Morning Update

China Actions and Bank Earnings Dampening Sentiment

After yesterday's rally, led by healthcare stocks ahead of last night's Senate election in Massachusetts, which resulted in a Republican victory and dampened some optimism regarding the passing of the Obama Administration's healthcare reform, stocks are under pressure in early action as traders digest key banking earnings reports and actions from China to stem excess liquidity. Bank of America and Morgan Stanley missed analysts' expectations, while Wells Fargo posted an unexpected profit but its revenues came up short of expectations. However, IBM is boosting some optimism in the tech sector after it topped profit projections and issued favorable guidance. Treasuries are higher after mixed reports on wholesale inflation and housing starts and building permits. Overseas, China led Asia lower after a banking regulator told some banks to limit lending, while Europe is also under pressure.

As of 8:54 a.m. ET, the March S&P 500 Index Globex future is 8 points below fair value, the Nasdaq 100 Index is 13 points below fair value, and the DJIA is 62 points below fair value. Crude oil is down $1.54 at $77.48 per barrel, and the Bloomberg gold spot price is lower by $15.05 at $1,123.15 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is up 0.9% at 78.19.

Dow member Bank of America (BAC $16 ¹) announced a 4Q net loss of $0.60 per share, including the one-time $4.0 billion negative impact associated with repaying funds to the government's Troubled Asset Relief Program (TARP), and compared to the loss of $0.53 per share that Wall Street analysts had forecasted. Revenue net of interest expense came in at $25.4 billion, missing the Street's expectation of $26.8 billion. BAC said credit quality showed signs of improvement compared to the prior quarter, although credit costs remained high as global economic conditions remained challenging. The company's net charge-offs were $1.2 billion lower than the prior quarter-declining sequentially for the first time in nearly four years-and its provision for credit losses was $10.1 billion, down $1.6 billion that last quarter.

Meanwhile, Wells Fargo (WFC $28) reported 4Q EPS of $0.08, compared to the consensus of analysts, which called for the company to post a $0.01 per share loss, with revenues of $22.7 billion, versus the $22 billion that was anticipated. WFC said its 4Q credit results were in line with its expectations and losses remained elevated, but a more favorable economic outlook and improved credit statistics in several portfolios further increase its confidence that its credit cycle is turning, provided economic concerns do not deteriorate. WFC's 4Q net charge-offs were $5.4 billion compared to $5.1 billion in 3Q, while its allowance for credit losses during 4Q increased by $500 million compared to 3Q.

Elsewhere in the financial industry, Morgan Stanley (MS $31) reported 4Q EPS of $0.14, compared to the $0.36 that analysts had expected, as revenues were $6.8 billion, compared to the $7.8 billion that was anticipated.

International Business Machines (IBM $134) reported 4Q EPS grew 10% versus last year to $3.59, topping the Street's forecast of $3.47, as revenues rose 1% year-over-year (y/y) to $27.2 billion, also exceeding the average analyst forecast of $27.0 billion. The Dow member's global services and software sales both grew by 2%, while its systems and technology revenue declined 4%. The company issued full-year 2010 EPS guidance of at least $11.00, compared to analysts' forecasts, which are calling for the company to post full-year earnings of $10.89 per share.

Wholesale prices rise, housing starts and building permits mixed

The Producer Price Index showed prices at the wholesale level rose 0.2% month-over-month (m/m) in December, after advancing 1.8% in November. The average economist forecast surveyed by Bloomberg called for prices to come in flat. Meanwhile, the core rate, which excludes food and energy, were flat compared to the forecast for a 0.1% increase. On a year-over-year basis, headline producer prices were 4.4% higher, and the core rate was 0.9% higher.

Elsewhere, housing starts for December were reported, and the release showed starts declined 4% m/m to an annual rate of 557,000 units, below economists' expectations of a decrease to 572,000, and also down from an upwardly revised 580,000 last month. Meanwhile, building permits unexpectedly jumped, growing about 10.9% m/m to an annual rate of 653,000 from last month's upwardly revised 589,000. The expectation was for a decrease to 580,000 units. Treasuries moved higher after the inflation and housing reports.

In other economic news, the US MBA Mortgage Application Index, rose 9.1% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 14.3% in the previous week. The increase came amid a 13 basis-point drop in the average 30-year mortgage rate to 5.00% versus the previous week, and as the Refinance Index advanced 10.7%, supporting the rise in the overall application gauge. Meanwhile, the Purchase Index also contributed to the increase, rising 4.4%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Europe comes under pressure amid China actions and data

Stocks in Europe are under pressure in afternoon action, led by financials and basic materials issues on concerns about the continued prosperity of the global economy on the heels of actions from the Chinese government to limit excess liquidity. Meanwhile, strength in healthcare and technology shares are limiting the damage across the pond on an upbeat earnings report from Dow member IBM and following the US Senate election results out of Massachusetts, which could have an impact on the success of the Obama Administration's healthcare reform. Economic data out of Europe offered little help to sentiment as results were mixed, with German producer prices unexpectedly declining m/m in December and Italian industrial orders increasing more than expected m/m in November, while jobless claims in the UK fell more than expected for December. Britain's FTSE 100 Index is down 0.6%, France's CAC-40 Index is off 0.5%, Italy's FTSE MIB Index is 0.9% lower, and Germany's DAX Index is 0.5% in the red.

Asia mixed as China falls on government action to slow loan growth

Stocks in Asia finished mixed, with shares in China coming under heavy pressure as the Chinese government continues to try to stem excess liquidity and prevent asset bubbles from forming in the nation. China's Shanghai Composite Index fell 2.9% and Hong Kong's Hang Seng Index declined 1.8% after the nation's banking regulator said in an interview that it has told some banks to limit lending, due to inadequate capital levels, and it will restrict overall credit growth in the nation to 7.5 trillion yuan ($1.1 trillion), per Bloomberg. Japan's Nikkei 225 Index dipped by 0.3% amid fears that China's action could stall the global economic recovery, but losses were limited by strength in healthcare stocks following the results of the US Senate election in Massachusetts. However, Australia's S&P/ASX 200 Index rose 0.1% after a report showed consumer confidence rebounded from a 3.8% decline in December to a 5.6% gain for January. Elsewhere, South Korea's Kospi Index rose 0.2%, Taiwan's Taiex Index declined 0.3%, and India's BSE Sensex 30 Index dipped 0.1%.