Evening Update

Losses Widen as Earnings and Trade Data Send Bulls Hiding

Stocks sold off early, pressured by China’s moves to sop up liquidity, a larger-than-expected increase in the trade deficit, and Dow member Alcoa kicking off earnings season with an uninspiring profit. Adding to the negativity, Chevron warned that 4Q earnings will likely be lower than 3Q, citing weaker refining margins, Wal-Mart announced that it will shutter some Sam’s Club facilities, and Electronic Arts lowered its full-year guidance for a second time. In other earnings news, Amgen said full-year EPS will come in at the low end of its previous forecast, Hartford Financial Services Group upped its guidance, while enthusiasm from an unexpected profit at KB Home was tempered by the figure being juiced by a tax gain. Treasuries were higher.

The Dow Jones Industrial Average fell 37 points (0.4%) to close at 10,623, the S&P 500 Index declined 11 points (0.9%) to 1,136, and the Nasdaq Composite lost 30 points (1.3%) to 2,282. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $1.73 lower at $80.79 per barrel, wholesale gasoline fell $0.04 to $2.10 per gallon, and the Bloomberg gold spot price tumbled $23.98 to $1,127.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was unchanged at 77.01.

Dow member Alcoa (AA $15) reported 4Q EPS ex-items of $0.01, missing the $0.06 estimate of Wall Street analysts, but revenues grew 18% versus last quarter to $5.4 billion, above the $4.8 billion forecast. The aluminum producer said this was a tough year for the aluminum industry, which saw a price crash, demand destruction, and a credit crunch, but it is stronger today than when the year started, as it reshaped its cost structure and built its cash reserves. AA said increased pricing and all-time record production and third party shipments, along with lower costs were partially offset by a weaker US dollar. The company expects that markets will remain weak in 1Q but prices will continue to rise. Shares were lower.

Chevron (CVX $80) warned that earnings for 4Q are expected to be lower than in 3Q, with upstream earnings—exploration and production—to be in line with 3Q as the benefit from higher commodity prices is offset by the absence of gains recognized in 3Q. However, downstream earnings—refining—are expected to be sharply lower, mainly due to significantly weaker refining margins. The Dow member posted 3Q EPS of $1.72, and analysts were expecting EPS of $1.77 in 4Q. Shares were lower.

Meanwhile, fellow Dow component Wal-Mart (WMT $55) reported that it will close 10 financially underperforming Sam’s Club locations in the US. The company expects that approximately 1,500 Sam’s associates will be impacted as a result of the closures. Shares were modestly higher.

Amgen Inc. (AMGN $56) came under pressure after the biotech firm announced that it sees full-year 2009 EPS coming in at the low end of the its previous guidance of $4.90-5.05, and revenues are expected to come in at the middle of its previous guidance of $14.4-14.8 billion. Analysts are expecting the company to report full-year EPS of $5.04 on revenues of $14.7 billion.

Hartford Financial Services Group (HIG $27 ¹) was higher after the insurance-based financial services company boosted its 4Q EPS outlook from a previous range of $0.65-0.80 to between $1.45-1.60. HIG said that during 4Q its property and casualty operations continued to see strong current accident year underwriting profitability, driven by disciplined risk selection and light catastrophe losses. Additionally, the company said its life results benefitted from improving margins in its more equity-sensitive businesses, driven by rising account values and reduced expense levels. Analysts are expecting the company to post 4Q EPS of $0.83 on revenues of $2.4 billion.

KB Home (KBH $16) reported a 4Q profit of $1.31 per share, compared to the Street’s forecast, which called for the company to post a $0.42 per share loss. However, the income figure includes a $191.7 million gain from a new tax benefit that permits a five-year carryback of losses for homebuilders. It was unclear if analysts had factored in the tax provision. Revenues fell 27% versus the same period last year to $674.6 million, but above analysts’ forecasts of $578 million as the number of homes delivered fell 22% year-over-year (y/y) and the average selling price declined 12% y/y. The company said looking forward, there are indications that housing market conditions may be stabilizing in some regions, reflecting, among other things, relatively high levels of affordability. Shares were nearly 5% lower.

Electronic Arts (ERTS $17) was under pressure after the video game software maker lowered its full year guidance for a second time since November. ERTS said it expects annual EPS ex-items to be in a range of $0.40-0.55, down from its previous outlook of between $0.70-1.00, while revenue is expected to be in a range of $4.1-4.2 billion, compared to its prior guidance calling for sales to be in a range of $4.2-4.4 billion. Analysts are expecting the company to report full-year revenue of $4.3 billion and EPS of $0.78. ERTS said the revised outlook is primarily the result of weakness in Europe in December, and a product mix shift to lower margin distribution products in the December quarter, primarily in North America.

Trade deficit widens

The trade deficit increased from a negatively revised $33.2 billion in October to $36.4 billion in November, versus the Bloomberg estimate calling for the deficit to widen to $34.6 billion. Strength in oil prices led to imports outpacing exports as the average price per barrel jumped $5.15 to $72.54, the highest since October 2008, to offset the lowest level of crude import volume since February 1999. Treasuries remain higher, holding onto gains following the trade report.

The widening in the trade balance may be causing some concern on the Street as larger net exports subtract from GDP—net exports took 0.81 percentage points from 3Q GDP—but yesterday’s upbeat import figure from China, which jumped 55.9% y/y, may be limiting some of the sting of the report, along with the fact the exports have gained ground for seven-straight months and sit at the highest level in over a year.

Treasuries were higher on the weakness in the equity markets with the yield on the 2-year note down 4 bps to 0.91%, the yield on the 10-year note 10 bps lower at 3.72%, and the yield on the 30-year bond also losing 10 bps to 4.63%.

Tomorrow, the economic calendar will remain light up until the final hours of trading, when the Federal Reserve releases its Beige Book around 2:00 p.m. ET. The report offers anecdotal data depicting business conditions from all twelve Federal Reserve Districts across the nation. The Federal Open Market Committee (FOMC), which sets the US Federal Reserve’s monetary policy and is scheduled to conduct their first two-day policy meeting of the year on January 26th, turn to the report prior to their policy meeting to provide information in preparation to discuss interest rates and monetary policy. The last report suggested improving conditions in residential real estate, manufacturing, and consumer spending. However, the Fed remains under the impression that “exceptionally low” levels of the fed funds rate are warranted for an “extended period,” and any improvements seen in the report pertaining to employment, the tight credit markets, and construction—all areas of weakness noted in the December Beige Book—could catch the eye of “Fed Watchers,” possibly greasing the skids for the Fed to further rein its stimulus efforts, and may lead to some language in the FOMC’s policy statement geared toward preparing investors for a possible rate hike.

The only other report on tomorrow’s docket is MBA Mortgage Applications.

China tightens policy and sops up liquidity

The People’s Bank of China (PBOC) announced on its website that it will increase the reserve requirements—funds that banks must set aside—by 50 basis points, effective Jan. 18, according to Bloomberg News. The PBOC’s current reserve requirement is 15.5%. The move follows the central bank’s interest rate increase on a 20 billion yuan one-year bill auction, the second time in a week the bank has increased interest rates on an auction. As well, the PBOC will remove 200 billion yuan through the execution of a 28-day bond repurchase agreement, to curtail excess liquidity.

With the nation’s trade, reported Monday, showing growth at unparalleled levels, and new loans surging to 9.2 trillion yuan ($1.3 trillion) during 2009, the bank’s actions may indicate the Chinese government’s concern of resurgent inflation and asset bubbles. Last year, Chinese Premier Wen Jiabao said that the unprecedented swell in loans had caused property prices to “rise too quickly.” Speaking on a condition of anonymity, a PBOC official commented that the decisions didn’t point to a fundamental change in the central bank’s monetary policy, according to Bloomberg. Instead, with the stimulus deployed by the government and large quantities of maturing bills generating greater liquidity than most other countries, officials are taking steps to address risks, the official said.

Elsewhere, a report out of the land down under showed home loan approvals fell by the highest amount since May 2008, following the string of three-straight interest rate increases by the Reserve Bank of Australia in the last three months of 2009.