Evening Update

Flu Worries Take Back Seat to Earnings and GM Restructuring

In a light volume day, stocks were lower for most of the session on fears the swine flu could spread and slow economic growth globally, and shares of travel-related companies fell, while healthcare companies with drugs to combat the flu were higher. However, traders viewed the General Motors restructuring announcement positively, as well as continued better-than-expected corporate earnings reports, with Verizon Communications, Humana, Corning and Whirlpool all beating Street forecasts. Qualcomm was higher after reaching a patent settlement with Broadcom, and despite posting an unexpected loss. Treasuries were higher and there were no major economic reports today.

The Dow Jones Industrial Average lost 51 points (0.6%) to close at 8,025, the S&P 500 Index fell 9 points (1.0%) to 858, and the Nasdaq Composite declined 15 points (0.9%) to 1,679. In light volume, 1.4 billion shares were traded on the NYSE, and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $1.41 to $50.14 per barrel, wholesale gasoline lost $0.04 to $1.40 per gallon, and gold decreased $7.35 to $905.85 per ounce.

Dow member General Motors (GM $2) rose over 20% after reporting that it has accelerated its restructuring and will focus on four core brands of Chevrolet, Cadillac, Buick, and GMC—phasing out its Pontiac brand by the end of 2010. GM said it will reduce its total number of assembly, powertrain, and stamping plants in the US to 34 by the end of 2010, from 47 in 2008, and reduce its US hourly employment levels from 61,000 in 2008 to 40,000 in 2010. GM also announced actions to strengthen its balance sheet, by launching a bond exchange offer for about $27 billion of its unsecured debt, which would require 90% of the aggregate principal amount outstanding to tender to be successful, and would result in bondholders owning 10% of the company. The offer is contingent on the U.S. Treasury receiving 50% of the pro-forma common stock in exchange for cancellation of at least 50% of GM’s Treasury debt (approximately $10 billion) and the employee retirement health care fund, the Voluntary Employee Beneficiary Association (VEBA), exchanging at least 50% (also approximately $10 billion), into common stock. If the exchange offers receive full participation, the U.S. Treasury and VEBA would own 89% of the pro-forma GM common stock, debtholders would own 10%, and existing GM common shareholders would own 1%.

Dow member Verizon Communications (VZ $31) reported 1Q EPS ex-items of $0.63, four cents above the Reuters estimate, and total operating revenues gained 11.6% to $26.6 billion, including results from its acquisition of Alltel Corp. The company said despite the general economic climate, sales remained strong for wireless, FiOS and strategic business services. VZ added 299,000 net new FiOS TV customers and a record 298,000 net new FiOS internet customers, while its wireless unit—a joint venture with Vodafone (VOD $18)—added 1.3 million net new customer additions, and it said it produced an industry-leading retail postpaid churn of 1.14%. However, the company's core wireline unit showed a 9.8% decline in access lines. Shares fell.

Corning (GLW $16) announced 1Q EPS ex-items of $0.10, topping the Street's forecast of $0.05, as revenues fell 39% to $989 million. The maker of glass for LCD TVs said it was satisfied to see the continued strength of LCD TV sales worldwide, and pleased to see demand for its glass pick up sooner than it anticipated. Looking ahead, the company said while economic uncertainty remains, it is expecting strong growth in display as its customers continue to ramp their capacity to match end market demand. It expects sequential volumes to be up more than 50%, and it increased its estimate for 2009 LCD glass market production and now expects LCD TV units to grow 18% this year versus a previous forecast of 9%. Shares were higher.

Qualcomm (QCOM $43) rose after it announced it has reached a settlement of a technology patent infringement battle with Broadcom (BRCM $25), in which QCOM will pay BRCM $891 million over four years. The patent battle dates back to May 2005, according to Reuters, and QCOM said the terms of the agreement will not result in any change to its 3G and 4G licensing revenue models. The upbeat legal news is helping limit the sting from QCOM's report of an adjusted fiscal 2Q loss of $0.03 per share, versus the Street's estimate of $0.40. However, revenues fell about 6% to $2.5 billion, which topped analysts' estimates, and raised its full-year revenue outlook and issued 3Q earnings outlook above the Street's estimate. Shares of BRCM closed in positive territory after overcoming early weakness.

Humana (HUM $29) reported 1Q EPS of $1.22, beating the analysts' estimates of $1.14, as revenues gained 10.8% to $7.7 billion. HUM said total premium and administrative services fees rose 11%, reflecting a 17% increase in average membership for the company's Medicare advantage and commercial medical products, along with continued pricing discipline across all business units. The company raised its full-year EPS outlook and issued 2Q earnings guidance above analysts' estimates. Shares rose.

Shares of Whirlpool Corp. (WHR $46) were higher after reporting 1Q EPS ex-items of $0.59, versus the Street's estimate, which called for a $0.18 per share loss. Revenues declined 23% to $3.6 billion. The appliance maker said earnings were favorably impacted by cost cutting measures and productivity initiatives. Sales for 1Q fell more than expected as retailers aggressively cut inventories, but the company said that they are “seeing indications the rate of consumer decline is lessening.” The company expects construction of new homes to fall 41% in 2009 and said consumers are delaying purchases of replacement appliances and are increasingly choosing lower-priced models. WHR reaffirmed its full-year EPS guidance.

Treasuries higher ahead of the economic releases to come

Treasuries were higher and there were no major economic reports today. The yield on the 2-year note lost 7 bps to 0.88%, the yield on the 10-year note fell 7 bps to 2.92%, and the yield on the 30-year bond decreased 4 bps to 3.84%.

The S&P/Case-Shiller Home Price Index for February will be released tomorrow and is expected to fall 18.7% year-over-year (y/y). The index is a three-month rolling average representing 20 major cities, and through January had fallen 29.1% from its peak in 2006. Steeply falling prices brought on by foreclosures have motivated buyers to begin to bargain shop and sales of new and existing homes have begun to stabilize.

Tomorrow, the Federal Open Market Committee (FOMC) will begin its two day meeting, concluding on Wednesday. With the fed funds rate already targeted to a rate near zero, no action is expected on the targeted interest rate. However, the Fed will likely update the market with regard to the unconventional measures it is taking to stabilize the economy and credit markets. Of particular interest will be any details regarding the status of the Term Asset-backed Securities Loan Facility (TALF), which has gotten off to a slow start. Additionally, investors will be monitoring progress on the Fed’s purchases of mortgage-backed securities and Treasuries.