Evening Update

Stocks Fall in Flight to Safety

Stocks were lower, led by materials and financials, and the dollar moved higher after Citigroup’s share offering disappointed investors and caused the government to delay selling its shares, and Standard and Poor’s became the second credit agency to downgrade Greece’s credit rating this month. Elsewhere in financials, Bank of America ended an 11-week search for a new CEO by appointing insider Brian Moynihan to the position, while analyst Meredith Whitney lowered 2010 and 2011 estimates for Goldman Sachs and Morgan Stanley. In other equity news, FedEx beat analyst forecasts, but gave disappointing 3Q guidance, General Mills reported positive profits on lower commodity costs, Paychex EPS beat Street estimates, while revenue fell short, and Discover Financial Services missed analysts’ forecasts on higher loan losses. In economic news, initial jobless claims rose, the Leading Economic Indicators Index increased for the eighth-consecutive month, and Philly Fed Manufacturing unexpectedly advanced, while Treasuries were higher.

The Dow Jones Industrial Average fell 133 points (1.3%) to close at 10,308, the S&P 500 Index lost 13 points (1.2%) to 1,096, and the Nasdaq Composite declined 27 points (1.2%) to 2,180. In modest volume, 1.6 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil fell $0.01 to $72.65 per barrel, wholesale gasoline decreased $0.02 to $1.85 per gallon, and the Bloomberg gold spot price decreased $41.70 to $1,096.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was higher by 0.9% to 77.70.

Citigroup(C $3) raised a total of $20.5 billion, consisting of $17 billion in a 5.4 billion share common equity offering priced at $3.15 per share, and $3.5 billion in “tangible equity units,” securities that make quarterly payments of 7.5% a year and include a requirement to buy Citi shares in 2010. The common equity offering price of $3.15 is less than the $3.25 the US government paid when it acquired its 34% stake in September, and as such, the government decided not to divest shares, but expects to do so in the next 12 months according to a Treasury official. Citi said the Treasury won’t sell any of its shares for at least 90 days. Shares were solidly lower.

Bank of America(BAC $15 ¹) announced that Brian Moynihan would be promoted to the CEO position, taking over for Ken Lewis, who had previously announced that he would depart the firm on December 31. In commenting after the announcement, Moynihan, the head of the company’s consumer banking unit, said that “Our core businesses are the right ones, we just have to execute.” He added that “As the recovery takes hold, we need to do a better job with risk management.” Shares ended the day under modest pressure.

FedEx (FDX $85) reported 2Q EPS of $1.10, four cents higher than analyst forecasts, on revenue of $8.6 billion. The company previewed the quarter last week, announcing that earnings results would come in at $1.10 per share. However, FedEx gave 3Q EPS guidance of $0.50-0.70, lower than the consensus $0.84, and a full year EPS forecast of $3.45-3.75, versus the Street’s estimate of $3.61. The company said that US volumes have not improved as much as international air shipments, and said that the forecast “reflects the current market outlook for fuel prices and a continued modest recovery in the global economy.” The company said it would resume salary increases and retirement plan contributions, citing “modestly improving economic conditions and business performance.” Shares were lower.

General Mills (GIS $69) reported 2Q profits of $1.54 per share ex-items, beating analyst estimates of $1.45 per share, on revenue of $4.08 billion, which was in line with the Street’s forecast. Gross margin increased to 42.8% from 30.4% as commodity costs fell. The maker of Cheerios cereal and Progresso soup raised its full-year earnings projection to $4.52-4.57 per share from an earlier forecast of as much as $4.45. Shares were modestly higher.

Paychex Inc. (PAYX $31) reported 2Q EPS of $0.35, ahead of analyst expectations of $0.33 per share, on revenue of $483 million, short of the Street’s estimate of $496 million. Payroll-service fees, which provide the bulk of the company’s revenue, fell 7%, while the human-resource segment’s growth continued with a 3% rise. In commenting on the results, the CEO said “The economic environment has continued to influence our results causing unfavorable year-over-year comparisons. On a positive note, our key indicators have been stable for the second quarter in a row.” Shares were lower.

Discover Financial Services (DFS $15) was sharply lower after the credit card firm announced 4Q EPS, excluding an antitrust settlement charge, of $0.12, three cents below the Street’s forecast. Additionally, DFS noted that its 4Q net charge-off rate—the portion of loans it does not expect to collect—jumped 295 basis points (bp) from the same period last year to 8.43%, which was also 4 bp higher than 3Q. DFS said its 1Q charge-off rate is expected to be between 8.4-8.9%. Moreover, the company said its delinquency rate of accounts over 30 days past due—an indicator used to forecast future loan charge offs—advanced 75 bp compared to last year to 5.31%, and was 21 bp higher than last quarter. DFS attributed the aforementioned increased rates to “higher levels of consumer bankruptcies and unemployment.”

Initial jobless claims unexpectedly rise, Leading Indicators increase, Philly Fed expands

Treasuries were higher in a flight to safety. The yield on the 2-year note fell 8 bps to 0.75%, the yield on the 10-year note lost 12 bps to 3.48%, while the yield on the 30-year bond declined 11 bps to 4.42%.

Weekly initial jobless claims increased by 7,000 claims to 480,000, versus last week's figure which was slightly downwardly revised to 473,000. The Bloomberg consensus called for claims to decrease to 465,000. The data is somewhat distorted this time of year due to seasonal adjustments. The four-week moving average, considered a smoother look at the trend in claims, fell to 467,500 from 472,750, and continuing claims increased by 5,000 to 5,186,000. pressure.

The Conference Board released the Index of Leading Economic Indicators (chart) for November, which rose a better-than-expected 0.9% versus the expectation of a 0.7% increase, marking the eighth consecutive monthly increase, and the longest series of gains since 2003-2004. Seven of the ten components were higher, led by better numbers for initial jobless claims, average workweek length, building permits and the yield curve. While the six-month growth rate has slowed somewhat in recent months, Conference Board economist Ken Goldstein said that “Looking ahead, we can expect a slowly improving economy through 2010. Employment held steady, making this the first month since December 2007 that it did not make a negative contribution to the index.”

The Philadelphia Fed’s Business Activity Index surprised to the upside, unexpectedly rising to 20.4 in December from 16.7 in November, while the Bloomberg survey of economists expected the index to decline to 16.0. The underlying components of new orders and shipments both fell slightly, but remained in positive territory, and for the first time since late 2007, more firms reported an increase in employment than reported declines. The Philadelphia Fed Index is the second regional economic report for the month of December, and given the weakness reported Tuesday in the Empire Manufacturing Index, was viewed with a positive eye. Both measures are volatile on a month-to-month basis, but are seen as early reports on the state of the national economy reported in the ISM Manufacturing Index, due out at the beginning of January.

The Senate Banking Committee voted today (16-7) in favor on the confirmation of Fed Chair Bernanke to another term. Bernanke’s first four-year term expires on January 31, 2010, and a full Senate vote is expected to occur after it reconvenes following a holiday break on January 19, 2010. In other news, as Congress heads toward holiday recess, the US House of Representatives narrowly approved a $155 billion measure for additional spending on construction and infrastructure projects, as well as provide aid to states. The bill would provide $48.3 billion for “shovel-ready” infrastructure projects to increase jobs, $53.3 billion for extended unemployment benefits and healthcare subsidies for the jobless for another six months, and aid to states to pay for teacher and police officer salaries, repair school buildings, and Medicaid coverage. The bill goes to the Senate for consideration in 2010.

There are no major releases on the US economic calendar scheduled for tomorrow.

Second Greece credit downgrade headlines international economic news

In European economic news, Standard & Poor’s (S&P) became the second credit ratings agency to lower the rating for the sovereign debt of Greece in just over a week, by one level to BBB+ from A-, following Fitch’s downgrade on December 8 to BBB+. S&P said that the rating could be lowered further if the government fails to gain sufficient political support to implement a credible, medium-term deficit reduction program. Earlier this week, Greece’s Prime Minister said “In the next three months we will take those decisions that weren’t taken for decades” to cut the country’s deficit. He said he would cut the deficit, currently at 12.7% of GDP per Bloomberg, below the EU’s 3% limit by 2013, and begin reducing debt. Measures considered include an overhaul of the tax system, asset sales, and cuts to military spending. Greece’s Finance Minister later said the 2010 deficit-reduction target would be 8.7% of GDP.

UK retail sales unexpectedly fell 0.3% in November, the fist decline in six months, versus the estimate that sales rose 0.5%, although the prior month was revised higher to 0.6%.

Canada’s consumer price index rose 1% in November, above the expectation of 0.8%, due mainly to higher gasoline costs, while the core inflation rate, which excludes gasoline and other volatile items, slowed to 1.5% on an annual basis, compared to a 1.8% reading in October. Bank of Canada Governor Mark Carney repeated plans to keep the benchmark interest rate at a record low 0.25% through June to stimulate the economy, as inflation is still below the 2% target.

Chinese companies are set to offer ten IPOs this week, hoping to raise more than 1 trillion yuan ($146 billion), potentially draining liquidity from markets as investors sell existing holdings to fund purchases of new issues. Adding to the negative sentiment and fueling concerns about asset bubbles, Hong Kong’s central bank said that the city is at risk of “sharp corrections” in asset prices after property prices have surged this year, and the Chinese central bank released a survey yesterday that showed almost half of Chinese view inflation as excessive.

Elsewhere, minutes from Brazil’s central bank meeting last week were released, showing policy makers feel “inflationary pressures will remain contained” as the country experiences a “gradual recovery,” The decision was made to keep the benchmark interest rate at a record low level for the third-straight meeting.

On tomorrow’s international economic calendar, the Bank of Japan meets to determine monetary policy and Japanese department store sales will be released. In Europe, the German PPI and Ifo survey of business confidence will be released, as well as industrial orders in Italy and business investment in the UK. In the Americas, Canada will release wholesale sales and Brazil will release its unemployment rate.