Morning Update

Uncertainty Keeps Bulls in Check

Yesterday's rally is being replaced by renewed caution after jobless claims jumped and housing starts and building permits plunged, reinforcing the view that the economy remains mired in a steep recession. Earnings are also squarely on the radar and are influencing early morning action. Apple posted better-than-expected profits, but eBay offered a soft outlook, Nokia missed, and SunTrust reported an unexpected loss. Meanwhile, UnitedHealth Group matched, Burlington Northern Santa Fe and Union Pacific beat the Street's profit estimates, and Sony will post a large loss and close a factory. Treasuries are up, and global markets are higher following gains in New York late Wednesday.

As of 8:36 a.m. ET, the March S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 80 points below fair value. Crude oil is down $0.01 to $43.54 per barrel, and gold is down $1.70 at $848.40.

Apple (AAPL $83) is trading higher after announcing fiscal 1Q revenues increased 6% to $10.2 billion, topping the Reuters forecast by about $500 million, and EPS improved by two cents to $1.78, easily beating the Street's forecast of $1.40. Sales of Macintosh computers increased by 9% to 2.5 million units and Apple sold 22.7 million iPods, up 3% versus last year. IPhone sales grew by 88% to 4.4 million units. Apple typically issues a conservative outlook and its 2Q forecast for revenue and profits was no exception as the numbers came in below the consensus forecast. The company did not issue a direct statement on the health of CEO Steve Jobs, but the chief operating officer said the company will do well no matter who leads the company since Apple's values are "embedded."

Shares of eBay (EBAY $12) are weaker after the company said it sees 1Q profits ex-items of $0.32-0.34 per share, solidly below the Street's view of $0.40, and revenues of $1.80-2.05 billion, just shy of analysts' estimate of $2.1 billion. The online auctioneer called the holiday season tough and competitive but it was able to post 4Q profits ex-items of $0.41 per share, two cents above the Reuters estimate. A number of Wall Street firms downgraded eBay, which is also pressuring shares.

SunTrust Banks (STI $15) swung from a $0.01 per share profit in 4Q a year ago to loss of $1.08, far below the Street's forecast of a $0.06 per share profit. The regional bank said that increased unemployment and continued declines in home values drove loan delinquencies significantly higher during the quarter, resulting in higher-than-expected credit losses. In light of the "strain on earnings" from increased credit costs, the bank is cutting its quarterly dividend from $0.54 per share to $0.10 per share until the economic and earnings environment improves. Shares are much lower.

UnitedHealth Group (UNH $25) posted 4Q earnings ex-items of $0.78 per share, in line with expectations, as revenues increased 9% to $20.5 billion. The healthcare provider said it expects meaningful growth in government-sponsored businesses in 2009. There is strong interest in its Medicare market offerings, UNH said, and continued expansion from its state and public health program relationships. UNH maintained full-year profit guidance.

Higher fuel surcharges offset lower volumes and helped Burlington Northern Santa Fe (BNI $66) post a 23% rise in 4Q EPS to $1.79, five cents ahead of expectations. Union Pacific (UNP $41) also beat the Street's profit forecast, posting 4Q earnings of $1.31 per share, versus the consensus of $1.23. The railroad cited lower fuel costs and better pricing, which offset "declining volumes in this difficult economic environment." UNP expects 2009 to be "a difficult year."

Another round of poor data

Housing starts and building permits continue to disappoint. Starts in December fell 15.5% to an annual rate of 550,000, well below the Bloomberg estimate of 605,000. Building permits offered little to stoke any optimism for homebuilders as the more forward-looking indicator of homebuilding dropped 10.7% to an annual rate of 549,000, south of the forecast of 600,000.

Weekly initial jobless claims increased 62,000 to 589,000, above the forecast of 543,000. The four-week moving average was unchanged at 519,250, and continuing claims increased 97,000 to 4,607,000.

Rising mortgage rates helped to dampen refis, but homeowners continue to take advantage of rates that are near historic lows. The US MBA Refinance Index fell 12.4% to 6491.8 in the latest week. Home purchases continue to languish near low levels, with the Purchase Index edging up just 2.5% to 303.1. Government aid to encourage homebuyers and even lower mortgage rates are likely needed to offset the negative impact from the poor economic climate.

Weak earnings limit Europe gains

Shares in Europe have come off early highs but remain to the upside after the late-day rally on Wall Street yesterday is offsetting weak earnings reports from key firms. Nokia (NOK $14) is under pressure after reporting 4Q net earnings slumped by 69% to 576 million euros and revenues fell 20% to 12.7 billion euros, below the consensus forecast provided by Bloomberg News of 975 million euros and 13.1 billion euros, respectively. The world's largest cell phone maker said handset sales were down 15% versus last year and reduced its full-year industry forecast amid falling consumer demand. Italy's Fiat (FIATY $6) reported 4Q net profits fell by over 70%, and it reduced its outlook for 2009, sending shares down by more than 10%.

Economic news underscored the view that the eurozone economy deteriorated late last year at a much faster rate than many policymakers had anticipated. Industrial new orders fell from -15.1% year-over-year (y/y) in October to -26.2% y/y in November, the worst reading since records began in 1995 and well below the forecast of -20.0%. And consumer spending in France declined more than forecast in December. Despite quickly diminishing economic activity and the growing risk of deflation in the UK, Japan, and the US, the European Central Bank reiterated that risks to price stability are balanced.

Financials power gains but enthusiasm muted by bleak BoJ forecast, exporters

The huge advance in financials in New York yesterday that inspired broad-based gains carried over to Tokyo, with the Nikkei 225 Index advancing 1.9%. Banking stocks pushed ahead as buying in the US spread to Asia, but the stronger yen and weak export data that showed overseas sales plunged by 35% versus a year ago pressured the automakers. The Bank of Japan held its key rate at 0.10% as expected and announced new measures to stem the decline in aggregate demand. BoJ Governor Masaaki Shirakawa warned that prices may fall for the next two years, signaling that Japan is about to enter a period of deflation, but there is not a risk of a "deflationary spiral."

After the close, Sony (SNE $23) warned it will post a record 260 billion yen annual operating loss ($2.9 billion) due to the surging yen and falling worldwide demand. The second-largest maker of consumer electronics products in the world plans to double its cost-cutting goals and will close one plant in Japan. Meanwhile, South Korea's LG Electronics reported a record net loss in 4Q on falling LCD TV and mobile phone sales. The company offered an uncertain outlook.

Chinese growth quickly slows

China reported GDP growth slowed from 9.0% y/y in 3Q to 6.8% y/y in 4Q, matching expectations and confirming that the economy slowed dramatically at the end of last year. Slumping demand around the world has stymied activity in China's once fast-growing economy, and China's weak economy is likely to reverberate across Asia. Inflation slowed from 2.4% y/y in November to 1.2% y/y, providing additional room for the central bank to cut rates and the government to stimulate demand.