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Stocks Lower After Earnings

Jeremy Glaser

U.S. Market
Stocks were lower this morning after a handful of disappointing earnings reports.

Durable goods orders were up 0.7% in June from May levels. Economists had expected a 0.5% rise in the month. Stripping out the volatile transportation category, orders were up 0.8%. Actual shipments of durable goods fell 1% in June.

At midday the S&P 500, Nasdaq and Dow were down 0.5%, 0.7% and 0.8% respectively.

Stocks on the Move
Questions about Amazon.com's (AMZN) long-term profit potential will amplify following the firm's second-quarter update provided late Thursday, where third-quarter forecasts calling for an operating loss between $810 million and $410 million overshadowed solid second-quarter metrics. Shares plunged over 10% on the news. Gross margins increased 210 basis points to 30.7% even after "substantial price reductions" within AWS. In our view, this implies increased contribution from Fulfillment by Amazon (third-party units as a percentage of total units ticked up by 100 basis points to 41%) and Prime memberships, which increased more in the quarter than the second quarter of last year, even after membership fee increases, and now stand at about 29 million according to our estimates. These trends support the network effect source behind our wide-moat rating, and should drive gross margins higher through improved Prime member engagement

Wide-moat Visa (V) continued to keep a tight lid on expenses in its fiscal third quarter, reducing personnel expenses 6%, marketing expense 9%, and professional fees 20%. Combined with a 5% increase in net operating revenue, these reductions increased the operating margin to 64% from 61%. However, pressure from customers continued, with client incentives consuming about 17% of gross revenue during the quarter. Geopolitical instability affected revenue to some extent, with a reduction in cross-border volume in areas like Russia, Ukraine, Venezuela, and the Middle East. Shares were down nearly 5% at midday.

Starbucks (SBUX) also reported after the bell Thursday. The firm reported earnings per share of 67 cents, slightly ahead of estimates of 66 cents per share and the 55 cents a share the firm earned in the year-ago period. Management also raised it’s full-year 2014 earnings guidance. Shares slipped 2.3% on the report.

Foreign Markets
Many European markets were sharply lower today. In late trading, the FTSE 100, Germany’s DAX and Paris CAC were down 0.4%, 1.5% and 1.8% respectively.

Asian shares were higher on the day. The Hang Seng was up 0.3%, the Shanghai Composite was 1.0% higher while the Nikkei 225 rose 1.1%.