MarketView for August 6

Summary

Stocks slid for a second consecutive day on Tuesday after comments from a pair of U.S. Federal Reserve officials left investors uncertain about the Fed’s so called “tapering program.”

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, was quoted as saying that the Fed could begin trimming the size of the stimulus program as soon as September, but might wait longer if the expected economic growth in the year's second half fails to materialize.

Later in the session, Chicago Fed President Charles Evans echoed the sentiment when he said the central bank will probably decrease the program later this year and could do so as early as next month, depending on the economic data.

One catalyst for Monday's downturn by the Dow Jones Industrial Average and the S&P 500 was provided by Richard Fisher, president of the Federal Reserve Bank of Dallas. He said he supported scaling back the central bank's stimulus next month unless economic data takes a turn for the worse.

The S&P 500's decline on Tuesday was its largest decline since June 24 as investors continued to take profits from the recent rally that drove the Dow and the S&P 500 indexes to back-to-back record closing highs late last week.

Disney chalked up slightly higher quarterly earnings number that beat Street expectations, even though its movie studio earnings declined, in results released after the closing bell. Disney's stock fell 1 percent to $66.35 in extended-hours trading. The stock ended regular trading at $67.05, up 1.6 percent.

During the regular session, the largest drag on the Dow was IBM, whose shares fell 2.3 percent to end the day at $190.99 after Credit Suisse cut its rating to "underperform" from "neutral," saying growth would be a challenge for IBM in the future. Credit Suisse also cut its price target on the Dow component by $25 to $175. IBM topped the list of the Dow's 10 worst-performing stocks.

Bank of America fell 1.1 percent to close at $14.64 after the U.S. Justice Department and the Securities and Exchange Commission filed civil lawsuits against the bank for what government lawyers said was a fraud on investors involving $850 million of residential mortgage-backed securities. The stock was among the Dow's 10 bottom performers.

Retailers' shares were among the day's biggest losers. American Eagle Outfitters shares fell12 percent to $17.57, a day after the retailer said its second-quarter profit would be hurt by weak sales and margins. A number of analysts downgraded the stock.

Of the 418 companies in the S&P 500 that had reported earnings for the second quarter through Tuesday morning, Thomson Reuters data showed that 67.5 percent have topped analysts' expectations, in line with the average beat over the past four quarters. On the revenue side, the data showed that 54 percent have reported revenue above estimates, more than in the past four quarters but below the historical average.

Volume was light for the second straight day, with about 5.5 billion shares changing hands on the three major equity exchanges, a number that was below the daily average of 6.36 billion. The thin volume exaggerated the market's swings.

Trade Deficit Falls

According to a report release by the Commerce Department Tuesday morning, economic growth was likely under reported in the second quarter, sue to a sharp decline in the trade deficit to its lowest point in more than 3-1/2 years at the end of June as exports touched a record high and imports fell.

The Commerce Department indicated that the trade gap fell 22.4 percent to $34.2 billion, the smallest it has been since October 2009. The percentage decline was the largest since February 2009. The shortfall on the trade balance was $44.1 billion in May.

When adjusted for inflation, the gap narrowed 17 percent to $43.2 billion, the smallest since January 2010. The deficit in June was far smaller than the government had estimated in its advance gross domestic product report last week.

Second-quarter GDP growth could be revised up to as high as an annual pace of 2.5 percent from the 1.7 percent rate initially estimated by the government. Trade subtracted 0.8 percentage point from second-quarter GDP growth, according to the first government estimate.

The three-month moving average of the trade deficit, which irons out month-to-month volatility, fell to $39.5 billion in the three months to June from $40.5 billion in the prior period.

The trade report offered a fairly decent hand-off to third-quarter and suggested the drag on exports from sluggish overseas growth was starting to lift, which was recently highlighted in manufacturing surveys.

Exports of goods and services increased 2.2 percent to a record $191.2 billion. The gain in exports was broad-based, with food, industrial supplies, capital goods and consumer goods rising. Motor vehicle exports, however, fell in June.

Strong export growth helped to lift the economy out of the 2007-09 recession and signs of a pickup, after faltering in recent months, should buoy expectations of acceleration in GDP growth during the last six months of this year.

Exports to the 27-nation European Union rose 1.5 percent in June. Exports to the EU in the first half of the year were down 5.5 percent compared to the same period in 2012. Exports to China increased 4.5 percent in June. They were up 4.2 percent for the first six months of 2013. There was a jump in exports to Brazil and the United Kingdom.

In June, imports of goods and services fell 2.5 percent to $225.4 billion. The drop was almost across the board. That number reflected hefty declines in petroleum imports and industrial supplies and materials, which tumbled to levels last seen in November 2010.

The drop in petroleum imports shows the U.S. is making strides in reducing its dependence on foreign oil; a trend that economists said could help to curb the nation's trade deficit. Some, however, were skeptical the trade deficit would remain lower and expected a bounce back in July.

Disney Results Mediocre

Disney expects to lose between $160 million and $190 million on its expensive summer movie bomb "The Lone Ranger," the media giant said on Tuesday as it reported a small gain in quarterly profit that exceeded the consensus  estimate.

The loss for "The Lone Ranger," a Western starring Johnny Depp, will be recorded for the quarter that ends in September, Chief Financial Officer Jay Rasulo said on a conference call with analysts.

Disney fell 1.9 percent in after-hours trading to $65.79 from a $67.05 close on the New York Stock Exchange.

"Lone Ranger" opened July 3 with a dismal $29 million in U.S. and Canadian ticket sales over its first weekend.

"There has been a lot said, I know, about the risk of basically high cost, tent pole films," Disney CEO Bob Iger said, "and we certainly can attest to that given what happened with Lone Ranger."

"We still think the tent pole strategy is a good strategy," he said. "That one way to rise above the din and the competition is with a big film, not just big budget, but big story, big cast, big marketing behind it."

For the quarter that ended in June, operating income at Disney's film studio declined 36 percent as hit film "Iron Man 3" failed to match the spectacular success of last year's "The Avengers."

Overall, net income for the quarter rose 1 percent to $1.85 billion. Adjusted earnings-per-share reached $1.03, exceeding the $1.01 consensus forecast. Operating income increased at the company's theme parks and its media networks division, which operates sports channel ESPN.

A gain in fees and advertising revenue at ESPN helped lift operating income at Disney's media networks by 8 percent to $2.3 billion for the quarter. At the parks unit, operating income increased 9 percent to $689 million as more people visited Disney's theme parks in Florida and California. The interactive gaming unit posted a loss of $58 million. The company is counting on the August 18 release of its Infinity game to turn the unit profitable.