Morning Update

Best Buy Tops, Fed on Tap

Stocks are higher ahead of the Fed's rate decision and policy statement later today after Best Buy topped the Street's profit forecast, while a modestly larger-than-expected loss at Goldman Sachs is being viewed in a favorable light. But shares pared gains after a steep decline in housing starts and building permits. Additionally, consumer prices fell at their fastest pace since records began in the late 1940s, while Johnson Controls withdrew guidance, and ITT Corp. offered a cautious 2009 outlook but may boost the dividend. Treasuries are gaining ground and world markets are mixed.

As of 8:45 a.m. ET, the December S&P 500 Index Globex futures contract is 11 points above fair value, the Nasdaq 100 Index is 13 points above fair value, and the DJIA is 91 points above fair value. Crude oil is up $0.53 to $45.03 per barrel, and gold is down $2.40 per ounce at $834.10. The overnight LIBOR rate increased 4 bp to 0.16%. The three-month LIBOR rate dipped another 2 bp to 1.85%.

Best Buy (BBY $23) reported 3Q adjusted EPS fell 34% to $0.35, well above the Reuters estimate of $0.24 per share, and same-store sales dropped 5.3%. Given the possibility that consumer spending may worsen, Best Buy said it plans to reduce capital spending by about 50% next year and substantially reduce store openings. Moreover, the electronics retailer said nearly all of its corporate employees are eligible for a voluntary separation package in order to reduce corporate expenses significantly. The company maintained its EPS guidance for fiscal 2009 of $2.30-2.90, which now assumes an annual comparable store sales decline of 1-5%.

Goldman Sachs (GS $66) reported a 4Q net loss of $2.2 billion or a loss of $4.97 per share, below the Street's view of a loss of $3.73. The company said results reflected extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class. Net revenues in investment banking fell 48% to $1.0 billion. Revenues in its trading group were a negative $3.4 billion due to losses from investments including corporate debt, private and public equities, and trading in credit products.
Consumer prices plunge at record rate, housing starts much lower

Led by a 17.0% drop in energy prices, retail prices followed up October's record 1.0% drop in the Consumer Price Index with a 1.7% decline in November, larger than an expected decline of 1.3% per Bloomberg. The core rate, which excludes food and energy, was unchanged, versus the consensus view of a scant 0.1% increase. Year-over-year, headline inflation slowed from 3.7% to 1.1% but the year-over-year core rate is lagging in the magnitude of declines and dropped from 2.2% to 2.0%. However, if we focus in on recent data, the three-month compounded annual rate of core inflation is just 0.4%, reflecting the sharp falloff in aggregate demand.

Housing starts tumbled 18.9% to an annual rate of 625,000 units, well below the consensus view of 736,000. The more forward-looking building permits plunged 15.6% to an annual rate of 616,000, far below the estimate of 700,000 units.

The Federal Open Market Committee resumes its two-day meeting today and will announce its decision on interest rates at about 2:15 p.m. ET. According to Bloomberg, analysts anticipate a 50 bp reduction in the target for the fed funds rate to 0.50%, the lowest reading in over 50 years, while fed funds futures are pricing in a more aggressive 75 bp reduction.

An official reduction would provide consumers with loans tied to the prime rate modest relief, but the massive actions the Fed has been taking to encourage lending among banks has kept the effective fed funds rate near 0.30% over the past six weeks and below 0.20% over the last ten days. We may get a peak at future actions by the Fed, but traders looking for more concrete signs from the Committee that it is gearing up to provide unconventional measures may be disappointed because past releases have typically been geared towards broad statements about the economy and the state of financial markets.

Choppy day in Europe

Gauges that measure manufacturing and services in the eurozone showed that economic activity fell at a faster pace in December versus the prior month. But the decline was not as bad as expected as the Manufacturing PMI declined from 35.6 to 34.5 and the Services PMI fell from 42.5 to 42.0, versus the Bloomberg forecast of 34.2 and 41.4, respectively. The smaller-than-expected dip is lending support to the backdrop though the economy remains under tremendous pressure. Still, European Central Bank President Jean-Claude Trichet signaled that a rate cut in January is not a sure thing, bucking the trend from the Federal Reserve and the Bank of England which have aggressively used lower rates to cushion falling demand. Trichet signaled the ECB may pause in January, noting that the central bank must be aware of "being trapped" at rates that would be too low. He would not rule out, however, a reduction in deposits rates in order to encourage interbank lending.

Elsewhere, industrial production in Russia fell by 8.7% versus a year ago, the worst reading since 2003 when the methods used to calculate production were changed and far below the estimate of a 1.8% decline. In the latest sign that growth in emerging markets, at best, is sharply slowing, Bloomberg News said that the drop was the worst since the economic crisis the country faced ten years ago. The country's finance minister said Russia is not "yet" in a recession. However, the deputy economic minister warned that a recession has begun and may last more than just a couple of quarters. Stocks in Russia are down modestly.

Tokyo slips ahead of Fed decision, BoJ remarks

Bank of Japan Governor Masaaki Shirakawa said yesterday's results from the Tankan survey on corporate sentiment, which showed confidence fell at the fastest rate in 34 years, indicate that the nation is facing "severe economic conditions." He reiterated that the BoJ is looking closely at downside risks to the economy and is carefully considering ways to assist corporate lending conditions, including buying corporate debt instruments. The main lending rate in Japan stands at just 0.3% and the central bank has limited room to influence policy by cutting rates.

The Nikkei 225 Index, which rallied sharply yesterday on expectations of a US bailout of automakers, fell 1.2% as economic headwinds resurfaced and pressured sentiment. The influential Nikkei financial newspaper reported that Toyota (TM $66) is set to ask steelmakers to cut prices by 30% amid falling demand, which would be the first drop in prices in seven years. Negotiations will begin early next year. None of the parties involved commented. Steel companies were among the biggest losers.