Morning Update

Concerns Persist

Worries about the health of the financial sector are persisting and a small profit from JP Morgan Chase is doing little to assuage concerns after a report that Bank of America is negotiating with the federal government over aid for its purchase of Merrill Lynch. However, shares are off early lows. Apple is also coming under renewed pressure amid new concerns over the health of its CEO, while Autodesk and Motorola reduced guidance and announced layoffs. In economic news, jobless claims rose and the Producer Price Index registered another decline, while overseas, the European Central Bank cut rates as expected. Treasuries are lower.

As of 8:43 a.m. ET, the March S&P 500 Index Globex futures contract is 3 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 5 points below fair value. Crude oil is down $0.18 to $37.10 per barrel, and gold is up $9.00 at $817.80.

Dow member JPMorgan Chase (JPM $26) reported 4Q net earnings of $0.07 per share, down sharply from $0.86 a year ago but six cents above the Reuters estimate. CEO and Chairman Jamie Dimon called the results very disappointing, driven by a loss in investment banking that was largely attributable to continued markdowns on leveraged loans and mortgage trading positions, as well as weak trading results. The bank also faced higher credit costs associated with a continued deterioration across its loan portfolios and added $4.1 billion to loan loss reserves.

Looking ahead, Dimon said that if the economic environment deteriorates further, which he called a "distinct possibility," it is reasonable to expect an additional negative impact on market-related businesses, continued higher loan losses, and increases to credit reserves.

The Wall Street Journal reported that Bank of America (BAC $10 ¹) and the US government are closing in on a deal to provide billions in additional government aid to assist the banking giant with its recently-completed purchase of Merrill Lynch. Bank of America, which has already received $25 billion in TARP funding, approached authorities last month because it said that larger-than-expected losses at Merrill in 4Q were endangering the January 1 close. The Journal said a failure to complete the acquisition could affect the stability of financial markets, and the government agreed to work with the bank. Bank of America has not commented. Shares of BAC are under pressure.

Shares of Apple (AAPL $85) are significantly lower after CEO Steve Jobs said that during the past week, he has learned that his health-related issues are "more complex than I originally thought." As a result, Jobs said he will take a medical leave of absence until the end of June, but he does plan to remain involved in major strategic decisions.

Citing global conditions that continue to impact demand, Autodesk (ADSK $18) cut profit guidance and announced a restructuring plan that includes a reduction of about 10% of its workforce, or 750 jobs. Shares are solidly lower.

Motorola (MOT $4) cut 4Q profit guidance, offered revenue guidance below the Street's forecast, and said it will further reduce its workforce by about 4,000 positions in 2009, with about 3,000 jobs coming from its mobile device business. The company said it shipped about 19 million cell phones as sales were hurt by continued weakness in consumer demand and customer inventory reductions.

Producer prices still falling, jobless claims rise

The Producer Price Index fell 1.9% in December, nearly in line with an expected decline of 2.0%, according to Bloomberg. The core rate, which removes food and energy, increased 0.2%, above the estimate of a 0.1% rise. Year-over-year (y/y), the headline rate is down 0.9%, but the core rate edged up from 4.2% y/y to 4.3%.

Weekly initial jobless claims increased 54,000 to 524,000, above the forecast of 503,000. The four-week moving average dropped 8,000 to 518,500, and continuing claims declined 115,000 to 4,497,000.

The Empire Manufacturing Index, a measure of manufacturing in New York, rose from -27.9 to -22.2, just ahead of the estimate of -25.0. A reading of zero suggesting conditions are neither contracting nor expanding. At 10 a.m. ET, the Philly Fed's Business Activity Index will be released and a slight improvement from -36.1 to -35.0 is forecast.

Europe struggles as ECB cuts rates

European shares have climbed off lows, with the volatile mining group partly offsetting losses in the insurance and auto sectors. The deepening recession in the eurozone forced the reluctant European Central Bank to cut its key interest rate by 50 bp to 2.0% as expected. Later this morning, the central bank will release its statement and ECB President Jean-Claude Trichet will comment on the bank's decision and the economic backdrop that led to the reduction. Yesterday, Germany's Federal Statistics office said 4Q GDP probably declined 1.5-2.0% from the prior quarter, which would be the worst contraction since the country reunified in 1990. Many economists believe that Europe's largest economy may be going through its worst recession since the Second World War.

Elsewhere, ASML Holding (ASML $16) swung to a 4Q loss of 88 million euros, sales fell by more than 50% to 494 million euros, and 4Q bookings plunged to 13 units amid excess capacity by its customers. The world's largest maker of lithography systems said it expects cash to be positive in 2009 and shares are higher.

Asia follows US lower

The gloom on Wall Street yesterday that followed the steep drop in US retail sales and worries about the financial sector spread to Asia, putting heavy pressure on the export-dependent economies. South Korea's Kospi Index lost 6.0% and Japan's Nikkei 225 Index shed 4.9% on rising worries that the US economy is not likely to bottom in the near term. Hyundai Motor (HYMLF $58) and Kia Motors tumbled over 10% after Fitch Ratings downgraded the ratings on the two companies and noted that auto demand in the US and Western Europe is contracting at a larger and quicker scale than had been anticipated.

Traders in Japan also had to deal with the largest monthly drop in core machinery orders in over 20 years as the proxy for capital spending plunged 16.2% in November, double expectations. Falling exports around the world has sharply reduced the demand for capital equipment, which is likely to add pressure on the already struggling Japanese economy.