Morning Market Update

Bulls Pause as Today’s Mixed Data Offers Little Cause

The US equity markets are loitering around the flatline in afternoon action as yesterday’s upward momentum on global economic optimism has stalled, courtesy of a flare-up in political unrest in the Middle East as well as persistent inflationary uneasiness and mixed data. However, a larger-than-forecasted increase in private sector jobs reported by ADP, along with better-than-forecasted earnings and announcements of shareholder value enhancement from Electronic Arts Inc, Mattel Inc, and Time Warner Inc are helping offset some of the aforementioned concerns. But markets are modestly tilted to the downside as Whirlpool Corp announced that higher materials costs hampered profits, while Broadcom Corp issued an outlook for higher operating expenses, overshadowing its better-than-forecasted 4Q profits, increased dividend, and stock repurchase addition. Treasuries are mostly lower after a favorable ADP employment report had little impact on the bond markets, along with a solid rise in MBA mortgage applications. Overseas, European stocks finished mixed following reports of hotter-than-expected inflation data and some diverse reports out of the corporate sector.

At 12:58 p.m. ET, the Dow Jones Industrial Average and the Nasdaq Composite are flat, while the S&P 500 Index is declining 0.2%. Crude oil is down $0.52 at $90.25 per barrel, wholesale gasoline is decreasing $0.03 to $2.49 per gallon, and the Bloomberg gold spot price is decreasing $8.13 to $1,329.98 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 77.20.

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 are sharply higher.

Mattel Inc. (MAT $25) 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 is trading 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 is trading 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 are under pressure.

Broadcom Corp. (BRCM $43) is down solidly as concerns about the company’s outlook for higher operating expenses is overshadowing 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 are mostly lower after showing little reaction to the employment data, with the yield on the two-year note up 5 bps to 0.65% and the yield on the 10-year note 3 bps higher at 3.47%, while the 30-year bond yield is 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.

Earnings and inflation data break the momentum in Europe

The equity markets in Europe finished mixed as the momentum from yesterday’s solid gains on a slew of favorable manufacturing reports was met with some conflicting results from the corporate sector and a hotter-than-expected read on euro-zone inflation. Shares of Electrolux AB (ELUXY $57) were solidly lower after the Swedish home appliance maker offered inline profits but issued a lukewarm outlook as it faces higher raw materials costs. Moreover, Scania AB (SVKFF $13) was down after the Swedish truckmaker posted disappointing earnings and offered a flat outlook on the negative impact of a stronger Swedish kronor. However, there were some positive moves in the equity markets that are worth noting, with shares of Renewable Energy Corp. (RNWEY $2) rising sharply after posting better-than-forecasted results, and Imperial Tobacco Group (ITYBY $62) moving nicely higher after the company issued an update that pleased analysts, while offering plans to increase its dividend payout.

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.

The UK FTSE 100 Index was 0.7% higher, France’s CAC-40 Index declined 0.2%, and Germany’s DAX Index finished flat, while Sweden’s OMX Stockholm 30 Index fell 1.4%.