Evening Market Update

Stocks Pull Back As Financial Earnings Fail to Impress

The US equity markets finished lower today, as traders juggled the release of numerous earnings reports from the financial and tech sectors, as well as additional data on the US housing sector. Particular attention was paid to the 4Q results of Goldman Sachs, which beat EPS estimates, but reported a 10% drop in revenue. Most of the other banks reporting today beat the Street’s forecasts, but failed to overly exceed expectations, while Wells Fargo matched on the bottom line and beat on the top line. Meanwhile, IBM gave the Dow some support after it reported solid 4Q earnings and revenue, and Apple easily beat analysts’ estimates, which helped to deflect some of the focus off yesterday’s announcement regarding Steve Jobs’ leave of absence. Domestic economic releases included a larger-than-expected fall in housing starts, a 17% increase in building permits, and a jump in mortgage applications, due to a rise in refinancing. Treasuries finished the day higher.

The Dow Jones Industrial Average fell 13 points (0.1%) to 11,825, the S&P 500 Index lost 13 points (1.0%) to 1,282, and the Nasdaq Composite declined 40 points (1.5%) to 2,725. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. Crude oil fell $0.58 to $90.80 per barrel, wholesale gasoline was flat at $2.48 per gallon, while the Bloomberg gold spot price advanced $2.03 to $1,370.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.4% to 78.59.

A plethora of earnings reports were released out of the financial sector, headlined by Goldman Sachs Group Inc. (GS $166), which announced 4Q EPS of $3.79, compared to the $3.77 that analysts had expected, with revenues falling 10% y/y to $8.6 billion, coming in just shy of the $9.0 billion that the Street was looking for. The company saw declines in revenues at its investment banking and trading in its fixed income, currency, and commodities divisions compared to last year, while its investment management revenues posted a solid gain. Moreover, Wells Fargo & Co. (WFC $32) posted 4Q earnings of $0.61 per share, matching expectations, while revenues of $21.5 billion modestly exceeded the $21.1 billion that was forecasted. WFC said all its business segments contributed to earnings, with double-digit revenue growth seen across multiple businesses, and its credit quality showed “continued and significant” improvement. Shares of both firms were lower.

Other reports from the sector included: Bank of New York (BK $31), US Bancorp (USB $27), and State Street Corp. (STT $48) all posted better-than-expected earnings and revenues, while Hudson City Bancorp Inc. (HCBK $12) beat the Street’s EPS estimates but came up short on its revenues. Nonetheless, shares of all four firms traded lower.

However, Apple Inc. (AAPL $339) reported fiscal 1Q EPS of $6.43, well above the $5.39 that analysts surveyed by Reuters had anticipated, with revenues jumping from $15.7 billion a year ago to $26.7 billion, exceeding the $24.3 billion that the Street had forecasted. The company said international sales accounted for 62% of the period’s revenue and it sold 7.3 million iPads during the quarter. Elsewhere, AAPL said it sold 4.1 million Macs in 4Q, representing a 23% increase year-over-year (y/y) and sales of iPhones surged 86% y/y to 16.2 million units, while sales of its iPods declined 7% y/y to 19.5 million. For 2Q, the company issued EPS and revenue guidance that topped analysts’ forecasts. AAPL moved to the downside.

Moreover, Dow member International Business Machines Corp. (IBM $156) posted 4Q EPS of $4.18, ten cents above the Street’s expectations, as revenues rose 7% y/y to $29.0 billion, above the $28.3 billion that was forecasted by analysts. The company achieved 11% y/y growth in software revenue, excluding divestitures, its systems & technology sales jumped 21%, and its services revenues grew 2%. The technology firm said revenues in the Americas rose 9% y/y, and its sales in Asia-Pacific increased 14%, but in Europe/Middle East/Africa, revenues declined 2%. Elsewhere, revenues from the company’s growth markets gained 15%, while sales in the BRIC countries—Brazil, Russia, India and China—rose 19%. IBM issued better-than-expected full-year 2011 EPS guidance. IBM finished nicely higher.

Housing starts and building permits mixed, mortgage applications rise

Housing starts  for December came in below expectations, falling 4.3% month-over-month (m/m) from a downwardly revised 553,000 annual rate of units in November, to a rate of 529,000 units, and compared to the 550,000 expectation of economists surveyed by Bloomberg. However, building permits exceeded expectations, jumping 16.7% m/m in December to an annual rate of 635,000, after November’s upwardly revised 544,000 rate. The expectation was for permits to increase to 554,000 units.

Digging into the numbers, data on the single-family segment added to the muted reaction to the report, with starts down 9.0% m/m and permits rising 5.5% m/m. The stronger permit data was attributed to changes in building codes in several states as homebuilders worked to get approvals before the changes took effect. Meanwhile, poor weather across the country influenced construction on starts.

In other housing news, the MBA Mortgage Application Index increased by 5.0% last week, after the index that can be quite volatile on a week-to-week basis, rose 2.2% in the previous week. The increase came as a 7.7% gain in the Refinance Index offset a 1.9% decline in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate dipped 1 basis point to 4.77%, above the record low of 4.21% on October 8.

Tomorrow, the housing data will continue to pour in, with the release of existing home sales, forecasted to rise 4.1% m/m in December to an annual rate of 4.87 million units. Exiting home sales make up the largest portion of home sales so the report may garner more scrutiny than next week’s read on new home sales, which are expected to rise by 3.5% to 300,000 annual units.

Other reports on tomorrow’s US economic calendar include the Conference Board’s Index of Leading Indicators, which is expected to increase 0.6% in December, and the Philadelphia Fed’s Business Activity Index, expected to decrease from 24.3 in December to 20.8 in January. Initial jobless claims will also be released, with expectations of a decrease to 420,000, from a previous reading of 445,000.

Treasuries were modestly higher, with the yield on the two-year note down 2 bps to 0.57%, while the yields on the 10-year note fell 3 bps to 3.34%, and the 30-year bond declined 4 bps to 4.52%..

Expansion of euro-area bailout fund in question, slew of Chinese data on deck

Economic news across the pond was relatively light, but separate reports showed UK jobless claims unexpectedly fell in December, and euro-zone construction output declined in November. Elsewhere, euro-area debt concerns remained in focus as traders continued to grapple with the notion that the EU’s euro-area bailout fund will not be expanded at least for the time being, and another successful debt auction out of Portugal, which drew lower borrowing costs and respectable demand for the troubled nation’s debt.

Economic news out of Asia/Pacific was also light, with the lone major report being a solid drop in Australian consumer confidence for the month of January. Focus in the region now turns to China, ahead of tomorrow’s 4Q GDP report and data on inflation. Economists surveyed by Bloomberg are forecasting China’s 4Q GDP expanded by 9.4% y/y, a slight slowdown from 9.6% in 3Q, and consumer prices are expected to slow from a 5.1% y/y increase in November to 4.6%, helping soothe some concerns about an overheating of the economy, which has prompted China’s central bank to deploy monetary policy tightening measures to try to thwart runaway inflation and the formation of asset bubbles. Other releases due out of China include PPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending.

Other international economic reports on deck include Japan’s leading index, German producer prices, euro-zone consumer confidence, and Canada’s leading indicators and wholesale sales.