Stocks fell as economic readings skewed to the downside and mixed earnings hampered sentiment, but the low volume and recent bullish run in stocks contributed to an environment of moderate stock profit taking, with Treasuries benefitting to the upside. Market momentum fell after the Federal Reserve released its Beige Book mid-afternoon, which indicated that four of the twelve districts no longer showed improving economic activity, with two reporting “steady” conditions and two reporting softness. Morning economic releases included a disappointing durable goods orders report and a decline in mortgage applications. Dow member Boeing Co and International Paper both reported mixed results, while Aetna Inc, CVS Caremark and Comcast beat earnings estimates. Elsewhere, ConocoPhillips beat the Street and said it would sell its stake in Lukoil Holdings, while subscriber growth buoyed shares of Sprint Nextel Corp despite a larger-than-expected loss.

The Dow Jones Industrial Average fell 40 points (0.4%) to close at 10,498, while the S&P 500 Index declined 8 points (0.7%) to finish at 1,106, and the Nasdaq Composite lost 24 points (1.0%) to 2,265. In light volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $0.51 to $76.99 per barrel, wholesale gasoline was unchanged at $2.06 per gallon, and the Bloomberg gold spot price gained $1.70 to $1,163.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was unchanged at 82.15.

Dow member Boeing Co announced 2Q EPS of $1.06, above the $1.01 Reuters consensus estimate of analysts surveyed, but revenues fell 9% year-over-year (y/y) to $15.6 billion, below the $16.2 billion that was expected on the Street. The aircraft maker said its order backlog is nearly five times its current annual revenue projection of between $64-66 billion, which it reaffirmed today. BA said, “With our commercial markets recovering, and the priorities of our government customers gaining clarity, we remain well positioned for growth in 2011 and beyond.” However, shares were lower on the softer-than-expected revenues and as some are expressing disappointment in its reaffirmed full-year 2010 and 2011 revenue guidance.

Aetna Inc reported 2Q adjusted earnings of $1.05 per share, compared to the $0.74 that analysts were anticipating, with revenues excluding capital gains dipping 2% y/y to $8.50 billion, but above the $8.49 billion that was expected. AET said it benefitted from higher commercial underwriting margin and improved underlying performance, partially offset by lower commercial insured membership. Also the company said its medical benefit ratios—a key industry metric measuring costs—improved y/y from 86.8% to 81.8%. AET increased its full-year EPS guidance, but shares were under pressure.

Separately, AET announced that it has entered into a 12-year contract with CVS Caremark Corpto provide Pharmacy Benefit Management services that will further enhance value and service for AET’s customers and members. Meanwhile, CVS reported 2Q EPS ex-items of $0.68, one cent above analysts’ expectations but the company lowered its full-year EPS and same-store sales—sales at stores open at least a year—guidance. CVS traded solidly higher on the Aetna deal.

Comcast Corp posted 2Q profits ex-items of $0.33 per share, one penny above the Street’s forecast, with revenues rising 6.1% y/y to $9.5 billion, topping the $9.3 billion that was forecasted. The company’s Chief Financial Officer said the total subscriber growth in June and July was weaker than expected, reflecting the sluggish economy, rising competition, and a loss of customers who took advantage of deep promotions offered last year in response to the government-mandated transition to a digital broadcast spectrum, per Dow Jones Newswires. CMCSA’s CEO said he remains cautious but optimistic about the company’s ability to execute in a soft economic environment. Shares rose after overcoming early sluggishness.

ConocoPhillips announced that its adjusted 2Q EPS came in at $1.67, above the $1.56 that analysts had anticipated, aided by improved global refining and marketing margins and higher US refining capacity utilization rates. COP said its exploration and production volumes and costs were inline with expectations. Also, COP said it will sell its entire stake in Lukoil Holdings, a portion of it being set to close this quarter and the rest being sold by the end of next year. Shares ended the day unchanged.

Sprint Nextel Corp moved higher despite posting a larger-than-forecasted 2Q loss as the company posted the first total net wireless subscriber growth in three years and its best postpaid subscriber—clients under contract—churn result, which is a ratio of clients leaving and joining the company’s service, ever. The upbeat subscriber results at the firm are overshadowing the company’s 2Q net loss of $0.25 per share, which was wider than the $0.20 that analysts expected. S posted revenues of about $8.0 billion, which dipped 1% y/y, matching the Street’s forecasts.

International Paper Co posted 2Q EPS ex-items of $0.42, one penny above the consensus estimate, with revenues growing 5% y/y to $6.1 billion, which was just shy of the $6.2 billion that was expected. The company said each of its businesses posted strong results and operating rates are strong, inventories are low, and input costs are moderating, positioning it “well for a stronger third quarter.” But shares were under heavy pressure on the revenue shortfall and after the company’s CEO sounded a cautious tone on a conference call with analysts, saying that the US economy is still growing, but it is growing at a slower rate.

Federal Reserve’s measure of economic growth slows in some areas

The Federal Reserve Beige Book was released in early afternoon trading, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 10. In the last report at the beginning of June, all districts reported continued improvement, while at a modest pace. Today’s report indicated that two districts, Cleveland and Kansas City, changed their assessment to “steady” from increasing, and two districts, Atlanta and Chicago, said the pace of activity slowed. Manufacturing was characterized by mixed trends, while services improved. Consumer spending showed continued strength on necessities but slower trends in big-ticket items, with declines in auto sales. Residential real estate was described as “sluggish” in most districts after the expiration of the tax credit and commercial real estate remained weak. Banking conditions were mixed, with soft or decreasing demand for loans and credit standards remained tight in most districts. Labor market conditions improved modestly, with several reports of temporary hiring. Prices were steady at both the consumer and wholesale level.

The report is used as an input to the Fed’s decision on whether to make changes in monetary policy. Thus far, the Fed has indicated that the slow progress in reducing unemployment and excess capacity in the economy has provided the conditions for keeping the fed funds rate “exceptionally low” for an “extended period.” As Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her article Double Trouble: A Slowdown, Not a Meltdown, double-dips are rare, but fears of them are not. Liz Ann says the list of risks is long for a double-dip, but it’s longer for why we’ll likely avoid one. Factors that indicate continued growth are leading economic indicators and positive global GDP forecasts, strong corporate profits and record corporate cash, and moderating initial jobless claims.

Treasuries moved higher after the report, with the yield on the two-year note losing 5 bps to 0.61%, the yield on the 10-year note declining 6 bps to 2.99% and the yield on the 30-year bond falling 1 bp to 4.06%.

Durable goods unexpectedly fall, mortgage apps dip

Durable goods orders (chart) fell 1.0% month-over-month (m/m) in June, versus the forecast of a 1.0% increase by economists surveyed by Bloomberg, and ex-transportation, orders declined 0.6%, compared to the expectation of a 0.4% increase. The drop in the headline rate was the second-straight monthly decline and the unexpected declines in June add to a string of recent reports that suggest manufacturing activity is leveling off. The national Institute for Supply Management Manufacturing Index has showed expansion has decelerated in May and June, and GDP forecasts have been downwardly revised recently, most notably at the Federal Reserve’s most recent policy meeting last month. 2Q GDP will be reported on Friday and economists are expecting the broadest measure of US output to expand by 2.5% compared to 1Q on an annualized basis (economic calendar).

However, Schwab’s Chief Investment Strategist Liz Ann Sonders, Director of Market and Sector Analysis, Brad Sorensen, CFA and Senior Market Analyst, Michelle Gibley, CFA have noted for some time that a soft patch in the economy is likely to emerge as we transition to more sustainable growth after the sharp V-shaped recovery we have experienced. They also point out in their latest bi-weekly Schwab Market Perspective: Will Earnings Light the Way?, that the possibility of a double-dip recession is still relatively remote. Some of the details of today’s durable goods report supports this view, with May’s 1.1% decline being revised to a 0.8% drop and non-defense capital goods excluding aircraft, considered a good proxy for business spending, increasing by 0.6% in June, which suggests that businesses continue to invest in capital. With businesses supporting demand for capital goods, the positive feedback loop of ramped up production—to meet this demand and as inventories have been running lean—could begin to spillover to the employment arena, which would result in further support to the economic recovery.

Our Schwab experts are looking to the ongoing 2Q earnings season, paying more attention to what companies say about their current operating environment than the actual second-quarter results, which only reflect the past. Liz Ann, Brad, and Michelle note that to this relatively early point in the reporting season, results have largely bested muted expectations, with confidence about the continuation of the economic recovery relatively pervasive. There are certainly still plenty of concerns and uncertainty in the corporate sector, but the relative optimism gives further credence to continued stabilization in the economy.

In other economic news, the Mortgage Application Index decreased 4.4% last week, after the index that can be quite volatile on a week-to-week basis, rose 7.6% in the previous week. The decline came as the Refinance Index fell 5.9%, offsetting a 2.0% gain in the Purchase Index. The decline in the overall index came amid a 10 basis-point increase in the average 30-year mortgage rate to 4.69%, moving off the record low of 4.59% that was reached last week.

Treasuries remain mixed in afternoon action after paring some gains that followed the durable goods and mortgage applications reports, and ahead of the release from the economic calendar in the form of the Federal Reserve’s Beige Book. In this report, due out at 2:00 p.m. ET, Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 10, used as an input to the Fed’s decision on whether to make changes in monetary policy.

Muted reaction to overseas economics, Chinese corporate profits was exception

The economic calendar was relatively light in Europe, with Spain reporting an unexpected increase in retail sales y/y in June, which rose 0.8%, versus the decline of 1.4% that economists forecasted. Also, German capacity utilization improved for manufacturing and capital goods, but declined in consumer and food sectors. Additionally, Germany released its report on the nation’s consumer prices for July, which rose 0.2% month-over-month, compared to the 0.3% increase that was expected, while y/y prices increased 1.1%, versus the 1.2% forecast. In other economic news in the area, Bank of England Governor Mervyn King noted that it may take “considerable” time before UK interest rates return to normal levels, per Bloomberg.

In Asia/Pacific economic news, Japanese small business confidence improved in July, South Korea’s current account surplus widened in June, and a Chinese government report showed earnings of Chinese industrial companies surged 72% in the first-half of the year compared to the same period a year earlier, per Bloomberg. Elsewhere, Australian 2Q consumer prices rose 0.6% quarter-over-quarter (q/q), versus the 0.9% increase in 1Q and compared to the 1.0% gain that economists had expected, limiting some expectations that the Reserve Bank of Australia will raise interest rates at its next meeting. In other economic news from down under, reports on New Zealand’s business confidence and activity outlook both declined in July.

The lone release on the US economic calendar tomorrow is weekly initial jobless claims, expected to decline to 460,000 from 464,000 the week prior.

In international economics, Japan retail trade, Australian home prices, UK housing prices and mortgage approvals, French producer prices, German employment, euro-zone business and consumer confidence will be announced tomorrow. Additionally, the minutes for the central bank of Brazil will be released.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

Charles has blogged 359 posts here.