Dow Futures

As of 1 p.m., Dow (INDEX: ^DJI  ) is down 1.3%. Political turmoil in Greece is beginning to call into question whether it will be able to make good on its austerity agreement in exchange for a bailout.

Hewlett-Packard (NYSE: HPQ  ) , as well as macroeconomic bellwethers Bank of America (NYSE: BAC  ) and Caterpillar (NYSE: CAT  ) are down 2%-3%.

The trouble is that deficit-reduction across Europe has plunged the continent into a deeper recession, as lower government spending and higher taxes have stifled economic activity.

Germany, which has been misreading the Euro mess as a crisis of fiscal irresponsibility rather than an economic crisis, hasn’t been keen to accept policies that might actually alleviate the problem, such as higher inflation targets or stimulus spending, opting instead for more cuts.

But Europeans are getting sick of all this failed austerity. France, Greece, and Holland have all seen electoral shakeups of their pro-austerity governments.

In the long term, that’s probably a good thing. The strategy of cutting spending and raising taxes to boost economic growth was never going to work. The sooner it gets reversed, the better.

And not just for economic reasons — economic crises are fodder for extremists. In Greece, a creepy black-T-shirted neo-Nazi party, whose chief platform is harassing immigrants, even received 7% of the vote.

Apparently years of 20% unemployment makes it difficult to repay debts and causes political upheaval. Who knew?

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After five straight losing sessions, the Dow (INDEX: ^DJI  ) is up 0.79% to 12,815.76 as I write. The Nasdaq (INDEX: ^IXIC  ) and S&P 500 (INDEX: ^GSPC  ) are also up, 0.97% to 3,020.1 and 0.86% to 1,370.32, respectively.

At 2 p.m. today the Fed is releasing the latest Beige Book, which gives economic data points from the 12 Federal Reserve districts. However, it’s last night’s after-market reporting by Alcoa (NYSE: AA  ) that is creating the most buzz.

Alcoa is famous in finance circles for being the first major company to report its results each earnings season. Beyond its early reporting, it’s fair to view it as a bit of a bellwether company, as its aluminum is needed globally and is dependent on macroeconomic forces.

Alcoa’s up 7.6% today after reporting a surprise $0.09 profit for the first quarter. Analysts expected a $0.04 loss after the fourth quarter’s loss of $0.03. Note, though, that last year’s first quarter recorded a $0.28 profit.

It noted strength in its aerospace division, with sales up 15%. Perhaps that helps explain fellow Dow component Boeing‘s (NYSE: BA  ) 2.5% rise so far today.

On the down side, Alcoa faces pricing pressure due to macro factors ranging from weakness in Europe to excess supply. To help fix the latter, in January it announced plans to reduce capacity by 12%. With its expectations for global demand to rise by 7% in 2012, it is hoping for a “global aluminum supply deficit in 2012.”

Get ready for more earnings season surprises
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As I write this, the Dow (INDEX: ^DJI  ) is down about 1%.

However, the banking sector is down more than two times as much:

Source: Yahoo! Finance.

The apparent cause of today’s Dow and banking declines is last Friday’s jobs report (the market was closed on Friday). Or, more precisely, the 120,000 jobs created in March coming in under expectations. For an excellent review of the jobs report and why it shouldn’t be taken too seriously, check out fellow Fool Morgan Housel’s thoughts.

But why are the banks down so much more than the general market on the same news? This has been a trend since the financial crisis. As sentiment on the economy goes, so go the big banks — but more violently.

If you look at the beta of the six largest banks (featured in the table above), you’ll see current betas ranging in the 1.5 to 2.0 range. In other words, the stock prices of the banks have been 50% to 100% more volatile than the overall market’s prices.

Put another way, the Dow has been up or down 1.0% or more only five times out of 66 trading sessions this year. That number for Bank of America is 48!

Even factoring in the expected additional volatility of an individual stock versus an index, that’s pretty huge.

Since banking is the circulatory system of the economy, it’s clear that the perceived health of the economy affects banks quite a bit.

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For the week, the Dow (INDEX: ^DJI  ) closed pretty much flat last week, ending up just under the 13,000 mark (12,977.57 to be exact).

Looking at the individual components, there were 17 winners and 13 losers. Only two components were up or down 5% or more, though.

The big winner
On the up side, JPMorgan Chase (NYSE: JPM  ) rose 6.1% this week. It’s also notable that the runner-up was the only other bank in the Dow: Bank of America (NYSE: BAC  ) , which was up 3.2%.

There has been a general run-up in bank shares this year as the news on the overall U.S. economy has been mostly positive. A few things to note about banking this week:

• Warren Buffett was generally favorable toward banks in his latest shareholder letter, released last weekend, and specifically favorable toward Bank of America and Wells Fargo (NYSE: WFC  ) . He also revealed on CNBC that he owns shares of JPMorgan Chase in his personal account. The man who is known for his annual shareholder letters again praised JPMorgan Chase CEO Jamie Dimon.
• On Friday, both JPMorgan Chase and Bank of America were deemed “substantially” improved in their performance with respect to mortgage assistance — the government will now pay them incentive payments. Read more here.
• Bank of America got a good deal of press in a Wall Street Journal story regarding its plans to change checking account fees. Bank of America denies that it’s made any decisions yet. Read more here.

The big loser
On the down side, Hewlett-Packard (NYSE: HPQ  ) lost an even 5% this week. The reason here doesn’t require much speculation. Its disappointing earnings on February 22 helped fuel nine straight losing sessions for HP before a slight uptick on Friday.

Meanwhile many of us value investors have this question on our minds: Have shares fallen enough to compensate for the drop in earnings power? Read about the latest quarter here.

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Although it lost 0.47% (61 points) this past week, the Dow Jones Industrial Average (INDEX: ^DJI  ) is off to a sizzling start in 2012. Through Feb. 3, the index was having its best start to a year since 1997.

In fact, since the widely followed index of U.S. blue chips bottomed out in March 2009, it’s nearly doubled.

Interestingly, because corporate earnings have been so strong in the past few years, that run-up hasn’t translated into sky-high price multiples. As the following table shows, the Dow index trades at a reasonable price-to-earnings multiple. Returns on equity have been moving up, while debt loads have been coming down:

Data from S&P Capital IQ; calendar years used. Price data from Morningstar.

That’s largely good news for followers of the market’s most popular index. Although I prefer other indexes (because of the Dow’s price-weighting), and although uncertainty in Europe persists — as we saw yesterday, when the index had its worst one-day performance of 2012 — the Dow seems reasonably valued right now. That’s a good sign for long-term-focused investors.

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After weeks of big gains, The Dow (INDEX: ^DJI  ) closed down 0.13% today after falling 0.5% point earlier.

It’s ordinary for traders to sell after a string of gains. But the last-minute negotiations between the European Union and Greece served as an added reminder today that the improving economic outlook that’s been driving market returns could have vulnerabilities. If conditions in Europe continue to deteriorate (goes the worry), the slowdown in economic activity could spill over into its trading partners, including the U.S.

Greece is caught in a catch-22 — the harsh austerity that the EU is demanding of Greece is almost certain to take a massive toll on its economy, making it even more difficult for the country to repay its loans. The only question left is whether something will get worked out that allows Greece to default in an orderly way that minimizes the damage to other economies and the global financial system. As recently as the fourth quarter, Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Morgan Stanley (NYSE: MS  ) all had significant exposure to stressed European markets.

Still, so long as Europe avoids a full-blown financial crisis, it could be more likely than most think that the U.S. economy escapes from the Europe’s troubles more or less unscathed. As far as the financial sector goes, regional banks generally have far less exposure to European markets or trading results.

While the market’s day-to-day fluctuations get all the headlines, it’s important for us to remember that it’s long-term performance — not week-to-week price fluctuations — that ultimately matter. If you’re interested in one stock that our chief investment officer picked to crush the market in 2012, check out our brand new report, “The Motley Fool’s Top Stock for 2012.” It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company by clicking here — it’s free. 

Today, the Dow (INDEX: ^DJI  ) was down 22 points (or 0.18%) to 12,734.63. The popular ETF that tracks the Dow, the SPDR Dow Jones Industrial Average (NYSE: DIA  ) , was down 0.15% to 127.06.

Of the 30 Dow components, 23 were down today. Four of them were down more than 1%.

The market as a whole reacted negatively to an unexpected new-home-sales decline for December. New-home sales fell 2.2% to a seasonally adjusted annual rate of 307,000. For 2011 as a whole, sales fell 302,000 — a 6.2% drop and the worst annual sales total on record.

Of course, if you’re looking for a housing bottom, this could be good news, as my fellow Fool Morgan Housel explains.

But the biggest daily loser, AT&T, had the most identifiable reason for being down. Its earnings report today disappointed folks just as Verizon’s did two days ago. Excluding charges, it reported earnings per share of $0.42, a penny off from analyst estimates. But including all one-time charges, it reported a loss of $6.68 billion, or $1.12 per share.

AT&T took a $4.2 billion charge from its failed bid for T-Mobile USA, but like Verizon, the longer-term problem for AT&T is its dependence on Apple. Even with efforts to diversify, some 80% of its smartphone sales were iPhones. Remember that these are extremely subsidized by the carriers to lock in customer contracts. And now that the iPhone isn’t exclusive to AT&T, the subsidies go from differentiator to table stakes.

There you have it — a bad day for AT&T and, more importantly, a sign of potential long-term trouble ahead if it can’t solve the margin sucking sound coming from Apple. If you want to read more about Apple and the companies that are capitalizing on the mobile boom, read our brand new free report: “The Next Trillion Dollar Revolution.”

After falling nearly a full percentage point in early morning trading, the Dow (INDEX: ^DJI  ) rocketed back to close up 81 points (or 0.64%).

Why the change of heart, you ask? The Federal Reserve announced that it expects to be holding short-term interest rates near zero through 2014.

To be frank, it’s a bit silly — though not surprising — that the market rallied on this news. No one expects us to be back near full employment by that time, and with the economy in a liquidity trap, core inflation won’t be up, either. That means that the conditions requiring low interest rates will still be in place two years from now.

Cyclical Dow components like Caterpillar (NYSE: CAT  ) and Alcoa (NYSE: AA  ) rallied strongly on the news, as they are especially susceptible to economic conditions. With the Fed more publicly committed to low rates, growth prospects have improved.

Mortgage REITs, led by Chimera (NYSE: CIM  ) and Annaly Capital (NYSE: NLY  ) , also jumped. Low borrowing costs have juiced their interest-rate spreads — and hence their yields — making them popular among dividend-thirsty investors. But REIT investors and, to a lesser extent, banking investors might not want to get too excited about the news just yet. If the announcement is a sign the Fed is becoming increasingly concerned about unemployment (it also revised its GDP growth estimates downward), that increases the likelihood it might take further actions to boost economic growth, like another Operation Twist or QE. And those actions might involve driving long-term rates down further, something that definitely wouldn’t help spreads.

The Dow surged today, but it’s important for us to remember that what happens to stocks on a day-to-day basis matters far less than their long-term performance. If you’re interested in one stock that our chief investment officer picked to crush the market in 2012, check out our brand-new report, “The Motley Fool’s Top Stock for 2012.” It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company for free. 

A whopping five Dow (INDEX: ^DJI  ) components plus Apple (Nasdaq: AAPL  ) reported earnings today.

Despite beating analysts’ earnings estimates with same-store sales growing an incredible 7.5%, McDonald’s was the second worst-performing stock in the Dow today. Shares had been nearing a 52-week high, at one point trading for 20 times earnings in January. Investors were expecting a lot out of McDonald’s, and even beating analysts apparently wasn’t enough to sate their hunger.

Last year it was catastrophe losses plaguing Travelers; this quarter it was underwriting and investment weakness. While analysts had expected earnings to plunge, the 31% decline in net income was worse than expected. And there’s more potential bad news for those investments: the IMF is lowering its global growth forecast today, and the likelihood of a Greek default appears to be increasing.

Verizon posted negative earnings due to pension charges. But adjusting for the charge, and in spite of a healthy 1.2 million iPhone subscriber net growth, Verizon came in just below estimates. Paradoxically, as has been the case with smartphone providers in the past, the earnings culprit may have been their operational success; heavy iPhone subsidy costs bit into Verizon’s bottom line.

But the biggest earnings shocker of the day was Apple. Sales of iPhones, which now make up the majority of Apple’s revenue, continue to skyrocket. Apple sold 37 million iPhones in the fourth quarter, during which it also introduced the iPhone 4S. That helped push revenue up 73% to a record $46.3 billion. Between the spike in sales and a huge boost in margins, Apple was able to once again blow away analysts’ earnings estimates.

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The Dow (INDEX: ^DJI  ) is up 0.5% today after several tech giants — IBM (NYSE: IBM  ) , Intel (Nasdaq: INTC  ) , and Microsoft (Nasdaq: MSFT  ) — reported strong earnings last night.

So what’s the big news from these tech biggies?

IBM reported 11% growth in its earnings per share and suggested a positive outlook for 2012. Operating margins were especially strong, spiking to 24.9% from 20.2% last quarter, or 24.3% in the fourth quarter last year.

Intel’s sales grew a whopping 21% in the fourth quarter. The rise of mobile devices, which aren’t Intel’s wheelhouse, has been a major concern for investors. But Intel’s earnings results should remind us that PC sales continue to flourish in emerging economies.

Microsoft’s margins are continuing to take hits, but the tech giant reported a decent 5% growth in sales and a more modest earnings increase. Xbox and CRM saw impressive numbers, and Microsoft looks to be playing the long game in search, as Bing’s market share climbed to 15.1%.

Hewlett-Packard (NYSE: HPQ  ) is also up big today. With its stock trading at just eight times earnings, it doesn’t take much to move it. HP posted sales declines in emerging economies last quarter, and the strong numbers coming out of PC-related companies could be a positive sign for the troubled PC maker.

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Bank of America (NYSE: BAC  ) was up about 5% this morning on the strength of a market-pleasing 7 a.m. earnings report, helping to drive the Dow (INDEX: ^DJI  ) and the market higher.

Importantly, B of A posted positive earnings for the fourth quarter and for the full year. It’s important because Bank of America has been the laggard of the big banks.

Wells Fargo (NYSE: WFC  ) , JPMorgan (NYSE: JPM  ) , and even Citigroup (NYSE: C  ) have been firmly in the black, but it’s only now that Bank of America is back to profitability on a trailing-12-month basis.

We also see an improving Tier 1 common equity ratio (up to 9.86% vs. 8.65% three months before) and less need for credit-loss provisioning (in other words, better credit quality). And for what it’s worth, it claims $14.4 billion in exposure to the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), down $1.4 billion from a year before.

That’s the good news.

The bad news is that the newfound profitability isn’t due to core operations. It’s due to shedding assets. For example, the fourth quarter’s $2 billion of net income can be attributed to the pre-tax $2.9 billion on the gain on sale of China Construction Bank shares.

Over the course of the year, B of A sold $34 billion in “non-core assets and businesses.”

But for Bank of America, I think we’ll take the earnings win any way we can get it. And bigger picture, I like what I’m seeing from CEO Brian Moynihan. He’s being prudent about becoming leaner and meaner — both through asset sales and through cost-cutting measures like Project New BAC that looks to cut some 30,000 jobs.  

When your stock is trading at about a third of book value, even an earnings report full of asterisks is welcome news. That’s what we see today for Bank of America.

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As the Dow (INDEX: ^DJI  ) shot up almost a percent in the early going today (mostly on China economic news), two American megabanks reported earnings this morning: Wells Fargo (NYSE: WFC  ) and Citigroup (NYSE: C  ) .

If you’re looking for the numbers, Citi reported pre-provision fourth-quarter revenue of $17.2 billion, resulting in earnings of $1.16 billion, or $0.38 a share. Wells hit $20.6 billion in pre-provision revenue, resulting in $4.1 billion in profit, or $0.73 a share.

While Citigroup disappointed due largely to its investment banking performance (Dow component JPMorgan (NYSE: JPM  ) reported similar problems last week), Wells Fargo beat last year’s results and analyst expectations.

The silver lining in Citi’s report was the improvement in loan performance. This echoes JPMorgan’s results last week. Wells’ performance makes sense in this context. It focuses on retail and commercial banking (i.e., lending) rather than investment banking.

Although each was up in early going, all of this spells bad news for Dow component Bank of America (NYSE: BAC  ) , Goldman Sachs, and Morgan Stanley, each of which reports later this week. The former has significant investment banking activities and the latter two are pure investment banks.

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The Dow (INDEX: ^DJI  ) rose slightly this week, closing up 0.5% for the week (12,422.06).

The S&P 500 (INDEX: ^GSPC  ) and the Nasdaq followed suit, rising 0.9% and 1.4%, respectively.

Despite the up week for the market, the latter part of the week held some bad news for Europe and for banking. Most significantly for Europe, ratings agency Standard & Poor’s downgraded France from its vaunted AAA perch. In banking, JPMorgan Chase‘s earnings weren’t stellar and Bank of America (NYSE: BAC  ) told regulators it would be willing to scale down in parts of the country if its situation deteriorates. Honestly, neither piece of news should be that shocking. Wall Street activities (the ones that were weak for JPMorgan) have been affected by Europe and are coming off heady times for trading. And all B of A is saying is that they’ll take the steps any reasonable operator would. It’s already been selling off non-core assets to get leaner and meaner. (Read more.)

All that said, JPMorgan was still up for the week with a 1.6% gain. Meanwhile, B of A was one of the week’s three biggest winners.

You’ll also notice that each of these three is up pretty big for the year. In fact, they’re the three biggest winners in the Dow so far.

Alcoa and Bank of America are coming off a miserable 2011 that saw their shares fall by about half (a little less for Alcoa, a little more for B of A). Meanwhile, Caterpillar was only down about three percent.

All three are especially sensitive to macroeconomic hopes and fears. And for whatever reason, sentiments have been more favorable to start the year.

If you’re a shareholder in Caterpillar, Alcoa, or B of A, enjoy these short-term gains. But let’s all remember to keep focused on the long term. If you’re looking for three vetted stocks with good future prospects, check out our brand new free report: “3 American Companies Set to Dominate the World.” Get instant access.

Two big pieces of news broke today that are likely to be hammering shares of the nation’s biggest banks and roiling the market. The Dow (INDEX: ^DJI  ) was down more than 1% in early morning trading.

1. Bank earnings season begins
Today officially kicks off the earnings season for banks, with JPMorgan (NYSE: JPM  ) , the largest American bank by assets, reporting a 23% drop in fourth-quarter profit. The bank recorded a total profit of $3.73 billion, equating to $0.90 a share, down from earnings of $4.83 billion for the same period a year ago, or $1.12 a share. This was on $22.2 billion in revenue, a drop of 17% from last year.

The year-over-year declines came disproportionately from the investment banking side of the operation — which includes revenue from trading, mergers, and stock offerings. This division saw business fall off in the quarter due to uncertainty surrounding the events in Europe. Its fourth-quarter net revenue was off by 30%, from $6.2 billion a year ago to $4.4 billion this year.

On the plus side, loan growth and loan quality figures were favorable.

Next up for bank earnings are Wells Fargo (NYSE: WFC  ) and Citigroup (NYSE: C  ) , both of which report on Tuesday, followed two days later by Bank of America (NYSE: BAC  ) .

2. More trouble for B of A?
It was also disclosed in The Wall Street Journal that Bank of America has informed banking regulators that it’s willing to retreat from some parts of the country if its financial problems persist. According to the report, the most likely targets for cutbacks are branches in areas with a population of less than 500,000, where about $60 billion of the bank’s roughly $1 trillion in deposits are held.

If this comes to fruition, it will mark a continuation of the bank’s departure from its years of reckless growth under Ken Lewis, B of A’s now-disgraced former CEO. Since taking over in 2010, current CEO Brian Moynihan has sold off billions of dollars of non-core assets and aggressively scaled back the company’s work force in an effort to bring the bank into compliance with a new regime of heightened banking regulations.

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