Evening Market Update

Equities Fall Just Short of a Comeback

After spending most of the day well entrenched in negative territory, the DJIA and S&P 500 Index were able to move back above the unchanged mark late in the day. However, increased speculation of further tightening in China following strong economic data out of the nation was too much for the bulls to overcome and equities still finished lower, but near the flatline. Even a larger-than-expected drop in jobless claims, a surge in existing homes sales, and the sixth-straight monthly increase in the Index of Leading Economic Indicators couldn’t surmount the negative sentiment. Concerns about a slowdown in the world’s second-largest economy also pressured commodities. Treasuries finished lower following the plethora of upbeat US economic data, partially limited by an unexpected decline in the Philly Fed Manufacturing Index. Earnings season continued in full force with mixed results, as F5 Networks’ shares suffered after reporting revenues that fell short of expectations and lackluster guidance, while Google reported results after the close that beat forecasts, Morgan Stanley saw a gain in its shares after top- and bottom-line results exceeded forecasts, and both Union Pacific and eBay bested the Street’s expectations. In other equity news, Wendy’s/Arby’s Group said it is exploring strategic alternatives for its Arby’s unit including a possible sale, and Dillard’s announced plans to form a subsidiary that will seek to operate as a real estate investment trust.

The Dow Jones Industrial Average fell 2 points (0.02%) to 11,833, the S&P 500 Index lost 2 points (0.1%) to 1,280, and the Nasdaq Composite declined 21 points (0.8%) to 2,704. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. Crude oil fell $2.22 to $89.59 per barrel, wholesale gasoline was $0.06 lower at $2.42 per gallon, while the Bloomberg gold spot price dove $20.70 to $1,349.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.2% to 78.82.

After the closing bell, Google (GOOG $626) reported earnings of $8.75 per share, above analysts’ expectations of $8.09, while revenues, less traffic acquisition costs, grew to $6.4 billion, also above forecasts.

F5 Networks Inc. (FFIV $109) was sharply lower after the networking hardware and software firm issued fiscal 2Q revenue guidance that missed the consensus estimate of analysts surveyed by Reuters. Also, the company posted fiscal 1Q revenues of $269 million, an increase of 41% year-over-year (y/y), but was just below the $271 million that the Street had expected. However, FFIV did achieve 1Q EPS ex-items of $0.88, which was five cents above analysts’ forecasts, and its 2Q EPS guidance was roughly inline with expectations. Although the company’s 1Q results and 2Q outlook were not large misses, they were exacerbated by lofty analyst expectations that had come courtesy of the company’s recent track record of posting strong quarterly results and favorable guidance, with JPMorgan Chase & Co pointing out that this quarter snapped a streak of six “beat-and-raise quarters.”

Meanwhile, Morgan Stanley (MS $29) reported 4Q EPS ex-items of $0.43, topping the $0.36 that analysts were anticipating, with revenues of $7.8 billion also exceeding the $7.4 billion mark that the Street had anticipated. The company said it delivered improved performance across most of its businesses, with its global wealth management posting “strong performance.” in 4Q. Shares were higher.

Moreover, Union Pacific Corp. (UNP $95) announced that its 4Q earnings came in at $1.56 per share, above the $1.48 that analysts had expected, with revenues growing 17% y/y to $4.4 billion, mostly inline with the Street’s forecast. The railroad said 4Q business volumes increased by 9% y/y. UNP is traded lower.

Elsewhere, eBay Inc. (EBAY $31) posted 4Q EPS of $0.52, above the $0.47 that analysts were expecting, with revenues increasing 5% y/y to $2.5 billion, roughly inline with the Street’s projections. Also, the ecommerce and online payment firm issued inline 1Q 2011 guidance, while offering a better-than-anticipated full-year 2011 outlook. Shares were nicely higher.

Outside of earnings news, shares of Wendy’s/Arby’s Group Inc. (WEN $5) were solidly higher after the company announced that it is exploring strategic alternatives for Arby’s Restaurant Group, including the sale of the brand. The company said it believes the best way to maximize shareholder value is to focus all of its management and financial resources on continuing to build the Wendy’s brand.

Also, Dillard’s Inc. (DDS $42) was up over 11% after the department store chain announced that it intends to form a wholly-owned subsidiary that will seek to operate as a real estate investment trust (REIT). DDS said it believes the formation of a REIT may enhance its ability to access debt or preferred stock and thereby enhance its liquidity.

Jobless claims fall and existing home sales jump to highlight the economic docket

Weekly initial jobless claims dropped by 37,000 to 404,000, versus last week's figure which was downwardly revised by 4,000 to 441,000, and the decline to 420,000 that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, declined by 4,000 to 411,750, and continuing claims fell by 26,000 to 3,861,000, below the forecast of economists, which called for continuing claims to come in at 3,985,000.

Elsewhere, housing data continued to pour in, with existing home sales jumping 12.3% m/m in December to an annual rate of 5.28 million units, compared to the 4.1% growth to 4.87 million units that was forecasted by economists, and November’s upwardly revised 4.70 million units. The median existing-home price declined 1.0% from a year ago to $168,800, and was 1.1% lower m/m. The National Association of Realtors (NAR) said a modest rise in distressed sales, which typically are discounted 10-15% relative to traditional homes, dampened the median price in December. The supply of homes fell by 4.2% m/m to 3.56 million units, equating to 8.1 months of supply at the current sales pace, down from 9.5 months in November. Sales of existing homes reflect closings from contracts entered one to two months earlier. Moreover, single-family homes sales jumped 11.8%, while condominium and co-op sales surged 16.4%. Finally, sales in all regions posted double-digit percentage gains, with sales in the West leading the way by achieving 16.7% growth.

Also, the Conference Board released the Index of Leading Economic Indicators (LEI) for December, which increased 1.0% month-over-month (m/m), above the 0.6% rise that economists expected, and following the unrevised 1.1% gain seen in November. This was the sixth-straight monthly advance for the index, led by increases in jobless claims, building permits, and a favorable yield curve.

Meanwhile, the Philly Fed Manufacturing Index unexpectedly declined, falling from the downwardly revised 20.8 in December to 19.3 in January. Economists had expected the index to remain unchanged and a reading above zero denotes expansion. Some of the underlying components of today’s report that are worth noting include: prices paid continued to increase, rising by 6.4 points m/m to 54.3, and prices received moved from 9.4 to 17.1, exacerbating some worries about inflationary pressures facing manufacturers. However, new orders more than doubled to 23.6, shipments increased from 5.2 to 13.4, and the number of employees jumped from 4.3 to 17.6, while the average workweek declined from 16.8 to 10.6.

Treasuries finished lower following the string of data. The yield on the two-year note was up 4 bps to 0.62%, the yield on the 10-year note rose 6 bps to 3.43%, and the 30-year bond increased 3 bps to 4.59%.

Chinese data sparks global concern of further tightening

A plethora of stronger-than-expected economic data in China resuscitated concerns that the government may deploy further measures to slow down the economy. A report showed China’s 4Q GDP expanded at a 9.8% y/y rate, accelerating from the 9.6% rate in 3Q, and above the 9.4% pace of growth that economists had forecasted. Meanwhile, separate reports showed increases in China’s consumer prices decelerated from 5.1% y/y in November to 4.6% in December, matching expectations, while the nation’s producer prices came in at 5.9% y/y, from 6.1%, and compared to the 5.7% that was expected. Other reports out of China included: larger-than-expected increases in industrial production and retail sales, while fixed asset urban investment came in just below economists’ estimates.

Economic data across the pond was mostly negative which exacerbated the negative sentiment and pressured stocks, as a report showed UK factory orders fell to the lowest level since October, German producer prices rose more than economists had forecasted, and Italy’s industrial orders unexpectedly fell. Elsewhere, euro-zone consumer confidence unexpectedly declined for January.

In the Americas, Canada’s Leading Index and wholesale sales both exceeded expectations, while Brazil’s central bank raised its benchmark interest rate by 50 basis points to 11.25%, matching economists’ expectations.

Tomorrow’s US economic calendar will be void of any major releases. However, the international docket will offer some reports worth a mention, including Germany’s Ifo Business Climate Index, retail sales in the UK and Canada, while Australia reports import/export prices and Japan will release its All Industry Index.