Evening Update

Choppy Day as Plenty of Data Added to the Fray

Traders had plenty of data to digest today, headlined by an afternoon release of the Federal Reserve’s minutes from its December monetary policy meeting, in which the report showed officials are grappling with its stimulus efforts. Stocks finished near the unchanged mark and Treasuries were mixed as the Fed’s report followed a moderate miss in the ISM Non-Manufacturing Index, a slightly higher rate than expected of job losses from private sector payrolls, and a decline in the two-week mortgage applications index. Equity news was also heavy as Dell announced AT&T will be the next mobile phone operator for its Mini 3 smartphone, Monsanto missed bottom-line estimates while Mosaic handily beat, Family Dollar stores issued strong results and guidance, Lockheed Martin announced job cuts, and Walgreen Co posted an unexpected decline in same-store sales. Elsewhere, Beazer Homes’ relatively large share offering overshadowed its jump in 1Q new orders, and Sonic Corp came under pressure after its disappointing profit report.

The Dow Jones Industrial Average rose 2 points (0.02%) to close at 10,574, while the S&P 500 Index added 1 point (0.1%) to 1,137, and the Nasdaq Composite was down 8 points (0.3%) to 2,301. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $1.32 higher at $83.09 per barrel, wholesale gasoline was up $0.01 at $2.13 per gallon, and the Bloomberg gold spot price jumped $20.10 to $1,138.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 77.46.

Dell (DELL $15) announced that Dow member AT&T (T $28) will become a mobile operator of its Mini 3 smartphone, which uses Google’s (GOOG $608) Android operating system, adding to the list of arrangements DELL has set up, including agreements with China Mobile (CHL $47)—the world’s largest mobile operator—and Claro in Brazil. AT&T also announced that it expects to introduce five new devices based on GOOG’s Android platform. Shares of DELL, T, and GOOG were lower, while CHL moved higher.

Agriculture giant Monsanto Co. (MON $86) issued a first quarter ongoing loss of $0.02 per share, lower than the consensus estimate of breakeven, on sales of $1.70 billion versus the expectation that sales would be $1.96 billion. The company confirmed full-year earnings and cash flow guidance saying that “early indicators of the seeds and traits business show the company on track” for the full year and with its operational plan through 2011 and 2012, while the first quarter is “a small but important quarter.” However, fertilizer company Mosaic Co (MOS $66) reported sales of $1.71 billion, besting the estimate for sales of $1.68 billion, as potash sales increased 30% from 1Q and phosphate volumes increased 15% sequentially. But MOS posted 2Q EPS of $0.24, which missed the Street estimate for EPS of $0.35. Shares of both firms were higher.

Family Dollar Stores Inc (FDO $31) reported 1Q EPS of $0.49, higher than the analyst estimate of $0.47, with same-store sales rising 2.4%. Revenue for the quarter ended November 28 was up 3.9% to $1.8 billion, as previously reported. The company is forecasting 2Q EPS to come in at $0.65-0.79 per share amid a 2-4% increase in same-store sales for the quarter, while the Street estimate is for a profit of $0.64 per share. The company affirmed its full-year earnings forecast while reducing its target revenue growth. Shares were nicely higher.

In other retail news, Walgreen Co. (WAG $37) reported a decrease in December same-store sales of 0.3%, missing the Reuters forecast of a 2.3% rise, as comparable pharmacy sales were negatively impacted by 2.1 percentage points due to generic drug introductions in the last 12 months. The company added that front-end—general merchandise—same-store sales fell 3.1% as the company decided to “take a cautious approach to buying this year’s seasonal inventory compared to last year.” Shares were lower.

Lockheed Martin (LMT $77) was lower after the global security company announced that it will eliminate 1,200 jobs as a result of a previously announced reorganization, which created its new mission systems & sensors business—one of three primary operating companies in its electronics systems business area.

Beazer Homes (BZH $5) was sharply lower after it announced that it will issue 18 million shares in a stock offering and an additional $50 million in convertible notes to use the proceeds to redeem debt due in 2011. Concerns about shareholder value dilution as the company had 40 million shares outstanding prior to the offering overshadowed a separate report from the homebuilder that showed a 36.6% increase in new orders for fiscal 1Q compared to the prior year.

Sonic Corp. (SONC $9) was down over 10% after the drive-in fast-food chain reported fiscal 1Q EPS of $0.10, missing the $0.14 estimate of Wall Street analysts, with revenues falling 26% to $137 million, roughly inline with the Street’s estimate. 1Q same-store sales fell 6.5% versus last year as SONC said, “The significant level of unemployment and its impact on consumer spending, combined with increased competition for value menu offerings, have negatively affected sales for the industry and for the Sonic system.”

Service ISM and ADP employment miss

The ISM Non-Manufacturing Index (chart) increased back into expansion territory, to 50.1 in December, slightly lower than the 50.5 forecast, after dipping below the 50 level that marks the separation between expansion versus contraction in November to 48.7, and the index is now reporting growth in three of the last four months. While non-manufacturing new orders fell to 52.1 from 55.1, the employment component rose to 44.0 from 41.6 and the prices index increased 0.9 to 58.7, indicating a slight increase in prices paid. Unlike the companion ISM Manufacturing Index, which has benefitted from “cash-for-clunkers” production and export strength and improved to 55.9 in December and has been more consistently showing expansion, the service sector is more domestic-driven and has been more volatile on a month-to-month basis, suffering from the weak state of consumer spending in the US.

Elsewhere, the ADP Employment Change Report was released and fell by 84,000 jobs, worse than the forecast that private sector employers shed 75,000 jobs in December, while November’s figure was revised to a smaller-than-initially reported loss of 145,000, and December’s decline was the smallest since March 2008. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls were flat in December, and that the unemployment rate increased to 10.1%, after falling to 10.0% in November.

In other economic news, the US MBA Mortgage Application Index rose by 0.5% last week, after the index, which can be quite volatile on a week-to-week basis, plunged 23% in the previous week, and today’s release is for a two-week period due to the Christmas holiday. Rates on 30-year fixed mortgages exceeded 5% for the first time since October. The average 30-year mortgage rate rose to 5.18% versus 5.08% in the previous week and 4.91% the week before. Within the index, the Refinance Index fell 1.6% after dropping 30.5% the previous week, to offset more modest changes in the Purchase Index, which rose 3.6% last week after dipping 4.0% the prior week. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Meanwhile, volatility in the energy sector followed the US Energy Information Administration’s inventory report, which showed crude oil stockpiles unexpectedly rose, increasing by 1.3 million barrels, compared to the Reuters forecast calling for a decline of 500,000 barrels. Additionally, distillate inventories fell by 300,000 barrels, compared to the expected drop of 1.9 million barrels, while gasoline inventories rose by 3.7 million barrels, versus the forecasted increase of 500,000 barrels. Crude oil and gasoline prices both fell initially following the report but both recovered and were higher.

Fed participants divided over next steps and economic path

The yield curve steepened after the minutes from the December 15-16 Federal Open Market Committee (FOMC) meeting were released midday, where the size and timing for the end of asset purchase programs were debated despite the affirmation of the end in March, and participants were still split over the medium-term outlook for inflation and the ability for the economy to generate a self-sustaining recovery without government support. The Fed said that low rates of resource utilization (a combination of factory utilization and the unemployment rate), subdued inflation trends and stable inflation expectations warranted “exceptionally low levels” of the federal funds rate for an “extended period.” Treasuries finished mixed, with the yield on the 2-year note falling 1 bp to 1.00%, the yield on the 10-year note advancing by 7 bps to 3.83%, and the yield on the 30-year bond increasing 9 bps to 4.70%.

The Fed discussed continued development of tools to “support a smooth withdrawal” at the “appropriate time,” conducting a test of the Fed’s ability to execute large scale reverse repurchase agreements (RRPs), with the ability to use Treasuries confirmed and the use of agency mortgage-backed securities (MBS) still being developed, with work to be completed “by spring.” Additionally, the use of a term deposit facility (TDF) was discussed and public comments are requested. The Committee plans to discuss alternative approaches to implementing longer-term monetary policy at upcoming meetings.

While reaffirming the timing for the end of asset purchase programs, some participants said it might be desirable to provide more policy stimulus in the future by expanding the scale and timing beyond the end of March, if the economic outlook were to weaken or if mortgage market functioning deteriorated, while one person felt the program could end now. They said the housing market had improved and that the outlook was for gains in activity to continue, but that the end of the MBS purchase program was a risk to the outlook.

Industrial new orders disappoint, debt concerns remain in focus

In Europe, industrial new orders and services PMIs out of the Euro zone came in lower than expected and the UK reported the first decline in consumer confidence in more than a year. Elsewhere, government debt was in view, ahead of a three-day meeting to discuss the finances of the Greek government, as the country’s Finance Minister rejected speculation they will need a bailout, saying “There will be no need for any outside help” and “we’re doing what needs to be done to bring the deficit down and control the public debt.” The comments were in contrast to a quote in an Italian paper citing European Central Bank policy maker Juergen Stark as saying “The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece.” Adding to the bearish government debt sentiment, Fitch Ratings lowered the credit rating on Iceland’s sovereign debt one level below investment grade, following a vetoed bill by Iceland’s president to reimburse the UK and Netherlands for their assistance provided to depositors of a failed Icelandic bank.

Meanwhile, in Asia, the Chinese Housing Minster said that the central bank will “closely watch changes in the property market, strictly implement relevant property lending policies,” will seek to prevent “abnormal volatility” in lending between quarters and at the ends of months, guide the pace of lending and encourage the flow of money into existing projects rather than new ones, and “stabilize the stock market’s operations,” while supporting “relatively fast” economic growth and manage inflation expectations. They affirmed their commitment to a “stable” yuan, despite a call today by a researcher at the Chinese Academy of Social Sciences for a one-time 10% appreciation in the currency. In Japan, the Asian nation named a replacement for Finance Minister who stepped down for health reasons.

In other news, in Australia a report showed that permits to build or renovate houses and apartments rose 5.9% in November, better than the 3.9% expectation. The Australian government gave grants for as much as $19,000 for first-time buyers of newly built dwellings in 2009, but has reduced the grant by two-thirds for 2010 and rates will likely rise as the central bank has hiked rates in three-straight meetings.

Tomorrow, the US economic calendar will yield only one major report in the form of weekly initial jobless claims, expected to increase by 8,000 to 440,000. Meanwhile, on the international economic calendar, the Bank of England will announce its monetary policy decision, Germany, Australia, and the Eurozone will report retail sales, German factory orders will come out, Eurozone consumer confidence will be reported, and UK home prices will be released.