Evening Update

Treading Lightly Ahead of Next Week’s Stress Test Results

Stocks closed slightly lower today in light volume, as investors continue to weigh the health of the banks with economic reports that continue to show a gradual healing taking place. The impact of the swine flu is on investors’ minds, but the “shoot first, ask questions later” nature of yesterday’s trading was reversed in today’s action. Traders are treading carefully ahead of the May 4 release of the stress test results to the public, and took notice of a report that Bank of America and Citigroup may need more capital and a separate report that Citi may be close to selling its Nikko Cordial brokerage division in a bid to improve its capital position. On the bullish side of the ledger, the Consumer Confidence Index improved nicely and housing prices were in-line with expectations, showing a slight improvement in the rate of decline. In equity news, Dow member IBM announced an increase in its dividend and share repurchase program, Pfizer, Bristol-Myers Squibb and Under Armour beat estimates, Office Depot reported an unexpected profit, while US Steel missed and cut its dividend. Biotechnology company Dendreon was halted after releasing results of its prostate cancer drug Provenge. Treasuries were lower.

The Dow Jones Industrial Average lost 8 points (0.1%) to close at 8,017, the S&P 500 Index fell 2 points (0.3%) to 855, and the Nasdaq Composite declined 6 points (0.3%) to 1,674. In light volume, 1.3 billion shares were traded on the NYSE, and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $0.22 to $49.92 per barrel, wholesale gasoline lost $0.01 to $1.40 per gallon, and gold decreased $12.37 to $894.13 per ounce.

The Wall Street Journal is reporting that US regulators have told Dow members Bank of America (BAC $8 ¹) and Citigroup (C $3) that they may need to raise more capital following the government's stress testing of the two banks. The report said the shortfall amounts to billions of dollars at BAC, according to a person familiar with the matter, and it is likely that these are not the only banks targeted by the Federal Reserve. The report also noted that both banks are objecting to the Fed's preliminary report and are expected to mount detailed rebuttals. The Fed and BAC did not comment and Citi said “Until the results of the stress tests are announced, our regulators have prohibited all financial institutions, including Citi, from making any comments related to the stress test.” A spokesman for Citi said that the bank is continuing with its plan to exchange debt for equity and shed assets to improve its capital position. BAC and C were lower.

Elsewhere, The Nikkei business newspaper reported that Citi reached an agreement in principle to sell its Japanese brokerage unit, Nikko Cordial, to Sumitomo Mitsui Financial Group for 500 billion yen ($5.2 billion).

IBM (IBM $102) rose after the Dow member increased its quarterly dividend from $0.50 per share to $0.55. IBM also said its board has authorized $3 billion in additional funds for use in the company's stock repurchase program, bringing the total amount to $6.7 billion in its stock repurchase program.

Dow member Pfizer (PFE $13) reported adjusted 1Q EPS of $0.54, topping the Reuters estimate of $0.49, as revenues fell 8% to $10.9 billion, which was slightly short of the Street's expectations of about $11 billion. The company said US sales fell by 10% versus last year, international sales—which accounted for 54% of total sales—declined by 7%. PFE said foreign exchange unfavorably impacted sales, but the loss of US exclusivity for Zyrtec, and revenue declines for Lipitor—due to continued intense competition—also negatively impacted 1Q sales. The drugmaker reiterated its full-year outlook. PFE fell after opening higher.

Fellow drugmaker Bristol-Myers Squibb (BMY $20) posted 1Q EPS ex-items of $0.48, one penny ahead of the Street's forecast, as revenues rose 3% to $5 billion, just shy of the $5.1 billion analysts forecast. BMY said financial results were supported by continued cost management improvements and its biopharmaceutical net sales increased 3% to $4.3 billion, led by a 13% gain in the US, partially offset by an 11% decline in international sales on an unfavorable foreign exchange. BMY said it experienced steady growth in sales of its cardiovascular drug Plavix and most of it line of drugs, but sales of its cancer drug Erbitux fell 12% compared to last year. The company reaffirmed its 2009 EPS ex-items forecast of $1.85-2.00. BMY was lower.

US Steel Corp. (X $26) posted a 1Q net loss ex-items of $3.84 per share, much wider than the $1.62 per share loss analysts called for, as revenues fell 47% to $2.8 billion, also short of the Street's forecast of $3.2 billion. The company said weak customer demand for flat-rolled products, coupled with customers' efforts to reduce inventories, has resulted in very low order rates and further downward pressure on prices for its flat-rolled and US Steel Europe segments. The company added that its tubular operations also experienced a severe downturn, primarily as a result of reduced drilling activity due to lower oil and gas prices, high inventory levels, and "unprecedented levels of unfairly traded and subsidized tubular imports from China." The steelmaker said it expects an operating loss in 2Q and slashed its quarterly dividend by $0.25 per share to $0.05 per share. Shares were lower.

Shares of biotechnology company Dendreon (DNDN $12) were halted after falling sharply ahead of a release of data for its experimental Provenge prostate cancer vaccine, and a conference call is scheduled after the market close. The study showed that Provenge extended lives of men with advanced prostate cancer by 4.1 months and the 3-year survival rate improved 38% compared to the placebo, with results achieving the level of statistical significance defined by the study. The results were previewed by the company’s CEO on April 14, when he said “Provenge significantly prolonged overall survival.”

Shares of Office Depot (ODP $3) were sharply higher after reporting 1Q EPS ex-items of $0.10, versus the Street's expectation of a $0.10 loss, and revenues fell 19% to $3.2 billion. ODP said consumers and small businesses reduced their spending, especially on large ticket items like furniture and computers. The office supply firm managed to offset some of the drop in sales by its cost cutting initiatives.

Under Armour (UA $25) shares were higher after reporting 1Q EPS of $0.08, better than the Street’s estimate of $0.03, after sales rose 27% to $200 million from a year ago. The gain was largely due to strong sales of UA’s new running shoe, and the company noted that the athletic footwear market represents a large growth opportunity.

Consumer confidence improves, home prices fall inline, Fed commences meeting

The Consumer Confidence Index (chart) rose from an upwardly revised 26.9 in March to 39.2 in April, well above the estimate of 29.9. Along with the improved overall reading, consumer confidence about the present situation and expectations for the next six months improved. The report suggests the recent signs of life in the economy and the preceding rally in equities may be beginning to repair some of the damage in confidence that stemmed from the sharp deterioration in the employment picture and destruction of consumer net worth via the collapse in housing and the severe drop in equity prices in the past two years. Treasuries were lower. The yield on the 2-year note gained 4 bps to 0.95%, the yield on the 10-year note rose 10 bps to 3.00%, and the yield on the 30-year bond increased 12 bps to 3.95%.

The S&P/Case-Shiller Home Price Index for February fell 18.6% year-over-year (y/y), in-line with expectations, and was a slight improvement from the 19.0% decline in January. The index is a three-month rolling average representing 20 major cities, and has fallen 30.7% from its peak in 2006. As a result, average home prices across the U.S. are at similar levels to what they were in 3Q 2003. While price declines continue, there was some deceleration in the rate of decline in some markets. It should be noted that the housing market seasonally starts to perk up in spring, and month-to-month fluctuations have occurred over the past year.

Steeply falling prices brought on by foreclosures have motivated buyers to begin to bargain shop and sales have improved from the January lows for both new and existing homes. Markets where prices have fallen the most have started to see an improvement in sales - in California, where median home sale prices are 39% lower than March 2008, existing home sales rose 64% in March 2009. The $8,000 federal tax credit for first-time home buyers and the additional $10,000 California credit for purchases of newly constructed homes has spurred interest in home purchases.

The Federal Open Market Committee (FOMC) will conclude its two day meeting tomorrow and will a release of the statement of the Committee’s actions. No action is expected on the interest rate front, but the Fed will likely update the market with regard to the unconventional measures it is taking to stabilize the economy and credit markets. Investors will be monitoring progress on the Fed’s purchases of mortgage-backed securities and Treasuries. 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. The Street will also be looking for any comments regarding any "green shoots" in the economy and whether that will have any impact on the Fed's asset purchasing appetite and keeping the fed funds rate targeted near zero.

When the Fed announced its intentions to purchase Treasuries on March 18, the 10-year Treasury yield plunged nearly 50 bps. However, the 10-year yield has backed up to the 3.0% level that traders view as the possible “line in the sand” for the Fed. While the 10-year Treasury yield has reversed course, there have been improvements in credit spreads in many markets, as confidence has improved.

Advance Gross Domestic Product, the broadest measure of economic output, for 1Q will also be released on Wednesday, and is expected to have fallen an annualized 4.7%, after dropping 6.3% in 4Q. Personal consumption is expected to rise 0.9% after falling 4.3% in 4Q and the GDP Price Index is expected to rise 1.8%, with the core PCE Index, which excludes food and energy, increasing 1.0%.