Morning Update

Profits Mixed but Bank Report Dampens Sentiment

Stocks are lower in early action as the Street mulls over another flood of corporate profit reports, and Morgan Stanley's much larger-than-expected loss and slashed dividend are exacerbating fears in the financial markets. Other reports on the busy earnings calendar—AT&T, Wells Fargo, and McDonalds all topped analysts' forecasts, while Boeing missed and lowered its 2009 EPS guidance. Treasuries have erased early losses and are nearly unchanged after the disappointing bank report, while mortgage applications increased. Overseas, markets are mostly lower.

As of 8:42 a.m. ET, the June S&P 500 Index Globex futures contract is 12 points below fair value, the Nasdaq 100 Index is 12points below fair value, and the DJIA is 93 points below fair value. Crude oil is down $0.09 at $48.46 per barrel, and gold is up $5.60 at $888.30per ounce.

Morgan Stanley (MS $25) posted a 1Q net loss of $0.57 per share, versus the Reuters estimate of a $0.09 per share loss, as revenues fell 62% to $3.0 billion. The company said it delivered strong results in commodities, interest rates, and credit products as well as investment banking. MS said it enhanced capital by reducing its quarterly dividend to $0.05 per share, from $0.27 per share. Shares are much lower.

Dow member AT&T (T $25) reported 1Q EPS of $0.53, topping the Reuters estimate of $0.48, as revenues came in at $30.6 billion. The company said growth in wireless and wireline data services in large part offset pressure from the macro-environment, including continuing declines in wireline voice access lines and business voice revenues.

Wells Fargo (WFC $19) reported 1Q EPS of $0.56, one cent ahead of the Street's estimate, as revenues were $21.0 billion, reflecting growth in both net interest income and fee income. Tangible common equity improved by $4.5 billion to 3.28% from 2.86% last quarter.

Dow member McDonald's (MCD $56) announced 1Q EPS ex-items of $0.83, versus the Street's estimate of $0.82, as revenues declined 10% to $5.1 billion. The company said foreign currency translation negatively impacted EPS by $0.08, but its solid operating results for the quarter were driven by strong global same-store sales, which grew 4.3%, despite one less day in the quarter due to 2008 leap year.

Fellow Dow member Boeing (BA $37) posted 1Q EPS of $0.86, missing the $0.91Reuters estimate, as revenues rose 3% to $16.5 billion. The jet maker reduced its 2009 earnings outlook to reflect changes in the commercial market.

Mortgage applications rise, led by refis

The US MBA Mortgage Application Index rose 5.3% to 1172.2 for the week ended April 17, following last week's report that failed to gain ground for a sixth-straight week. The Refinance Index advanced 7.7% to 6540.7, while the Purchase Index declined, falling 4.2% to 253.0. The Mortgage Bankers Association (MBA) said the average 30-year fixed loan increased 3 basis points to 4.73%, and the MBA noted that refinancing demand overshadowed the drop in loan requests to buy homes. Treasuries are lower.

In early action, US Treasury Secretary Timothy Geithner is addressing the Economic Club of Washington on the global recession and a Q&A session will follow. The address comes on the heels of his testimony yesterday that he said the "vast majority" of US banks have sufficient capital positions. Geithner will probably reiterate that returning normalcy to the credit markets and stabilizing the financial system remains a key pillar of the economic recovery.

Yesterday, Geithner acknowledged that the Troubled Asset Relief Plan (TARP) results were "mixed," and although he noted that there are some signs of improvements in the credit markets, he said "Despite these improvements, the cost of credit is very high." 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 reverses gains as US markets wane

Stocks in Europe were slightly higher in afternoon action as banks supported the advance, following US Treasury Secretary Timothy Geithner's upbeat comments toward the group yesterday. However, as the US markets falter in early action on the disappointing report from Morgan Stanley, stocks in European action have succumbed to the pressure and are lower. Earnings reports are also in focus across the pond, headlined by Volkswagen (VLKAY $61), as the German automaker said 1Q profits fell 74% as the global recession squeezed the company's bottom line—shares are lower. Elsewhere, the world's second-largest appliance maker, Electrolux (ELUXY $18) is up sharply after reporting a smaller-than-expected loss and saying there are "early signs" the market slump is leveling off, and Roche Holding (RHHBY $33) is under pressure after it said the cancer drug Avastin—produced by Genentech, which is owned by Roche—failed to reduce the risk of tumors returning to patients being given chemotherapy. Also, beer maker Heineken (HINKY $14) is under pressure after it said earnings declined by a "high teens" percentage in the quarter ended March 31 and that sales of beer by volume declined 6.3% missing the Bloomberg forecast of a 2.5% drop. Traders are treading somewhat cautiously ahead of the UK's Labour party annual budget presentation.

Asia mostly lower on earnings uneasiness

Stocks in Asia were mostly lower as traders showed some cautious sentiment about what the earnings season will yield in terms of determining whether or not the global recession has produced its worst days. However, technology shares managed to advance to limit losses, led by sharp gains in a couple of firms. Chip maker Elpida Memory (ELPDF $6) jumped almost 15% after its president said it plans to raise prices on its DRAM chips by as much as 50% next month as the efforts by fellow chipmakers to cut production in the face of the slumping demand reduced elevated inventory levels that had weighed on prices. Also Pioneer (PNCOF $3) surged about 17% after the Nikkei newspaper said the government is considering an equity investment because it is concerned about the electronics firm's financial position. Pioneer did not comment on the story. In economic news, a report showed the rate of the slide in exports in Japan eased in March, as trade exports fell from -49.4% in February to -45.6% as drops in exports to the US and China—the country's two largest trading partners—fell.