Morning Update

Posting a Downward Tally after Yesterday's Rally

Stocks are looking lower in early action after yesterday's rally on optimism toward the financials after Fed Chairman Ben Bernanke downplayed the prospects of a nationalization of the US banking system. Traders are awaiting the release of existing home sales and more testimony from the Fed chairman, while reacting to last night's speech by President Obama, which tried to reassure Americans grappling with the recession that the government stands ready to support a recovery. In equity news, Dollar Tree and JM Smucker both topped earnings expectations. Treasuries are mixed and overseas, markets received a boost from yesterday's advance on Wall Street.


As of 8:49 a.m. ET, the March S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 11 points below fair value, and the DJIA is 76 points below fair value. Crude oil is up $0.43 to $40.39 per barrel, and gold is down $5.30 at $963.80.

Dollar Tree (DLTR $36) reported 4Q EPS rose 10.6% to $1.15, two cents ahead of the Reuters estimate, as revenues increased 6.8% to $1.39 billion, and same-store sales rose 2.2% for the quarter. The discount store said traffic, sales and earnings growth was led by customers looking to stretch their household budgets.

JM Smucker (SJM $41) reported fiscal 3Q EPS ex-items of $0.88, one cent ahead of the Street's estimate, as revenues grew 6% to $1.2 billion. The food company said it benefitted from strong financial performance in its core businesses and it is well positioned to navigate through today's tough economic times. However, the company lowered its full-year guidance.

Treasuries mixed as housing data and Bernanke testimony sits on deck

Treasuries are mixed as traders await more housing data on the economic docket. At 10 a.m. ET, existing home sales for January will be released, and the expectation is for a rate of 4.79 million units on an annualized basis, up 1.1% month-over-month (m/m), after unexpectedly rising 6.5% in December. The dramatic price discounts presented by foreclosures and lower mortgage rates have begun to stimulate sales in regions that have experienced the steepest declines in prices. The National Association of Realtors previously noted that distressed sales, such as foreclosures, comprised 45% of transactions in December.

While builders have significantly slowed the pace of new home starts, hope for a near-term bottom in home prices is being stifled by still-high inventories of new and existing homes, tight lending standards and dour consumer sentiment. Nevertheless, some blocks of a stabilizing housing foundation are falling into place, and our government announced another plan to address the housing problem.

In other economic news, the US MBA Mortgage Application Index dropped 15.1% to 743.5 after last week' sharp 45.7% increase. The Refinance Index fell 19.1% to 3,618 as the continued slide in home prices helped keep demand for refinancing subdued. The Purchase Index also fell 2.6% to 250.5, signaling that any recovery in housing has not yet begun.

Also, Federal Reserve Chairman Ben Bernanke will resume his semi-annual Humphrey-Hawkins testimony before the House Financial Services Committee at 10 a.m. ET. Yesterday the Fed Chief reiterated many of the assessments of the economy and economic projections from the last Federal Open Market Committee (FOMC) meeting in front of the Senate Banking Committee and is expected to present similar testimony today. However, traders will most likely be looking for any more comments during the Q&A session about nationalizing struggling financial firms, which he downplayed the prospect yesterday, saying "we don't need majority ownership to work with the banks" and "I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn't necessary." The comments helped boost financial shares, which led to yesterday's rally.

Financials leading Europe higher but gains have been pared

Stocks in Europe are modestly higher in afternoon action, led by solid gains in the financial sector after Bernanke's testimony yesterday helped soothe concerns regarding the likelihood that nationalization for US banks, which would deal a blow the shareholders, may not be imminent. However, gains have been limited and stocks are well off of the highs of the day, led by healthcare stocks, exacerbated by another decline at Novartis (NVS $39) after it said 4Q profit will be stemmed by the stronger dollar and increased costs in its pharmaceuticals division. In other equity news, the world's largest confectionary maker Cadbury (CBY $30) is higher after posting an in line profit report and saying it expects sales to grow between 4-6% this year, which was near the low end of its forecasts, but maintained its guidance for higher profit margins on strength in chocolate and gum sales.

Elsewhere, the advance in Europe was limited after Standard & Poor's slashed the long-term foreign currency rating of the Ukraine by two levels to CCC+, seven levels below investment grade, reflecting intensifying execution risks associated with its arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections, S&P said.

Asia rebounds on weaker yen and stronger financials

Stocks in Asia were broadly higher as financial shares gained ground on relative optimism toward the group, supported by the eased fears that some major US banks will be nationalized. Japanese issues led the rally in the Asia/Pacific region with the Nikkei 225 Index rising 2.7%, aided by the upbeat banking sentiment and by strength in export issues that benefitted from the weakness in the yen, which hit a three-month low versus the dollar yesterday. The Japanese currency has declined over 3% this week against the greenback, boosting optimism for increased profits for Japanese export firms that rely heavily on sales in the US. Elsewhere, the Hong Kong's Hang Seng Index rose 1.6% as the government said it will refund taxes and increase infrastructure spending, but shares pared gains after the region's financial secretary said Hong Kong's economy may shrink by 2-3% this year, and after 4Q GDP fell 2.5% versus last year, more than the expected 2% contraction the Bloomberg estimate called for. Australia was the only main market in the Asian region to finish in the red, after positing a slight 0.1% decline.