Evening Market Update

Oil Concerns Take a Backseat

After being under heavy pressure this week from higher oil prices, traders put Middle East unrest on the backburner Friday, and amid tepid trading, traders nibbled on some perceived bargains. Even a larger-than-forecasted downward revision to 4Q GDP provided little reaction, although better consumer confidence, to a level not seen since January 2008, was positively received. In equity news, Dow member Boeing Co won a large contract expected to be worth $30 billion. On the earnings front, Gap Inc, Salesforce.com Inc, and OmniVision Technologies beat the Street, while JC Penney Co's guidance was met with skepticism, and AIG's profit was fueled by gains from divested assets. Treasuries were higher.

The Dow Jones Industrial Average rose 62 points (0.5%) to 12,130, the S&P 500 Index gained 14 points (1.1%) to 1,320, and the Nasdaq Composite advanced 43 points (1.6%) to 2,781. In moderately light volume, 954 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil gained $0.60 to $97.88 per barrel, wholesale gasoline rose $0.04 to $2.91 per gallon, while the Bloomberg gold spot price increased $5.05 to $1,407.93 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-gained 0.2% to 77.24. For the week, including dividends, the DJIA fell 2.0%, the S&P 500 Index lost 1.7%, and the Nasdaq Composite declined 1.9%.

Dow member Boeing Co. (BA $73 ¹) rose after the aerospace company announced that it has received a contract from the US Air Force to build the next-generation aerial refueling tanker aircraft that will replace 179 of the service's 400 current tankers. The contract, which BA won over European Aeronautic Defence & Space Co. (EADSF $28), is expected to be worth more than $30 billion. Shares of EADSF were lower in European trading.

J.C. Penney Co. Inc. (JCP $34) reported 4Q EPS of $1.09, above the $1.08 consensus estimate of analysts surveyed by Reuters, with revenues rising 2.8% year-over-year (y/y) to $5.7 billion, inline with the Street's forecast. The department store said 4Q same-store sales-sales at stores open at least a year-grew 4.5% y/y. JCP issued better-than-expected full-year EPS guidance and a same-store sales growth outlook of low-to-mid single digits, but shares were under pressure as some analysts noted that the sales targets may be tough to achieve. Additionally, the company announced a $900 million share repurchase program.

Gap Inc. (GPS $23) posted 4Q EPS of $0.60, above the $0.57 that analysts anticipated, with revenues increasing 2.8% y/y to $4.4 billion, above the $4.3 billion that the Street projected, while its same-store sales were flat y/y. However, the retailer issued full-year 2011 EPS guidance that missed expectations, noting pressure from sourcing cost inflation. Separately, GPS announced an additional $2 billion to its share repurchase program and intentions to increase its annual dividend from $0.40 per share to $0.45 per share. Shares rose.

American International Group Inc. (AIG $39) reported 4Q net income of $11.2 billion, or $16.60 per share, which included $17.6 billion in gains from sales of its divested businesses, and an after-tax operating loss of $2.2 billion, but it was unclear if analysts EPS estimates were comparable. The insurer said it completed several key restructuring milestones in the quarter and in 2011 as it emerges from its restructuring, it will focus on growing its already strong businesses domestically and around the world. Shares fell.

Salesforce.com Inc. (CRM $139) was higher after the enterprise cloud computing software company achieved 4Q EPS of $0.31, above the $0.26 that analysts expected, with revenues rising 29% to $457 million, exceeding the $453 million that was anticipated. The company also increased its full-year 2012 revenue outlook.

OmniVision Technologies Inc. (OVTI $31) shares rose over 30% after the company reported fiscal 3Q earnings ex-items of $0.84 per share, well above the $0.58 that was forecasted on the Street, with revenues rising 11.0% y/y to $265.7 million, exceeding the $242 million expectation. Also, the maker of chips used in digital cameras, video games and smartphones issued 4Q EPS guidance that topped expectations.

4Q GDP revised lower, February consumer sentiment revised to more than a 3-year high

The second look at 4Q Gross Domestic Product, the broadest measure of economic output, showed a smaller-than-expected rate of expansion, as it rose at a 2.8% quarter-over-quarter (q/q) annualized rate of growth, compared to the 3.2% increase initially reported, and the 3.3% growth forecasted by a survey of economists by Bloomberg. Also, personal consumption rose 4.1%, below the 4.2% estimate, and lower than the 4.4% increase that was originally reported. The GDP Price Index rose 0.4%, above the 0.3% gain anticipated, and the core core PCE Index, which excludes food and energy, increased 0.5%, above expectations of a 0.4% increase. The downward revision to growth comes due to more complete data, with consumers contributing 0.1% less than the initial estimate, and state and local government subtracting 0.2% more, and while both imports and exports were downwardly revised, the net trade figure was relatively unchanged from the first estimate.

The rate of growth in 4Q accelerated to 2.8% from 2.6% in 3Q, due almost entirely to the increased growth in consumer spending to a 4.1% rate after rising 2.4% in 3Q. Meanwhile, the sharpest decline in inventories since 1988, per Bloomberg, subtracted 3.7% from growth after adding 1.6% in 3Q, due to the combination of strong demand and tight inventory controls. Real final sales, GDP less the change in inventories, grew 6.7% in 4Q. Areas that also offset the gain in consumer spending were a slowdown in business spending on equipment and software, lack of contribution from the federal government, and 2.4% decline in state and local government spending.

Meanwhile, the final University of Michigan's Consumer Sentiment Index  improved more than originally reported, revised higher from a 75.1 initial reading to 77.5 for February-the highest level since January 2008-compared to the increase to 75.5 that economists had expected. The improvement in the index came as the economic outlook component was revised solidly higher, while the current economic conditions component was adjusted slightly upward. On inflation, consumers left their outlooks unchanged for the one-year and five-year time frames at 3.4% and 2.9%, respectively.

Treasuries pared early losses after the GDP report and were higher despite the favorable read on consumer sentiment. The yield on the two-year note was down 2 bps at 0.72%, the yield on the 10-year note lost 3 bps to 3.41%, and the 30-year bond yield fell 4 bps to 4.50%.

Internationally, easing Middle East concerns took focus away from economic data

Globally, the trading day took its cues from a decline in the oil market after Saudi Arabia continued to give its reassurance that it would meet any supply shortage. In economic news from the Asia/Pacific region, Japan’s consumer price index was unexpectedly flat y/y in January, with economists expecting a slight decline and Hong Kong’s trade deficit narrowed more than expected, led by much higher than expected exports, which gained 27.6%.

Meanwhile, in Europe, German consumer prices rose 0.5% month-over-month (m/m) in February to match economists expectations, while the UK downwardly revised its 4Q GDP reading from -0.5% q/q to -0.6%. Elsewhere, in the Americas, Mexico’s unemployment rate rose less than expected, to 5.4%.


Crude week for bulls as Middle East concerns send oil sharply higher

This week, the enthusiasm regarding global economic prosperity was put on the back burner as anti-government sentiment escalated to the oil-producing nation of Libya-causing oil production to be cut in the region-and a simultaneous spike in crude oil prices, which at one point eclipsed the $100 per barrel mark, fueled economic uneasiness and the global markets posted noticeable losses. Even with a larger-than-forecasted drop in weekly initial jobless claims, growing consumer confidence, and mostly better-than-expected earnings reports from the retail sector, the bulls did not stand a chance amid the escalating uneasiness toward the Middle East. Housing data did little to help the markets’ fortunes as an unexpected increase in existing home sales was met with reports showing home prices continued to be pressured and new home sales tumbled. Moreover, earnings from Dow members provided some motivation for traders to push the sell button, with Hewlett-Packard Co. (HPQ $43) posting disappointing revenues and lowering its outlook, while Wal-Mart Stores Inc. (WMT $52) missed the Street's revenue forecast as US sales continued to contract. However, markets did get a late-week reprieve, rebounding somewhat from the early sell-off as concerns that the geopolitical unrest would spread to major oil producer Saudi Arabia were eased, which cooled the surge in oil prices, aided by Saudi Arabia's pledge to pick up the slack in oil production as needed.

Will the US jobs report show improvement?

Next week brings some key reports on the health of the economy in February, starting with Tuesday's release of the ISM Manufacturing Index, forecasted to remain flat at 60.8, while prices paid are expected to rise to 83.0 from 81.5 according to a Bloomberg survey of economists, and the ISM Non-Manufacturing Index, to be released on Thursday, is anticipated to remain unchanged at 59.4. A reading of 50 separates expansion from contraction. In addition to the pricing components, traders will be eyeing the employment component.

Wednesday brings the Federal Reserve Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for March 15. In a speech earlier this month, Fed Chair Ben Bernanke noted that the economic recovery appears to have strengthened in recent months, although not fast enough to bring about a significant improvement in the job market. Bernanke added that, "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

The lagged improvement in the job market puts an elevated focus on employment, with both ADP Employment Change and initial jobless claims set to be released next week, as well as the most comprehensive reading on jobs in the form of Friday’s nonfarm payrolls, expected to grow 190,000 in February after disappointing for the past three months, including a 36,000 gain in January. The unemployment rate is estimated to increase slightly to 9.1% after dropping to 9.0% in January.
Other releases on the US economic calendar include personal income and spending, the Chicago Purchasing Manager survey of manufacturing and services sectors, pending home sales, construction spending, vehicle sales, MBA Mortgage Applications, unit labor costs and nonfarm productivity, and factory orders.

International releases will include, Canada's December GDP and Ivey Purchasing Managers Index, Mexico's consumer confidence, and Brazil's manufacturing PMI, industrial production, and GDP. In Europe, releases include euro-zone CPI, PPI and retail sales, manufacturing and service PMI reports from the euro-zone and the UK, consumer confidence and home prices in the UK, and German employment and retail sales. Asia/Pacific reports will include Japan's industrial and vehicle production, retail trade, housing starts, construction orders, vehicle sales, employment and capital spending, Australia's home prices, retail sales, new home sales, GDP and building approvals, China's manufacturing and services PMIs, and South Korea's industrial production and leading index. The European Central Bank meets to discuss monetary policy, as do the central banks of Australia, Brazil, Canada, and Mexico.