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Revenue misses from MSFT, AMZN, KLAC, AXP and BNI has the futures below fair value but well off their lows as European stocks rallied at around 4am when Germany’s July IFO business confidence number was released and was almost 1 point more than expected rising to the highest level since Oct ’08. Also, the Euro Zone manufacturing and services composite index was 1.5 points higher than forecasts and at a 10 month high at 46.8 with 50 being the breakeven between expansion and contraction. In response, the euro is rallying to the highest level since early June vs the US$ and the $ index is just shy of its lowest level since Sept ’08. Don’t discount the possibility that Europe recovers more quickly than the US does as their consumer base is much less leveraged and exports (particularly in Germany) are a key driver, especially to Asia. UK Q2 GDP fell more than expected, by 5.6% y/o/y. A slightly better than expected Q2 GDP report from South Korea helped to buoy Asian markets as the Shanghai composite rose to a fresh 13 month high for a 3rd straight day. The final U of Michigan confidence figure is expected to rise to 65, a touch above the preliminary report.

Our criminally corrupt Congress:

The House Appropriations Subcommittee will vote on a defense bill today that includes thousands of earmarks worth billions of dollars. Many will be directed to entities whose top employees donated to the members of the panel that authored the bill. Jacob Sherman reports.

Make that belatedly.

America’s previously neutered accountants — traditionally, green-visored chickenshit-cowards who have rolled over for their belly rubs from America’s CEOs and CFOs, giving them all of the bullshit they asked for over the past 2 decades — seem to be developing a spine of sorts.

Recall that in the midst of the credit crisis, the Accounting Standards Board were knuckled under by Congress. FASB now seems to be regretting their act of political cowardice. Here’s Jonathan Weil:

“Turns out America’s accounting poobahs have some fight in them after all. Call them crazy, or maybe just brave. The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging.

It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.”

The mere fact these gutless wonders are even considering Fair Value accounting is a massive improvement. If the lobbyists and bought & paid for Congress don’t interfere, we may actually expect to see significant changes:

“The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits.”

That is a huge correction to a previous outrage.

Remember, mark to market accounting hasn’t caused these problems — It merely exposed them to bank investors.

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Previously:
How Congress Betrayed Investors to Help Banks (April 3, 2009)

http://www.ritholtz.com/blog/2009/06/how-congress-betrayed-investors/

CDS/FASB (April 2nd, 2009)

http://www.ritholtz.com/blog/2009/04/cdsfasb/

What Does the FASB Proposal Mean for Financials? Evolution or Revolution? (March 18th 2009)

http://www.ritholtz.com/blog/2009/03/what-does-the-fasb-decision-mean-for-financials-evolution-or-revolution/

Sources:
Accountants Gain Courage to Stand Up to Bankers
Jonathan Weil
Bloomberg, July 23 2009

http://www.bloomberg.com/apps/news?pid=20601039&sid=a5BsXz90CMso

FASB Grows A Pair? Watch Those Stocks!
Karl Denniger
Market Ticker, July 23. 2009

http://market-ticker.denninger.net/archives/1255-FASB-Grows-A-Pair-Watch-Those-Stocks!.html

Good Evening; Unless you’ve been in a cave or in meetings all day, you know by now that U.S. stocks were kited to new highs today. And that’s really all you need to know. There was a batch of reasons given, from economic data to corporate earnings, but the biggest reason for today’s surge was the surge itself. In carrying to new highs for the year, rising stock prices forced shorts to cover and underexposed longs to feel uncomfortably overexposed to cash. As the day progressed, it almost seemed as if the “all clear” siren had sounded somewhere, indicating that the storm that knocked our economy and markets around for months was now over. With a swelling consensus that the bear market is now in hibernation, investors don’t want to miss out on the historic bull market that is sure to follow. Or so went today’s frenzied logic. As we shall later see, in both sports and investing, the desire to avoid missing out on history is a powerfully motivating force.

A raft of corporate earnings reports too numerous to mention came out during the past 24 hours, and they were mostly of the positive surprise variety. U.S. stock index futures were already trading higher due to these reports when some good news on jobless claims surfaced. New claims rose by a slightly less than expected 30K, but the bulls were especially heartened to see continuing claims drop for the second straight week. A 3.6% rise in existing home sales and a reduction in the backlog of unsold homes only reinforced the rationale for buying stocks today.

Opening higher, the major U.S. averages marched northward until they were all up more than 2% after 100 minutes of trading. The rest of the session was spent going sideways, but the rally really never suffered any setbacks today. By day’s end, the Dow (+2.1%) could brag the least, while the Russell 2000 and Dow Transports (both up 3.25%) vied for top honors. Predictably, the perceived parting of the storm clouds left Treasurys feeling unloved and unwanted. Yields rose 7 to 14 bps across the curve, and if recovery has indeed come (which, other than some welcome inventory rebuilding, I personally doubt), then Treasury yields are too skimpy to stay at these levels. Given the fast rises in stock and interest rates, the dollar probably should have rallied more than the modest amount it did today. But the uptick in the greenback didn’t hurt commodities, and most of them went up along with equities. The CRB index tacked on 1.75% to what has become an impressive run in recent weeks.

“Want two free tickets to this afternoon’s ballgame?” was the question posed to two of my colleagues as they returned from lunch this afternoon. Visions of a fun afternoon away from work watching the White Sox flashed before there eyes, but these team players decided to turn down this gift and return to the office. Little did they know that White Sox pitcher, Mark Buehrle, would soon become only the 16th pitcher in major league history to throw a perfect game (see below). Nor did these poor souls know that White Sox outfielder, Dewayne Wise, would heroically save the perfect game (and Buehrle’s no-hit shutout) by leaping above the left field wall to snatch a home run away from Tampa’s Gabe Kapler in the ninth inning. The circus catch only added to the sense of history made in Chicago today.

My colleagues were kicking themselves when they heard the news, just as under-invested kicked themselves when they saw today’s rocket launch in equities. The NASDAQ has been the focus of the run since the March lows, as managers use the beta-heavy names in that index as a way to play catch up ball. The NAS is now up a cool 54% in just over four months, prompting some to wonder if they, like those who passed up on the free Sox tickets this afternoon, are missing out on history in the making. Of course, the NASDAQ has been up 50% or more in roughly six months time on three other occasions during the past ten years. From August of 1999 to March of 2000, the NAS rose a stunning 110%. From September of 2001 to January of 2002, the tech-laden index rose just more than 50%, just as it did from March of 2003 to September of that same year. The sharp-eyed among you will note that devastating losses followed these quick gains in both 2000 and 2002, while the 2003 rally was followed by two years of sideways action.

The 2007-2009 bear stock market has been the worst almost any manager has ever lived through, and no one wants their son to ask them, “Daddy, why didn’t you buy stocks at the bottom like Chester’s Dad?” They don’t want the boss (or clients) asking them the question, either. This rally may thus keep running, despite its overbought condition and some setbacks along the way (one of which might start tomorrow after MSFT’s earnings miss tonight). I could easily see others feeling compelled to participate before the S&P 500 returns to 4 digit territory. As with sports, it’s the same with investing: It’s how our decisions might look in retrospect that causes fearful decision making in the present. My friends would have loved to attend the Sox game, especially for free, but they worried what the man in the corner office might think if they couldn’t be found. Like those who watch over other people’s money, they managed away from potential pain and found a different form of it. Let’s hope the same doesn’t happen to those who feel like they have to chase the rally on Wall Street.

– Jack McHugh

U.S. Stocks Rally, Dow Tops 9,000 for First Time Since January
Mark Buehrle Throws First Perfect Game in Five Years

I’ve just got home after a fast West Coast trip, and its pretty amazing what passes for good news these days.  Beating dramatically lowered earnings forecasts on cost cutting and layoffs — rather than top line growth — seems to be the order of the day.

The irony is that the Wall Street analyst community overestimated earnings at the top of the cycle — pure extrapolation of trend to infinity. They seem to be doing thesame thing now, only extrapolating falling earnings to zero.

What that produces is not true upside surprises, but merely jumping over a dramatically lowered bar.

Then there is the straight out bad news:

• Microsoft Profit Drops 29% as PC Slowdown Weighs on Revenue; Shares Slump
• U.S. Stock Futures Fall on Microsoft, American Express, Amazon.com Results
• Amazon.com Profit Drops 10% as Sales Fall Short of Estimates; Shares Slide
• American Express Profit Drops as Recession Pressures Cardholder Payments

We have been lightening up into the rally, and are sitting on some cash. Regardless, I expect tomorrow will sting a little on the long positions.

In this environment, capital preservation is paramount .  .  .

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UPDATE: July 24, 2009 5:32am

Futures say not so much sting aftert all . . .

June Existing Home Sales totaled 4.89mm annualized, 50k more than expected but May was revised down by exactly 50k to 4.72mm so taken together about in line. It is though the 3rd month in a row of gains and its at the highest level since Oct ’08 as both single family and condos/co-ops saw sales gains. Months supply fell to 9.4 from 9.8, the lowest since Dec ’08. The high was 11.3 in April ’08 and it got as low as 3.6 in Jan ’05. The NAR said that distressed sales were 31% of the overall total and said 29% of buyers were first time (helped out by the $8000 tax credit). Prices are down 15.4% but rose to $181,800 sequentially, the highest since Oct ’08 as prime foreclosures rise and lead to higher priced homes for sale, thus skewing the median price higher. The South and the West saw the best sales gains as they are still being influenced by foreclosures. The Northeast and Midwest were up a touch. Mortgage rates are up about 40 bps since the contracts were likely signed on these closings so we need to see what influence, if any, in the next few months that it had on sales.

The Relative Strength Index (RSI, defined as a non trending indicator that measures the momentum of a security to determine whether it is in an overbought or oversold condition according to Bloomberg) of the NDX is at the highest level since Oct ’07. RSI is just a snapshot perspective of a particular move and doesn’t specifically ring a bell at a certain level as overbought can get more overbought and vice versa, before a trend reversal takes place so take this as just an indicator of the strength of this rally rather than as a sell signal. It does though tell you that the risk reward in the very short term becomes more skewed in favor of risk and less of reward. The NDX of course is now up 12 straight days.

Within the weekly jobless claims data, the Labor Dept also includes a category called Emergency Unemployment Compensation which includes those that have exhausted the 26 week period of receiving claims. It includes the extra 20 weeks that were added in the stimulus package and another 13 weeks above that for certain states that have unemployment rates above certain levels. The non seasonally adjusted level for the week ended July 4th totaled 2.63mm, up 107k from the week prior. I raise this point in light of the circumstances where those that haven’t found a job after 26 weeks of receiving claims are no longer included in the Continuing Claims portion of the data but are still receiving unemployment insurance.

Initial Jobless Claims totaled 554k, 3k less than expected but the prior week was revised up by 2k. Continuing Claims continued to fall, by 88k for the week and was 165k less than expected. Both are impacted by the unusual seasonal adjustments this year because of the differing timing of auto plant shutdowns. However, continuing claims are now being pressured due to more people seeing their 26 week unemployment insurance expire and who are falling off the calculated rolls (many get extensions up to 79 weeks but that is not included in the Labor Dept’s calculation) as opposed to them getting new jobs. Those that received extended benefits (an additional 13 weeks due to the stimulus package), past the 26 weeks, totaled 360k, not seasonally adjusted, up from 297k last week and 347k the week prior. The insured unemployment rate was unchanged at 4.7%.

Peter Boockvar

Managing Director

Equity Strategist

Miller Tabak + Co.

Office: 212-370-0346

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Jim Bianco tallies up the damage — Approaching $1.5 Trillion In Losses, and about $1.1 trillion in raised capital:

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click for larger chart

Source: Bianco Research