents. Polaris raised estimates for 2010 to $3.80-$3.90 from $3.48-$3.60 just three months ago. Analysts were expecting $3.62. Polaris shares gave back an early gain to end up only 31-cents.

VMWare (VMW) a maker of computer virtualization software posted earnings of 34-cents compared to estimates of 32-cents. Revenue rose +48% to $673.9 million. That was more than the $657 million analysts expected. The demand for virtualization is growing by leaps and bounds and VMW apparently is leading the sector in business growth. Shares of VMW gained +4% in after hours to $75.50.

Juniper Networks (JNPR) posted earnings of 30-cents that beat the street, margins were higher at 67.5% and the CFO was optimistic about the second half of 2010. The company said AT&T and Verizon were ramping up spending on network equipment now that the recession was over. What is wrong with this picture? The stock lost a buck after the close after Juniper announced it was going to file a shelf registration to sell up to $1.5 billion in shares. Juniper said it had no plans to actually sell the shares but wanted to have the registration in place to take advantage of future opportunities.

United Airlines (UAUA) posted its best quarterly profit since 1999 of $1.29 per share. UAL said passenger revenue rose +27% overall and 52% in the Pacific and 56% in Latin America. UAL said costs had risen +1.9% while capacity grew 1.1%. The company said to expect more fees for things like checked bags as the airline industry evolved. UAL gained +5% on the news.

Ameritrade saw record trading activity in the quarter thanks to the higher volatility. Average client trades rose to 413,000 per day, a gain of +6%. The company said it added 175,000 new accounts during the quarter bringing its total to 7.9 million. Client assets were $323.8 billion, up +22% from $265 billion a year ago. That was down -5% from the March quarter thanks to the market decline and the increased volatility. The S&P declined -11.9% over the same period. Earnings were 30 cents compared to estimates of 28 cents. AMTD shares fell -4% on the news.

Ameritrade Chart

So far the S&P scoreboard has 46% of companies reporting beating earnings, 31% met estimates and 23% missed estimates. The average beat is approaching a 50% increase in profits from the comparison quarter. However, the strongest companies report first and that number will decline sharply as the weeks progress. The analyst target for the S&P earnings this quarter is a 26% increase. Unfortunately revenues are only increasing by 5%.

BP agreed to sell $7 billion of U.S. assets to Apache. Part of those proceeds will go to the $20 billion cleanup fund to pay claims. With total fines, claims and expenses now estimated to grow to between $100 to $150 billion BP is going to need to raise a lot more cash. BP also announced plans to sell fields in Vietnam and Pakistan, which analysts valued at $3 billion.

BP is currently battling the Coast Guard in an attempt to NOT reopen the collection efforts on the leaking well. If BP is forced to begin collection using all four vessels stationed above then the government can finally find out how much oil actually leaked out of the well over the last two months. Until now BP could only collect up to 25,000 bpd and the rest flowed into the gulf. The current setup has a capacity of up to 80,000 bpd and BP does NOT want to turn it on. BP is liable for fines of up to $4,300 per barrel that leaked into the gulf. If there is no hard number on the flow rate then BP can argue in court that the rate was "undetermined" and try to get a smaller fine. If they turn on the collection system now and find out that the flow rate is 60,000 bpd then BP will be fined on 60,000 bpd for the last two months since they cut off the riser. The total fine could be as much as $18 billion.

BP is trying to stall until the tropical storm headed for Cuba moves too close to connect the collection vessels. If it comes into the gulf BP will gain another ten days as the ships move out of harms way and then back again. However, depending on the track the ship drilling the relief well will also have to shutdown and move. BP hopes it can get the relief well drilled and plugged before the Coast Guard makes them restart the collection process. The storm below has a 60% chance of turning into a hurricane headed for the gulf.

Hurricane Chart

The "Soup Nazi" is back in business. The soup kitchen immortalized in a Seinfeld episode reopened in midtown Manhattan on Tuesday, six years after it closed. The owner, Al Yeganeh, was known for being extremely brusque and ordering instructions were strictly enforced. "THE LINE MUST BE KEPT MOVING. Pick the soup you want! Have your money ready! Move to the extreme left after ordering!" If you didn't move left you might be told "no soup for you today." The line was around the block for the reopening with people willing to pay $20 for an extra-large cup of soup or $7 for a small one. Yeganeh was made famous by Seinfeld but the owner ridiculed Seinfeld as an "idiot clown" and bristles at the N-word label. Yeganeh did not appear for the re-opening because he avoids publicity after the Seinfeld exposure to his abruptness. The Soup Nazi episode was one of the most popular in the Seinfeld series.

Liz Claiborne Inc (LIZ) announced today they will close all 87 outlet stores under the Liz Claiborne brand. They have been losing money for sometime. The Liz Claiborne brand will become an exclusive brand for other retailers. They announced in October 2009 they were moving the namesake line from Macy's to J.C. Penny. Their outlets for other brands will remain open.

The Dow traded in a 229-point range today and probably managed to stop out everyone with either a long or short stop loss. The opening plunge -148 points sent many stocks to new lows for the last week. Dow component IBM was responsible for 45 of the Dow points during the drop.

The Dow came within seven points of Dow 10,000 before recovering on bargain hunting and short covering. The initial bargain hunting rebound prompted many shorts to cover as evidenced in dozens of individual stock charts I scanned. The 2-3 point declines were met with buying but around 1:30 a real short squeeze began to push most stocks well back into the green. The Dow closed at 10,230 and just over the 50-day average.

Dow Chart

The S&P-500 did not decline as far as the Dow. The S&P respected support at 1060 and rallied past Monday's resistance at 1075 to close at 1083. I see this as mildly bullish. However, I believe it is just an earnings expectation bounce for Microsoft, Amazon and Ebay later this week. When the majority of stocks that report earnings are getting killed it does not make sense to buy ahead of a report and hold over earnings.

The S&P still has major resistance at 1100 and I think today's rebound is just setting up another short entry at that level.

S&P-500 Chart

The Nasdaq bounced off support at 2160 and appears to be headed back to resistance at 2250 if Apple can hold its gains past the open tomorrow. The SEMI book-to-bill report tonight rose to 1.19 from 1.12 showing that $1.19 in new orders were received for every $1 in orders billed. This should help the chip sector on Wednesday but the earnings reports will still be the key.

I don't believe the Nasdaq will make it over the strong resistance ahead even if the rest of the big cap techs make it through earnings without a disaster. I would be a buyer over 2250 but only for a short-term trade.

Nasdaq Chart

In summary I still believe we will finish July at a lower level. The performance of companies who have already reported better than expected earnings is a clear indication that investors are not happy with the results. The barely positive +5% revenue gain for the companies already reported is very weak. Earnings are still coming from cost cutting and not increases in sales for the majority of those reported. There are standouts like Polaris and Apple but I doubt they will hold up the market on their own. I am cautious about any further gains and will be looking for the next resistance failure.

Jim Brown