Morning Update

Caterpillar Dents Sentiment

An early boost to sentiment from the announcement that Pfizer will buy Wyeth is being replaced by Caterpillar's poor 4Q profit report and weak outlook, signaling that the global recession that has depressed corporate profits remains under heavy pressure. Job losses in the US have been steep, and demand around the world continues to contract amid unstable credit conditions and weak sentiment. Meanwhile, the Street is bracing for a number of earnings reports this week as 4Q earnings season kicks into high gear. GDP for the just ended quarter will also be out, while traders will be awaiting this week's FOMC meeting. Separately, McDonald's posted better-than-expected profits, Treasuries are extending losses amid worries about future borrowings, and global markets are mixed.

As of 8:31 a.m. ET, the March S&P 500 Index Globex futures contract is 2 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 64 points below fair value. Crude oil is down $0.72 to $45.75 per barrel, and gold is up $3.60 at $899.40.

Dow component Pfizer (PFE $17) said it has entered into a definitive agreement to buy Wyeth (WYE $44) for $50.19 per share, or about $68 billion, in a cash and stock transaction. Pfizer said the deal is expected to yield cost savings of about $4 billion to be fully realized by the third year after closing, and no drug will account for more than 10% of revenues in 2012. Pfizer also announced it will cut its dividend by 50%, reduce its workforce by 10%, it and reported 4Q adjusted EPS of $0.65, five cents above the Reuters estimate.

Fellow Dow member Caterpillar (CAT $36 ¹) said demand in 4Q was "whipsawed" as key industries were hit by a rapidly deteriorating global economy and deteriorating commodity prices. In anticipation of lower demand, Caterpillar said it encouraged dealers to align inventory with declining volume, and they responded with significant order cancellations, particularly in December. The maker of heavy machinery used in construction said EPS fell from $1.50 a year ago to $1.08, $0.20 per share below the Reuters forecast. Shares are much lower.

Global economic conditions and key commodity prices have continued to decline significantly. Financial markets remain under stress, Caterpillar said, and expectations for 2009 have deteriorated. Because the uncertainty around the depth and duration of this recession makes it very difficult to forecast sales and revenues, Caterpillar is rapidly executing strategic "trough" plans and implementing actions throughout the company to deal with a "very challenging global business environment." Caterpillar also said it has initiated actions which will "remove about 20,000 workers." Revenues and earnings for 2009 are forecast to be well below the Street's view.

Dow member McDonald's (MCD $58) reported 4Q net earnings of $0.87 per share, four cents above the Street's forecast, as same-store sales in the US increased 5.0% and global same-store sales grew 7.2%. The company said it begins 2009 with six years of momentum, a business model that has delivered even in challenging economic conditions and January sales that remain strong.

4Q GDP looking dire

This week's economic calendar will likely be highlighted by Friday's release of 4Q advance GDP. The total measure of output may fall at an annualized rate of 5.4%, according to the consensus forecast by Breifing.com, the worst showing in over 25 years amid the steep slump in jobs and the drop-off in consumer spending. The Federal Reserve has cut interest rates to near zero and has embarked on a series of unconventional means to stimulate economic activity, and President Barack Obama is set to propose a fiscal stimulus plan that is also designed to get the economy back on track. Nonetheless, the plans are unlikely to halt the slide in GDP in the near term and 1Q GDP will probably show another weak quarter before demand starts to show signs of stabilizing later in the year.

The conclusion of the FOMC's meeting on Wednesday is also likely to get plenty of attention. The Fed seems unlikely to reduce interest rates any more since the target resides at zero to 25 bp, but comments on the economy and any additional announcements relating to its policy of "credit easing" would be notable.

Other important reports this week will begin today when existing home sales is reported at 10 a.m. ET. The housing market is not showing signs of bottom yet as employment slumps and consumer confidence remains shaky. A 2.0% decline in December to an annual rate of 4.4 million units is forecast per Bloomberg. Also, look for the Leading Index today. Additionally, the S&P/CaseShiller Home Price Index will be reported on Tuesday, durable goods orders, new home sales, and weekly jobless claims on Thursday, and the Chicago Purchasing Managers' Index, and final University of Michigan consumer sentiment on Friday.

Banks bulk up Europe

Financials are pacing gains in Europe in afternoon trading, with shares of Barclays (BCS $3) surging after saying it does not need to raise fresh capital and reiterating that it will report an annual pre-tax profit "well ahead" of the 5.3 billion pound consensus. BNP Paribas (BNPQY $14) is also higher after announcing it expects to report an annual 2008 profit of 3 billion euros, while ING Groep (ING $7) is pushing forward after saying the Dutch government will absorb losses on most of its Alt-A portfolio of mortgage-backed securities. The company's CEO will step down as it expects to post a 3.3 billion euro 4Q operating loss.

Earnings woes take Tokyo lower

Many markets across Asia were closed today, but Tokyo was open for business and saw its benchmark Nikkei 225 Index ease by 0.8%. Heavy construction equipment maker Komatsu (KMTUY $43) closed down almost 5% after cutting its full-year profit forecast by about 40% because of fast-falling demand around the world. Exporters also came under pressure but shipping companies gained ground amid hopes that imports to China may be stabilizing.