Evening Market Update

Phil Fails To See His Shadow, Stocks Fail to Continue Rally

Stocks fell slightly below the flatline in the final hour of trading, as the momentum from yesterday’s solid gains hit a wall today in the form of increased tension in Egypt and inflationary pressures across the globe. The domestic economic docket did what it could to lift sentiment, as the ADP employment report showed a larger-than-expected increase in private sector jobs, while MBA mortgage applications also saw a solid increase. News from the equity front was somewhat mixed, with Electronic Arts, Mattel and Time Warner all beating analysts’ earnings expectations and announcing enhancements to shareholder value. However, on the negative side of the ledger, Whirlpool missed on the bottom-line due to higher materials costs and Broadcom said it expects higher operating expenses in the future, which overshadowed its favorable 4Q earnings. Treasuries finished mostly lower, especially at the short end of the curve.

The Dow Jones Industrial Average was 2 points (0.0%) higher at 12,042, the S&P 500 Index fell 4 points (0.3%) to 1,304, and the Nasdaq Composite lost 1 point (0.0%) to 2,750. In moderate volume, 937 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. Crude oil rose $0.13 to $90.90 per barrel, wholesale gasoline fell $0.02 to $2.50 per gallon, while the Bloomberg gold spot price declined $1.02 to $1,337.08 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 77.09.

Electronic Arts Inc. (ERTS $18) reported fiscal 3Q EPS ex-items of $0.59, three pennies above the consensus estimate of analysts surveyed by Reuters, with revenues rising 4.8% year-over-year (y/y) to $1.4 billion, roughly inline with the Street’s expectations. The video game publisher said its digital revenues jumped 39% y/y and its announcement of a $600 million common stock repurchase program “demonstrates our confidence in EA’s digital strategy.” ERTS revised its full-year EPS outlook to a level that topped analysts’ projections. Shares were sharply higher.

Mattel Inc. (MAT $24) announced 4Q EPS of $0.89, three cents above analysts’ forecasts, as revenues grew 9% y/y to $2.1 billion, mostly inline with what the Street had anticipated. 4Q sales in the US rose 11% y/y and its international revenues increased 6% y/y as it saw growth across its Barbie, Hot Wheels, and American Girl brands and markets. The toy company announced that it will start paying a quarterly dividend, instead of an annual payout, with the declaration of $0.23 per share in 1Q, reflecting an annualized dividend of $0.92 per share, which is an 11% increase compared to last year. MAT traded to the upside.

Time Warner Inc. (TWX $35) achieved 4Q earnings ex-items of $0.67 per share, above the $0.62 expectation, with revenues increasing 8% y/y to $7.8 billion, exceeding the $7.5 billion forecast, aided by growth in its networks and filmed entertainment segments. TWX issued full-year 2011 EPS guidance that topped expectations and announced an 11% increase in its quarterly dividend to $0.235 per share. TWX moved solidly higher.

Whirlpool Corp. (WHR $83) posted 4Q adjusted profits of $2.11 per share, below the $2.26 that was anticipated, but revenues grew 4% y/y to $5.0 billion, above the $4.8 billion that had been forecasted. The appliance maker said its results were favorably impacted by cost reduction and productivity initiatives, higher unit volume, and lower incentive compensation, which were offset by lower product price/mix and higher material costs. WHR issues full-year EPS guidance, including the impact of US energy tax credits it expects to earn as a result of recent tax legislation, that topped the Street’s expectations. Shares finished lower.

Broadcom Corp. (BRCM $44) was down solidly as concerns about the company’s outlook for higher operating expenses overshadowed the chipmaker’s better-than-expected 4Q earnings and the announcement of a 12.5% increase in its quarterly cash dividend and a $300 million accelerated share repurchase plan. BRCM posted 4Q EPS ex-items of $0.75, one penny above the consensus estimate, while revenues jumped 45% y/y to $2.0 billion, slightly above the $1.9 billion expectation.

Private sector payrolls rise and mortgage applications grow

The ADP Employment Change Report showed private sector payrolls rose by 187,000 jobs in January, above the forecast of economists surveyed by Bloomberg, which called for a 140,000 increase, and December’s 297,000 job gain was revised to 247,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 143,000 jobs in January, after posting a disappointing 103,000 in December. Excluding government hiring, January private sector payrolls are expected to increase 140,000, after expanding by a smaller-than-forecasted 113,000 in December.

Treasuries were mostly lower after showing little reaction to the employment data, as the yield on the two-year note increased 6 bps to 0.66%, the yield on the 10-year note was 4 bps higher at 3.48%, while the 30-year bond yield was flat at 4.62%.

In other economic news, the MBA Mortgage Application Index increased by 11.3% last week, after the index that can be quite volatile on a week-to-week basis, declined 12.9% in the previous week. The increase came as an 11.7% gain in the Refinance Index joined a 9.5% increase in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate ticked 1 basis point higher to 4.81%, above the record low of 4.21% on October 8.

Euro-area prices rise, placing more focus on tomorrow’s ECB policy meeting

The economic front across the pond offered little help to sentiment as euro-zone producer prices rose 0.8% month-over-month (m/m) in December, compared to the 0.7% increase that was expected by economists. On a y/y basis, euro-zone producer prices are 5.3% higher, from 4.5% in November, and the 5.2% that was forecasted. Rising inflationary concerns across the globe have come into focus as of late to add some uneasiness regarding the global economic outlook.

In Asia/Pacific, Australia reported that new home sales declined in December, while the country is also bracing for a cyclone that is heading for northeast Australia. Action was lighter than usual in the region, with markets in China, South Korea, and Taiwan all closed ahead of the Lunar New Year holiday, which also shortened today’s trading session in Hong Kong.

Back in the Americas, Brazilian industrial production unexpectedly declined for the second-straight month, with output falling 0.7% m/m in December, after dropping 0.2% in November.

Focus turns to tomorrow’s ISM Non-Manufacturing Report

Tomorrow, the US economic calendar will yield the release of the January ISM Non-Manufacturing Index, forecasted to remain at 57.1 that was reported in December. Business activity in the service sector has signaled expansion every month since December 2009—as depicted by a reading above 50, and the report has a lot to live up to following yesterday’s ISM Manufacturing Index, which rose to the highest rate of expansion in nearly seven years, complimenting similar reports out of Europe to help the global equity markets rally. Underlying components of the data that are likely to garner the most attention are new orders and business activity, which both pierced the 60 mark in December, but the lion’s share of scrutiny may fall on components pertaining to employment and inflation, which are related to the dual mandate of the US Federal Reserve.

Other releases on the US economic calendar tomorrow include initial jobless claims, expected to fall to 420,000 from a previous reading of 454,000, and factory orders, which economists expect to have declined 0.5% in December, after rising 0.7% in November.

The highlight of tomorrow’s international docket will be the European Central Bank’s policy statement and interest rate decision. Economists are expecting the headline rate to remain unchanged at 1.0%, but focus will be on whether the statement mentions concerns about inflation. In the last policy statement, ECB President Jean-Claude Trichet said interest rates will not be increased in the near future, but did express some inflationary concerns. Other releases on the international front include euro-zone retail sales and Australian building approvals.