Will Apple reignite the rally?

Apple clobbers analyst estimates after stocks rebound from steep losses in the morning. IBM and Johnson & Johnson move lower. Goldman Sachs rallies despite missing estimates.

By Charley Blaine Jul 20, 2010 12:41PM

Charley BlaineUpdated at 7:30 p.m. ET

Stocks opened with a thud today but put on a big rebound. Result: a second straight day of gains for the major indexes. 

Wednesday may get a boost from
Apple (AAPL), up 2% after hours to $257.20 from a regular close of $252.07, after easily beating analyst estimates for fiscal-third-quarter earnings and revenue. 

Apple's strong results and bullish outlook should give traders an improved view of the economy. Futures trading indicates a higher open for stocks in the morning.

The Dow Jones industrials ($INDU) closed up 76 points to 10,230. The blue chips had been down as many as 147 points shortly after the open. So the total swing was 223 points.

The Standard & Poor's 500 Index ($INX) was up 12 points to 1,083, and the Nasdaq Composite Index ($COMPX) added 24 points to 2,222.

Apple earned $3.51 a share in the fiscal third quarter on revenue of $15.7 billion, ahead of Street estimates of $3.12 a share and revenue of $14.77 billion. Net income of $3.25 billion was up 78% from a year ago. Revenue was up 61%.

Apple's results were a record, beating those of the first fiscal quarter, which ended on Dec. 31. It surpassed even the most optimistic estimates. And, CEO Steve Jobs said in a statement, "we have amazing new products still to come this year."

The company expects fiscal-fourth-quarter revenue of about $18 billion, with earnings of $3.44. The revenue estimate is higher than the consensus estimate; the Street is estimating $3.81 in earnings. Apple typically lowballs its guidance.

Apple said it sold 3.5 million Macintosh computers in the quarter, up 33% from a year ago, with sales up 73% in its Asia-Pacific region. IPhone sales totaled 8.4 million, up 61% from a year ago but down 4% from the second fiscal quarter as Apple began  production of the iPhone 4. 

IPad mobile-device sales totaled 3.28 million units, generating revenue of $2.17 billion. The company said the device is being tested by half the companies in the Fortune 100.

Bernanke, earnings on tap

The question for Wednesday is whether the Apple glow can carry over.

There are important earnings reports due from Coca-Cola (KO), United Technologies (UTX), Wells Fargo (WFC), Morgan Stanley (MS) and Qualcomm (QCOM).

In addition, Federal Reserve Chairman Ben Bernanke will testify Wednesday morning about the economy before Congress. There was some chatter today he might discuss possible ways to loosen credit further to boost the economy that helped turn the stock market around, The Wall Street Journal said.

Revenue misses lead to lower market open

Today's weak open was set up by investor disappointment with earnings from IBM (IBM) and Texas Instruments (TXN) late Monday as well as from Goldman Sachs (GS) and Johnson & Johnson (JNJ).

Yet where some investors saw disaster, others saw opportunity, especially in Goldman Sachs, and started to buy.

As important: Traders who had shorted the market late last week started to lock in their profits and bought back shares.

Crude oil rose 90 cents to $77.44 a barrel. Gold settled up $9.80 to $1,191.70. Interest rates were lower, with the 10-year Treasury yield at 2.932% from 2.964% on Monday.


IBM, down 2.5% to $126.55, and Johnson & Johnson, down 1.7% to $58.58, subtracted 39 points from the Dow.

Twenty-three of the 30 Dow stocks were higher, led by Home Depot (HD), up 3.2% to $27.93; Wal-Mart Stores (WMT), up 2.8% to $50.88; and Caterpillar (CAT), up 2.5% to $66.43. In addition, 55 stocks in the Nasdaq-100 Index ($NDX.X) rose.

The index, which tracks the largest Nasdaq stocks, was up 20 points to 1,839, led by Sears Holdings (SHLD), up 4.5% to $64.80, and Urban Outfitters (URBN), up 4.4% to $33.64 after an upgrade Monday from analysts at Thomson Financial-Gradient.

Cyclical stocks -- especially metals, industrial and energy shares -- were the market leaders. Freeport-McMoRan Copper & Gold (FCX) was up 5.7% to $64.32.   Despite the woes of TI and IBM, technology shares were higher as well.

Yahoo results don't impress

While Apple shares were higher after hours, Yahoo (YHOO) was struggling. Shares tumbled 4.6% to $14.50 after hours. The regular close of $15.20 was up 0.7%.

The company earned 15 cents a share in the second quarter, up 50% from a year go and a penny ahead of estimates.

But revenue net of traffic acquisition costs -- $1.12 billion -- was down slightly from a year ago and lower than the consensus estimate of $1.17 billion.

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Goldman sees a tough economy
Goldman Sachs shares were up 2.2% to $148.91. The company reported $8.8 billion in revenue, down 36% from a year ago. It earned $613 million, or 78 cents, a share, down from $3.44 billion, or $4.93 a share, a year ago. Analysts had expected earnings of $1.99 a share.Goldman Sachs

But those results included the full cost of the company's $550 million settlement with the Securities and Exchange Commission last week and a $600 million charge for the British tax on bank bonuses. Take those out, and the company basically met Street estimates.

Still, Goldman saw a slowing economy take its toll. Investment banking revenue fell 36% to $917 million, while revenue from its trading business fell  39% to $6.55 billion.

"Our business is driven by economic activity," chief financial officer David Viniar told analysts. "Right now, the business environment is pretty slow."

Meanwhile, Johnson & Johnson shares dropped because of a revenue concern. While global sales were up 0.6% to $15.3 billion, that was still lower than the consensus estimate of $15.6 billion.

More important, global sales of consumer products fell 5.4% in the second quarter to $3.6 billion.

The company cut its full-year 2010 profit view to between $4.65 and $4.75 per share.

IBM and Texas Instruments' big shadow
Since high-priced stocks have a bigger effect on the Dow, IBM was necessarily the big weight on the blue-chip index. It had fallen to as much as 5.3% after the open to $122.93 before buying set in. IBM

IBM did not have an awful quarter. The company earned $2.61 a share, up 12.5% from a year ago. Net income was up 9% to $3.4 billion. Revenue, however, was $23.7 billion, up 2% from a year ago but lower than the Street estimate of $24.2 billion.

IBM's woes pushed Hewlett-Packard (HPQ) down 0.2% to $46.61. Dell (DELL) was off  0.6% to $13.36.

Texas Instruments, down 3.1% to $24.77, pushed chip stocks lower. The Philadelphia Semiconductor Index ($SOX) was down 8 points, or 2.1%, to 350.

Both companies reported weaker-than-expected revenue as the slowing economic rebound makes it difficult to stimulate demand.

Building permits move higher; housing starts drop
The news from the housing market was mostly bad, with a dollop of good news. The Commerce Department said housing starts fell 5% from May -- and 5.8% from a year ago -- to a seasonally adjusted rate of 549,000, the lowest level since October.

That reflects the expiration of the first-time and existing homebuyer tax credits on April 30.

But building permits rose 2.1% from May to 586,000 units. That's still down 2.1% from a year ago. Most of the increase, however, was from permits for apartments. Most of that gain came in the Northeast.

The permit gain helped builder stocks move higher. Pultegroup (PHM) added 4.7% to $8.30. Ryland (RYL) was up 3.4% to $16.38. And copper prices moved higher as well, finishing up 2.3% to $3.005 a pound. Copper is a key component of plumbing and electrical wiring.

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