Morning Market Update

Markets Cool as Street Mulls Plethora of Profit Reports

The US equity markets are under pressure in early action as traders are digesting a full slate of corporate earnings, headlined by a plethora of profit reports from members of the Dow Jones Industrials. Results were mixed, with Verizon Communications and American Express Co missing analysts’ earnings expectations, while Johnson & Johnson posted softer-than-forecasted revenues and issued disappointing guidance. However, Travelers Companies Inc, DuPont, and 3M Co all exceeded the Street’s projections. Treasuries are higher amid the earnings results, which also included a favorable report from Texas Instruments, and after the S&P/Case-Shiller Home Price Index showed home prices declined again. Meanwhile, data on consumer confidence and regional manufacturing are due out later this morning, while the Federal Reserve is set to begin its first monetary policy meeting today. Overseas, Asia finished mostly higher after the steep gains in the US yesterday and as the Bank of Japan increased its growth forecast for the year. Elsewhere, European markets gave up an early advance and are mixed after the UK reported an unexpected contraction in its 4Q GDP.

As of 8:47 a.m. ET, the March S&P 500 Index Globex future is 5 points below fair value, the Nasdaq 100 Index is 14 points below fair value, while the DJIA is 38 points below fair value. Crude oil is $1.16 lower at $86.71 per barrel, and the Bloomberg gold spot price is down $5.13 at $1,329.23 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 78.30.

Dow member Verizon Communications Inc. (VZ $35) posted 4Q EPS ex-items of $0.54, one penny below the consensus estimate of analysts surveyed by Reuters, with revenues falling 2.6% year-over-year (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.

Texas Instruments Inc. (TXN $35) reported 4Q EPS ex-items of $0.64, exceeding the $0.63 that the Street had forecasted, with revenues increasing 17% y/y to $3.5 billion, roughly inline with expectations. The company also issued 1Q guidance that matched expectations.

Dow member American Express Co. (AXP $46) 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.

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.

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.

Dow component 3M Co. (MMM $90) 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.

Dow member Johnson & Johnson (JNJ $62) posted 4Q adjusted profits of $1.03 per share, matching expectations, as revenues fell 5.5% y/y to $15.6 billion, compared to the $16.0 billion that was forecasted. Moreover, JNJ issued full-year 2011 guidance that missed the Street’s projections.

Home prices decline, consumer confidence report after the opening bell

Just before the opening bell, the S&P/Case-Shiller Home Price Index was released showing 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%. Treasuries remain higher following the home price data. The yield on the two-year note is 2 bps lower at 0.61%, while the yields on the 10-year note and the 30-year bond are declining 5 bps to 3.35% and 4.51%, respectively.

Later this morning, the economic calendar will yield the releases of the Consumer Confidence Index, forecasted to improve from 52.5 in December to 54.0 in January, and the Richmond Fed Manufacturing Index, which is anticipated to decrease from 25 in December to 22 for January.

Meanwhile, the Federal Open Market Committee (FOMC) is set to begin its two-monetary policy meeting today, and 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 contracts unexpectedly, European markets give up early gains

Stocks in Europe are mostly lower in afternoon action, after erasing early gains following a disappointing 4Q GDP report out of the UK, which dampened sentiment across the pond. UK 4Q GDP 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. Meanwhile, Spanish banks are under pressure to weigh on the markets in Europe amid skepticism toward the nation’s efforts to strengthen its financial sector. However, losses are being limited by some positive announcements out of the corporate sector, with shares of Ericsson AB (ERIC $12) rising solidly after it posted favorable 4Q sales, while Siemens AG (SI $125) is gaining ground after it reported better-than-expected 1Q profits. The aforementioned upbeat sales results from Ericsson are being partially offset by a steep decline in shares of STMicroelectronics NV (STM $12) after losses at its wireless joint venture with Ericsson widened.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is flat, Germany’s DAX Index is gaining 0.3%, while Spain’s IBEX 35 Index is dropping 1.3%.

Asia mostly higher after yesterday’s solid gains in the US

Most major equity markets in Asia finished in positive territory after the solid upward momentum from yesterday’s trading session in the US helped buoy sentiment about upcoming earnings season in the region. Japan’s Nikkei 225 Index rose 1.2%, aided by the aforementioned optimism, while traders digested the Bank of Japan’s monetary policy announcement. The BoJ 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. Meanwhile, Chinese stocks posted losses on the day with the Hong Kong Hang Seng Index dipping 0.1%, after the nation’s trade deficit widened more than anticipated, and the Shanghai Composite Index fell 0.7%. Elsewhere, Australian stocks gained ground, with the S&P/ASX 200 Index rising 0.5%, following a report that showed consumer prices rose at a smaller rate than economists had expected. In other interest rate moves 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. India’s BSE Sensex 30 Index declined 1.0%. Rounding out the day, South Korea’s Kospi Index rose 0.2%.