Evening Update

As Go Financials, So Goes the Market

Stocks ended the day solidly in positive territory, erasing early losses after US Treasury Secretary Geithner said that the vast majority of banks were currently well-capitalized, offsetting yesterday’s concerns regarding the potential for banks having to raise additional capital. Earnings results poured in, including six Dow components, and IBM, Caterpillar, DuPont and United Technologies posted better-than-expected earnings, Merck & Co. missed forecasts and Coca-Cola reported in-line earnings. In other earnings news, Texas Instruments, US Bancorp, Jefferies Group and Western Union beat estimates, while State Street posted in-line earnings, and Comerica missed. Bank of New York Mellon missed and lowered its dividend, whereas Coach beat and initiated a dividend. Treasuries were lower in reaction to a Fed purchase of seven to ten year maturity Treasuries that fell short of expectations, as well as a higher equity market.

The Dow Jones Industrial Average rose 128 points (1.6%) to close at 7,970, the S&P 500 Index gained 18 points (2.1%) to 850, and the Nasdaq Composite advanced 36 points (2.2%) to 1,644. In moderate volume, 1.7 billion shares were traded on the NYSE, and 2.4 billion shares were traded on the Nasdaq. Crude oil rose $0.04 to $48.55 per barrel, wholesale gasoline gained $0.01 to $1.41 per gallon, and gold fell $0.85 to $883.65 per ounce.

Dow member IBM (IBM $102) reported 1Q EPS of $1.70, three cents ahead of the Reuters estimate, and it posted revenues of $21.7 billion, which came in short of the Street's $22.6 billion. IBM said the strong US dollar impacted its revenue results and its total global services revenues decreased 10%, its software segment sales declined 6%, and its systems and technology segment revenues were down 23%. IBM reiterated its full-year 2009 earnings of at least $9.20 per share and said it remains ahead of pace for its fiscal 2010 roadmap of $10-11 per share. Shares overcame early losses and were higher.

Texas Instruments(TXN $17) reported 1Q EPS of $0.01, one penny ahead of the Street's estimate, as revenues fell 36% to $2.1 billion. The company said its revenue and earnings exceeded expectations but the company emphasized caution about the business climate, but said demand for its products has begun to stabilize after sharp drops in the past two quarters. TXN issued 2Q guidance in line with analysts' estimates and shares erased early gains and were lower.

Dow component Caterpillar (CAT $31 ¹) lowered its full-year EPS and revenue guidance and said, "A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009." CAT noted that China would be its strongest market in 2009, saying “China, with an economy one-third the size of the US, is allocating over three times as much for infrastructure.” The company said that the US infrastructure spending from the stimulus package will amount to $70 billion, or about 6.5% of last year’s total construction spending, and therefore is not large enough to offset the steep decline in private sector construction spending. CAT also posted a 1Q loss of $0.19 per share—its first quarterly loss in 17 years—due to job cut expenses. But excluding these costs, CAT posted EPS ex-items of $0.39, easily ahead of the $0.02 forecast of analysts, as revenues fell 22% to $9.2 billion. Shares ended to the upside after being lower in early action.

Bank of New York Mellon(BK $28) closed nearly unchanged, after being under pressure in early trading, upon reporting 1Q EPS ex-items of $0.53, ten cents below the Street's forecast, and revenues fell 14% to $3.3 billion. BK said its revenues were impacted by lower equity market values, client volumes, and interest rates. The company also lowered its quarterly dividend by 63% to $0.09 per share, saying the slashed dividend reflects its commitment to build capital further, pursue growth opportunities and, with the permission of its regulators, repay the government's investment in the firm. However, despite the earnings shortfall, BK said its expense management and efforts to build its capital base led to market share gains and a 10% decline in operating expenses. On key financial strength ratios, BK said it improved its tier-1 capital ratio—excluding Troubled Asset Relief Plan (TARP) funds—and its tangible common equity.

Dow member Coca-Cola (KO $43) announced 1Q EPS ex-items of $0.65, matching the Street's estimate, as operating revenues fell 2.8% to $7.2 billion. Sales by volume rose 2%, led by international markets, as strength in emerging markets such as China and India helped offset a 2% decline in North America and Central and Eastern Europe. On a conference call with analysts, the company said given the environment, it may experience quarter-to-quarter volatility and it sees performance for the first half of 2009 in line with its long-term targets, but 2Q profit will be below long-term targets. Shares were lower.

DuPont (DD $28) posted 1Q EPS of $0.54, topping analysts' estimates by two cents, as revenues fell 20% to $6.9 billion. The Dow member said its results reflect earnings from its agriculture and nutrition, and pharmaceuticals units, strong companywide pricing and cost discipline, partly offset by the impact of a severe decline in global industrial demand. DD lowered its 2009 EPS outlook and said it sees 2Q overall sales to be flat-to-slightly up from 1Q. Also, the company said it would seek to more cost reductions, including cuts to contractor positions and work schedule reductions, and it announced that it will cut 2009 spending plans by 12.5% to $1.4 billion. DD was higher after recovering from early pressure.

Merck & Co. (MRK $24) fell after announcing 1Q EPS ex-items of $0.74, four cents shy of the consensus estimate, with revenues of $5.4 billion also missing expectations. The fellow Dow component said foreign exchange negatively impacted global sales and the loss of US marketing exclusivity of Fosamax further affected sales performance to the downside. MRK said its results in part reflect the impact of the difficult global economy on patients, providers and payors, but it remains on track to meet its full-year earnings guidance.

Dow member United Technologies (UTX $48) posted 1Q EPS of $0.78, one penny ahead of the Street's forecast, as revenues fell 12% to $12.2 billion. The company said the drop in revenue reflects adverse foreign currency translation and an organic sales decline. UTX’s CEO said that “we saw stabilization in the rate of year-over-year decline across most of our businesses in March.” UTX reaffirmed its full-year outlook and shares were higher.

Coach (COH $21) posted 1Q EPS ex-items of $0.38, beating analyst estimates of $0.36 and said the company has begun to see stabilization of comparable-store sales to pre-Christmas levels in North America. Coach’s CEO said the biggest difference in the quarter was that traffic had improved from the fourth quarter. The company announced an initiation of a quarterly dividend of $0.75 cents a share, to be paid on June 29, to stockholders of record as of June 8. Shares rose nearly 15%.

U.S. Bancorp (USB $19), the sixth-largest bank by deposits, reported 1Q EPS of $0.24, higher than the Street’s estimate of $0.20. However, charge-offs from delinquent accounts spiked 25% and the company boosted the provision for future loan losses, but benefitted from record mortgage banking revenue. USB’s CEO said he sees trouble ahead for areas like construction and development loans. In a call with analysts, he said "There is a slowing down of ... consumer appetite and commercial appetite in the last couple of weeks, maybe the last half of the quarter," adding "I think there is a reason to believe that as the cycle matures, people are becoming a little more careful." Shares were higher by 20%.

Additionally, several other financials were higher after posting results. Trust bank State Street Corp (STT $36) posted in-line earnings despite a drop in revenue from all fee types, including servicing, management, trading, securities finance and processing, and reported a rise in its tangible common equity ratio to 5.87%. Regional bank Comerica Inc (CMA $22) reported a rise in its tangible common equity ratio to 7.27%, and a 1Q EPS loss of $0.16, worse than analyst estimates of a $0.09 loss. Middle-market investment bank Jefferies Group(JEF $17) reported 1Q EPS of $0.19, better than the $0.08 loss expected, and noted strength in fixed income and commodities business, and a growing business in restructuring. Money transfer company Western Union(WU $16) reported 1Q EPS of $0.32 versus estimates of $0.27 and said that consumer-to-consumer transactions grew 7% and that the amount of money per transaction fell. WU reiterated 2009 EPS guidance of $1.18 – 1.28, versus the Street’s estimate of $1.22. STT, CMA, JEF were all higher by more than 15% and WU rose 13%.

First quarter earnings are forecasted to be down 53% from a year ago, and although earnings season will be brutal, that doesn’t mean the market can’t go higher. With expectations so low, it may not take much in the way of positive news or guidance to propel the bulls - something we’ll be watching as the season progresses.

No major economic reports, Geithner says banks currently “well-capitalized”

Treasuries moved lower as the equity markets overcame early uneasiness and the Fed’s purchase of seven to ten year maturity Treasuries fell short of expectations, with the Fed buying $7 billion of the $26.8 billion offered by dealers. There were no major U.S. economic releases today. The yield on the 2-year note gained 2 bps to 0.93%, the yield on the 10-year note rose 6 bps to 2.90%, and the yield on the 30-year bond increased 5 bps to 3.74%.

Traders listened to Treasury Secretary Timothy Geithner's testimony before the Congressional Oversight Panel. Geithner said “currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.” Earlier, he added, "We believe that even under the conservative estimate of available funds described here, we have the resources to move forward implementing all aspects of our Financial Stability Plan." He said that it’s possible the Treasury may have even more money remaining, depending on how many banks repay TARP and whether a housing-aid program uses its full allocation. He did not offer any hints about the results of the "stress tests" of the nation's 19 largest banks, which are expected to be released in May, but he said the tests will determine whether some banks must raise more capital and it will offer options for doing so, such as raising it from private sources or request capital from the Treasury in the form of convertible preferred stock. He also warned that uncertainty about the value of legacy assets— the toxic assets clogging banking balance sheets—is constraining the ability of financial firms to raise private capital. In response to a question regarding making the decision for firms paying back TARP funds, Geithner said federal regulators will base their decision on whether an individual bank's repayment would result in a reduction of the overall credit available in the economy.

Geithner acknowledged that the TARP results were "mixed," and although he noted that there are some signs of improvements in the credit markets, he said "Despite these improvements, the cost of credit is very high." Though we’ve seen some glimmers of hope—especially in areas targeted by government action—credit spreads (a measure of risk tolerance in the market) remain high, indicating continued extreme caution in credit markets. Along with the TARP, we’re watching the participation of firms in both the TALF (Term Asset Lending Facility), aimed at restarting the critical securitization market, and the recently announced PPIP (Public-Private Investment Plan), designed to rid banks’ balance sheets of “toxic” assets. However, hesitation to partner with the government seems to be growing as the “price of admission” gives companies pause, with caps on pay, intervention in business decisions, and the possibility of being questioned by Congress for profits earned from participation in these plans.