Evening Update

Shares Lower As Traders Brace for Earnings Season

Stocks fell in light trading today, and traders took profits after a several week rally, ahead of what is anticipated to be a weak earnings season. In equity news, General Motors was reported to be preparing for bankruptcy, Emerson Electric lowered guidance and gave a dour outlook, Applied Materials reported a reduction in a solar order, YRC Worldwide warned of significant 1Q charges, and Brinker International provided upbeat guidance. The London Times reported that the International Monetary Fund was set to raise its forecast of toxic assets to $4 trillion. Consumer credit declined in February and Treasuries fell. After the bell, Dow component Alcoa reported earnings to mark the unofficial start to earnings season.

The Dow Jones Industrial Average fell 186 points (2.3%) to close at 7,790, the S&P 500 Index lost 20 points (2.4%) to 816, and the Nasdaq Composite decreased 45 points (2.8%) to 1,561. In light volume, 1.3 billion shares were traded on the NYSE, and1.8 billion shares were traded on the Nasdaq. Crude oil fell $1.90 to $49.15 per barrel, wholesale gasoline lost $0.02 to $1.46 per gallon, and gold gained $13.56 to $882.46 per ounce.

Dow component Alcoa (AA $8) reported after the close of today’s trading, posting a 1Q loss ex-items of $0.59 per share versus the estimate of a loss of $0.56 per share. Revenues were $4.1 billion versus the expectation of $4.08 billion. The company cited the continuing economic downturn and a 26% decline in metal prices. However, the company said that they moved to strengthen their balance sheet and reduce costs. Shares were lower during the regular trading session.

Shares of General Motors (GM $2) were sharply lower after a source familiar with the company told Reuters that the automaker and Dow member is in "intense" and "earnest" preparations for a possible bankruptcy filing. The source said a plan to split the corporation into a new company made up of its most successful units, and an old one of its less-profitable units, is gaining momentum and is seen as the most sensible configuration. GM did not comment on the report.

Emerson Electric (EMR $31) lowered guidance for FY09 EPS to $2.40 - 2.60, down from its February forecast of $2.70 – 2.95 per share and versus the Street’s estimate of $2.47 per share. Revenues are expected to fall 13 – 15% to $21.0 – 21.7 billion, including a 5% negative currency impact. CEO David Farr apologized for “how badly I missed this forecast” and said the downturn in customer demand had been more severe versus his expectations in February. He said businesses dependent on industrial capital spending continue to see rapid declines in demand, and said these businesses would likely continue to suffer well into 2010. Consumer product related businesses had seen orders stabilize but demand has yet to recover. Shares of the maker of industrial-automation equipment, power network gear, parts for appliances and heating and cooling equipment erased early gains and closed unchanged.

Applied Materials (AMAT $11) fell after announcing that one of its solar production gear client has reduced its $1.9 billion order by more than 85% to $250 million as a result of the worsening global economy since the order was announced in March 2008. AMAT's solar business is part of its energy and environmental solutions unit, which accounted for over 20% of the company's total revenue in 1Q, according to Reuters.

YRC Worldwide (YRCW $4) declined 25% after the transportation company said in a regulatory filing that due to internal network restructuring and the economic environment it expects significant 1Q charges of between $161-185 million to operating income. The company added that volume declines increased throughout the quarter and daily freight tonnage in its US national network was down 29% versus last year.

Shares of Brinker International (EAT $17) rose after the restaurant firm issued guidance for its fiscal 3Q, saying it expects EPS ex-items for the quarter to be in the range of $0.44-0.45, easily topping the Reuters estimate of $0.35 per share. The parent of Chili's restaurants said 3Q was positively impacted by an increase in its margins due to continued success in lowering and controlling operating costs, partially offset by a greater-than-expected decrease in same-store sales, which fell 5.6%.

Treasuries strengthened as equities weakened, reports of higher toxic assets

The London Times reported that the International Monetary Fund was set to raise its forecast of global toxic assets to $4 trillion. The IMF did not comment on the report. Treasuries rose as equities were under pressure and there were no major U.S. economic reports today. The yield on the 2-year note fell 3 bps to 0.91%, the yield on the 10-year note decreased 3 bps to 2.89%, and the yield on the 30-year bond lost 1 bp to 3.71%.

Consumer credit fell by $7.48 billion in February versus the expectation of a $3.0 billion fall and January’s $1.8 billion increase was revised higher to $8.1 billion. The gauge of short-term and intermediate-term credit extended to individuals—excluding loans secured by real estate—rose for the first time in four months in January. However the volatility demonstrated by this report shows that the economic recovery is still tenuous. The steep fall in spending and manufacturing following the Lehman Brothers bankruptcy in September 2008 was so dramatic that it simply could not be sustained. After recovering from a state of paralysis during which consumers locked down, some pent-up demand has built up and retail sales rose in January and February. However, it is unclear if the monthly reports we have received will translate into sustainable trends, or if they are simply blips off the bottom. It is probable that the path to recovery will not be in a straight line.

Fed meeting minutes will be released tomorrow

The Federal Open Market Committee's (FOMC) March monetary policy meeting minutes will be released tomorrow and traders will be interested in the discussion that led to the surprise announcement that the Fed would purchase up to $300 billion in longer-term Treasuries—aimed at making borrowing more affordable for a range of loans and drive new capital flows into higher-risk assets. However, while the equity markets have been comforted by the willingness of the government to do whatever it takes to stabilize the credit markets, some credit spreads have started to widen again, casting doubts on the ultimate success of these initiatives. They add that keys to long-lasting recovery are the degree to which private money will enter credit markets and the return of confidence so vital to their functioning.