Evening Update

Sixth-Straight Weekly Gain, Glass Seen as Half-Full

Stocks moved higher for the sixth-straight week, on hopes that the worst of the recession is in the rear view mirror, and that expectations for corporate profits have been overly pessimistic. Financials were leaders to the upside today, despite Citigroup shares experiencing some profit-taking, as better-than-expected results had been largely priced into the stock after a string of other financials posting positive results. In other earnings news, General Electric beat expectations, Google reported earnings ahead of the Street, but offered cautious commentary, and Mattel posted an in-line loss. In economic news, the University of Michigan’s Consumer Sentiment Index rose to a level not seen since before the collapse of Lehman Brothers. Treasuries fell.

The Dow Jones Industrial Average rose 6 points (0.1%) to close at 8,131, the S&P 500 Index gained 4 points (0.5%) to 870, and the Nasdaq Composite advanced 3 points (0.2%) to 1,673. In heavy options-expiration driven volume, 2.0 billion shares were traded on the NYSE, and 2.4 billion shares were traded on the Nasdaq. Crude oil gained $0.35 to $50.33 per barrel, wholesale gasoline rose $0.02 to $1.49 per gallon, and gold fell $7.68 to $868.03 per ounce. For the week, the DJIA rose 0.6%, the S&P 500 Index gained 1.5%, and the Nasdaq Composite increased 1.2%.

Dow member Citigroup (C $4) posted a smaller-than-expected 1Q loss of $0.18 per share, compared to the Reuters estimate, which called for a $0.30 per share loss for the quarter. C said that total revenues were up 99% to $24.8 billion versus the same period last year, with sequential improvement across all regions. The company said its net interest margin increased 50 basis points to 3.30% compared to 1Q last year and 8 bps versus last quarter, and operating expenses were down by $3.7 billion, or 23%. Its teir-1 capital ratio—a key measure of financial strength—improved from 7.7% in 1Q 2008 to 11.8%. C said the quarterly results were its best since 2Q 2007 and it has taken steps to strengthen its position further, by lowering risk by reducing the problem legacy assets that have caused many of its losses. The company added that it continued to extend significant amounts of credit to US consumers and continued to focus on supporting the US housing market. Shares gave up early gains and were lower.

Fellow Dow component General Electric (GE $12 ¹) reported 1Q EPS declined 40% to $0.26, five cents above the Street's expectations, as revenues fell 9% to $38.4 billion. The company said industrial sales were down 1%, its financial services revenues fell 20%, while energy infrastructure profits grew by 19% and its technology infrastructure earnings gained 6%. GE said its capital finance unit extended $69 billion of new credit in 1Q, and it earned $1.1 billion and remains on track for a profitable 2009. The company's total equipment and services backlog was steady at $171 billion. GE said the results do not include any impact from newly issued mark-to-market accounting rules, which it is implementing in 2Q. On a conference call with analysts, GE's CEO said "the economy remains tough," noting that "there are places where we can still win and we are positioning the company to excel as we come out this in 2010, 2011, or whenever that takes place." Shares were higher after recovering from early losses.

Google (GOOG $392) posted 1Q EPS ex-items of $5.16, topping analysts' estimates of $4.93, as revenues increased 6% to $5.5 billion versus last year, but down 3% versus 4Q—its first sequential decline since the stock went public in August 2004. The number one internet search engine said its site revenues fell 3% sequentially to $3.7 billion—67% of total revenues. "We're still basically in uncharted territory," GOOG's CEO said on a conference call. Adding that, "Google is absolutely feeling the impact. Users are still searching but they're buying less. Ultimately, what that really means is the ads are converting less." Shares overcome early weakness and were higher.

Mattel Inc. (MAT $15) reported a 1Q loss of $0.14 per share, slightly larger than the Street's forecast of a $0.13 per share loss, as revenues fell 15% to $785.6 million, also below the Street's forecast. The toy maker said revenues were impacted by foreign exchange rates and retailer inventory reduction, and it said it will continue to manage costs and expenses in light of expected revenues. However, shares rose 15%, suggesting analysts may have feared a worse loss than what was reported.

Consumer sentiment jumps to pre Lehman collapse level

Preliminary University of Michigan consumer sentiment (chart) improved much more than expected, rising from 57.3 in March to 61.9 in April, above the forecast of a decline to 58.5. The index sits at a level not seen since September—before the collapse of Lehman Brothers, which led to November's lowest reading since 1980. In addition to the overall sentiment improvement, survey results for current economic conditions and expectations both rose as well. The upbeat reading in consumer sentiment illustrates the apparent shift from uncertainty regarding the depth and duration of the global recession to cautiously broaching the idea that the worst of the recession may be behind us. We've been on the verge of upgrading the consumer discretionary sector, and are moving the sector from marketperform to outperform. While this is by no means a sign that all is well with the consumer, because it certainly isn't, the stock market is a forward-looking mechanism and it appears that there may be some light at the end of the tunnel. Toward the end of previous recessions, we've seen the discretionary sector start to relatively outperform even as payrolls continued to fall. Treasuries were lower. The yield on the 2-year note gained 7 bps to 0.97%, the yield on the 10-year note rose 11 bps to 2.94%, and the yield on the 30-year bond rose 8 bps to 3.80%.

Data dump helps week post sixth-straight jump

Stocks finished in the green for the sixth-straight week as 1Q earnings season heated up and financials were in the hot seat. This week may prove to be the pivotal point for the financials during the earnings season as several major firms revealed their bottom lines. Last week's favorable pre-announcement from Wells Fargo (WFC $20), trouncing analysts' estimates, had some debating whether or not this was an anomaly for the group, but better-than-expected reports helped relatively soothe some of those concerns. Goldman Sachs (GS $121) kicked things off by surprising the Street with its profit report that came in much better than forecasts a day earlier than expected. However, shares came under pressure after it announced a $5 billion public offering of common stocks to help it raise enough capital to pay back the $10 billion in Troubled Asset Relief Program (TARP) capital it had received from the government. Nonetheless, Goldman's report paved the way for Dow members JPMorgan Chase's (JPM $33) and Citigroup's reports that also came in better than expected. Outside of financials, the earnings front yielded a major report in the tech sector and from a fellow Dow member. Intel (INTC $16) reported earnings that topped estimates and said it believes PC sales bottomed, but it came under pressure as it offered a cloudy outlook.

The economic docket was plentiful, keeping traders busy, headlined by an unexpected drop in retail sales on both the headline and excluding autos. Also, declines in headline producer and consumer prices continued to curb any inflationary fears—however, while it’s natural to cheer falling prices, an era of deflation can have a destructive impact if it enters a negative spiral, where consumers hold off on purchases in the hope of lower prices in the future, stifling economic growth.

Elsewhere, industrial production and capacity utilization fell, and housing starts and building permits came in lower than expected, but all these reports were seen as possible positives as they are necessary to aid in lowering the elevated inventory levels in their respective industries. The argument that we may be bottoming received support on multiple fronts as President Barack Obama said recent actions by the government are "starting to generate signs of economic progress," and Federal Reserve Chairman Ben Bernanke suggested that "recently we have seen tentative signs that the sharp decline in economic activity may be slowing." These comments were illustrated by improvements in the Philly Fed and Empire Manufacturing Indices. Although 1Q earnings season has the potential to reach its pinnacle next week with a plethora of key reports, the Street will likely be keeping a bent ear toward the economic arena as traders continue to search for more potential "green shoots" in the economy.

Housing market data and durable goods on the calendar next week

The first report on housing next week will be on Thursday, where existing home sales for March will be reported and are expected to have fallen 1.5% month-over-month (m/m) to an annual rate of 4.65 million units, after rising 5.1% in February to 4.72 million units. Post-Lehman, sales have been dominated by the rapid falling prices afforded by foreclosures, which have accounted for 40-45% of transactions on average. On Friday, new home sales for March will be released, and it is expected that sales rose 0.9% m/m to an annual rate of 340,000, after rising 4.7% in February.

Sales have picked up in the areas with the steepest declines in prices, and prices continue to fall due to elevated inventories of homes available for sale. In February, average price for existing homes fell 15.5% from a year ago and 18.0% for new homes. Expect prices to fall another 10-15% before finding stability. However, sales typically turn before prices, and once home sales begin to rise, that could boost confidence and get others off the sidelines.

While mortgage rates are near 40-year lows, lending standards remain tight, as banks are concerned about their capital ratios that deteriorate with continued falling valuations in their underlying collateral, such as home loans. In order to restore normalcy to credit markets, the Fed has launched campaigns to purchase mortgage-backed securities and longer-term Treasuries. The Fed is simply bypassing the banks, and by purchasing Treasuries, the Fed can theoretically lower rates for many different markets, including mortgages. However, there are consequences of the aforementioned Fed programs and "there's no such thing as a free lunch."

Durable good orders will be reported on Friday, and are expected to have fallen 1.5% m/m in March, after unexpectedly rising 3.4% in February. Ex-transportation, orders are forecasted to have declined by 1.2%, after advancing 3.9% in February. Manufacturers have been cutting production dramatically in response to falling demand, to preserve cash, cut costs, and lower inventory levels. Economic data continues to be volatile month to month.The economy is still contracting, and while the pace of decline is slowing in some indicators, others continue to deteriorate. It is probable that the path to recovery will incur bumps along the way.

Other releases on next week’s economic schedule include MBA mortgage applications and initial jobless claims.