Morning Update

Weak Data, Earnings Lower Stocks

Yesterday's broad-based rally is giving way to renewed caution as earnings continue to disappoint and remind traders that the steep recession is taking a big toll on corporate profits. Qualcomm and Starbucks are under pressure after missing the Street's profit estimates, while Starbucks announced new store closures. Ford Motor Co. continued to post losses but said its cash burn rate is expected to slow, while Lam Research and Flextronics missed. Meanwhile, continuing jobless claims reached a record high, underscoring the severity of the recession, and durable goods orders fell more than expected. Treasuries are little changed, and world markets are mixed.

As of 8:40 a.m. ET, the March S&P 500 Index Globex futures contract is 10 points below fair value, the Nasdaq 100 Index is 15 points below fair value, and the DJIA is 99 points below fair value. Crude oil is down $1.21 to $40.95 per barrel, and gold is down $4.70 at $883.50.

Qualcomm (QCOM $37) is trading lower after reporting fiscal 1Q earnings ex-items fell 40% to $0.31 per share, well below the Reuters forecast of $0.47, as net revenues increased 3% to $2.5 billion. The second largest maker of wireless chips said economic conditions were weak and the distress in global financial markets resulted in additional impairments to its marketable securities portfolio. Reduced visibility in the marketplace makes it difficult to forecast future inventory levels or predict when a recovery will begin, QCOM said. As a result, while it continues to estimate healthy growth in the CDMA-device market, the company lowered its shipment estimate for calendar year 2009. Qualcomm offered soft 2Q revenue guidance and cut its full-year outlook.

Starbucks (SBUX $10) reported 1Q net revenues fell 6% to $2.6 billion, driven by a 9% drop in same-store sales, while EPS ex-items fell 46% to $0.15 per share, two cents below the Street's forecast. Including charges related to restructuring, Starbucks earned $0.09 per share. The company said it has a solid balance sheet and strong cash flow and liquidity, and it is well-positioned to weather the challenging economy, but it plans close another 200 stores in the US and 100 in international markets, which is in addition to the approximately 660 closures announced in July. The decision could result in job cuts of up to 6,000, Starbucks said.

Dow member 3M (MMM $55) reported a smaller-than-expected drop in 4Q adjusted EPS to $0.97, beating the Street's forecast of $0.93, and sales fell 11.2% to $5.5 billion. The industrial conglomerate cut its 2009 outlook and plans to reduce capital expenditures. .

Ford Motor Co. (F $2) reported a 4Q loss excluding items of $1.37 per share, below the consensus forecast of a loss of $1.23, as a sharp decline in global demand for autos pressured results. But the number two US automaker said it had liquidity at the end of the quarter of $24 billion, including cash of $13.4 billion and said it burned through $5.5 billion in cash. Based on current planning assumptions, Ford also reconfirmed that it does not need a bridge loan from the government, barring a significantly deeper economic downturn or a significant industry event. The company's CFO said 1Q will probably be the toughest quarter and some market recovery may occur in the second half of the year. He also said he sees a "substantially slower" cash-burn rate in 2009.

Rising jobless claims, falling durable orders

Weekly initial jobless claims increased 3,000 to 588,000, above the forecast of 575,000. The four-week moving average increased 24,250 to 542,500, and continuing claims jumped 159,000 to 4,776,000, exceeding the levels reached in the 1974 and 1982 recessions (though the labor market was smaller during those periods) and highlighting the difficulty laid off workers are having finding new jobs. The large number of high-profile layoffs announced recently is likely to show up in the numbers in the coming weeks and months, exacerbating pressure on the already weak economy.

Durable good orders fell 2.6% in December, worse than an expected drop of 2.0% and November was revised substantially lower. Ex-transportation, orders fell 3.6%, versus the forecast of a 2.7% decline. November was also revised lower. Orders for non-defense capital goods ex-aircraft, which is considered a good indicator of capital spending, fell 2.8%.

New home sales will be released at 10 a.m. ET and a 2.5% drop in December is expected.

Europe heads lower

Banks are pacing the sell-off in Europe, while mining, steel, and other cyclicals pull shares lower for the first time in four days. Falling metal prices are putting pressure on commodity issues, while shares of Xstrata (XSRAF $9) are down sharply after the company said it plans to raise capital through a heavily-discounted rights issue. Royal Dutch Shell (RDSA $51) posted a 4Q net loss of $2.8 billion on slumping oil prices. Ex-items, the oil producer reported net profits fell 32% to $5.7 billion and said it expects industry conditions to remain challenging.

Sentiment is also eroding after eurozone consumer confidence and economic confidence fell to new lows in January. The economic situation in the eurozone has worsened dramatically in recent weeks, and the latest reports suggest further deterioration is likely. The European Central Bank reluctantly reduced interest rates in January, and the latest reports give policymakers the cover to cut again in February. ECB President Jean-Claude Trichet said in an interview today that 2009 will be "very difficult." But he reiterated to Bloomberg TV yesterday that March's meeting will be "important," signaling the central bank may forgo a rate cut in next month.

Asia rallies

Traders in Hong Kong returned from a three-day holiday and played catch-up to recent gains in global markets by pushing up the Hang Seng Index by 4.6%. And Japan warmed to Wall Street's rally yesterday, with the Nikkei 225 Index rising 1.8%. Nippon Steel (NISTY $31), the second biggest maker of steel in the world, finished nearly unchanged after cutting its full-year profit outlook to 175 billion yen from 330 billion yen and forecasting a net loss in 4Q due to falling demand. Sony (SNE $21) said profits tumbled in 3Q and reiterated that it expects a record operating loss for the year ending in March of 260 billion yen. Nintendo (NTDOY $45), however, posted a 21% rise in 3Q operating earnings but lowered its full-year profit forecast, slightly reducing its sales target for the Wii gaming console.

Elsewhere, the Reserve Bank of New Zealand cut its key rate by 1.5 percentage points to 3.0%. The governor of the central bank said the global economy is "now in recession" and the outlook internationally has been "marked down considerably" since December.