Evening Update

Banking Jitters and Technology Outperformance Continue

After spending a majority of the day in positive territory, financials fell into the session close, bringing the rest of the market lower. Traders continue to be jittery ahead of the results of the stress tests for the banks, due out on May 4, with the Fed issuing the methodology for the tests on Friday. Morgan Stanley’s earnings miss was the subject of much chatter for the day and Wells Fargo’s results were in-line with the pre-release given nearly two weeks ago. Technology shares were leaders on the upside, lead by results from Yahoo, SanDisk and Seagate Technologies. General Motors said it would miss a $1 billion debt payment. Earnings season is in full gear, with McDonald’s, AT&T, Ingersoll-Rand and Air Products and Chemicals beating earnings estimates, Boeing and Norfolk Southern missing projections, and Capital One Financial announcing a larger-than-estimated loss. J.C. Penney raised guidance for the current quarter. Elsewhere, mortgage applications increased, the state of California issued a record-sized bond and Treasury Secretary Geithner noted tentative signs the severity of the downturn was beginning to moderate. Treasuries were lower.

The Dow Jones Industrial Average fell 83 points (1.0%) to close at 7,887, the S&P 500 Index lost 7 points (0.8%) to 844, while the Nasdaq Composite advanced 2 points (0.1%) to 1,646. In moderate volume, 1.8 billion shares were traded on the NYSE, and 2.6 billion shares were traded on the Nasdaq. Crude oil rose $0.30 to $48.85 per barrel, wholesale gasoline lost $0.02 to $1.39 per gallon, and gold rose $6.81 to $890.61 per ounce.

Morgan Stanley (MS $23) posted a 1Q net loss of $0.57 per share, versus the Reuters estimate of a $0.09 per share loss, as revenues fell 62% to $3.0 billion. The company said it delivered strong results in commodities, interest rates, and credit products as well as investment banking. Results were hampered by a change in an accounting rule that resulted in a $1.5 billion decrease in net revenues. However, the company also recognized net losses of $1 billion in real estate investments and reduced its quarterly dividend to $0.05 per share, from $0.27 per share to protect capital. MS noted it’s Tier 1 capital ratio under Basel I was 16.4%, or 12.9% excluding TARP capital of $10 billion, and its tangible common equity ratio was 4.3% Shares were lower in a volatile session.

General Motors (GM $2) said it is not planning on making a $1 billion bond payment due June 1st if it does not finish a debt-for-equity exchange by then or if it enters bankruptcy protection. The exchange offer is expected before the end of April. Shares were lower.

Dow member AT&T (T $26) reported 1Q EPS of $0.53, topping the Reuters estimate of $0.48, as revenues came in at $30.6 billion. The company said growth in wireless and wireline data services in large part offset pressure from the macro-environment, including continuing declines in wireline voice access lines and business voice revenues. Shares rose.

Wells Fargo (WFC $18) reported 1Q EPS of $0.56, one cent ahead of the Street's estimate, as revenues were $21.0 billion, reflecting growth in both net interest income and fee income. Tangible common equity improved by $4.5 billion to 3.28% from 2.86% last quarter. In an interview according to Reuters, WFC's chief financial officer said the US economic downturn is "getting closer to the bottom," but not out of the woods. In terms of paying back TARP funds, he declined to comment and said the company is not sitting back and letting capital sit in the company. Shares fell in choppy trading.

Dow member McDonald's (MCD $54) announced 1Q EPS ex-items of $0.83, versus the Street's estimate of $0.82, as revenues declined 10% to $5.1 billion. The company said foreign currency translation negatively impacted EPS by $0.08, but its solid operating results for the quarter were driven by strong global same-store sales, which grew 4.3%, despite one less day in the quarter due to 2008 leap year. Shares closed lower, erasing early gains.

J.C. Penney (JCP $27) raised guidance for its 1Q EPS to “flat to slightly positive,” versus prior guidance of a loss of $0.05 – 0.10 per share. In an analyst meeting, management noted a more predictable trend across its business, and the CFO said “I never thought flat to slightly positive would look so good.” Shares were higher.

Fellow Dow member Boeing (BA $37 ¹) posted 1Q EPS of $0.86, missing the $0.91 Reuters estimate, as revenues rose 3% to $16.5 billion. The jet maker reduced its 2009 earnings outlook to reflect changes in the commercial market. Shares were higher in choppy trading.

SanDisk (SNDK $16) finished up sharply after the company reported a 1Q loss of $0.48 per share, narrower than the Street's forecast of $0.77, and although revenues fell 22% to $659 million, they topped analysts' estimates of $535 million. The maker of flash-memory card used in MP3 players and digital cameras said it is encouraged that industry supply and demand balance is becoming better aligned, resulting in higher flash pricing. SNDK noted better-than-expected demand, strong product cost reductions and lower operating expenses for the results. SNDK issued 2Q revenue guidance above the Street's forecast.

Seagate Technologies (STX $7) reported a fiscal 3Q loss ex-items of $0.45 per share, in line with the Street's forecast, as revenues came in at $2.1 billion, which beat analysts estimates. The hard disc drive maker is up solidly after saying as a result of improving operational performance, assuming a relatively stable business environment, it believes it can improve margins and reach profitability within fiscal year 2010. STX reaffirmed its 4Q revenue guidance and issued 4Q profit guidance below the Street's expectations. Shares were higher.

Yahoo (YHOO $14) announced that 1Q EPS ex-items were $0.15, versus the Street's estimate, which called for $0.08, and revenues fell 13% to $1.6 billion. The number-two search engine said it is not immune to the ongoing economic downturn, but careful cost management in the quarter allowed its operating cash flow to come in near the high end of its outlook range. The company also announced that it expects to reduce its workforce by 5% and issued 2Q earnings from operations guidance that came in below analysts' expectations. Shares closed nearly unchanged, erasing early gains.

Capital One Financial (COF $14) reported a $0.39 per share loss from continuing operations for 1Q, which was much larger than the consensus, which called for a $0.04 per share loss. Revenues fell 5.6% versus last quarter to $3.7 billion, as a result of declining purchase volumes, changes in the mix of earning assets, and the combination of improving early stage delinquencies and worsening later stage delinquencies. COF reported its key financial strength ratios—tangible common equity improved 20 basis points to 4.8% from its year-end level, while its tier-1 capital ratio at an estimated 11.4% "continues to be well above the regulatory minimum." Shares were lower in choppy action.

Ingersoll-Rand (IR $19) reported a 1Q EPS loss from continuing operations of $0.06, better than the analyst estimate of a loss of $0.12. Despite lowering its full-year revenue growth rate, the company raised its forecast for EPS from continuing operations to $1.40 – 1.90, higher than the Street’s estimate of $1.40. In a statement, the company said that the better results were driven by productivity and cost-reduction initiatives. They also noted balance sheet improvement through debt refinancing and cash management. Shares of the provider of air conditioning, climate control, security and industrial technologies were over 15% higher.

Air Products and Chemicals (APD $61) reported 1Q EPS from continuing operations of $0.89, higher than the Street’s $0.82 estimate as revenues fell 23% to $1.96 billion, below analyst estimates of $2.08 billion. The company lowered its fiscal year EPS outlook to $3.85 – 4.05, down from its previous prediction of $4.00 – 4.30 and versus the Street’s estimate of $4.00. Despite the lowered guidance, shares of the supplier of gases and oxygen to the industrial and medical sectors were higher.

Norfolk Southern (NSC $38) posted a 38% drop in 1Q EPS to $0.47, well below the Reuters estimate of $0.56, as total railway revenues fell 22% to $1.9 billion. The railroad outfit said the drop in revenue was primarily the result of a 20% reduction in traffic volume and lower fuel-related revenues. Shares were nearly unchanged, erasing early losses.

Mortgage applications rise, led by refis, California sold a record $6.85 billion in debt

The US MBA Mortgage Application Index rose 5.3% to 1172.2 for the week ended April 17, and has gained ground for six out of the past seven weeks. The Refinance Index advanced 7.7% to 6540.7, while the Purchase Index declined, falling 4.2% to 253.0. The Mortgage Bankers Association (MBA) said the average 30-year fixed loan increased 3 basis points to 4.73%, and the MBA noted that refinancing demand overshadowed the drop in loan requests to buy homes. Treasuries were lower. The yield on the 2-year note gained 2 bps to 0.96%, the yield on the 10-year note rose 4 bps to 2.93%, and the yield on the 30-year bond increased 7 bps to 3.81%.

The state of California sold $6.85 billion in the largest long-term general obligation bond sale in the state’s 158-year history, aided by a new federal subsidy. The deal included $5.23 billion of taxable 25- and 30-year debt with the federal government rebating 35% of interest costs. The long-term bonds were priced at 365 bps over Treasuries with similar maturities, or about 7.43% according to Bloomberg. A new program called Build America Bonds gives state and local governments the ability to attract corporate debt investors while the subsidies allow for lower costs than what the issuers would be able to obtain in the tax-exempt market. The deal was increased from an initial range of $3 – 4 billion and had expressions of interest of more than $10 billion according to California Treasurer Bill Lockyer.

US Treasury Secretary Timothy Geithner addressed the Economic Club of Washington on the global recession. Geithner noted that there are tentative signs the severity of the downturn was beginning to moderate, saying that some measures of consumer spending and industrial output had started to stabilize and financial conditions had improved moderately. The address came on the heels of his testimony yesterday where he said that currently the "vast majority" of US banks have sufficient capital positions. Geithner reiterated that returning normalcy to the credit markets and stabilizing the financial system remains a key pillar of the economic recovery.

Yesterday, 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. 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.

Housing data parade to start tomorrow

Existing home sales for March will be reported tomorrow 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.



Additionally, initial jobless claims will be released on Thursday.