Evening Update

Calm Before the Earnings Storm

Stocks ended mixed after the Dow Jones Industrial briefly traded in positive territory and financials were solidly higher, adding to last week’s gains after Wells Fargo announced results that blew away expectations. Earnings season will kick into high gear this week, led by Goldman Sachs after the close today, and traders are cautiously optimistic that banks’ earnings reports will produce another round of positive sentiment, despite loan losses that continue to amass. In equity news, Boeing reduced its forecast and announced production cuts, GM is reported to be given a June 1st bankruptcy deadline, Chevron announced an earnings shortfall, Express Scripts is purchasing WellPoint’s prescription drug business and Seagate Technology announced higher revenues for the current and forward quarter, but eliminated its dividend and announced a capital raise. There were no major U.S. economic reports and Treasuries were higher.

The Dow Jones Industrial Average lost 26 points (0.3%) to close at 8,057, while the S&P 500 Index gained 2 points (0.2%) to 859, and the Nasdaq Composite advanced 1 points (0.0%) to 1,653. In light volume, 1.5 billion shares were traded on the NYSE, and 1.8 billion shares were traded on the Nasdaq. Crude oil lost $2.19 to $50.05 per barrel, wholesale gasoline fell $0.02 to $1.46 per gallon, and gold rose $12.20 to $893.85 per ounce.

Goldman Sachs (GS $130) surprised the Street by reporting after today’s close, ahead of tomorrow’s scheduled report, and reported 1Q EPS of $3.39, much higher than the expectation of $1.64 per share. The company also announced an offering of $5 billion in stock and hopes to pay off the $10 billion in TARP capital they received from the government.

Dow member Boeing (BA $37 ¹) fell after the jet maker reduced its twin-aisle airplane production plans for 2010 due to "significant deterioration" in the business environment for airplanes and cargo operators driven by unprecedented global economic conditions. BA said this is an "extremely difficult" economic time for its customers and it will cut its monthly production of its 777 airplanes from seven to five per month beginning in June 2010 and it will also delay previous plans to modestly increase 747-8 and 767 production—with no change to the 737 production rate. BA also said that the weak global economy has contributed to significant declines in escalation indices that affect forecasted pricing for commercial airplanes already ordered. As a result, the company said 1Q net earnings will be reduced by approximately $0.38 per share.

Fellow Dow component General Motors (GM $2) lost over 15% after the New York Times said the US Treasury is directing the automaker to lay the groundwork for a potential "surgical" bankruptcy filing by June 1, according to people familiar with the matter. Neither the Treasury nor GM commented.

Shares of Chevron (CVX $68) were down as the company warned that earnings for 1Q are expected to be sharply lower versus last year. The energy firm said upstream earnings are expected decline substantially, in part due to lower prices for crude oil and natural gas, while downstream profits are also anticipated to be much lower, with average margins on the sale of refined products off significantly.

Express Scripts (ESRX $57) announced that it will purchase WellPoint's (WLP $44) NextRx prescription business for $4.68 billion in a combination of cash and stock. The deal includes a 10-year contract for ESRX to provide services to WLP, and ESRX said the deal is expected to be neutral to slightly accretive for the company in 2009, and moderately add to earnings in 2010. Shares of both firms rose.

Seagate Technology (STX $6) announced 3Q revenue is expected to be $2.1 billion, higher than its forecast in January of $1.6 – 2.0 billion and the Street’s estimate of $1.88 billion, and said 4Q sales would be $1.9 - 2.2 billion, better than analysts’ forecast of $1.86 billion. The results were aided by better-than-expected shipments and market share gains. In providing its outlook, the company said current uncertainty in global economic conditions make it more likely that actual results could differ materially from current expectations. STX plans on more restructuring, and is suspending its dividend, which was slashed in January. The dividend elimination will save the company $60 million a year. STX is also planning on selling $430 million in notes in a private placement, which will be partially targeted toward paying some of all of $300 million in principal on debt due Oct. 1. Shares were lower.

Big Bank reports a reason to tune in to the week's installment of earnings season

Earnings season will kick into high gear this week, and financials will likely garner the lion's share of attention, starting with Goldman Sachs, followed by Dow members JPMorgan Chase (JPM $34) and Citigroup (C $4), on Thursday and Friday, respectively. The Street will likely be looking for details on the sector's financial strength in the form of tier 1 capital ratios and tangible common equity—that have been at the heart of the government's stress testing of the major banks. Also, traders may be looking for commentary on lending activity, both from the firms' standpoint as well as borrowing demand from consumers, which is vital to economic growth. Financials have led the rally off the March 9th low, and were propelled higher after last week's report from Wells Fargo (WFC $20), where it said it easily beat the Street's estimates.

It would be the third-worst fall in the past 100 years, surpassed only by the roughly 80% earnings collapses during World War I and the Great Depression. The fourth quarter of 2008 was the sixth consecutive down quarter for earnings, and 2008 the second straight down year.

Techs will also be well represented as Dow component Intel (INTC $16) will also report tomorrow, and Google (GOOG $373) will release its results on Thursday. Other notable reports that will likely help gauge the health of the economy include a pair of Dow members, with Johnson & Johnson (JNJ $51) reporting profits tomorrow and General Electric (GE $11 ¹) on Friday.

Busy economic week kicks off tomorrow with retail sales and producer prices

Treasuries were higher and the day was void of any major economic releases—which may be the calm before the economic storm for the week. The yield on the 2-year note lost 8 bps to 0.87%, the yield on the 10-year note fell 8 bps to 2.84%, while the yield on the 30-year bond decreased 7 bps to 3.68%.

As if the flood of key earnings reports out this week were not enough, traders will have a full slate of economic data to contend with in deciphering whether the current global recession has seen its darkest days. Advance retail sales will kick things off tomorrow, and are expected to show a rise of 0.3% in March, following two months of better-than-expected results, with February falling a scant 0.1% and January showing a rise of 1.8%. Ex-autos, sales are expected to be flat versus February.

The trend in prices will be measured by the Producer Price Index, which will also be released on Tuesday, and the headline rate is expected to be 0.0% in March. The core rate, which excludes food and energy, is expected to rise 0.1%. Year-over-year, the headline rate is expected to fall 2.2%, and the core is expected to rise 4.0%. For now, an environment of falling prices is the current concern. While the Fed has pumped massive amounts of liquidity into the system and the monetary base has increased, the money multiplier has plunged.