Morning Update

Earnings Pour in But Sentiment Falls Out

Stocks are poised to be under pressure for a second-straight session as lingering concerns about the health of the financial sector is conspiring with a plethora of earnings reports from several Dow members to sour sentiment. IBM topped the Street's profit estimate but its sales missed, Caterpillar also topped but it lowered its guidance, Coca-Cola matched the consensus, DuPont beat but lowered its EPS outlook, United Technologies came in better-than-expected, but Merck & Co. missed forecasts. Outside of the Dow, Texas Instruments posted 1Q profits that were better than the Street had forecast. Treasuries are higher as equities slide and traders await testimony from Treasury Secretary Geithner. Overseas, markets are lower.

As of 8:52 a.m. ET, the June S&P 500 Index Globex futures contract is 5 points below fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 54 points below fair value. Crude oil is down $0.25 at $48.26 per barrel, and gold is up $7.40 at $894.90per ounce.

Dow member IBM (IBM $100) reported 1Q EPS of $1.70, three cents ahead of the Reuters estimate, but shares are under pressure after it posted revenues of $21.7 billion, which came in short of the Street's $22.6 billion. IBM said the strong US dollar impacted its revenue results and its total global services revenues decreased 10%, its software segment sales declined 6%, and its systems and technology segment revenues were down 23%. IBM reiterated its full-year 2009 earnings of at least $9.20 per share and said it remains ahead of pace for its fiscal 2010 roadmap of $10-11 per share.

Texas Instruments (TXN $17) reported 1Q EPS of $0.01, one penny ahead of the Street's estimate, as revenues fell 36% to $2.1 billion. The company said its revenue and earnings exceeded expectations but the company emphasized caution about the business climate, but said demand for its products has begun to stabilize after sharp drops in the past two quarters. TXN issued 2Q guidance in line with analysts' estimates.

Dow component Caterpillar (CAT $30 1) posted 1Q EPS ex-items of $0.39, easily ahead of the $0.02 forecast of analysts, as revenues fell 22% to $9.2 billion. The company lowered its full-year guidance and said, "A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009." Shares are lower.

Dow member Coca-Cola (KO $44) announced 1Q EPS ex-items of $0.65, matching the Street's estimate, as operating revenues fell 2.8% to $7.2 billion. Sales by volume rose 2%, led by international markets, as strength in emerging markets such as China and India helped offset a 2% decline in Central and Eastern Europe.

DuPont (DD $27) posted 1Q EPS of $0.54, topping analysts' estimates by two cents, as revenues fell 20% to $6.9 billion. The Dow member said its results reflect earnings from its agriculture and nutrition, and pharmaceuticals units, strong companywide pricing and cost discipline, partly offset by the impact of a severe decline in global industrial demand. DD lowered its 2009 EPS outlook and maintained its $0.41 per share 2Q dividend.

Merck & Co. (MRK $25) announced 1Q EPS ex-items of $0.74, four cents shy of the consensus estimate, with revenues of $5.4 billion also missing expectations. The fellow Dow component said foreign exchange negatively impacted global sales and the loss of US marketing exclusivity of Fosamax further affected sales performance to the downside. MRK reaffirmed its 2009 EPS ex-items guidance.

Dow member United Technologies (UTX $46) posted 1Q EPS of $0.78, one penny ahead of the Street's forecast, as revenues fell 12% to $12.2 billion. The company said the drop in revenue reflects adverse foreign currency translation and an organic sales decline. UTX reaffirmed its full-year outlook.

No major economic reports, but Geithner testimony may command attention

Treasuries are higher as uneasiness remains in the equity markets and as there are no major economic releases scheduled for today. However, traders may pay attention to Treasury Secretary Timothy Geithner's testimony before the Congressional Oversight Panel at 10:00 a.m. ET. The Street may be looking for any details on the results of the "stress tests" of the nation's 19 largest banks, which are expected to be released in May, and any details on how the Troubled Asset Relief Program (TARP) is being spent to try to help return normalcy to the credit markets-which could lead to a recovery in the financial markets and the global economy.

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. However, 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.

Europe lower as financial fears outweigh German confidence

Stocks in Europe are under pressure in afternoon action as early gains from a jump in a key gauge of investor sentiment in Germany-Europe's largest economy-are being overcome by fears in the financial sector that the worst of the credit crisis may not be over. Yesterday's increase in provisions for bad loans from Dow member Bank of America (BAC $8 1) is adding to the uneasiness in the banking group. Germany's ZEW Index-a key reading of investor confidence-advanced into positive territory for the first time since July 2007 and the highest level since June 2007. The report advanced to 13 in April, from -3.5 in March, and above the 2.0 expectations of economists surveyed by Bloomberg, stoking optimism that the German economy may be on the mend and supporting the argument that the worst of the global recession may be in the rear-view mirror. In other economic news, the Sweden's central bank cut its benchmark interest rate to 0.5% and said it was ready to take further steps to revitalize the economy. Also, year-over-year UK inflation at the consumer level fell from 3.2% in February to 2.9% in March, matching economists' expectations.

The report continues to give the Bank of England room to maneuver on the monetary policy front as it suggests inflations is slowing. However, in response to excess slack in the economy, as measured by a low 69.3% capacity utilization, and low demand, businesses slash prices to stimulate demand. While it's natural to cheer falling prices, an era of deflation can have a destructive impact if it enters a negative spiral, where consumers hold off on purchases in the hope of lower prices in the future, stifling economic growth.

Asia slides as the yen and credit worries collide

Stocks in Asia came under pressure led by financials as traders reacted to yesterday's report from Bank of America. Hong Kong's Hang Seng Index led the decline, falling almost 3%, while Japanese markets were not too far behind as the Nikkei 225 Index fell 2.4% and the broader Topix Index declined 2.1% as the pressure from the financial sector was met with soured sentiment toward profitability of export issues amid yesterday's strong advance in the yen versus the dollar, which poses a threat to sales in firms that rely heavily on revenues in the US. A sharp drop in industrial metals and crude oil yesterday also weighed on mining shares to exacerbate the decline in Asia. In equity news, shares of China Mobile (CHL $46) fell after the world's largest wireless carrier yesterday said 1Q net income rose 5.2% to 25.2 billion yuan ($3.3 billion) shy of the 26.5 billion yuan estimate of analysts surveyed by Bloomberg.