Evening Market Update

Stocks Inch Higher on Mixed Earnings Reports

The US equity markets closed modestly higher, as the Dow and S&P indexes managed to cross over, but again failed to close above the 12,000 and 1,300 levels, respectively. Multiple corporate earnings reports helped move the markets, including an impressive beat by Dow member Caterpillar, which also issued strong guidance for 2011. However, shares of fellow Dow components Procter & Gamble and AT&T did not fare as well, as both companies managed to beat analysts’ EPS expectations, but missed revenue targets and disclosed disappointing components of their respective reports. In other equity news, Starbucks exceeded top- and bottom-line expectations, but issued weak 2011 guidance, while shares of Netflix surged on solid 4Q results. Domestic economic news did little to lift sentiment, as headline durable goods orders unexpectedly fell in December and US jobless claims saw a larger-than-forecasted increase over the past week. Treasuries were higher on the day, as the only other release on the economic front was a solid rise in pending home sales.

The Dow Jones Industrial Average gained 4 points (0.04%) to 11,990, the S&P 500 Index was 3 points (0.2%) higher at 1,299, and the Nasdaq Composite advanced 16 points (0.6%) to 2,755. In moderate volume, 989 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. Crude oil fell $1.76 to $85.57 per barrel, wholesale gasoline declined $0.04 to $2.39 per gallon, while the Bloomberg gold spot price plunged $33.70 to $1,344.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 77.72.

Dow member Caterpillar Inc. (CAT $97 ¹) achieved 4Q EPS of $1.47, well above the $1.28 consensus estimate of analysts surveyed by Reuters, with revenues jumping 62% year-over-year (y/y) to $12.8 billion, versus the $11.7 billion that the Street had forecasted. The heavy machinery company said as the global economy continued to improve, demand for its products “increased substantially.” CAT issued better-than-expected full-year 2011 guidance, as continued growth in developing countries, improving economies in North America and Europe, strong demand for mining products and the need for its dealers to add to inventories and replenish rental fleets should all contribute to higher sales. However, the company did caution that the increases are likely to be mitigated somewhat by small declines in later cycle industries, such as turbines and marine engines. Shares were higher.

Starbucks Corp. (SBUX $33) reported fiscal 1Q EPS of $0.45, above the $0.39 that the Street was looking for, with revenues rising 8% y/y to $3.0 billion, exceeding the $2.9 billion that analysts had projected. The coffee chain said its same-store sales—sales at stores open at least a year—rose 7% y/y, driven by increases in customer traffic and average ticket amount. However, the company issued disappointing full-year EPS guidance, saying higher coffee costs are expected to have an unfavorable $0.20 per-share impact. Shares traded lower.

Dow member Procter & Gamble Co. (PG $64) posted fiscal 2Q EPS ex-items of $1.13, topping the $1.10 analyst estimate, with revenues increasing 2% y/y to $21.3 billion, compared to the $21.6 billion that the Street was anticipating. The consumer products conglomerate said organic sales—excluding divestitures, acquisitions, and foreign exchange—increased 3% y/y and volumes grew by 6%, as it saw growth in all major geographic regions. However, shares moved lower as the company’s margins narrowed by 210 basis points (bps) due to higher commodity costs and an unfavorable product mix as the company noted increased consumer demand for cheaper products. PG maintained its full-year EPS outlook.

AT&T Inc. (T $28) announced 4Q EPS ex-items of $0.55, one penny above the consensus estimate, as revenues gained 2.1% y/y to $31.4 billion, just below the $31.5 billion that was forecasted by analysts. The Dow component said it achieved its “best-ever” wireless customer additions, with more than 2.8 million subscribers added, while its average monthly revenues per postpaid—customers under contract—subscriber rising 2.2% y/y. Shares traded lower after the company’s addition of 400,000 retail postpaid wireless subscribers came in below the Street’s forecast of above 500,000, and as traders contemplate the impact of the loss of exclusivity of Apple Inc’s (AAPL $343) iPhone.

Netflix Inc. (NFLX $211) was sharply higher after the movie and TV content subscription provider reported 4Q EPS of $0.87, easily exceeding the $0.71 that analysts were anticipating, and net subscriber additions of about 3.1 million. The earnings and subscriber growth more that offset a slight miss in its 4Q revenues, which although jumped 34% y/y to $596 million, it came up short of the $598 million that was expected.

Durable goods orders mixed, jobless claims jump, pending home sales on the horizon

Durable goods orders unexpectedly fell, dropping 2.5% month-over-month (m/m) in December, compared to the 1.5% increase that was expected by economists surveyed by Bloomberg, and November’s figure was left unrevised at a 1.3% drop. However, ex-transportation, orders rose, gaining 0.5%, compared to the expectation of a 0.9% rise, and November was unadjusted at a 2.4% increase. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, grew by 1.4% in December, compared to the 1.3% increase that was anticipated, after rising by an unrevised 2.6% in November. The headline drop in durable goods came as nondefense aircraft and parts tumbled 99.5% m/m, illustrating how volatile this figure can be.

Moreover, weekly initial jobless claims jumped by 51,000 to 454,000, versus last week's figure which was downwardly revised by 1,000 to 403,000, and well above the 405,000 level that economists expected. The four-week moving average, considered a smoother look at the trend in claims, rose by 15,750 to 428,750, and continuing claims increased by 94,000 to 3,991,000, exceeding the forecast of economists, which called for continuing claims to come in at 3,873,000. The jump in jobless claims came amid a backlog of claims that could not be filed in previous weeks due to severe winter weather in various parts of the country, according to a US Labor Department official that was quoted by Bloomberg.

Despite the disappointing economic data today, we believe the economy continues to improve, although the dramatic recession we are rebounding from left the economy still far from a normalized state and not everything will improve in a straight line. As the Fed noted in the statement from their meeting yesterday, despite continued expansion, the recovery has not brought about a significant improvement in labor market conditions.

In more positive economic news, pending home sales rose more than expected, increasing 2.0% m/m in December, compared to the increase of 1.0% that economists were anticipating. However, compared to last year, the gauge of the pipeline of existing home sales is down 3.6%, after falling a downwardly revised 2.8% in November. The third-straight monthly gain in sales came courtesy of an 11.5% m/m increase in the South and an 8.0% rise in the Midwest, offsetting a 13.2% drop in the West. Elsewhere, sales in the Northeast increased 1.8%.

Treasuries were higher, after paring early losses following the aforementioned manufacturing and employment data. The yield on the two-year note declined 4 bps to 0.59%, the 10-year note was 2 bps lower at 3.39%, and the 30-year bond yield fell 2 bps to 4.57%.

S&P cuts Japan’s credit rating

The biggest economic news of the day in the Asia/Pacific region came after the trading session ended, as Standard & Poor’s cut Japan’s sovereign credit rating for the first time in nine years, due to the nation lacking a “coherent strategy” to address its debt situation, per Bloomberg. Japan’s rating was lowered to AA- from AA, but it kept its outlook for the rating as stable. Japan’s Economy and Fiscal Policy Minister said the downgrade was “regrettable,” and added that the government’s “commitment to fiscal reform hasn’t been fully understood.” Meanwhile, the Chinese government announced new measures to cool down real estate prices, including the requirement for city governments to set price control targets, per Reuters. Additionally, Australia’s leading index came in unchanged and the government announced a temporary new tax to help cover the costs of the recent flooding in the region.

Economic news out of Europe was highlighted by a larger-than-expected m/m drop in consumer prices in Germany in January. Additionally, a gauge of the housing sector in the UK declined, euro-zone consumer confidence was revised lower, and French consumer confidence deteriorated.

Back in the America’s, Brazil’s unemployment rate fell to 5.3% in December, down from 5.7% in November, but slightly higher than the 5.1% rate forecasted by economists.

First estimate of 4Q gross domestic product due up

Tomorrow brings the first reading of 4Q gross domestic product (GDP), expected to grow at a 3.5% quarter-over-quarter (q/q) annualized rate, accelerating from the 2.6% gain in the third quarter. The largest component of GDP, personal consumption, is expected to grow 4.0% in 4Q, after advancing 2.4% in 3Q. Inflation is expected to have moderated further, with the GDP Price Index increasing 1.6%, and the core PCE Index, which is the Fed’s preferred measure of inflation and excludes food and energy, rising 0.4%.

The other release on the US economic calendar is the final University of Michigan Consumer Sentiment Index reading for January, expected to be revised higher to 73.3 from the initial reading of 72.7, while still lower than December’s 74.5 reading.

Major international releases will focus on Japan, with household spending, CPI and retail trade set to be released.