The Overnight Report: No Kicker

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By Greg Peel

The Dow fell 29 points or 0.25% while the S&P slipped 0.05% and the Nasdaq 0.14%.

The Dow was up 63 points on the open following the second quarter result from Dow component Bank of America. BA became the fourth commercial bank after Wells Fargo, JP Morgan and Citigroup to beat estimations, with earnings coming in at US72cps versus US59cps consensus. Once again, this looked fabulous.

But once again, only if you consider a 41% fall in income to be fabulous, along with US$5.8bn in further write-downs. The result also included US$212m in costs on the consolidation of recently acquired Countrywide, although Countrywide’s US$2.3bn loss was not incorporated into BA’s books this quarter.

The BA-driven rally was not to last long. While BA shares finished up 4% on the day, the rest of the financial sector was mixed to down following an extraordinary round of short-covering last week. The moratorium on naked short-selling began last night, and volatility calmed considerably. The VIX is now at 23.

Markets do not usually jump 20% and go on with it straight away and this was the case with the financial index last night. Also putting a dampener on last week’s enthusiasm was a bounce-back in the price of oil. Oil rose US$2.16 to US$131.04/bbl. While oil’s big fall last week suggested some stabilisation was nigh, the impetus for the rise came from the Gulfs – Persian and Mexican.

Part of oil’s fall last week was attributed to apparent progress in the diplomatic tussle between Iran and the US, however on the weekend the two rivals once again hit a stalemate over nuclear enrichment on the one hand and sanctions on the other. Meanwhile, weather-watchers said well hello as Tropical Storm Dolly strengthened in the Gulf and threatened to cross the Texas-Mexico coastline as Hurricane Dolly.

On oil’s move the Dow then fell to be down 73 points before rallying back to unchanged and falling off again.

The US dollar had responded well to the BA result but also began to fall back as oil rose. Adding to weakness in the greenback was the release of the June leading economic indicators result, which fell 0.1%. While this was in line with expectation, the number implies that the US economy will be weaker in 3-6 months time.

Gold rallied on oil and the US dollar, clawing back US$10.90 to US$965.50/oz. Despite the lower than expected Australian PPI (which helps reduce expectations of an interest rate rise) the Aussie shot up over US0.6c to US$0.9768. Japan being closed may have helped.

Base metals also swung back into positive mode on oil and the dollar, with aluminium (the new volatility) adding 3%, with lead (always volatile) up 5% and zinc 3%, with the others slightly higher.

The SPI Overnight lost 32 points.

That was the day session. The real action was in the after-market session.

There were four major profit releases after the bell last night – Dow components American Express and Merck, and leading techs Apple and Texas Instruments. All of them were bad.

American Express’ second quarter earnings came in at US56cps versus US88cps estimate. The company which goes right to the heart of consumer credit saw its income drop 38% and management warned that Amex would not be able to meet longer term targets until the economy showed improvement. Amex shares fell 3% in the day-session and another 11% after the bell.

Drug giant Merck had already spooked the market during the day session following a negative announcement regarding the effectiveness of its cholesterol drug Vytorin. The company withheld its result till after the bell, and then announced earnings roughly in line with estimation. However with doubt now surrounding Vytorin, Merck elected not to provide ongoing guidance which was enough to worry the market. Merck shares had fallen 6% in the day session and fell another 7% after the bell.

CSL ((CSL)) shareholders will not be pleased to hear that among the numbers was a significant drop in the sales of Gardasil.

Tech star and lauded purveyor of iThis and iThat – Apple – put in an EPS of US$1.19 against expectation of US$1.07. However, the gloss was taken off when September quarter guidance was announced as US$1.00 versus an estimate of US$1.25. Apple shares were up 0.6% in the day session and fell 6% after the bell.

Tech conglomerate Texas Instruments booked a 4% drop in income, with EPS slightly missing at US44c versus US45c. Despite the close result, Texas management noted its dismay at a sudden drop-off in demand in the quarter and the market reacted accordingly. The shares were up 1% in the day session and down 12% after the bell.

This quartet of disappointment will not bode well for Wall Street’s opening tonight. Earnings results are gradually painting a picture of reality and we are only moving into the middle of the season.

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