Netflix shares slump on subscriber woes

Updated: 11:54 p.m. ET

Shares of Netflix (NFLX) were down 26.4% to $87.43 after hours as the video-rental company's third-quarter results caused many investors to dump their shares as quickly as they could.

The problem was that subscription growth fell from the second quarter as more than 805,000 customers dumped the service after the company wanted to separate streaming subscriptions from traditional DVD subscriptions, a move that would have raised subscription rates.

The move -- and a parallel move to create two brands -- forced the company to cut its fourth-quarter earnings guidance to 36 cents to 70 cents a share; analysts had been looking for 95 cents. Netflix shares, which closed at $118.84 in regular trading, are down more than 61% from their $304.79 peak on July 13. 

Meanwhile, the market moved higher on strong earnings from construction-equipme​nt giant Caterpillar (CAT) and gains in financial and materials stocks.

The Dow Jones industrials ($INDU) closed up 105 points, or 0.9%, to 11,914. The Standard and Poor's 500 Index ($INX)  was up 16 points, or 1.3%, to 1,254, and the Nasdaq Composite Index ($COMPX) added 62 points, or 2.4%, to 2,699. The index topped 2,700 several times during the day; it hasn't closed above that level since Aug. 1. 

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In additiion, there were continuing hopes that the eurozone nations will come up with a solution to their debt-and-banking crisis by Wednesday.

Netflix wasn't the only earnings miss after the close. Texas Instruments (TXN) shares were down 1.6% to $31.20 after hours as the semiconductor missed Street estimates.

The company earned 51 cents a share in the quarter; Wall Street was looking for 58 cents. The company said costs from its acquisition of National Semiconductor reduced earnings by 9 cents a share.

As stocks moved higher, so did crude oil (-CL), gold (-GC) and silver (-SI).

Stocks look to open slightly lower on Tuesday.

A really big rally for stocks

If the market can hold at current levels, this may be the best month for the Dow since April 1999, since December 1991 for the S&P 500 and since April 2009 for the Nasdaq. October has been that kind of month.

The rally is powerful enough -- 15% or more since intraday lows on Oct. 3 -- that many skeptics have switched their year-end forecasts, ratcheting their closing predictions for the major indexes higher.

Caterpillar's big earnings report
Caterpillar, up 5% to $91.77, was the top performer among the 30 Dow stocks and was responsible for about 31% of the gain for the blue-chip index. The company reported third-quarter income rose 44%. Earnings excluding one-time charges came to $1.71 a share, exceeding the consensus estimate of $1.57. Demand for shovels and drills used to dig up metals rose.

Backlog orders standing at record levels and higher commodity prices have led to a favorable environment for its growing mining business. The company expects to post record results in 2011 and improve on those results next year.

Caterpillar's results suggested that the domestic economy may not fall into recession any time soon. Europe is a different question because it is not clear that, with austerity measures being imposed in many countries, the continent can avoid a recession.

A big week for earnings
Caterpillar is part of a big week for earnings. Companies due to report this week include:

Tuesday: Amazon.com (AMZN), 3M (MMM), DuPont (DD), Peabody Energy (BTU) and United Parcel Service (UPS).

Wednesday: Boeing (BA), Ford Motor (F), Glaxo SmithKline (GSK), ConocoPhillips (COP) and Norfolk Southern (NSC).

Thursday: ExxonMobil (XOM), Aetna (AET), Colgate-Palmolive (CL), Procter & Gamble (PG) and Royal Dutch Shell (RDS.A).

Friday: Chevron (CVX), Merck (MRK), Goodyear Tire & Rubber (GT), Newmont Mining (NEM) and Whirlpool (WHR).

Will the European solution work?
Supposedly, the 17 eurozone nations are working toward a solution to their debt-and-banking crisis, to be announced Wednesday, and it may look like this:

• An expansion of its European Financial Stability Facility rescue fund, which is what Greece is counting on to pay its bills. This may not be as big as some would like and may add  pressure to Italian and Spanish bonds.
• A demand that investors in Greek bonds agree to writedowns of as much as 50% of their face amount.
• A recapitalization of European banks so that they can absorb market shocks. The big fear about a Greek default is that it could generate huge losses for many banks and set off a credit panic. A weekend summit suggested the recapitalization might costs 100 billion euros (or $139 billion). Many analysts, however, believe the number should be north of 200 billion euros, or $280 billion.

There is a lot of skepticism about an announcement that purports to be the big solution. "There is a risk that any bold announcements made on Wednesday do not stand up to closer scrutiny," economist Ben May of Capital Economics wrote today. "In the past, eurozone policymakers have not been afraid to use smoke and mirrors to make deals sound more impressive than they really are."

Strong results from China and Japan
While Europe was inching toward a deal, China's manufacturing sector returned to expansion in October as HSBC's PMI index rose to a preliminary five-month high of 51.1 from 49.9 in September.

Japan posted a $3.9 billion trade surplus in September as exports rose 2.4% year-on-year. Both indicators topped forecasts and have recovered all their losses since the March earthquake.

Commodity prices rise
Crude oil shot up 4.5% to $91.33 a barrel on the Chinese and Japanese news.

Gold settled up $16.20 to $1,652.30 an ounce. Silver (-SI) added 45.1 cents, or 1.5%, to $31.644 an ounce. Copper (-HG) jumped 7% to $3.339 a pound.

The euro rose against the dollar. The stock market rally drew money away from bonds. So interest rates were higher. The 10-year Treasury yield rose to 2.234% from Friday's 2.203%.

Freeport-McMoRan Copper & Gold (FCX) jumped 8% to $39.50.  

Some deals to cheer about
Health care management company Cigna (CI) said it will buy Nashville-based HealthSpring (HS) for $3.8 billion, or $55 a share in cash. HealthSpring shares shot up 33.7% to $53.70; Cigna shares were up 0.6% to $45.96.

Oracle (ORCL) said it would buy RightNow Technologies (RNOW) for $1.43 billion. Oracle shares rose 2.3% to $32.87 while cloud services provider RightNow jumped 19.4% to $42.94. 

Mattel (MAT) said it would buy HIT Entertainment, which owns preschool brands such as Thomas & Friends, Barney and Bob the Builder, for $680 million in cash. Mattel shares were up 2.1% to $28.41.

Separately, Google (GOOG) is considering bidding for troubled Internet search pioneer Yahoo (YHOO), according to a news report. Yahoo shares added 3.7% to $16.71 while Google shares rose 1% to $596.42.