Evening Market Update

Mixed on Bullish Job News and Cisco Disappointment

Stocks were mixed in trading today, weighed down by disappointing guidance from Dow member Cisco Systems Inc and continued commodity inflation discussion by companies issuing earnings results. Even a release that showed US initial jobless claims fell to the lowest level since July 2008 and news of a transition in day-to-day leadership in Egypt were unable to provide a significant lift to sentiment. The technology sector led to the downside on Cisco’s results, with Akamai Technology’s lowered guidance adding to the negative side of the ledger, although Alcatel-Lucent and IPG Photonics provided positive results. Guidance from PepsiCo Inc and Activision Blizzard Inc showed pressure, while Whole Foods Inc, Goodyear Tire & Rubber and Sprint Nextel Corp issued bullish results. Treasuries fell and the US dollar rose.

The Dow Jones Industrial Average lost 11 points (0.1%) to 12,229, the S&P 500 Index gained 1 point (0.3%) to 1,322, and the Nasdaq Composite added 1 point (0.3%) to 2,790. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. Crude oil rose $0.02 to $86.73 per barrel, while wholesale gasoline lost $0.06 to $2.47 per gallon, and the Bloomberg gold spot price fell $1.58 to $1,362.08 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— rose 0.8% to 78.26.

Dow member Cisco Systems Inc. (CSCO $19) reported fiscal 2Q EPS ex-items of $0.37, two cents above the Reuters consensus estimate, with revenues increasing 6% year-over-year (y/y) to $10.4 billion, above the $10.2 billion that the Street was expecting. However, shares of the networking company fell nearly 15% as the company’s revenue for switches—used for the connection of multiple computers and a sizeable portion of its business—declined and margins contracted by a larger amount than expected. Also, the company issued an outlook for its revenues and margins that disappointed, and it warned of lower public sector spending.

Adding to the negative sentiment in the technology sector, Akamai Technology Inc (AKAM $41) announced 4Q results above its guidance but issued a revenue outlook for 1Q below analysts’ estimates, resulting in its shares dropping 15%. The company, which operates a content delivery network for cloud-computing and online digital media operations, noted that long-term contract renewals signed with eight of its top ten media customers over the past several months with “normal price adjustments” that results in lower prices in exchange for larger volumes in the future, as well as a slower rate of media and entertainment traffic, would result in lower revenues in 1Q.

However, there were several tech stocks posting gains over 20% today, including French phone-equipment maker Alcatel-Lucent (ALU $4) on its December quarter results and future guidance, and fiber laser and amplifier company IPG Photonics Corp (IPGP $47) on a positive pre-announcement of its 4Q results.

Meanwhile, PepsiCo Inc. (PEP $63) announced 4Q EPS ex-items of $1.05, one penny above the Street’s forecast, with revenues growing 37% y/y to $18.2 billion, above the $17.6 billion that analysts had expected, as volumes increased by 9%. However, the company issued full-year 2011 EPS guidance that missed expectations, noting it anticipates “high global commodity cost inflation and difficult macroeconomic conditions in developed markets.” Shares fell.

However, shares of Whole Foods Market Inc. (WFMI $60) rose over 10% after the natural and organic foods supermarket chain posted fiscal 1Q EPS of $0.51, topping the $0.46 that was estimated by analysts. The company’s revenues rose 14% y/y to $3.0 billion, roughly inline with the Street’s projection, and same-store sales—sales at stores open at least a year—increased 9.1% y/y. The company said that consistent strong results, ongoing signs of increasing consumer confidence, and “some positive impact from inflation” allows for the possibility that year-to-date same store results of 9% “could be sustainable,” prompting the company to raise future guidance.

Implications of inflation on corporate results were also evident in commentary from Goodyear Tire & Rubber Co (GT $14) after reporting its 4Q results, where it posted EPS ex-items of $0.07, above the $0.07 loss estimate. GT said that raw material costs would increase 25-30% y/y in 1Q and noted “some wage pressure” in emerging markets. Goodyear said that price increases and strong demand for higher priced products in North America resulted in sales gaining 17% in the region, despite flat volumes. Shares gained nearly 15%.

Elsewhere, Sprint Nextel Corp. (S $5) gained ground after it reported “the best” quarterly total company wireless subscriber additions and net postpaid—customers under contract—additions in roughly five years, as well as posting revenues of $8.3 billion, a gain of 6% y/y, above the $8.2 billion estimate. The subscriber and revenue figures more than offset the company’s 4Q loss of $0.31 per share, which was wider than the $0.29 per share shortfall expected.

Activision Blizzard Inc. (ATVI $10) reported 4Q EPS ex-items of $0.53, two cents above the Street’s forecast, with revenues increasing 2% y/y to $2.6 billion, compared to the $2.4 billion estimate. However, shares of the video game maker were under sharp pressure as the company issued guidance that missed expectations, offsetting announcements that it will add $1.5 billion to its share repurchase program and increase its dividend by 10%. Also, ATVI announced that it will disband its Guitar Hero business due to continued declines in the music genre.

Jobless claims fall below 400k, wholesale inventories rise more than expected

Weekly initial jobless claims dropped by 36,000 to 383,000—the lowest since July 2008—versus last week's figure which was upwardly revised by 4,000 to 419,000, and well below the 410,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, fell by 16,000 to 415,500, and continuing claims dropped by 47,000 to 3,888,000, below the forecast of economists, which called for continuing claims to come in at 3,900,000.

Treasuries were lower after losing ground following the employment data, with the yield on the two-year note adding 4 bps to 0.83%, the 10-year note yield gaining 5 bps to 3.70%, and the 30-year bond increasing 7 bps to 4.78%.

In other economic news, wholesale inventories for December rose more than expected, increasing 1.0% month-over-month (m/m) compared to the 0.7% increase that economists had expected. Sales gained 0.4%, with petroleum leading the way, rising 3.0%, while computers fell 1.3%. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—rose slightly to 1.16 from 1.15.

Tomorrow’s US economic calendar will yield December’s trade balance, with the deficit expected to grow to $40.5 billion from $38.3 billion in November, and the preliminary University of Michigan Consumer Sentiment Index for February, expected to increase to 75.0 from 74.2.

Bank of England stays put

The Bank of England concluded its monetary policy meeting and kept its benchmark interest rate unchanged at 0.5%, and made no changes to its asset purchase program, as expected. European economic news was mixed, as French industrial production unexpectedly rose, while its manufacturing activity declined by a smaller rate than forecasted, and Italian industrial production topped expectations, while UK manufacturing production unexpectedly declined, Spanish home sales fell for a fourth month and the inflation rate in Portugal rose to the highest level since May 2006 according to Bloomberg.

In a light day in Asian economic news, Japan’s machine orders rose at a much smaller rate m/m in December than economists estimated and Australia’s employment change increased more than expected.

International releases scheduled for tomorrow include Germany’s CPI and wholesale price index, French non-farm payrolls and wages, UK PPI, and industrial production in India and Mexico. China is scheduled to announce January lending and money supply in the next few days, while the Bank of Korea’s central bank meeting tomorrow is expected to result in a 25 basis point rate hike to 3.0%.