Morning Update

Looking to Get Back on Track

Following yesterday's declines on a disappointing start to 4Q earnings season and worries regarding the impact on the global economic recovery of China's efforts to stem excess liquidity, stocks are moving higher in morning action. Treasuries are lower in early trading after mortgage applications jumped, and ahead of a report from the Federal Reserve pertaining to business activity across the twelve Fed districts in the US. In equity news, Google is threatening to leave the Chinese market on censorship and following a "highly sophisticated" attack on its infrastructure, while Dow member Kraft Foods and QLogic Corp both increased their earnings guidance. Overseas, Asian markets came under pressure, while European stocks have overcome early losses and are higher.

As of 8:43 a.m. ET, the March S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 9 points above fair value, and the DJIA is 29 points above fair value. Crude oil is down $0.60 at $80.19 per barrel, and the Bloomberg gold spot price is higher by $7.33 at $1,135.83 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is down 0.4% at 76.65.

Google (GOOG $590) announced that it is considering shutting down its Chinese search site and facilities as it said it cannot tolerate strict censorship and after it discovered a "highly sophisticated" attack on the world's largest internet search firm's corporate infrastructure originating from China that resulted in the theft of intellectual property from GOOG. The company added that at least twenty other companies from a wide range of businesses have been similarly targeted, and it has evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists.

Dow member Kraft Foods (KFT $29) increased its full-year EPS guidance from at least $1.97 to at least $2.00, reflecting strong operating gains as well as a significant increase in marketing investments versus the prior year. KFT said it is delivering high-quality earnings growth despite the difficult economic environment, and it is well positioned to deliver sustainable top-tier performance, "with or without Cadbury." Analysts are expecting the company to report $2.00 per share in earnings for 2009.

QLogic Corp (QLGC $21) reported preliminary 3Q results, in which it expects to post EPS ex-items of between $0.29-0.30, versus its previously forecasted range of $0.22-0.24, with revenues expected to be between $147-149 million, exceeding the previously forecasted range of $134-140 million. Analysts are calling for the technology infrastructure firm to report 3Q EPS of $0.25 and revenues of $140 million. QLGC said its revenue performance was driven by strong sequential growth for its host products compared to 2Q.

Mortgage apps increase, Fed report on deck

The US MBA Mortgage Application Index, rose 14.3% last week, after the index, which can be quite volatile on a week-to-week basis, gained a slight 0.5% in the previous week. The increase came amid a 5 basis-point drop in the average 30-year mortgage rate to 5.13% versus the previous week, and as the Refinance Index jumped 21.8%, supporting the rise in the overall application gauge. Meanwhile, the Purchase Index rose 0.8%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March. Treasuries are lower.

On the horizon, the economic calendar will remain light up until the final hours of trading today, 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, turns 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.

Europe slightly higher after overcoming early pressure

Stocks in Europe are modestly higher in afternoon action, overcoming an early loss that came from lower oil and gas and financials issues, on lingering uncertainty of the impact on the global recovery from China's efforts to prevent an overheating of its economy. Technology and health care stocks are leading the way, despite the German government reporting that 4Q GDP probably "remained at a level of the previous quarter," in which 3Q GDP expanded at 0.7% quarter-over quarter, and that GDP for Europe's largest economy contracted at a 5.0% annual growth rate in 2009. The German DAX is up 0.4% to help the resiliency across the pond. In other economic news, Italian industrial production rose by a smaller amount than expected, France's consumer prices increased slightly more than forecast, and UK industrial production gained more than anticipated. France's CAC-40 Index is up 0.1%, while the UK's FTSE 100 Index is off by 0.1%. In equity news, financials are getting some additional pressure from the announcement from France's second-largest bank, Societe Generale (SCGLY $15), that it had a "slight profit" in 4Q after taking about a 1.4 billion euro ($2.0 billion) charge due to writedowns and loan loss provisions.

Asia slumps on China tightening fallout

Stocks in Asia were mostly lower, led by commodity-related issues on continued uncertainty as to whether the attempts recently by China to keep inflation from flaring up and containing potential asset bubbles will be detrimental to the sustainability of the global economic recovery. Financials led Chinese stocks lower, with the Shanghai Composite Index tumbling 3.1% and Hong Kong's Hang Seng Index falling 2.6%, in reaction to the People's Bank of China's (PBOC) late-day announcement yesterday that it will increase the reserve requirements of banks-the amount these firms must set aside in reserve-by 50 basis points effective January 18th. This action took economists by surprise and increased speculation that the PBOC could raise its benchmark lending rate sooner than anticipated. Japan's Nikkei 225 Index dropped 1.3% on the aforementioned economic uneasiness, exacerbated by a solid gain in the yen versus the US dollar yesterday as traders reined in their risk tolerances by covering short positions that had been created to use the proceeds to finance investments in higher yielding assets-known as the carry trade-which pressured export shares in Japan. In economic news, South Korea's unemployment rate held at 3.5%, and the Kospi Index was 1.6% lower, while the Bank of Thailand kept its main interest rate at 1.25%, and its SET Index rose 0.2%. Elsewhere, Australia's S&P/ASX 200 Index fell 0.6% and Taiwan's Taiex Index dropped 1.4%, while India's BSE Sensex 30 Index rose 0.5%.