Microsoft, Google earnings misses may stall rally

By Charley Blaine and Elizabeth Strott

The Dow Jones industrials finished up more than 200 points today for the second time in two days.

But the streak may end Friday after earnings disappointments from Google (GOOG, news, msgs), Microsoft (MSFT, news, msgs) and Merrill Lynch (MER, news, msgs).

Shares of the three companies were down at least 6% in after-hours trading after their quarterly results fell short. (Microsoft is the publisher of MSN Money.) Futures trading in stock indexes suggest the Dow will open down more than 60 points on Friday.

All three were affected in various ways by the economy. Meanwhile shares of eBay (EBAY, news, msgs) fell 13.9% to $24.20 after the online auction house offered a weaker-than-expected outlook during its quarterly report on Wednesday.

Today IBM (IBM, news, msgs) reported better-than-expected earnings, but its shares were pushed slightly lower anyway.

The disappointments came after a drop in crude oil to under $130 a barrel accelerated what had been a decent rally, fueled by gains in financial stocks.

The Dow closed up 207 points, or 1.9%, to 11,447. The Standard and Poor's 500 Index was up 15 points, or 1.2%, to 1,260, and the Nasdaq Composite Index was up 27 points, or 1.2%, to 2,312. The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, rose 9.6 points, or 0.5%, to 1,853.

The Dow has gained 446 points in the last two days, its largest two-day point gain since Nov. 28. Its 4.1% percentage gain over the two days is its largest since Nov. 27-28, 2002, when the blue-chip index gained 5.2%.

The rally trimmed the losses for the three major indexes since October to less than 20%. That means the bear market is over -- at least for now.

• Get free, real-time stock quotes on MSN Money

Crude oil closed at $129.29 a barrel, down $5.31, or 4%, from Wednesday on worries over U.S. demand and easing political tensions between Iran and the West over the OPEC producer's nuclear program.

Oil's slide marks the biggest three-day loss in the market in percentage terms since December 2004, and the biggest three-day loss in dollar terms since oil futures started trading in New York in 1983

How the misses happened

Here's how the earnings from the three companies disappointed investors:

Google. Google tumbled because it failed to meet Wall Street's expectations for larger-than-expected revenue and earnings gains. The company earned $4.63 a share on revenue of $5.4 billion. Earnings were up 30% from a year ago; revenue was up 38%. Analysts had been expecting revenue as high as $5.6 billion. More importantly, they had expected earnings of $4.72, Reuters said.

• Video: CNBC discusses Google's earnings

What caused the earnings miss, the company insisted, was a drop in income from cash management as Google tried to cope with the falling dollar.

On a conference call, CEO Eric Schmidt said traffic and advertising revenue had held up despite the soft economy.

• Top Stocks blog: Early reaction to Google's disappointment

The stock ended the after-hours session down 7.6% to $492.75 from a regular close of $533.44. "It's hard to love the numbers," analyst Colin Gillis of Canaccord Adams told Reuters. "There's the initial shock of this being the best company in the space, and it just came up short."

Microsoft. Microsoft cited a "tough" environment for its profit miss for the fiscal fourth quarter. The company, locked in an on-again, off-again pursuit of Yahoo (YHOO, news, msgs), also lowered its fiscal 2009 forecast range while slightly increasing its revenue outlook. The stock fell 6% to $25.87 in after-hours trading from a regular close of $27.52.

• Video: See what people were saying about Microsoft

For the current quarter, Microsoft said earnings will range from 47 cents to 48 cents on revenue between $14.7 billion to $14.9 billion. The Wall Street estimate had been 50 cents a share in earnings and $15.06 billion in revenue, Reuters said.

Microsoft has weathered a soft U.S. economy by ramping up sales to emerging markets and offering products aimed at corporate customers and consumers. However, analysts said today's results were proof that Microsoft isn't immune to a broader downtown in spending.

Microsoft earned $4.3 billion, or 46 cents a share, in its fiscal fourth quarter, up 41% from $3.04 billion, or 31 cents a share, a year ago. Revenue rose 18% to $15.84 billion. The earnings were a penny below the analyst estimate of 47 cents. Revenue beat their forecast of $15.65 billion.

Merrill Lynch. The investment house said it lost $4.9 billion, or $4.97 a share, down from a profit of $2.1 billion or $2.24 a share a year ago. The loss was twice as large as analysts had expected. And the stock was off 6.8% after hours after gaining 9.8% to $30.73 in regular trading.

The biggest reason for the company's fourth straight quarterly loss was soured investments in mortgages and other debt. The company said it would sell billions of dollars of assets to shore up its capital.

The company wrote off $9.4 billion from exposure to a number of investments related to the mortgage bust.

Merrill is already selling its stake in the Bloomberg News business for $4.4 billion. It will also sell a controlling stake in Financial Data Services to an undisclosed party for more than $3.5 billion. Financial Data Services provides mutual fund administrative services.

"We like the company, but it's having a tough go," said Chris Armbruster, an analyst with Al Frank Asset Management.

Moody's Investors Service downgraded Merrill Lynch's long-term debt to A2, its sixth-highest grade.

• Video: CNBC discusses Merrill Lynch's big writedown

IBM. Big Blue said earnings grew 22% from a year ago, blowing past Wall Street estimates, and the company raised its 2008 earnings forecast.

Customers in emerging markets used its services and equipment, and big companies increased their uses of technology to save money.

IBM said it will earn at least $8.75 a share for 2008, up from a previous outlook of $8.50.

IBM earned $2.8 billion, or $1.98 a share, up from $2.3 billion or $1.55 a share a year ago. Revenue was up 13% to $26.8 billion. Analysts had expected earnings of $1.82 and revenue of $25.9 billion.

Chief Financial Officer Mark Loughridge told a conference call that U.S. business grew in the quarter, the weak dollar helped IBM and that currency hedges would help it mitigate any strengthening of the dollar next year.

• Video: Check the latest discussions on IBM

Can the market move higher?

If you'd asked investors and money managers before today's close if the rally could continue Friday, most would have said yes.

After Microsoft, Merrill Lynch and Google reported, big caution flags were raised.

JPMorgan's report helped financial stocks continue their rebound. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial sector of the S&P 500, was up 3.9% to $20.18. The ETF gained 13.15% on Wednesday.

Oil's big drop -- and a bigger drop for natural gas -- pulled money away from energy stocks. The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund was down 1.5% to $75.70 on top of a 2.6% loss on Wednesday. ExxonMobil (XOM, news, msgs) was down 0.6% to $80.33; oil-and-gas producer Apache (APA, news, msgs) fell 2.9% to $111.12.

But the S&P 500 finished right at 1,260, right about at its low in March. That may prove to be a strong resistance point on Friday -- a level that might caused some investors to sell and take profits from the powerful Wednesday and Thursday rallies.

Twenty-four of the 30 Dow stocks were higher on the day, along with 359 S&P 500 stocks and 75 Nasdaq-100 stocks.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$129.29	$134.60	-$5.31	-7.65%	34.71%
Heating oil (per gallon)	$3.7438	$3.8410	-$0.0972	-4.08%	41.31%
Natural gas (per million BTU)	$10.5370	$11.3980	-$0.8610	-21.09%	40.81%
Unleaded gasoline (per gallon)	$3.1633	$3.2794	-$0.1161	-9.66%	27.00%

JPMorgan profit lower but not as bad expected

JPMorgan reported earnings of $2 billion, or 54 cents per share. That's a 53% slump from the $4.23 billion, or $1.20 per share, the Dow component reported in the same period last year -- but a dime better than the consensus estimate of 44 cents per share.

JPMorgan's results include $540 million in costs related to its acquisition of Bear Stearns. The bank also said that it had increased its credit reserves to $1.3 billion.

The company said the economy is weak and likely to get weaker, and capital markets will continue to be stressed.

CEO Jamie Dimon also said JPMorgan won't increase the dividend "until we see clear daylight."

JPMorgan's results follow better-than-expected earnings from Wells Fargo (WFC, news, msgs), which helped spark a broad rally on Wednesday.

"Clearly things are bad but it's not as if there's utter bleakness out there," Mike Lenhoff, chief strategist at Brewin Dolphin, told Reuters.

Fitch keeps Fannie rating steady

Shares of troubled mortgage giant Fannie Mae (FNM, news, msgs) jumped 18.2% to $10.93 today, after Fitch Ratings affirmed its AAA rating on the company's debt.

But Fitch did lower its rating on preferred shares of Fannie Mae to "A+" from "AA-" this morning.

Fannie and sibling Freddie Mac (FRE, news, msgs) have been walloped in recent days as worries about their ability to survive the mortgage-market mess intensified. The federal government over the weekend announced plans to help bail out the companies, which own or control nearly half of all U.S. mortgages.

Shares of Freddie rose 22% to $8.33 on the day.

Wachovia inspected by state regulators

Wachovia's (WB, news, msgs) St. Louis, Mo., securities division was raided today by state regulators, part of an investigation into the company's auction-rate securities sales practices.

"Hundreds of Missouri investors have called my office because of inability to access their money," Missouri Secretary of State Robin Carnahan said in a statement. "They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments, or pay school tuition."

The Missouri regulators began the investigation in April, but the company has not fully complied, "prompting today's onsite inspection," the statement said.

The news rattled the markets a bit when it came out earlier this morning, and the Dow gave up all its morning gains. The benchmark index has since recovered, though, as have Wachovia shares, which were up 27.5% to $13.44.

Housing starts aren't as good as they seem

Housing starts rose 9.1% in June to a 1.066 million pace, the Commerce Department said this morning -- a report that, at first glance, looked like good news.

After poring through the data, however, things didn't look so great. "A 42.5% jump in multi-family housing starts accounted for all the gain," wrote Nomura Chief Economist David Resler in a note to clients. "The Census Bureau noted that most of this increase came from New York City, where builders rushed to file permits (and start new buildings) ahead of the July 1 imposition of a tougher building code."

Building permits rose 11.6% last month to a seasonally adjusted annual rate of 1.091 million, also thanks to a jump in permits for multi-family homes.

Homebuilding stocks moved higher in part because of the report. Lennar (LEN, news, msgs) was up 5.1% to $12.31; Pulte Homes (PHM, news, msgs) added 6.3% to $11.37.

Meanwhile, a report on manufacturing in the Philadelphia region also helped deflate the mood of the markets a bit this morning. The Philly Fed index rose to a reading of negative 16.3 in July from a reading of 17.1 in June, the eighth straight month of weakness.

Economists had been looking for a reading of negative 16. Negative readings indicate contraction.

Coca-Cola disappoints; United Technologies doesn't

Several other companies reported earnings this morning, including Dow components Coca-Cola (KO, news, msgs) and United Technologies (UTX, news, msgs). Coca-Cola reported earnings of $1.42 billion, or 61 cents per share, for the second quarter, a 23% decline from the $1.85 billion, or 80 cents per share, the company earned last year. Excluding items, Coca-Cola earned $1.01 per share, above the consensus estimate of 96 cents per share.

The stock fell 3.8% to $50.34.

Coca-Cola was weighed down by a big loss at bottler Coca-Cola Enterprises (CCE, news, msgs), in which it owns a 35% stake. The bottler reported a second-quarter loss of $3.17 billion, or $6.52 per share, which included a $5.3 billion charge. Excluding that charge, Coca-Cola Enterprises earned 56 cents per share, above analysts' expectations of 53 cents.

Coca-Cola said its earnings were reduced by 40 cents because of the bottler's loss.

United Technologies also beat analysts' estimates. The company earned $1.28 billion, or $1.32 per share, a 10% increase from the $1.15 billion, or $1.16 per share, it earned in the same period in 2007. The consensus estimate was $1.31 per share.

The stock was up 5.9% to $64.70 on the news.

The company also raised its full-year guidance to between $4.80 and $4.95 per share, up from a previous forecast of between $4.65 and $4.85 per share.

Short hits from the markets -- 4 p.m.

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.390%	1.345%	0.045	-18.48%	-55.73%
5-year Treasury note yield	3.332%	3.186%	0.146	-0.27%	-3.56%
10-year Treasury note yield	4.038%	3.934%	0.104	1.48%	0.07%
30-year Treasury bond yield	4.638%	4.582%	0.056	2.36%	4.01%
Currencies
U.S. Dollar Index	72.495	72.335	0.160	-0.42%	-5.48%
British pound in dollars	$1.9996	$2.0008	-0.0012	0.32%	0.52%
Dollar in British pounds	£0.5001	£0.4998	0.0003	-0.32%	-0.52%
Euro in dollars	$1.5860	$1.5873	-0.0013	0.70%	8.52%
Dollar in euros	€ 0.6305	€ 0.6300	0.0005	-0.69%	-7.85%
Dollar in yen	106.20	106.11	0.09	0.01%	-5.05%
Canadian dollar in U.S. dollars	$0.995	$0.995	$0.0003	1.58%	0.25%
U.S. dollar in Canadian dollars	$1.005	$1.006	-$0.0005	-1.54%	-0.24%
Commodities
Gold	$970.70	$962.70	$8.00	4.57%	15.84%
Copper	$3.7150	$3.6505	$0.06	-4.31%	22.16%
Silver	$18.7350	$18.8050	-$0.07	7.00%	25.57%
Corn	$6.3125	$6.5850	-$0.27	-12.90%	38.58%
Crude oil (NYMEX) (per barrel)	$129.29	$134.60	-$5.31	-7.65%	34.71%