Evening Market Update

Bulls Fight Back

Mixed US economic and earnings reports, as well as concerns over global economic growth, hampered equities for most of today’s session, but stocks were able to pare those losses with a late-day dash toward to the flatline to finish mostly unchanged. Weakness in commodity prices pressured the resource sector, while a sizable improvement in the Consumer Confidence Index was overshadowed by a decline in the Richmond Fed Manufacturing Index and another drop in home prices. Earnings season rolled on, dominated by a plethora of reports from Dow members, as Travelers Companies, DuPont, and 3M Co all exceeded the Street’s forecasts, but Verizon Communications and American Express missed analysts’ expectations, and Johnson & Johnson posted softer-than-forecasted revenues and issued lackluster guidance. Outside of the Dow, shares of Tellabs suffered following EPS and revenue misses and a disappointing 1Q outlook. Treasuries finished higher following the mixed economic news, while the Federal Reserve began its first monetary policy meeting of 2011 today, which will culminate with its midday statement release tomorrow.

The Dow Jones Industrial Average lost 3 points (0.03%) to 11,977, the S&P 500 Index was flat at 1,291, and the Nasdaq Composite gained 2 points (0.1%) to 2,719. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil fell $1.68 to $86.19 per barrel, wholesale gasoline tumbled $0.07 to $2.37 per gallon, while the Bloomberg gold spot price edge $1.13 lower to $1,333.23 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.1% to 77.93.

Dow member Johnson & Johnson (JNJ $61) posted 4Q adjusted profits of $1.03 per share, matching expectations, as revenues fell 5.5% year-over-year (y/y) to $15.6 billion, compared to the $16.0 billion that was forecasted. The company said sales were “significantly impacted” by recalls of certain over-the-counter medicines and it noted that it is facing a broader slowdown in health-care spending trends, partly due to economic sluggishness, per Dow Jones Newswires. Moreover, JNJ issued full-year 2011 guidance that missed the Street’s projections. JNJ was solidly lower on the disappointing sales and guidance.

Dow member Verizon Communications Inc. (VZ $36) posted 4Q EPS ex-items of $0.54, one penny below the consensus estimate of analysts surveyed by Reuters, with revenues falling 2.6% y/y to $26.4 billion, compared to the $26.5 billion that the Street had forecasted. VZ added 955,000 total net customer additions to its wireless unit, while adding 197,000 and 182,000 internet and TV customers, respectively. Shares were higher.

Dow member American Express Co. (AXP $45) announced 4Q EPS ex-items of $0.94, two cents shy of the consensus estimate of analysts, and revenues, which rose 13% y/y to $7.3 billion, were roughly inline with expectations. The company said revenues grew as a result of higher cardmember spending and higher travel commissions and fees, partially offset by lower interest income due to a smaller loan portfolio and lower yields on the portfolio. AXP also said credit indicators strengthened and the amount needed to set aside for problem loans “declined significantly” y/y. AXP is traded lower.

Travelers Companies Inc. (TRV $56) achieved earnings ex-items of $1.89 per share, topping the $1.66 that analysts had anticipated, with net written premiums increasing 1% y/y to $5.2 billion, compared to the $5.3 billion that was expected. The Dow component said its 4Q EPS were down about 11% y/y, largely attributable to higher favorable reserve adjustments and lower catastrophe losses in the same period a year ago. TRV also reported that its Board of Directors authorized an additional $5 billion to its share repurchase program. TRV was nicely higher.

Dow member DuPont (DD $49) announced that excluding significant items, its 4Q EPS came in at $0.50, above the $0.32 estimate of analysts, with revenues growing 15% y/y to $7.4 billion, exceeding the $7.0 billion that the Street had projected, driven by 12% higher volume and 6% higher local prices. The company said it benefited from particularly strong growth in its electronics & communications unit, as well as its performance chemicals segment, which led broad-based sales growth across all businesses. DD also increased its full-year 2011 guidance. Shares were higher.

Dow component 3M Co. (MMM $89) reported 4Q EPS of $1.28, compared to the $1.24 that analysts had expected, with revenues growing 9.6% y/y to $6.7 billion, versus the $6.6 billion that the Street forecasted. MMM raised its full-year EPS outlook, however, shares came under pressure as the consumer and industrial conglomerate’s margins narrowed.

Outside the Dow, Tellabs Inc. (TLAB $6) were down over 19% after the telecom-equipment company reported 4Q EPS ex-items of $0.02, below the $0.08 that analysts were expecting, as revenues rose 5% y/y to $410 million, compared to the $418 million that the Street was looking for. Also, the company issued 1Q revenue guidance that came up short of expectations.

Home prices decline and manufacturing decelerated, while consumer confidence jumps

The S&P/Case-Shiller Home Price Index showed a drop in home prices of 1.6% y/y in November, matching what economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.5% lower, compared to forecasts, which called for a decline of 0.80%. The release showed that the annual growth rate in seventeen of the twenty cities that make up the index showed deceleration, with home prices falling m/m in nineteen of the twenty regions. Moreover, the report said eight markets—Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland, Seattle and Tampa—hit their lowest levels since home prices peaked in 2006 and 2007, meaning average prices in those markets have fallen even further than the lows set in the spring of 2009. However, the data showed that four markets—Los Angeles, San Diego, San Francisco and Washington DC—showed y/y gains. The report did little to soothe concerns about the health of the overall housing market, with the Chairman of the Index Committee at Standard & Poor’s (S&P), David Blitzer noting that “more analysts will be calling for a double-dip in home prices.”

However, today’s price data lags sales results by a month and we have seen recent sales figures come in stronger than expected, possibly helping temper some of the pessimism toward the housing sector. Last week, existing home sales jumped over 12% m/m in December—exceeding economists’ estimates by three times—and tomorrow’s new home sales release is forecasted to show a 3.5% increase for December after rising 5.5% in November.

Meanwhile, the Conference Board’s Consumer Confidence Index improved more than expected, rising from an upwardly revised 53.3 in December to 60.6 in January, and compared to the increase to 54.0 that was expected. This was the highest level since May and the underlying components of the report showed sentiment toward the present situation, expectations, and the labor differential—the amount of consumers saying jobs are plentiful minus those saying jobs are hard to get—improved.

However, the Richmond Fed Manufacturing Index fell more than expected, dropping from an unrevised 25 in December to 18 in January, compared to the decrease to 22 expected by economists. Expansion in manufacturing activity, as noted by a reading above zero, decelerated as new orders volume, order backlog, and wages all declined—but continued to denote expansion—while the number of employees remained unchanged at a reading of 14 and the average workweek rose from 15 to 20.

Treasuries finished higher following the economic reports. The yield on the two-year note was 4 bps lower at 0.58%, the yield on the 10-year note was down 7 bps to 3.33%, and the 30-year bond yield lost 6 bps to 4.50%.

Elsewhere, the Federal Open Market Committee (FOMC) began its two-monetary policy meeting, which will conclude tomorrow with the release of its midday statement at approximately 12:15 pm ET. 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.

UK growth unexpectedly contracts, anxiety over Spain deepens

Sentiment across the pond took a hit following disappointing economic news out of the UK. 4Q GDP in the nation contracted 0.5% quarter-over-quarter (q/q), versus the 0.5% expansion that economists had expected. Compared to last year, the UK’s output grew 1.7%, below the 2.6% growth that was anticipated. Further exacerbating the negative sentiment, Spain’s Finance Minister Salgado said that its banks will need 20 billion euros ($27 billion) in new capital to meet new reserve requirements, which are part of the nation’s plans to stabilize its banking sector, per the Associated Press. The announcement fostered increased skepticism toward the nation’s efforts to strengthen its financial sector. Even strong demand at a debt auction of bonds issued by the European Union’s (EU) financial stability facility had little impact on the soured attitude surrounding the European nation.

Further east, the Bank of Japan kept its benchmark interest rate unchanged at a range between 0 to 0.1%, as expected, but did raise its economic growth forecast for the year from 2.1% to 3.3%, while increasing its outlook for inflation from a 0.1% increase for the year to a gain of 0.3%. However, the central bank noted that the y/y rate of prices is expected to decline, but the trend will continue to slow. In other central bank action in the region, India increased its benchmark interest rates by 25 basis points, as expected, while keeping its cash reserve rate unchanged, inline with forecasts. Meanwhile, Hong Kong’s trade deficit widened more than anticipated, while a report that showed consumer prices in Australia rose at a smaller rate than what economists had expected.

In addition to the conclusion to the Federal Open Market Committee’s two-day monetary policy meeting and the new home sales report, the only other item on tomorrow’s US economic docket is the MBA Mortgage Applications Index. Internationally, the economic calendar will be very light, with Germany reporting import prices and the Bank of England releasing the minutes from its last policy meeting.