Morning Update

Financial Fallout Dulls Upbeat Consumer Data

Stocks are looking lower in early action on more pessimism in the financial sector, led by another $30 billion in funding for AIG after it posted a $61.7 billion 4Q loss and overseas, HSBC launched the UK's largest rights offering aimed at helping cushion the credit-market crunch. However, personal income and spending came in better than expected, but that report is doing little to limit the sting in early action. In other equity news, PNC Financial cut its dividend and Dish Network reported 4Q EPS that matched expectations. Treasuries remain higher despite the relatively upbeat economic data, and as traders are await the latest release of the ISM Manufacturing Index and construction spending. Elsewhere, Asian markets came under solid pressure.

As of 8:45 a.m. ET, the March S&P 500 Index Globex futures contract is 13 points below fair value, the Nasdaq 100 Index is 17 points below fair value, and the DJIA is 105 points below fair value. Crude oil is down $2.17 to $42.59 per barrel, and gold is up $8.00 at $950.50.

The US Treasury and Federal Reserve said that AIG (AIG $0.42) will get up to $30 billion in additional funding, restructuring a previous agreement that the struggling insurer had received from the government. The Treasury and Fed said, "Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high." The announcement comes as AIG posted a $61.7 billion net loss, or $22.95 per share. Excluding certain items, the company posted a $14.17 per share loss, which was much larger than the loss of $0.37 analysts surveyed by Reuters called for, on continued severe credit market deterioration, particularly in commercial mortgage backed securities (CMBS).

PNC Financial (PNC $27) announced that it will reduce its quarterly common stock dividend from $0.66 to $0.10 per share. PNC said, "We are taking this proactive step to build capital, further strengthen our balance sheet and serve our customers in an unprecedented and uncertain economy." The company added that its 1Q results to date, excluding acquisition costs, are in line with Wall Street analyst expectations.

Dish Network (DISH $11) reported 4Q EPS of $0.48, in line with the Street's estimate, as revenues rose 1% to $2.9 billion. Dish said it lost approximately 102,000 net subscribers during the quarter.

Personal income and spending better than expected

Personal income unexpectedly rose 0.4% in January, versus the Bloomberg estimate of -0.2%, and December was unrevised at -0.2%. Personal spending increased 0.6% in January, topping expectations of a 0.4% increase. The savings rate jumped from an upwardly revised 3.9% to 5.0%, suggesting that despite the larger-than-expected increase in spending in January, consumers continue to save amid the deepening recession. The PCE Price Index, which is released with the income and spending data, rose 0.7% in January, while December was revised higher. The core PCE Price Index, which excludes food and energy, increased 0.1%. Year-over-year, core prices are up 1.6%. Treasuries remain higher, despite the better-than-expected personal outlay report.

Later today, the ISM Manufacturing Index will be released along with construction spending, kicking off a busy economic week, dominated by labor data, culminating with Friday's labor report.

Nonfarm payrolls for February are expected to fall 650,000, after January's 598,000 job decline and the unemployment rate is expected to increase from 7.6% to 7.9%. The continued large quantities of job looses suggests that consumer spending-which accounts for the lion's share of the economy-will likely remain a major headwind for the economy as consumers are saving more to reduce debt, build their retirement accounts back up, and increase their emergency savings to protect themselves in case of future job loss. Additionally, because businesses have a tendency to be reactive with respect to layoffs, the unemployment rate tends to lag economic activity. The unemployment rate will likely continue to rise, and could reach 9% (from January's 7.6%), which doesn't bode well for consumer sentiment or spending.

The pullback in consumer spending is contributing to the forecast for more weakness in the ISM Non-Manufacturing Index for February, which will be released Wednesday. The key gauge of activity in the service sector is expected to soften to 41.0 from January's 42.9, and the separation point between contraction and expansion is a reading of 50.

Additional reports on the economic calendar for this week include pending home sales on Tuesday, MBA Mortgage Applications, the ADP Employment Change and the Fed's Beige Book on Wednesday, and nonfarm productivity, unit labor costs, initial jobless claims and factory orders on Thursday.

Banking sector socking sentiment across the pond

Stocks in Europe are solidly lower in afternoon action led by sharp declines in financials following the capital raising and restructuring efforts from Europe's largest bank. HSBC (HBC $35) is down about 20% after it announced that it plans to raise 12.5 billion pounds ($17.7 billion) in the UK's largest rights offering in order to boost its capital position to try to help it weather the financial crisis. The announcement came after HSBC reported a 70% drop in full-year net income on a loss in North America, prompting it to close its consumer lending business in the US. The company also cut its full-year dividend by 29% and said it will eliminate 6,100 jobs.

The economic front is offering little to help soothe the sting from the financial sector as both the UK and euro zone manufacturing PMI's fell to levels below the forecast of economists surveyed by Bloomberg, further exacerbating global recessionary fears and weighing on materials and industrial issues. Elsewhere, the euro is under pressure after European Union leaders rejected Hungary's 180 billion euro ($227 billion) Eastern European financial aide package, which is adding to the pessimism regarding the health of the European economy.

Japan and Korea lead Asia lower

Stocks is Asia were broadly lower to begin the week led by solid declines in Japan and Korea. Economic concerns continued to shape sentiment as fears about the possibility of a deeper-than-expected global recession weighed on export issues in Japan as the Nikkei 225 Index fell 3.8%. Financials also came under pressure, exacerbated by the negative news out of Europe that HSBC is maneuvering to try to shore up its balance sheet and survive the credit crisis. Asian markets received no relief from Korean trading as the Kospi Index fell 4.2% as exports were pressured and its currency hit an 11-year low as the won continued its recent slide. Australia also contributed to the decline, as the S&P/ASX 200 Index dropped 2.8% after Moody's lowered its ratings outlook for the nation's three largest banks. However, China managed to post a gain, with the Shanghai Index rising 0.5% led by relative optimism following the third-straight monthly improvement in the country's Purchasing Manager's Index.