Market Talk

Big show today, markets trying to rebound after yesterday’s sell-off, earnings from Goldman and J&J as well as a look at this afternoon’s earnings, and author, economist and sometimes actor Ben Stein comes on to talk about the U.S. debt issues, the future of the economy and the importance of diversification.

US stocks surge, a day after falling, on…what, exactly?

Because BofA offered a bullish picture at its investor day? Because crude oil futures slipped 42 cents?

Doesn’t look like much changed between yesterday and today, but stock traders are buying today after selling yesterday. The market has been especially volatile lately, and you can count this as just one more session in that string. It’s not a string that likely to end, either.

DJIA surges 124 (1%) to 12214, S&P 500 gains 12 (0.9%) to 1322, Nasdaq Comp rises 20 (0.7%) to 2766. Crude drops, but is still over $105/barrel. Which means today’s action is just traders playing games with numbers. It was the first gain in three sessions for the Dow, and while it regained about 75% of what it lost over the previous two sessions, it’s still down from Thursday.

Banks do lead the way broadly, but the Dow’s biggest gainers are IBM and Caterpillar. Those two, along with Boeing, are often the stocks traders play when they want to juice the index. John’s written about this more than I have, but Caterpillar’s relatively small float makes it particularly susceptible to, ah, suggestion.

Meanwhile, the euphoria yesterday over rumors floating around that Gadhafi was trying to figure a way to get out of Libya have just disappeared, because all the news today is about pro-Gadhafi forces digging in.

Crude futures were indeed essentially flat today. But, twice in the morning, at least twice that we noticed, the market tried to push Nymex crude under the $103/barrel mark, which was previously a resistance point and now appears to be a support point, because traders turned back both attempts. That means, technically speaking at least, crude futures are still poised to rise.

I expect, too, that crude prices will keep rising, as will prices at the pump. At some point, and I think that point is coming soon, it will start to exert a noticeable drag on the economy. The only question you should be seriously worried about is: will oil prices rise enough to break the economy? We know that they can; we don’t know yet whether they will.

Apple and IBM’s earnings (blow out earning, in the case of the former) can’t overcome the market’s general malaise today, as Goldman’s earnings and the housing-starts report were two notable disappointments.

US stocks close higher as Citi’s earnings and a better-than-expected measure of home-builder confidence prompted investors to move into risky assets.

DJIA rises 81 (0.7%) to 11144, led by BofA’s 3% rise and JPMorgan’s 2.8% gain. Blue-chip index posts first gain in three days and hits its highest close since May 3. S&P 500 gains 9 (0.7%) to 1185, behind a 2.3% rise in the financial sector. The broad measure has risen in six out of the last seven sessions. Nasdaq Comp increases 12 (0.5%) to 2481.

Financials on fire after suffering big losses at the end of last week. Citi jumps 5.6%, Wells Fargo rises 5.5% and Fifth Third gains 3.4%. Dollar started the session higher, but as stocks rallied, the dollar fell and the euro rose, continuing a familiar theme.

Focus shifts to earnings. Apple and IBM both fall in after-hours trading even as results exceed expectations. That’s what happens when these stocks are priced to perfection. IBM had been up 16% since August and Apple was sitting at an all-time high of $318 a share prior to results. But Apple only sells 4.2 million iPads and 9.1 million iPods. Shares fall 6.3% in late trading. And IBM’s outsourcing signings fall more than expected in 3Q and shares drop 3.9%.

Next up, BofA, Coke and J&J all scheduled to report quarterly results.

Earnings season is starting to produce some high-profile disappointments, like IBM and Goldman Sachs, which is what we’re discussing today on the Markets Hub. (By the way, I have no idea why I said “International Business Machines” at the top instead of just IBM. Who doesn’t know IBM? Weird.)

Of course, we’re also taking a look at Apple, which will disappoint absolutely no one. Those guys are masters at playing the expectations game.

You saw it out of IBM and Texas Instruments. You saw it this morning with Goldman Sachs. Revenue, it’s down. So, what’s keeping earnings up? Margins. That’s the focus of today’s Upshot column:

More than two years after the recession put corporate America on a cost-cutting binge, companies are still finding ways to squeeze more profit out of smaller operations.

Second-quarter margins are looking great for companies reporting thus far, and the higher margins are keeping the three-quarter-long rebound in profitability running.

Toy maker Hasbro Inc. on Monday posted a surprising 11% jump in earnings, even as revenue fell 7%. The Pawtucket, R.I., company’s operating margin, or profit from ongoing operations, increased to 10.8% from 9.2% a year ago as royalty payments including for its Transformers and GI Joe toys were down 32% and advertising costs fell 12%.

The only problem with this, is that right now magins are running ahead of historic norms, and history suggests they will eventually come back down to those levels. If sales don’t rise over the next couple of quarters, margins will come under pressure. It’s amazing, actually, that companies can still find places to trim, more than two years after the recession started. That, of course, doesn’t say much for prospects in the jobs market, incidentally.

Stocks looked like they might stage a rally in the premarket session, but it’s not really showing up in regular trading. That’s because the focus is turning back to the U.S. and the recovery here, and how that’s showing up in this season’s earnings report.

US stocks jump across the board as energy leads the way following a 2.5% rise in crude oil futures. DJIA gains 25 to 11117, S&P 500 increases 10 to 1207, Nasdaq Comp rises 20 to 2500.

All ten of the S&P 500′s sectors post gains amid light volume.

Oil snaps back after a three-day losing streak. Earnings, however, disappointed investors, with IBM dropping 1.9%, Coke falling 1.5% and Johnson & Johnson declining a fraction.

Keep in mind the Dow has gained 98 points this week, coming close to regaining the 126 points it lost last Friday when the SEC dropped its bombshell civil-fraud suit against Goldman.

Lots of activity on the earnings front after hours.

Apple (AAPL) tops expectations for FY2Q, which comes as a surprise to anyone who’s never heard of Apple. The company’s FY3Q EPS estimate of $2.28-$2.39, which is well below Wall Street’s estimate for $2.70 a share, is a classic strategy of remaining overly conservative. Take its FY2Q EPS of $3.33, which blows away the estimate of $2.45 a share.

Results were largely driven by iPhone sales, which doubled year-earlier results and eclipsed the holiday period.

Yahoo (YHOO) posts a profit of $310.2 million, or 22¢ a share, as company posts its first quarter of revenue growth in a year and a half and surprises analysts with strong profit growth.

(Roger Cheng contributed to this post.)

Bulls aim for some follow-through on yesterday’s rebound, with Friday’s lapse in risk appetite just an irritating memory now. US dollar is weaker, with USD index back below 81.00, and oil and gold both up smartly.

Strong 1Qs from Goldman Sachs this morning and IBM late yesterday, but the results seem to be well-anticipated as IBM moves lower, GS edging higher premarket.

No notable economic data on the calendar.

On the earnings front, Coca-Cola’s (KO) 1Q profit jumped 20% on continuing strength abroad. But North American sales continued its declining trend as consumers continue to shy away from its pricier drinks. KO shares were off 1.2% at $54.65 premarket.

Johnson & Johnson’s (JNJ) 1Q earnings rose 29%, ahead of analysts’ expectations, as sales increased and it booked a $910M litigation gain. But JNJ slightly lowers its 2010 earnings forecast, which seems to have more to do with currency trends than US health-care overhaul. Shares were slightly higher premarket.

Yahoo (YHOO) and Apple (AAPL) report after the close.

S&P futures up 4; 10-yr lower, yield at 3.82%.

 Oracle (ORCL) apparently isn’t afraid of due diligence, agreeing to buy Sun Microsystems (JAVA) for $7.4B, just two weeks after IBM’s talks to buy Sun collapsed.

The per-share price is $9.50 cash, which is 42% above JAVA’s close Friday. The companies valued the transaction at about $5.6B after factoring in Sun’s cash and debt. 

The frequently acquisitive ORCL sees the deal adding to non-GAAP earnings by “at least” 15c/share in the first full year after closing.

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