Evening Market Update

Sell-Off Continues as Middle East Turmoil Looms

Stocks followed up yesterday’s decline with another day in the red, although a modest afternoon rally helped the major indexes to finish off their lows. Focus remained on the growing geopolitical unrest spreading across the Middle East, including the effect it is having on crude oil prices, which surged again today and briefly crossed the $100 per barrel mark for the first time since 2008. The global concerns overshadowed some positive US housing data in the form of an unexpected increase in existing home sales and a solid rise in mortgage applications. On the equity front, shares of Hewlett-Packard fell sharply after the Dow member reported disappointing revenues and weak guidance, while Lowe’s Companies and DirecTV both managed to beat top- and bottom-line expectations. In M&A news, Duncan Energy Partners received a $2.4 billion buyout offer from Enterprise Products Partners. Treasuries finished the day mixed.

The Dow Jones Industrial Average tumbled 107 points (0.9%) to 12,106, the S&P 500 Index fell 8 points (0.6%) to 1,307, and the Nasdaq Composite was 33 points (1.2%) lower at 2,723. In moderately heavy volume, 1.3 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. Crude oil rose $2.97 to $98.39 per barrel, wholesale gasoline gained $0.01 to $2.72 per gallon, while the Bloomberg gold spot price increased $11.33 to $1,410.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 77.37.

Dow member Hewlett-Packard Co. (HPQ $44) reported fiscal 1Q EPS ex-items of $1.36, above the $1.29 consensus estimate of analysts surveyed by Reuters, with revenues growing 4% year-over-year (y/y) to $32.3 billion, below the $33.0 billion that the Street had forecasted. The company said its revenue in its personal systems group, which includes its PC business, declined 1% y/y, as a 12% drop in sales to its consumer clients offset an 11% increase in revenues out of its commercial clients unit. HPQ issued 2Q guidance that missed expectations and it lowered its full-year revenue outlook, while increasing its 2011 EPS projection. Shares WEre sharply lower.

Home improvement retailer Lowe’s Companies Inc. (LOW $26) posted 4Q EPS of $0.21, above the $0.18 expectation of analysts, with revenues increasing 3.1% y/y to $10.5 billion, compared to the $10.4 billion that was anticipated on the Street. The company said same-store sales—sales at stores open at least a year—rose 1.1% y/y. LOW added that while uncertainty in the market remains, the economic recovery is continuing as it issued full-year EPS guidance that exceeded expectations. LOW traded lower after giving up early gains.

DirecTV (DTV $45) announced 4Q EPS of $0.74, well above the $0.62 expectation, as revenues rose 11% y/y to $6.6 billion, exceeding the $6.5 billion estimate. The satellite TV provider said it posted the “best quarter in a decade,” achieving a 667,000 consolidated increase in subscribers, and it exits 2010 with “good momentum,” which it looks to build on in 2011. DTV finished higher.

In M&A news, shares of Duncan Energy Partners (DEP $40) surgiedover 20% after the company announced that it has received a buyout offer from Enterprise Products Partners (EPD $43) for $42.00 per share in stock, valued at about $2.4 billion. EPD traded lower.
Existing home sales unexpectedly increase and mortgage applications rise
 Existing home sales unexpectedly rose, gaining 2.7% month-over-month (m/m) in January to an annual rate of 5.36 million units, compared to the 1.1% decline to 5.22 million units that was forecasted by economists surveyed by Bloomberg. December’s jump was revised slightly lower to a rate of 5.22 million units from 5.28 million. The median existing-home price declined 3.7% from a year ago to $158,800—the lowest since April 2002, per CNBC—and was 5.9% lower m/m. The National Association of Realtors (NAR) said the uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence, and the “extremely favorable housing affordability conditions are a big factor.” The supply of homes fell by 5.1% m/m to 3.38 million units, equating to 7.6 months of supply at the current sales pace, down from 8.1 months in December. Sales of existing homes reflect closings from contracts entered one to two months earlier. Moreover, single-family homes sales, which jumped 11.8% in December, increased 2.4%, while condominium and co-op sales rose 4.7%. Regionally, sales in the Northeast fell 4.6%, with sales in the West leading the way by achieving 7.9% growth.

Today’s data evoked some relative optimism regarding the housing sector, after three-consecutive months of increases in sales activity, and the NAR noting that January’s sales pace was higher y/y for the first time in seven months. However, today’s report showed distressed home sales continued to gather nearly 40% of the market share as “unnecessarily tight credit” conditions fostered “abnormally high levels of all-cash purchases, along with rising investor activity,” suggesting pricing may continue to be pressured.

In other housing news, the MBA Mortgage Application Index increasing by 13.2% last week, after the index that can be quite volatile on a week-to-week basis, decreased 9.5% in the previous week. The gain came as a 17.8% jump in the Refinance Index was accompanied by a 5.1% increase in the Purchase Index. The growth in the overall index came as the average 30-year mortgage rate fell 12 basis points to 5.00%, above the record low of 4.21% on October 8.

Treasuries were mixed, as the yield on the 2-year note was 1 bp higher at 0.70%, the yield on the 10-year note rose 2 bps to 3.48%, while the 30-year bond yield declined 3 bps to 4.58%.

Middle East uneasiness weighs on global markets

The economic front across the pond continued to take a back seat to the Middle East crisis, as a report showing euro-zone industrial new orders unexpectedly increased m/m in December and were well above forecasts on a y/y basis is being met with a tempered reaction. Meanwhile, the Bank of England’s minutes from its most recent policy meeting garnered some relative attention, as it revealed another member joined the ranks calling for a rate hike. In other economic news, consumer prices in France declined more than expected m/m in January and were below expectations compared to the same period last year, while Italy’s Consumer Price Index came in below estimates.

In Asia/Pacific, Taiwan’s industrial production decelerated to a level that was below economists’ forecasts, Hong Kong’s 4Q GDP expanded at a larger-than-expected rate, and New Zealand continues to recover and assess the damage from the recent 6.3 magnitude earthquake that hit the region.

Back in the Americas, Mexico’s retail sales grew 2.6% in December, below the 3.1% increase expected by economists, but above the 2.4% rate seen in November.

More housing data to come

New home sales , the compliment to today’s existing home sale report, will be released tomorrow and is forecast to fall 7.4% m/m in January to an annual rate of 305,000 after spiking by 17.5% in December. While new home sales are small portion of housing sales, they are considered a timelier indicator of conditions in the housing market as they are based on signings instead of closings. Additionally, durable goods orders for January will be released, expected to increase 2.8% after falling 2.5% m/m in December, while ex-transportation, orders are forecasted to have grown 0.5% m/m, the same rate as in December. Orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, are expected to fall 1.0% after growing 1.4% the month prior. The other release on the US economic calendar is weekly initial jobless claims, forecasted to fall to 405,000 from 410,000.

International releases include euro-zone consumer confidence, Germany’s GDP, Italy’s retail sales, French jobseekers, Australia’s leading index, Hong Kong’s trade data, and Brazil’s unemployment rate.