Fortunately, the analyst consensus holds that the economy expanded at a faster pace than the 1% rate of the first quarter, putting us safely outside of recession territory. Investors get another view inside the struggling labor market where layoffs (mainly among financials) have resulted in overall job contractions for five consecutive months.

Economists hope for another positive showing for manufacturing from the ISM index, especially on the heels of last week’s strong durable goods data. Finally, Exxon-Mobil Corp. (XOM) and Chevron Corp. (CVX) headline this week’s installments in the ongoing earnings season as investors get a reprieve from the weak financial releases and see just how much record oil and gas prices have padded the pocketbooks of those energy-sector executives [Click here for additional insight on Chevron, in Money Morning’s new “Buy, Sell or Hold” feature.]

Market Matters

The Federal Communications Commission late Friday approved the $3.3 billion merger of Sirius Satellite Radio Inc. (SIRI) and XM Satellite Radio Holdings Inc. (XMSR), a move that means the still-nascent industry might actually be able to operate at a profit. [Please click here for a complete news story on this satellite radio merger posted elsewhere in this issue of Money Morning.]

With the immediate threat of a Freddie Mac (FRE)/Fannie Mae (FNM) failure looking less and less likely, investors were able to focus more on the heart of earnings season. Thus far, the results have been mixed (or confusing) at best. Of course, financials took top priority (again) as the nation’s largest bank by asset size, Bank of America Corp. (BAC), saw its profits decline by more than 40%, much to the delight – that’s right, delight – of investors who feared much worse. Wachovia Corp. (WB) followed up with a trifecta of bad news:

• A greater than expected loss.
• A dividend cut.
• And some employee pink slips.

And yet, its stock price was up for the week as investors began to believe the worst of the news may be behind us (a feeling that will only last until the next bit of bad news hits).

Outside of the financial world, investors had plenty of reasons to grin. Heavy equipment-maker Caterpillar Inc. (CAT), oil giant ConocoPhillips (COP), communications staple AT&T Corp. (T) and the world’s biggest drugmaker Pfizer Inc. (PFE) each announced strong earnings. Even Internet retailer Amazon.com Inc. (AMZN) shrugged off prospects for weak consumer activity and raised its year-end forecast. Southwest Airlines Co. (LUV) accomplished what none of its competitors could do by reporting its 69th consecutive profitable quarter, thanks to some “ingenious” hedging moves. On the downside, US Airways Group Inc. (LCC), UAL Corp. (UAUA), and JetBlue Airways Corp. (JBLU) suffered along with the rest of their winged brethren; Costco Wholesale Corp. (COST) showed that even discounters can struggle during dire times (apparently consumers can’t afford bulk purchases); and Ford Motor Co. (F) posted its worst quarter – ever. [Please click here for a “Buy, Sell or Hold” analysis of Ford shares elsewhere in today’s issue of Money Morning.]

United Parcel Service Inc. (UPS) had trouble dealing with the higher gasoline costs, while Texas Instruments Inc. (TXN) lowered its outlook for the year. Some reports required a tad bit more analysis. While Apple Inc. (AAPL) rejoiced over its “best June quarter for revenue and earnings” in its history, it disappointed investors with a weaker-than-expected end-of-year forecast.

Toymaker Hasbro Inc. (HAS) benefited from strong demand for “Iron Man” products, though management worried about the holidays as the company finds itself forced to pass along higher gas prices to consumers. Merger talks resurfaced (another sign of business optimism) as drugmaker Roche Holding Ltd. (OTC ADR: RHHBY) will acquire the remaining shares in Genentech Inc. (DNA) it doesn’t already own. Finally, Carl Icahn will have more say in the future of Yahoo! Inc. (YHOO) deals as he and his “cronies” will be given three seats on that “infamous” board.

Consumers got an even greater reprieve from recent energy woes as oil prices continued their decline, and crude even dropped below $123 for the first time in several weeks. Likewise, gas prices declined to just above $4 a gallon nationally (a drop of 10 cents per gallon) as the higher weekly inventory report revealed a continued slide in demand, and as service stations owners looked to regain those gas-guzzling customers.

While investors tried to make sense over the recent earnings reports, some took solace in the lower energy prices, and hope the “trend” continues as summer travel winds down and the holiday shopping season approaches.

A surprisingly weak housing report put a damper on the newfound optimism from the oil decline and prompted some late-week selling that moved the Dow Jones Industrial Average Index into the red for the week. Still, the general mood seems to be changing, as investors are more willing to dip their toes back into the equity pool – though let’s hope they do so without badly stubbing their toe in the process.