Evening Market Update

Bernanke Speech Slows Bulls But Dow Win Streak Rolls On

Stocks finished the day mixed and near the flatline, but the Dow’s late-day rally managed to keep an eight-day streak of gains intact. The Street paid close attention to the House testimony of Federal Reserve Chairman Ben Bernanke, where he reiterated that the economy has strengthened, but that unemployment remains high. However, inflation concerns were the key focal point of the speech and the proceeding Q&A session, in which Bernanke pointed out that although commodity prices have increased, overall inflation is still quite low, and the Fed will be able to reverse its stimulus efforts when needed to ensure price stability. The testimony overshadowed impressive earnings reports from Dow members Walt Disney and Coca-Cola, as well as news of a new $7 billion share repurchase program and increased dividend from fellow Dow component 3M. On the M&A front, NYSE Euronext and Deutsche Boerse AG confirmed that the two exchanges are in advanced merger talks, while the London Stock Exchange Group agreed to acquire the TMX Group in a deal valued at $3.2 billion. Treasuries finished higher following a successful 10-year note auction.

The Dow Jones Industrial Average was 7 points (0.1%) higher at 12,240, the S&P 500 Index fell 4 points (0.3%) to 1,321, and the Nasdaq Composite declined 8 points (0.3%) to 2,789. In moderately light volume, 959 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil rose $0.01 to $86.95 per barrel, wholesale gasoline gained $0.04 to $2.53 per gallon, and the Bloomberg gold spot price fell $0.18 to $1,363.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— fell 0.5% to 77.60.

Dow member  Walt Disney Co. (DIS $43) reported fiscal 1Q EPS of $0.68, above the $0.56 consensus estimate of analysts surveyed by Reuters, with revenues increasing 10% year-over-year (y/y) to $10.7 billion, exceeding the $10.5 billion that the Street had expected. The company said its earnings were driven by growth at media networks, studio entertainment, parks and resorts, and consumer products. Shares were sharply higher.

Meanwhile, fellow Dow component  Coca-Cola Co. (KO $63) posted 4Q earnings ex-items of $0.72 per share, slightly above the $0.71 that was expected by analysts, as revenues grew 40% y/y to $10.5 billion, topping the $10.0 billion that was anticipated. The beverage company said it saw “strong worldwide volume growth” of 6% y/y, and it had gains in total nonalcoholic ready-to-drink items, driven by volume and market share gains in both sparkling—which includes Coke and Diet Coke—and still beverages, comprised of its Dasani water and Powerade sports drinks. Shares traded higher.

Elsewhere, 3M Co. (MMM $91) announced that its Board of Directors authorized a 5% increase in its quarterly dividend to $0.55 per share, and the repurchase of $7 billion of the company’s outstanding common stock, replacing the company’s existing repurchase program. The Dow member said today’s announcement reflects the strength of its business model and its confidence in the future. Shares finished to the upside.

In M&A news, shares of NYSE Euronext (NYX $35) and Deutsche Boerse AG (DBOEY $9) were sharply higher after the two exchanges confirmed that they are engaged in advanced discussions regarding a potential merger, but cautioned that no agreement has been reached and there cannot be any assurance that an agreement will be reached. The deal would be an all-stock transaction and the combined company would have dual headquarters in New York and Frankfurt.

In related news from the global exchanges, the London Stock Exchange Group (LDNXF $15) announced that it has reached a deal to acquire the TMX Group (TMXGF $43)—the parent of the Toronto Stock Exchange—in an all stock transaction valued at about $3.2 billion. The combination creates one of the largest exchanges based on the number of listings, especially for natural resources, mining, and commodities companies. The LSE will own 55% of the combined company, which has yet to be given a name, and will have over 6,700 listed companies. Shares of both companies finished higher.

Fed Chief reiterates policy stance to the House, while mortgage applications decline

With the economic calendar void of any major releases, Federal Reserve Chairman Ben Bernanke’s testimony at a hearing of the House Budget Committee garnered the lion’s share of attention on the Street. Bernanke reiterated that the economic recovery appears to have strengthened from the middle of 2009, but the unemployment rate remains high, and “until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” Also, he echoed a recent speech in saying that the Fed is seeing increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. On inflation, the Fed Chief again recognized the increases seen in some “highly visible prices,” especially gasoline, while many industrial and agricultural commodities have risen lately. “Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable,” Bernanke added. As a result, the Fed Chairman reiterated that it will review its $600 billion asset purchase program, commonly known as quantitative easing, or QE2, in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. Finally, on fiscal policy Bernanke continued to say that policymakers face significant challenges, and even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs.

Elsewhere, the lone release on today’s US economic calendar was the  MBA Mortgage Application Index, which fell 5.5% last week, after the index that can be quite volatile on a week-to-week basis, increased 11.3% in the previous week. The decrease came as a 7.7% drop in the Refinance Index was accompanied by a 1.4% decline in the Purchase Index. The decrease in the overall index also came as the average 30-year mortgage rate jumped 32 basis points to 5.13%, well above the record low of 4.21% on October 8.

Very quiet on the international economic front

In European economic news, Germany reported that exports grew at a smaller pace than economists had expected in December, causing its trade surplus to contract by a larger amount than was anticipated. Meanwhile, the UK trade deficit widened in December.

In the Asian/Pacific region, Japan’s consumer confidence climbed to 41.1 in January from a December reading of 40.2, while Taiwan issued a report that showed inflation in the nation came in cooler than economists expected. Also, Australia’s consumer confidence improved in February.

The US economic calendar will be on the light side again tomorrow, with the headline report being wholesale inventories, expected to increase 0.7% in December after falling 0.2% in November. Additionally, initial jobless claims will be reported, with economists expecting a decline from 415,000 to 410,000.

The international docket will be slightly more active, with economic releases including French, Italian and UK industrial and manufacturing production, Japanese machine orders, and the Australian unemployment rate for January. Moreover, the Bank of England will conclude its two-day monetary policy meeting, with no changes expected to the target interest rate or asset purchase program.