Morning Update

Financial Fears Has Sentiment Slipping Gears

Stocks are lower in early action as persistent fears about the health of the assets on banks' balance sheets and the uncertainty regarding the future of the Nation's largest financial firms are weighing on sentiment. Overseas, markets are also succumbing to the pessimism toward the financial sector, adding to the weakness in early action. On the equity front, Lowe's Companies missed earning expectations, while JC Penny and Intuit topped the Street's profit projections. Treasuries are higher amid the soured sentiment on the Street, holding onto gains following an in-line reading of consumer inflation.

As of 8:49 a.m. ET, the March S&P 500 Index Globex futures contract is 12 points below fair value, the Nasdaq 100 Index is 9 points below fair value, and the DJIA is 105 points below fair value. Crude oil is down $1.6 to $38.62 per barrel, and gold is up $18.90 at $995.00.

Lowe's Companies (LOW $17) reported 4Q EPS fell about 61.0% to $0.11, one penny shy of the Reuters estimate, as sales declined 4.0% to about $10.0 billion. Same-store sales fell 9.9% and the second-largest home improvement retailer said the economic pressures on consumers intensified in 4Q, resulting in a further decline in consumer confidence and dramatic reductions in consumer spending. LOW added that amid the "intense" sales competition during the holiday season, it chose to be more aggressive than planned with merchandise markdowns, which pressured the gross margin. The company issued 1Q and full-year EPS guidance that came in below analysts' expectations.

JC Penney (JCP $15) announced 4Q EPS of $0.94, two cents ahead of the Street's estimate, as total revenues fell 9.8% to $5.8 billion, as same-store sales fell 10.8%. The department store said its strongest merchandise came in women's apparel and family shoes, and the best performance came in the southwest region of the country. But JCP said the gross margin declined 160 basis points, reflecting pressure from a weak sales environment and increased promotional levels during the holiday season. The company issued 1Q guidance below analysts' estimates.

Intuit (INTU $21) reported fiscal 2Q EPS ex-items of $0.34, topping analysts' estimates of $0.27, as revenues fell 5% to $791 million. The provider of business and financial software such as QuickBooks and TurboTax said its 2Q EPS "significantly exceeded" its guidance as it continued to adapt in this strained economy, and by managing expenses, it expected to deliver strong earnings growth for the year. The company issued 3Q revenue guidance below the Street's estimates, lowered its full-year sales outlook, and reduced the lower end of its 2009 EPS guidance.

Consumer inflation generally in line with expectations

After a 1.7% rebound in energy prices, the Consumer Price Index rose 0.3% in January, in line with the Bloomberg expectations. The core rate, which strips out food and energy, was up 0.2%, just above the forecast of 0.1%. Year-over-year (y/y), core inflation dipped from 1.8% to 1.7%. The headline rate was unchanged. Treasuries are higher following the report.

The slightly larger-than-expected rise in core inflation may be helping soothe some of the deflationary concerns that have gained recently in response to falling demand, businesses are slashing prices in an effort to stimulate sales. This increases the risk of a deflationary spiral (where declining demand precipitates downward prices), and keeps downward pressure on demand.

Europe falls as financials mauled

Stocks are under solid pressure in Europe, led by declines in financials and insurers amid fears about the strength of assets on their balance sheets and amid a lawsuit of the largest Swiss bank. UBS (UBS $11) is down about 16% after it was sued by the US government to force the disclosure of as many as 52,000 American customers who allegedly hid their Swiss accounts from tax authorities, according to Bloomberg. This comes on the heels of yesterday's announcement that the bank will pay a $780 million fine to avoid US prosecution that it helped Americans evade taxes. The US and Zurich-based UBS disagreed over how many account holders the bank must disclose to the IRS, agreeing to solve it in court. UBS said in a statement late yesterday that it "believes it has substantial defenses" to the US attempt to enforce the summons and will "vigorously contest" the case. Elsewhere, UK mining firm Anglo American (AAUK $9) is down about 14% after it suspended its dividend and share buybacks, and will cut 9,000 jobs, after reporting pre-tax profits fell over 1%.

Economic pessimism pounds Asia markets

Stocks in Asia were broadly lower after the late-day slide in the US markets and exacerbated concerns that the global recession may have more depth despite the flood of stimulus plans that have been unveiled recently. Financial shares led the decline and in Japan, the broad-based Topix Index fell to the lowest level in 25 years. Even though weakness in the yen persisted, which typically favors export issues and helps support the Japanese markets, the gloomy economic sentiment proved too much for stocks. A 3.7% drop in the South Korean Kospi Index led the Asian decline amid continued weakness in the region's currency, while Chinese issues were the lone bright spot as the Shanghai Index rose 1.5% on the announcement of more stimulus efforts aimed at stoking demand for home appliances and expanding loans for the petrochemical companies. In equity news, the struggling auto market continues to produce casualties as the world's largest tiremaker Bridgestone Corp. (BRDCY $28) fell over 7% after warning that net income will probably fall over 70% as demand for new cars wanes.