Evening Update

Better Earnings Phoned In, But Economic Data Weak

Stocks rose today in choppy trading, marked by lack of conviction regarding the next move in stock prices, as traders weighed data and commentary about a global economy that remains weak alongside earnings that have generally been better-than-feared. Existing home sales fell more than expected, United Parcel Service missed and pushed out an economic recovery to 2010, and Nucor said steel demand was virtually non-existent. However earnings beats were reported by a string of companies across many sectors, including: Apple, eBay, ConocoPhillips, PNC Financial, Raytheon, Union Pacific, Marriott and Royal Caribbean Cruises. Dow member Johnson & Johnson increased its dividend. Jobless claims rose and Treasuries were mixed.

The Dow Jones Industrial Average rose 70 points (0.9%) to close at 7,957, the S&P 500 Index gained 8 points (1.0%) to 852, and the Nasdaq Composite advanced 6 points (0.4%) to 1,652. In moderate volume, 1.6 billion shares were traded on the NYSE, and 2.5 billion shares were traded on the Nasdaq. Crude oil rose $0.77 to $49.62 per barrel, wholesale gasoline was unchanged at $1.39 per gallon, and gold rose $13.10 to $902.85 per ounce.

Apple Inc. (AAPL $125) reported fiscal 2Q EPS rose about 15% to $1.33, well above the Reuters estimate of $1.09, as revenues gained about 9% to $8.2 billion, also beating the Street's forecast. The company sold 2.22 million Mac computers—a 3% decline versus a year ago, 11.01 million iPods—3% unit growth, and 3.79 million iPhones—123% unit growth—for the quarter. The company's gross margin improved 3.5 percentage points to 36.4% and it noted that international sales accounted for 46% of the quarter's revenue. AAPL, which typically offers conservative guidance, said it sees 3Q EPS between $0.95-1.00 and sales between $7.7-7.9 billion. Analysts expected the company to report EPS of $1.12 and sales of $8.3 billion for 3Q. Shares were higher.

United Parcel Service (UPS $53 ¹) reported adjusted 1Q EPS of $0.52, falling short of the Street's forecast of $0.56, as revenues came in at $10.9 billion, also below analysts' expectations. The package carrier said continuing deterioration in global economic activity resulted in decreased revenues and profitability in all business segments. The company's CFO said "economic indicators tell us recovery in US might begin late this year, but more likely not until 2010." UPS said it is scaling back 2009 capital spending and issued 2Q EPS guidance that came in below analyst estimates. Shares were lower.

Dow member Johnson & Johnson (JNJ $51) announced that its Board of Directors has declared a 6.5% increase in its quarterly dividend rate, from $0.46 per share to $0.49 per share. "Given our strong financial position, confidence in the future of Johnson & Johnson, and in recognition of our solid results in 2008, the Board has voted to increase the dividend for the 47th consecutive year," the company said. Shares rose, erasing early losses.

ConocoPhillips (COP $40) was higher after reporting 1Q EPS fell 79% to $0.56, but much better than the Street's forecast of $0.39, as revenues fell 44% to $30.7 billion. The better-than-expected earnings came as COP's daily oil and gas production increased more than expected due to production from new developments, the impact of production sharing contracts, and less planned and unplanned downtime. COP said it expects 2Q production in its oil and gas unit will be lower than 1Q, due to planned maintenance and seasonality, but full-year production is expected to be slightly higher than 2008.

Ebay (EBAY $17) reported 1Q EPS ex-items of $0.39, five cents above the Reuters estimate, as revenues came in at $2 billion, also above the Street's forecast. The ecommerce firm said its PayPal, Classifieds, and Skype performed well, delivering year-over-year revenue growth. The company issued 2Q guidance that was in line with analysts' estimates. Shares were solidly higher.

EMC Corp (EMC $12) reported 1Q EPS of $0.10 per share, or $0.16 excluding stock-based compensation, in-line with analyst estimates. The company’s CEO said that information technology spending “has reached or is very near the bottom” and should rebound in the second half of the year, despite current conditions in which customers delay large orders and buy only what they need. Shares were lower.

PNC Financial (PNC $41) was up after posting 1Q EPS of $1.03, easily above the Street's forecast of $0.42, as revenues came in at $3.9 billion—reflecting the acquisition of National City in December. The company said its key financial strength ratios reflected meaningful increases from year end as its Tier-1 risk-based capital ratio was 10.2% and its tangible common equity ratio was 3.3%. PNC said its net interest income was strong and its noninterest income benefitted from "robust" residential mortgage banking activity driven by refinancing volumes. The company said credit quality deterioration continued in 1Q, resulting in additions to loan loss reserves beyond net charge-offs.

Raytheon (RTN $44) posted 1Q EPS from continuing operations of $1.11, eleven cents ahead of the Street's forecast, as revenues gained 10% to $5.9 billion. The defense company said it had growth across all of the company's businesses with solid bookings of $5.2 billion, and a backlog of $37.9 billion. RTN increased its full-year guidance. RTN was higher.

Union Pacific (UNP $50) rose after reporting 1Q EPS of $0.72, above the consensus estimate that called for $0.65, with revenues falling 20% to $3.4 billion. The railroad firm said the weak global economy affected all six of its business groups but it took decisive steps to reduce costs.

Marriott (MAR $22) reported 1Q EPS from continuing operations of $0.24, better than the Street’s estimate of $0.14 and revenue of $2.5 billion, in-line with estimates. Revenue per available room fell 17.3%. While saying they “could not forecast results with any certainty,” the company gave a forecast for 2009 EPS of $0.88 – 1.02, better than analyst estimates of $0.88. The company said they continue to feel the impact of the global economic downturn but are finding new ways of controlling costs and driving revenue. Shares were solidly higher.

Royal Caribbean Cruises (RCL $14) shares were over 20% higher as the company posted a 1Q EPS loss of $0.17, better than analyst estimates of a $0.34 loss, on revenue of $1.33 billion, which bested the forecast of $1.31 billion. While the company lowered its 2009 EPS estimate to $1.35 from $1.40, the estimate was nevertheless higher than the analyst estimate of $0.97. Shares of RCL have been under pressure due to balance sheet concerns as well as slowing consumer spending. Regarding the aggressive discounts the company has offered, RCL’s CEO said “Admittedly, we are providing our guests more value than we would like to these days, and pricing continues to be miserable” and added “but at least it seems to be at a miserable level that’s relatively stable.” The company said that balance sheet liquidity improved and that they were comfortable that they would secure the necessary financing for the Allure of the Seas ship.

Nucor (NUE $40), the largest U.S. steel maker by production, reported its first-ever loss of $0.60 per share, worse than estimates of a loss of $0.57. The company’s steel mill utilization rate fell to 45% from 92% a year ago. The company said that demand for steel is “virtually non-existent” and that more price cuts are a possibility. Shares fell.

Housing sales drop and jobless claims

Existing home sales for March fell 3.0% month-over-month (m/m) to 4.57 million units on an annual rate, worse than the expectation of a fall of 1.5% to a rate of 4.65 million units, after rising a revised 4.9% in February. Year-over-year sales declined 7.1%. According to the National Association of Realtors (NAR), sales of lower-priced homes have trended up, driven by the $8,000 tax credit for first time buyers, who accounted for 53% of transactions.

Lower prices afforded by distressed property sales, consisting of foreclosures and short sales, have attracted bargain hunters, and accounted for 50% of transactions, up from the 40-45% average post-Lehman. The average existing-home price was $175,200, falling 12.4% from a year ago. Inventories fell to 3.74 million existing homes available for sale from 3.8 million in February, but the falling pace of sales means that the supply homes for sale rose to 9.8 months.

Weekly initial jobless claims (chart) increased by 27,000 to 640,000, versus last week's figure that was upwardly revised by 3,000 to 613,000. The increase was in line with the Bloomberg consensus. The four-week moving average dropped by 4,250 to 646,750, and continuing claims jumped by 93,000 to 6,137,000, versus the forecast of 6,120,000. The report marks the twelfth- straight week of claims above 600,000. Treasuries were mixed and showed little reaction to the data. The yield on the 2-year note lost 2 bps to 0.93%, the yield on the 10-year note fell 1 bp to 2.93%, and the yield on the 30-year bond was flat at 3.80%.

Economic data to heat up tomorrow

Tomorrow will bring the new home sales report for March, and it is estimated that sales were flat month-over-month at 337,000 units on an annualized rate. Housing starts in March fell, which could aid in lowering the elevated inventory of homes available for sale. As Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article Brighter Light at End of Housing Tunnel the last thing we need now are new building starts that only add to inventory in a weak sales environment. However, sales and traffic of potential home buyers have picked up, notably in areas where prior price declines have been most severe.

Durable good orders are expected to have fallen 1.5% month-over-month in March, after rising 3.4% in February. Ex-transportation, orders are expected to drop 1.2%. While manufacturers have been cutting production dramatically over the past six months, demand has also fallen significantly. Finding the optimum level of inventory levels has been difficult due to the uneven rate of demand.

Deterioration in the both existing and new home sales, as well as durable goods orders in March, after improvements in February could be somewhat discouraging for those looking for light at the end of the recession tunnel. However, economic data can 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 have some bumps along the way. However, a majority of the Conference Board’s Leading Economic Indicators are moving in the right direction. Astute investors know that the stock market is one of these indicators, typically bottoming before the economy.