Evening Market Update

Stocks End Week Mixed, With Dow Higher and Techs Lower

Stocks ended mixed on Friday, with the Dow and the industrials component of the S&P 500 gaining ground on a strong earnings report from General Electric Co, while the technology-heavy Nasdaq continued to be weighed down by the negative sentiment provided by Thursday's earnings reports. Sentiment was boosted by an easing of concerns about European banks and a bullish reading of business confidence in Germany - Europe's largest economy. In other equity news, Dow component Bank of America fell on a confusing earnings report, while Dow member Hewlett-Packard rose after announcing changes to its Board of Directors. Elsewhere, Google beat estimates and announced a management change and Intuitive Surgical announced blow-out numbers. Treasuries rose and the US economic calendar was void of major reports.

The Dow Jones Industrial Average advanced 49 points (0.4%) to 11,872, the S&P 500 Index rose 3 points (0.2%) to 1,283, and the Nasdaq Composite lost 15 points (0.6%) to 2,690. In moderate volume, 1.2 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil rose $0.48 to $89.59 per barrel, wholesale gasoline gained $0.04 to $2.46 per gallon, while the Bloomberg gold spot price declined $3.85 to $1,342.43 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-fell 0.8% to 78.15. For the week, including dividends, the DJIA was 0.7% higher, the S&P 500 Index lost 0.8%, and the Nasdaq Composite declined 2.4%.

Dow member General Electric Co. (GE $20 ¹) reported 4Q EPS of $0.36, topping the $0.32 that analysts surveyed by Reuters had expected, with revenues increasing 1% year-over-year (y/y) to $41.4 billion, exceeding the $39.9 billion that the Street had forecasted. The company said its industrial segment posted organic revenue-excluding divestitures, acquisitions, and currency exchange rates-growth of 6% y/y. Meanwhile, orders for infrastructure grew 12% y/y, equipment orders rose 20%, and services posted a gain of 5%. Also, the company said it saw “strong execution” at its GE capital unit, as earnings came in at $1.1 billion, up from $1.0 billion a year ago, as losses and impairments declined q/q and it saw improvement in delinquencies across the businesses. Shares were solidly higher.

Fellow Dow member  Bank of America Corp. (BAC $14 ¹) posted 4Q EPS ex-items of $0.04, compared to the $0.15 that analysts had expected, but it was unclear if the Street's estimate was comparable, due to its results including a goodwill impairment charge, as well as litigation expenses, and a provision for outstanding and future mortgage repurchase claims that some analysts may or may not have factored into their estimates. Revenues came in at $22.4 billion, compared to the $24.9 billion that the Street had expected, down from $25.1 billion that it posted in the same period last year. The company said credit costs declined significantly as the economy continues to improve and its global wealth and investment management unit achieved record asset management fees. BAC fell.

Meanwhile,  Google Inc. (GOOG $628) announced 4Q EPS ex-items of $8.75, above the $8.09 that analysts were anticipating, with revenues growing 26% y/y to $8.44 billion, exceeding the $8.04 billion that analysts were anticipating. Excluding traffic acquisition costs (TAC)-expenses paid to its marketing partners-revenues came in at $6.37 billion, versus the $6.06 billion that the Street was looking for. The world’s largest internet search engine said its Google sites revenues, which accounted for 67% of total revenues, grew 28% y/y, while its network revenues rose 22% y/y, representing 30% of total sales. Meanwhile, the company’s paid clicks-a measure of the frequency of customer clicks on its ads-increased 18% y/y and was up 11% quarter-over-quarter (q/q). Separately, the company announced that starting on April 4, current Chief Executive Officer Eric Schmidt will assume the role of Executive Chairman, with Larry Page taking charge of the company’s day-today operations as CEO. Shares pared early gains and ended lower.

In other corporate shake-up news, Dow member Hewlett Packard Co. (HPQ $47) announced that its Board of Directors appointed five new members, including the former President and CEO of eBay Inc. (EBAY $30), Meg Whitman. In addition, HPQ announced that incumbent Directors Joel Hyatt, John Joyce, Robert Ryan, and Lucille Salhany are not standing for re-election at the company’s annual meeting of stockholders. HPQ rose.

Elsewhere, Intuitive Surgical Inc. (ISRG $334) was sharply higher after the surgical robotics firm reported 4Q EPS $3.02, which easily exceeded the $2.26 estimate of analysts, as revenues rose 21% y/y to $389 million, also above expectations, which called for revenues of $370 million. The company said revenue growth was driven by continued robotic procedure adoption and higher sales of the da Vinci Surgical System.

Economic calendar bears no fruit to finish out the week

Treasuries ended higher while there were no major US economic reports scheduled for release today, with the yield on the two-year note flat at 0.62%, while the yield on the 10-year note is declining 2 bps to 3.42% and the 30-year bond rate is decreasing 3 bps to 4.58%.

This week's economic reports provided a mixed reaction in the markets, with regional manufacturing reports out of New York and Philadelphia showing smaller-than-expected rates of expansion in January, while initial jobless claims fell more than expected and the Index of Leading Economic Indicators posted the sixth-straight monthly increase. Even the housing data for the week diverged with housing starts dropping much more than anticipated and building permits, although surging almost 17% month-over-month (m/m), the figure was attributed to changes in building codes in several states as homebuilders worked to get approvals before the changes took effect. Moreover, existing home sales surged three times what economists had expected, providing a glimmer of optimism toward the lackluster recovery in the housing sector. On the equity front, performance was mixed, with the gain in the Dow driven by strong earnings reports by Dow components IBM Corp (IBM $156) and General Electric Co, while financials reported disappointed relative to high expectations after last week's report by JPMorgan Chase & Co (JPM $45) and technology shares were hit hard by F5 Networks Inc (FFIV $110) lackluster report.

European sentiment rises on German economy and banks

Banks led another day of continued better sentiment in Europe as shares of Royal Bank of Scotland Group Plc. (RBS $14) surged on a report from the Financial Times that the bank, which is majority owned by the UK government, may be nearing the exit of a government program to insure distressed assets sooner than previously forecasted. RBS did not comment on the matter. The sector also found support from a report from Reuters that Spain's government is mulling a partial takeover of the nation’s weakest savings banks, which helped soothe the outlook for the troubled nation that sits at the forefront of the euro-area’s debt crisis. Spain did not comment on the matter.

Meanwhile, European stocks also got a boost from a report out of Germany-Europe's largest economy-which showed the Ifo Business Climate Index rose to 110.3 in January from 109.8 in December, compared to the 109.9 reading that economists were expecting. The gauge of German business morale rose to the highest level since records began for a reunified Germany in 1991, aided by strong exports and household spending, per Bloomberg. Adding to the upbeat sentiment, a reading of business confidence in France also gained ground. However, a report showed UK retail sales declined in December.

While there were no major economic reports in Asia/Pacific, the Americas provided additional positive data, as Canadian retail sales grew much more than expected in November at 1.3% versus the expectation of 0.5% and October's result was upwardly revised to 1.0%. Meanwhile, the unemployment rate in Mexico fell to 4.94% in December, also besting the 5.05% estimate, while the central bank left rates unchanged at 4.5%.

Full week of economic data

The week starts off with more data on the housing market, with Tuesday's S&P/CaseShiller Home Price Index, which lags the sales data by a month, anticipated to show a 1.6% decline year-over-year (y/y) in November, and fall of 0.9% month-over-month (m/m). Meanwhile, Wednesday's release of new home sales is expected to grow 3.5% in December to an annual rate of 300,000 after gaining by 5.5% m/m in November. Thursday's existing home sales report, which reflect closings from contracts entered one to two months earlier, posted a significant upside surprise, rising 12.3% m/m. New home sales are considered a more timely indicator of conditions in the housing market, as they are based on signings instead of closings.
Friday brings the final reading of 3Q gross domestic product (GDP), expected to be revised up to 3.5% from a 2.6% quarter-over-quarter (q/q) annualized rate. Upward revisions to GDP include better trade figures as well as an increase in the largest component of GDP, personal consumption, which is expected to be revised to 4.0% from the initially reported 2.4%. Inflation readings are expected to be revised slightly lower, with the GDP Price Index gain of 1.7% below the original 2.1% rise, and the core PCE Index, which excludes food and energy, forecasted to be revised 0.1% lower to a gain of 0.5%.

However, markets will likely focus on the midday statement release on Wednesday that concludes the two-day Federal Open Market Committee (FOMC) meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or to the $600 billion asset purchase program, commonly known as quantitative easing, or QE2. Fed Chair Bernanke and Vice Chair Yellen have recently indicated that near-term changes to QE2 are unlikely due to the long time expected to return to full employment. However, attention will likely focus on the vote in support of QE2, due to the regularly scheduled turnover of four members, as well as any changes to the economic forecast.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to increase 1.5% in December after falling 1.3% m/m in November, while ex-transportation, orders are forecasted to have grown 0.9% m/m, after gaining 2.4% in November. The week also includes the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, pending home sales, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for January. Additionally, President Obama will be giving the State of the Union Address on Tuesday night.

International releases include euro-zone manufacturing and services PMI reports and consumer confidence, German CPI, French jobseekers and consumer spending, UK GDP, Japanese household spending, CPI and retail trade, Australian CPI and leading index, Brazil's unemployment rate, Canada's CPI, and Mexico’s retail sales. Additionally, the central banks of Japan and India meet, and the minutes from the last Bank of England meeting will be released.