Phone companies and network suppliers are finally feeling optimistic after second-quarter profits and earnings were shown to have improved over the first quarter. On the downside, Jeffry Bartash for The Wall Street Journal reports that the decline in business and unemployment has kept overall demand for telecom services low.

While telecom executives have yet to see an end to the recession, the industry believes that demand will resume by the end of this year, and should last into 2010. That’s because the industry has had to cut costs and become increasingly efficient, which means that as sales increase, margins may also rise.

Stable profits and avoidance of sharp sales declines have helped AT&T (T) and Verizon  Communications (VZ). Internet and phone service are considered “must haves” for most  people.

• iShares Dow Jones U.S. Telecommunications Sector (IYZ): up 13% year-to-date; AT&T 23.2%; Qwest 4.2%

• Merrill Lynch Telecom HOLDRs (TTH): down 4.7% year-to-date; AT&T 54.8%; Qwest 2.3%; Verizon 29.5%

For more stories about telecom, visit our telecom category.

Despite a global recession, AT&T (T) has opted to spend $1 billion in expanding its global network, which would add greater capacity for businesses in the U.S. and overseas, reports Jeff Meisner for E-Commerce Times. It has put more than $3 billion into its network since 2006.

The network expansion will focus on Asian markets like China, India, the Philippines, Thailand and Malaysia. North American networks will also be boosted in Mexico and Puerto Rico.

While AT&T is looking optimistic, Sprint Nextel Corp. (S) reported a $1.6 billion fourth-quarter loss. Losing 1.3 million customers probably didn’t help much, and it laid off 8,000 workers, writes Antonio Perez for The Epoch Times. In the past year, Sprint lost 4.5 million subscribers; whereas, AT&T gained 2.1 million customers.

Sprint’s losses are said to be the effect of business downsizing where the number of active contracts will likely decline. Layoffs have also harmed its wireless mobile broadband market. The cause for hope is their new line of mobile phones that are set to come out later this year.

• HOLDRS Merrill Lynch Telecom (TTH): down 8.0% in the last month; 9.3% in the last three months; holdings in AT&T, 57.8%; Sprint is 1.2%

• iShares Dow Jones U.S. Telecommunications Index (IYZ): down 4.4% in the last month; up 4.8% in the last three months; AT&T is 23.1%; Sprint is 4.8%

• Vanguard Telecom (VOX): down 4.5% in the last month; up 4.7% in the last three months AT&T is 20.0%; Sprint is 4.0%

Sprint Nextel (S) took a hit the first day of the month, despite announcing that it had finalized a previously announced deal to combine its next-generation wireless broadband business with Clearwire, reports Olga Karif for BusinessWeek. This deal would ensure faster service for both carriers and save expenses while maximizing profits.

What’s the problem?

Despite receiving fund from backers such as Google, Intel, Comcast, and Time Warner Cable, totaling $3.2 billion, it may not be enough money. Clearwire expected to be able to offer its service to 120 million to 140 million people by the end of 2010. But the buildout plans assumed that, in late 2009 or in early 2010, Clearwire would be able to raise an additional $2 billion to $2.3 billion. The rollout schedule is cut back and the capital markets are virtually closed.

Nonetheless, Sprint is taking the brunt if this and the company does not have a feature product to keep them in the rankings with the likes of Apples’ iPhone deal with AT&T (T), and Verizons’ (VZ) Blackberry, associated with Research In Motion (RIM).

Without a major product sweeping the nation, is Sprint the bad apple in the bunch? Could be, but at least it’s not a huge component of any of these telecom ETFs:

• iShares Dow Jones U.S. Telecommunications (IYZ): down 47.4% year-to-date; Sprint 4.6%; AT&T 26.6%; Verizon 18.5%

• Merrill Lynch Telecom HOLDRs (TTH): down 38.8% year-to-date; AT&T 57.7%; Verizon 27.1%; Sprint 2.7%

• Merrill Lynch Wireless HOLDRs (WMH): down 52.1%; Verizon 12.8%; Research In Motion 15.7%; Sprint 3.1%

After striking a potentially lucrative deal with Verizon Wireless (VZ), Walt Disney Co. (DIS) has plans to stay in wireless contact with theme park visitors, past and present, anywhere, reports Dawn Chmielewski for The Los Angeles Times. The plan allows visitors to download an application to their mobile phones that would allow Disney to pinpoint their location and recommend activities or restaurants to users.

The new service has broad implications for marketers and consumers, which may prove to be a controversial issue regarding privacy.

It is said that location-sensitive applications, such as the one Disney plans on using, are considered the next wave of marketing and advertising.

But will this help or hurt the telecoms? The industry’s reputation is already tarnished by their role in wiretapping scandals; will people really want them to be able to track them?

The Bush administration acknowledged in August American telecom’s role in domestic eavesdropping by the National Security Agency (NSA), writes Eric Lichtblau for The New York Times.

There are those who think it vital for Congress to give retroactive legal immunity to companies assisting in the NSA program. AT&T (T) and other major carriers are being sued over their reported roles in the program which permitted eavesdropping without warrants.

Will these events keep their marketing efforts from catching on?

Telecom ETFs affected by privacy issues in the telecom industry include:

• HOLDRS Merrill Lynch Telecom (TTH): down 39.5% year-to-date; Verizon is 27.1%; AT&T is 57.7%

• iShares Dow Jones U.S. Telecommunications Index (IYZ): down 48.6% year-to-date; Verizon is 15.9%; AT&T is 22%

• Vanguard Telecom (VOX): down 46% year-to-date; Verizon is 20.5%; AT&T is 18.7%

Robert Holmes for The Street reports that each ETF holds so few companies that it could make the timeframe for a turnaround longer within these sector-targeted funds. The fewer the holdings, the more exaggerated the moves become for the ETF. Telecom has a tendency to do well when the market is healthy and do really poorly when things are going down.

Two stocks that are dominating this industry are Verizon (VZ) and AT&T (T). A large chunk of every telecom ETF is given to these companies. AT&T is down 19.1% year-to-date, while Verizon is off by 16.2%.

• iShares Dow Jones U.S. Telecom (IYZ): AT&T is 21.4%; Verizon is 15.5%; down 20.4% year-to-date; down 0.1% for the last month
• Vanguard Telecom Service (VOX): AT&T 20.8%; Verizon 19.9%; down 19.1% year-to-date; down 0.6% for the last month
• Telecom HOLDRs (TTH): AT&T is 58.5%; Verizon is 24.3%; down 22% year-to-date; up 2.5% for the last month

A little more diversified is the PowerShares Dynamic Telecom & Wireless (PTE). Its top holding, American Tower Corp. (AMT), is 5.1% of the Fund. Verizon is 5.1%, and AT&T is 4.7%. Year-to-date, it’s down 17.9%, and in the last month it’s down 3.7%.

Kraft Foods (KFT) reported its second-quarter earnings, which rose 4%, reports Emily Fredrix for the Associated Press. Could higher food prices being sending consumers back to their old college day low-cost standbys?

Kraft doesn’t just make the famous macaroni and cheese in the blue box, but also Velveeta, Oreo cookies and Maxwell House coffee. Their earnings reports beat analyst expectations, thanks in large part to the company’s swift action when it came to rising prices. Many of their competitors lagged behind them when it came to charging a bit more to offset rising costs.

The Vanguard Consumer Staples (VDC) is up slightly in trading today, and it’s down 5.9% year-to-date. Kraft is 3.6% of the fund. It’s also 3.9% of the Consumer Staples Select Sector SPDR (XLP), which is down 5.6% year-to-date.

Verizon (VZ) also reported higher profits today, because of wireless sales that were strong enough to offset any losses among landline users. Executives went on to say that they didn’t expect a significant impact from the weakening economy, reports Ritsuko Ando for Reuters. Second-quarter revenue rose 3.7%, in line with expectations.

There are still nerves about a labor dispute, as the union’s labor contact is set to expire on Aug. 2. Verizon’s shares are trading lower today, and it’s weighing down a few ETFs that count it as a top component:

• iShares Dow Jones US Telecom (IYZ): down 20.5% year-to-date; Verizon is 15.4%
• Telecom HOLDRs (TTH): down 23.6% year-to-date; Verizon is 24.3%

AT&T (T) announced today that its quarterly profit had gone up even more than expected, reports Ritsuko Ando for Reuters. The growth among its wireless subscribers compensated for the loss in traditional landlines. Analysts said they were still worried about that, as well as growth in the number of high-speed internet subscribers in the second quarter, which was weaker than expected.

AT&T gets a boost from its relationship with Apple (AAPL), as the exclusive U.S. carrier for the iPhone.

Another cell phone market player, however, hasn’t fared so well. Yesterday, Vodaphone (VOD) reported a disastrous second quarter, and its share price dropped 14% as a result, reports Stephen Beard for Marketplace. That prompted the company to buy back $2 billion of its stock to restore confidence.

The company was hit worst in Spain, where the collapse of the property market has left many people out of work, prompting them to leave the country and the Vodaphone network.

ETFs potentially affected:

• iShares S&P Global Telecommunications (IXP): down 18% year-to-date; AT&T is 15.7% year-to-date; Vodafone is 12.4%
• Telecom HOLDRs (TTH): down 22.7% year-to-date; AT&T is 58.5%
• PowerShares Dynamic Telecom& Wireless (PTE): down 18.8% year-to-date; AT&T is 5.1%