Morning Update

Citi Deal Steals Sentiment

Stocks are looking solidly weaker in early action as sentiment has been soured by the announcement that the US Treasury will convert up $25 billion in preferred stock that it holds in Citigroup to common equity if private holders also participate in the exchange. Adding to the woes in early action, 4Q GDP was revised solidly lower, and overseas, Lloyd's Banking Group is tumbling to take Europe well below the flatline. In other equity news, Dell, Inc. topped earnings expectations but computer system demand fell and it offered cautious commentary. Treasuries are moving higher amid the uneasiness in financials and after the GDP revision. Elsewhere, Asian markets were mixed.

As of 8:47 a.m. ET, the March S&P 500 Index Globex futures contract is 17 points below fair value, the Nasdaq 100 Index is 15 points below fair value, and the DJIA is 129 points below fair value. Crude oil is down $2.35 to $42.87 per barrel, and gold is up $15.60 at $958.20.

Dow member Citigroup (C $2) is down sharply after the US Treasury Department said it will participate in Citi's securities exchange offer to strengthen its capital structure by converting dollar-for-dollar-up to $25 billion-of the preferred stock that it holds in the maligned bank to common stock to match conversions by private preferred holders in a bid to strengthen Citi's capital base. The Treasury said the transaction, "does not increase the amount of Treasury's investment in Citigroup." According to Bloomberg, the conversion deal would cut existing shareholders' stake in the company by 74%.

Dell, Inc. (DELL $8) reported 4Q EPS ex-items of $0.29, one cent ahead of the Reuters estimate, as revenues fell 16% to $13.4 billion. The company said revenues at its Americas commercial business declined 17%-led by a 23% drop in units-as computer systems demand was down significantly among all customers, particularly small and medium businesses and its largest corporate customers. Dell Chairman and CEO Michael Dell said a lot of IT spending is being deferred until there is better economic visibility and it is being very disciplined in managing costs, and generating profitability and cash flow. Looking ahead, Dell said it believes global IT end-user demand will continue to be uncertain and challenging.

US output worsens after another look

4Q preliminary Gross Domestic Product , the broadest measure of economic output, was revised from the initial report of a 3.8% annualized rate of decline to a 6.2% drop, decreasing much more than the Bloomberg forecast of a 5.4% decline. Personal consumption was revised from -3.5% to -4.3%, also much worse than the expectation of -3.7%. GDP benefitted from a rise in inventories, initially, but stockpiles were revised lower to add to the larger-than-expected decline in output. Real final sales, which exclude changes in inventory, worsened from -5.1% to -6.4%.

Pricing pressures, which appeared to have slowed markedly, actually rose with the GDP price Index gaining 0.5%, compared to the forecast of -0.1%. The core PCE Index, which excludes food and energy, was up 0.8%, above the estimate of 0.6%. The rate continues to sit below the Fed's implied target of 1-2%. Treasuries are moving higher in early action following the disappointing GDP data and worries about the financial sector.

Economic activity remains in decline as consumers are pulling back sharply after being beaten down by still-falling home prices, the big drop in stock prices and rising unemployment. To make matters worse, as profits plunge, corporations are responding with more job cuts and decreased spending. The economy is likely to undergo a deep and extended recession, and to short-circuit the negative feedback loop in the U.S. economy, the country needs a successful implementation of massive fiscal spending. The government has announced a fiscal stimulus plan, a housing recovery plan and measures to bolster the banking system. To date, these measures seem underwhelming in their scope and speed to stem a decline in the economy.

Other reports on the economic calendar that are due out later this morning include the Chicago Purchasing Manager survey and the University of Michigan Consumer Sentiment Index.

Banking woes whip sentiment in Europe

Stocks in Europe are solidly lower in afternoon action, led by weakness in financials. Lloyds Banking Group (LYG $4) is providing most of the sting to sentiment across the pond as shares are trading down about 21%, after it failed to disclose the size of assets that would be insured by the government's Treasury asset protection program. Adding to the pressure on Lloyds, the company reported its full-year net income dropped 75% as its recently acquired HBOS unit posted annual losses of 10.8 billion pounds. Europe's largest phone company Deutsche Telekom (DT $12) is higher after it announced it will combine its mobile and fixed-line units to reduce costs and gain market share, and it seeks to preserve its dividend. DT also reported earnings before taxes, interest, and depreciation of 19.5 billion euros, topping the Reuters estimate of 19.3 billion euros.

Asia mixed as weak yen strengthens Japan

Stocks in Asia were mixed, with earnings concerns weighing on sentiment in China as the Shanghai Composite Index fell 1.8% and Hong Kong's Hang Seng Index declined 0.7%, but South Korea's Kospi Index rose 0.8% and Japan's Nikkei 225 Index led advancers with a 1.5% gain. Japan was in focus as the weakness in the yen, which traded lower versus the dollar to a level not seen since November, helped continue to support optimism toward export issues that the weakened Japanese currency will boost revenues in companies that rely on sales in the US. The relatively upbeat mood in Japan helped offset economic news that showed manufacturers cut production by a record 10% in January and a sharp decline in household spending. In equity news, Sony Corp (SNE $16), gained ground on the softer yen and after the announcement that its chairman and CEO will lead its electronics division, after it was reported that he will replace the company's president. Elsewhere, tractor maker Kubota (KUB $24) came under pressure after it said it is considering reducing its dividend by as much as 30% because of "astonishingly bad" earnings results.