Evening Update

Green Shoots of Modest Economic Improvement Send Market Higher

Stocks rose, but closed off the highs of the day, as traders continue to search for signs the worst of the economic downturn is behind us, with today’s indicators being the rebound in personal consumption reported within the otherwise worse-than-expected 1Q GDP release and the Federal Reserve maintaining its size and scope of programs as part of its monetary policy meeting. Dow component Wal-Mart Stores said they had a strong Easter and in earnings news, Time Warner, Aetna, Qwest Communications, DreamWorks Animation SKG, and Wyndham Worldwide all beat estimates, while Massey Energy missed and lowered production and E*TRADE Financial reported a larger-than-expected loss and announced it received notification from its regulator that it needed to raise capital. Elsewhere, former Fed Chief Paul Volker said the economy is leveling off, but expressed concerns about the Fed’s purchase programs. Treasuries were mixed, with the mid-to-long end of the curve selling off after the Fed maintained the size of its Treasury purchase program.

The Dow Jones Industrial Average rose 169 points (2.1%) to close at 8,186, the S&P 500 Index gained 18 points (2.2%) to 874, and the Nasdaq Composite increased 38 points (2.3%) to 1,712. In moderate volume, 1.5 billion shares were traded on the NYSE, and 2.4 billion shares were traded on the Nasdaq. Crude oil gained $1.05 to $50.97 per barrel, wholesale gasoline rose $0.05 to $1.45 per gallon, and gold increased $5.53 to $898.90 per ounce.

Dow component Wal-Mart Stores (WMT $50) was higher after Wal-Mart U.S. CEO Eduardo Castro-Wright spoke at a conference saying that Wal-Mart U.S. had a strong Easter, and that the Easter shift from March to April this year hurt March same-store sales. The world’s largest retailer said that it is seeing customers “treat themselves” to items such as sporting goods, bedding and towels, now that many Americans are seeing lower withholding taxes and gasoline prices that are more than 30% lower than last year. The company also said that 55% of new customers earn more than $50,000 a year and tend to spend 40% more per average ticket.

Time Warner(TWX $22) reported 1Q EPS ex-items of $0.45, six cents above the Reuters estimate, and revenues fell 7% to $6.9 billion. The multi-media firm said revenues were negatively impacted by decreases in sales at its AOL, publishing and filmed entertainment segments, which were partially offset by an increase at its networks segment. The networks segment, the group's largest, benefited primarily from higher rates at both Turner and HBO and the impact of the consolidation of HBO Latin America Group. TWX has also notified Google that it intends to purchase the Internet company's 5% stake in AOL and announced that it may decide to pursue an alternative other than a spin-off with respect to either or both of AOL’s businesses. TWX reaffirmed its full-year business outlook and its shares were higher.

Aetna (AET $22) reported 1Q operating EPS of $0.96, three cents above the Street's forecast, as revenues rose 11% to $7.6 billion. The healthcare firm said its medical membership grew by 1.4 million members during the quarter to a total of 19.1 million, which led the growth in revenues along with premium rate increases for renewing membership. AET reiterated its full-year EPS outlook however shares were down amid concerns of higher than projected commercial medical costs, a result of layoffs in the economy which led to increased COBRA membership.

Qwest Communications (Q $4) posted 1Q EPS ex-items of $0.13, topping the Street's forecast of $0.08, as revenues declined 7% to $3.2 billion. The company said disciplined execution and focus on cost controls have produced a strong start to the year given the current economic climate. Q reaffirmed its full-year earnings guidance and shares traded higher.

E-TRADE (ETFC $2) reported a 1Q net loss of $0.41 per share versus expectations of a loss of $0.40 per share. Total net revenues for the quarter were $497 million, down 6% versus the same period last year. ETFC announced that it will look to raise capital after receiving notification from its primary banking regulator that it would need to address capital requirements on its balance sheet. One alternative that the company continues to pursue is the U.S. Treasury's TARP program, which would result in significant dilution of ETFC shareholders. Shares fell over 30%.

DreamWorks Animation SKG (DWA $24) reported 1Q EPS of $0.71, beating estimates of $0.45 per share, while revenues grew 68% to $263 million. The company’s results were positively influenced by the blockbuster performance of Madagascar: Escape 2 Africa, Monsters vs. Aliens, as well as continued contribution from Kung Fu Panda, the company’s most successful original film ever. DWA’s results also included a tax benefit of $19 million. Management also updated investors on its share repurchase program, announcing that so far this year it has repurchased $46 million, or 2.3 million shares, at an average price of $20.20. The company is authorized to eventually repurchase as much as $150 million in stock. Shares in DWA were 25% higher.

Wyndham Worldwide (WYN $12) delivered 1Q adjusted EPS up 17% at $0.41, beating expectations for $0.35 per share. Revenue, however, fell 11% to $901 million amid economic headwinds, adverse currency effects, and a realignment of the company’s vacation ownership business. Wyndham was able to offset the revenue fall with cutbacks in marketing and other operating costs. The company reaffirmed its guidance for the full-year of adjusted EPS between $1.61 - 1.85 which is above analyst estimates of 2009 EPS of $1.60. Shares rose 35% on the day.

Massey Energy (MEE $15) shares were more than 20% higher despite reporting 1Q EPS of $0.51, below the Street estimate of $0.53, after the company cut its production outlook to support pricing. The company estimates it will ship 38 – 41 million tons of coal, down from a prior forecast of 44 – 46 million tons. In 2010, the company expects to ship 35 – 40 million tons, down from 45 – 47 million tons. The company also plans to cut costs further, reduce wages, benefits and capital spending.

Fed says the economic outlook has improved, maintains prior actions, former Fed Chair Volcker speaks

The Federal Open Market Committee concluded its two-day meeting today and kept the fed funds target at a range of 0.00-0.25%. In outlaying its economic outlook and actions to address it, there were few changes, with the exception that the Committee said that the outlook “had improved modestly since the March meeting, partly reflecting some easing of financial market conditions, but expects that economic activity is likely to remain weak for a time.” And that they continue to see “some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the fed funds rate for an extended period. The Committee continues to anticipate that policy actions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

As previously announced, the Fed will provide support to mortgage lending and housing market and to improve overall conditions in private credit markets, the Federal Reserve will purchase up to $1.25 trillion of agency mortgage-backed securities, and up to $200 billion of agency debt by the end of this year. In addition the Committee will buy up to $300 billion of Treasury securities by autumn. The amount and timing of purchases is the same as the prior announcement, with the exception of taking out the “longer-term” maturity specification of the Treasury purchases. The Fed said that it will continue to evaluate the timing and overall amounts of its purchases in light of the evolving economic outlook and conditions in financial markets, as well as the size and composition of the Fed’s balance sheet. Treasuries were mixed, with the mid-to-long end of the curve selling off upon receiving the statement. The yield on the 2-year note lost 2 bps to 0.93%, while the yield on the 10-year note rose 9 bps to 3.09%, and the yield on the 30-year bond increased 6 bps to 4.01%.

Elsewhere, Bloomberg is quoting former Federal Reserve Chairman Paul Volcker, the head of Obama’s Economic Recovery Advisory Board, in a television interview airing this weekend on Bloomberg Television, as saying the U.S. economy is “leveling off at a low level” and doesn’t need a second fiscal stimulus. In calling the current environment the “Great Recession,” he said the economy is functioning only by the “grace of government intervention” and that “we’re in for a long slog” before a recovery takes hold. Despite praising Fed Chair Bernanke, Volcker expressed concern about the Fed’s programs, saying the Fed “is going beyond the traditional role of central banks” and that “at some point it’s reasonable to ask should this particular institution, with its independence very well protected, be allocating so much of what is essentially government money.” In addressing inflation, he said that it is a threat in the future, but is “not right on the doorstep” currently.

Nation's output falls to start the year, but consumption gains

Advance Gross Domestic Product(chart), the broadest measure of economic output, fell at an annualized rate of 6.1% in 1Q, much worse than the Bloomberg forecast of a 4.7% decline, and only slightly better than the 6.3% decline in 4Q. The measure is the first reading on economic activity in 1Q, and is likely to be revised in future readings. Personal consumption rose 2.2%, much better than the 0.9% expected rise, after declining 4.3% in 4Q. Personal consumption spending was led by a 9.4% jump in durable goods purchases. GDP was negatively impacted by a drop in exports and business investment spending, which fell 30% and 37.9%, respectively. Real final sales, which exclude the 2.8% impact from a decline in inventories, fell 3.4%.

Pricing pressures gained steam, with the GDP Price Index rising 2.9%, compared to a gain of 0.5% in 4Q and the forecast of 1.8%. The core PCE Index, which excludes food and energy, rose 1.5%, just above the estimate of 1.3%, and the rate sits between the Fed’s implied target of 1-2%. Treasuries were little changed after showing modest reaction to the data.

Despite the worse-than-expected decline, the market is taking solace in the report, due to the 2.2% rise in spending by consumers, who represent nearly 70% of GDP. Negative impacts of falling inventory (down 2.8%) and government spending (down 4.0%) are expected to be reversed in the future, as the fiscal stimulus kicks in and low stocks of inventories combined with increasing demand imply the need to rebuild inventory in the future. There is some question as to whether the resumption in consumer spending is sustainable in light of high consumer debt levels, and whether the 1Q spending was a temporary blip that resulted from having a few extra dollars in consumer wallets. When the crisis took another leg down following the Lehman Brothers bankruptcy last September, consumers went into hibernation and corporations began destocking inventory to align with falling sales. However, the steep fall in spending and manufacturing was so dramatic that it simply could not be sustained and some pent-up demand built up. In 2009, consumers have benefitted from mortgage refinancing, a decrease in gasoline prices versus a year ago, and tax refunds now up 17% from 2008. However, the economy is still contracting and it is probable that the path to recovery will not come in a straight line.

In other economic news, the US MBA Mortgage Application Index fell 18.1% to 960.6 for the week ended April 24. The Refinance Index dropped 21.9% to 5108.2, while the Purchase Index declined, falling 0.6% to 251.6. The Mortgage Bankers Association (MBA) said the average 30-year fixed loan fell 11 basis points to 4.62%, just above the 4.61% all-time low. The MBA noted that refinancing demand fell sharply, despite a near record low mortgage rate, which led to the lowest level in mortgage applications since mid-March.

Tomorrow’s economic calendar includes personal income and spending, initial jobless claims as well as the Chicago Purchasing Managers Index.