Morning Update

Shares Receive a Lift

A rally in Europe is spreading to shares in the US after yesterday's steep slide attracts bargain hunters. But equities are off early highs amid ongoing worries that the global economy may be entering a deep recession and the impact on corporate bottom lines. General Electric lowered guidance, Sears Holdings posted a larger-than-expected loss, Beazer Homes offered more sobering commentary, and the Wall Street Journal said that Goldman Sachs may report its first loss. Treasuries are slightly lower, and Asian markets sold off in the wake of yesterday's drop on Wall Street.

As of 8:30 a.m. ET, the December S&P 500 Index Globex futures contract is 16 points above fair value, the Nasdaq 100 Index is 21 points above fair value, and the DJIA is 132 points above fair value. Crude oil is up $0.73 to $50.01 per barrel, and gold is up $9.20 per ounce at $786.00. The overnight LIBOR rate fell 8 bp to 1.00%, and the three-month LIBOR rate dropped 1 bp to 2.21%.

Dow member General Electric (GE $16 ¹) said 4Q EPS is trending toward $0.50-0.52, the low end of its previous range of $0.50-0.65 per share. The industrial conglomerate also focused its comments on GE Capital, saying that it is diversifying funding, shrinking the portfolio, reducing leverage, and focusing on the highest-return businesses at the unit. GE also said it is committed to retaining its Triple-A credit rating, reiterated that it plans to maintain its dividend through 2009, and is positioned to return to double-digit growth in 2010.

Sears Holdings (SHLD $32) reported a 3Q loss ex-items of $0.90 per share, well below the Reuters estimate of a loss of $0.49. The owner of Kmart and Sears stores said same-store sales fell 9.0%, with the decline in October becoming more pronounced at Sears. The company said it plans to close 8 more underperforming stores, which comes on top of the 14 already shuttered. As a result of what it called the "severe conditions" in the economy, Sears backed away from its prior profit forecast for the second half of the fiscal year.

Staples (SPLS $15) reported 3Q EPS ex-items was unchanged at $0.42, matching the Street's estimate. Sales of nearly $7.0 billion came in slightly below expectations, with $2.0 billion coming from its acquisition of Corporate Express.

Beazer Homes (BZH $2) reported a 4Q net loss of $12.32 per share and said conditions in both the overall economy and housing market came under greater pressure during 4Q and have continued to deteriorate since that time. The homebuilder blamed low levels of consumer confidence, falling home prices, extensive new and existing home supply, and reduced access to mortgage financing.

The Wall Street Journal reported that Goldman Sachs (GS $66) is likely to report a net loss of as much as $2 billion in the quarter just ended, or about $5 per share. A loss would be the first since the company went public almost 10 years ago as the company deals with write-downs related to private equity and commercial real estate. Goldman Sachs did not comment.

Dow member JPMorgan Chase (JPM $26 1) said it will cut about 9,200 jobs at Washington Mutual, or about 21% of the workforce. According to Reuters, financial firms has have announced layoffs totaling over 100,000 since September.

Yields near lows

Treasury yields are slightly higher but continue to hover near record lows after Fed Chief Ben Bernanke said yesterday that the central bank may buy longer-term Treasuries in the open market in substantial quantities to assist economic activity. Mortgage rates have dropped precipitously in recent days as yields have fallen and spreads between agencies and Treasuries have narrowed. Anecdotal reports suggest the homeowner inquiries regarding refinancing of mortgages are up substantially. A continued drop in rates would likely be a shot in the arm for the struggling residential real estate market.

There will be no major economic reports out today but look for the major automakers to report sales for November this afternoon, while the top executives for the Big Three return to Capitol Hill to plead for assistance. Manufacturing in the US, Europe, and China has come under severe pressure as consumers have shifted their focus to savings. Auto sales have been especially hard hit due to growing job worries and a restriction in credit.

Europe rebounds

Markets in Europe reacted poorly at the opening to a steep fall in Tokyo in overnight action, but buyers quickly stepped in during midmorning trading and shares have turned solidly higher. Tesco (TESO $7) is much higher after the UK's largest retailer reported lackadaisical same-store sales that topped expectations. Like many companies in today's environment, the retailer plans to reduce capital expenditures. Meanwhile, the eurozone Producer Price Index fell 0.8% in October, the largest drop in 22 years and greater than a forecast decline of 0.3%. The worsening economy and its favorable impact on inflation, coupled with a near collapse in oil prices, should give the European Central Bank more leeway to cut rates in the coming months. The ECB is expected to reduce its key rate by 50 bp to 2.75% at its Thursday meeting. The Bank of England, which is dealing with growing economic woes, is projected to slash rates by a full percentage point to 2% on Thursday.

Tokyo tracks Wall Street lower

The late-day sell-off in New York on Monday quickly spread to Japan, sending the Nikkei 225 Index down by 6.4%. Mining shares were the hardest hit and lost nearly 10% amid worries about a global recession and its impact on the demand for commodities. Exporters were also pressured after a rise in the yen yesterday. Despite rate cuts around the world, the Bank of Japan kept its key rate unchanged at 0.3% and suggested the rate will remain steady in the near term. Bank of Japan Governor Masaaki Shirakawa noted that another rate cut could cause "various market problems" under current accommodative conditions. But the BoJ did announce it will accept more collateral from banks, including less highly-rated corporate debt.

Australia relaxes monetary policy

The Reserve Bank of Australia, however, continues on its path toward easier monetary policy, cutting its key rate by a larger-than-expected 100 bp to 4.25%. Analysts had expected a 75 bp reduction. The central bank said it sees "significant moderation" in demand, and inflation will "soon start to fall." Shares did not respond favorably and fell over 4%. Continued fears that China is facing stiffer-than-expected headwinds hurt commodity producers.