Evening Market Update

Stocks Unnerved by Middle East Tensions

US equities tumbled on the first day back from the long holiday weekend amid heightened anxiety toward the violent anti-government protests in the oil-producing nation of Libya. Crude oil prices surged, exacerbated by a Reuters report that the nation has halted oil production and has decided to exercise “force majeure”, a contractual clause freeing both parties of an oil contract from liabilities or obligations in light of an extraordinary event. Treasuries finished higher on a flight to safety as a result of the geopolitical turmoil, and following US economic news that showed home prices fell again, but consumer confidence marked a three-year high and manufacturing activity in Richmond improved unexpectedly. On the earnings front, Dow member Home Depot posted better-than-expected numbers and increased its dividend, while fellow Dow members Wal-Mart Stores and Hewlett-Packard both bested the Street’s EPS forecasts but fell short on revenue estimates. Elsewhere, Macy’s achieved 4Q earnings that exceeded analysts’ forecasts, while Barnes & Noble offered up disappointing results and suspended its dividend. In other equity news, Dynegy announced a management shakeup and said its merger agreement with Icahn Enterprises is over.

The Dow Jones Industrial Average tumbled 178 points (1.4%) to 12,213, the S&P 500 Index dove 28 points (2.1%) to 1,315, and the Nasdaq Composite was 78 points (2.7%) lower at 2,756. In moderately heavy volume, 1.3 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. Crude oil soared $5.71 to $95.42 per barrel, wholesale gasoline gained $0.06 to $2.75 per gallon, while the Bloomberg gold spot price dropped $8.85 to $1,397.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% higher at 77.80.

After the close, Dow member Hewlett-Packard (HPQ $48) reported 1Q EPS or $1.36, above the $1.29 forecast by analysts, on revenues of $32.30 billion, short of the $32.96 billion expected.

Fellow Dow member  Wal-Mart Stores Inc. (WMT $53) reported 4Q EPS ex-items of $1.34, above the $1.31 consensus estimate of analysts surveyed by Reuters, with revenues increasing 2.5% year-over-year (y/y) to $115.6 billion, below the $117.1 billion that the Street had expected. The world’s largest retailer said its same-store sales—sales at stores open at least a year—in the US declined 1.8% y/y, while increasing 2.7% at its Sam’s Club. WMT said it was pleased with its earnings performance in 4Q across its three operating segments, but “we are disappointed” by US 4Q sales. However, the company said its 4Q international net sales rose 8.9% and this segment “continues to be our growth engine, and we expect accelerated growth in emerging markets.” WMT issued full-year EPS guidance that was inline with expectations. WMT issued full-year EPS guidance that was inline with expectations. Shares were solidly lower.

As well, Dow component Home Depot Inc. (HD $38) posted 4Q EPS of $0.36, five cents above the Street’s estimate, with revenues increasing 3.8% y/y to $15.1 billion, exceeding the $14.8 billion that analysts were anticipating. The world’s largest home improvement retailer said its same-store sales rose 3.9% y/y, with US stores increasing 4.8%. HD also reported that it will increase its quarterly dividend by 6% to $0.25 per share, and it increased its full-year 2011 EPS outlook. HD gave up an early advance and ended lower amid the broad-based decline in the equity markets.

Meanwhile, Macy’s Inc. (M $23) announced 4Q earnings ex-items of $1.59 per share, above the $1.52 that was expected, with revenues rising 5.4% y/y to $8.3 billion, matching forecasts, with same-store sales gaining 4.3% y/y. The department store said it believes the company is now “on a clear path” that will lead to continued growth in sales, earnings and cash flow in the years ahead. Shares have relinquished early gains and are lower.

Elsewhere, shares of Barnes & Noble Inc. (BKS $16) were sharply lower after the bookseller reported fiscal 3Q EPS of $1.00, below the $1.13 that was projected, and revenues, which increased 7.3% y/y to $2.3 billion, missed the $2.4 billion expectation. Also, the company suspended its quarterly dividend to provide the company financial flexibility and allow it to take advantage of any other market opportunities that may present themselves. Finally, BKS said due to the recent bankruptcy filing by competitor Borders Group Inc (BGPIQ $0.27) and the potential short-term impact that their announced store closures may have in the marketplace, it has decided not to issue guidance for the balance of fiscal 2011.

Outside of earnings, Dynegy Inc. (DYN $6) announced that its President and CEO Bruce Williamson will resign and its current Board of Directors does not intend to stand for reelection at the company’s next annual meeting. Also, DYN announced that its merger agreement with Icahn Enterprises LP (IEP $42) has been terminated, due to an insufficient number of shares tendered in response to the takeover offer. Shares were lower.

Home prices decline, but consumer confidence hits three-year high

The S&P/Case-Shiller Home Price Index showed a decline in home prices of 2.38% y/y in December, compared to the 2.40% drop that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.41% lower, compared to forecasts, which called for a decline of 0.50%. Chairman of the Index Committee at S&P, David Blitzer said, “We ended 2010 with a weak report,” and even though we have seen improvements in the overall economy, “housing continues to drift lower and weaker.” S&P noted that regionally, results were mixed, with California “doing better,” but Las Vegas, Miami, Phoenix and Tampa all making new lows in December and “renewed weakness” in some cities that were among the last to reach their peaks, including Atlanta, Charlotte, Portland and Seattle, where new lows were also seen.

The price data lags sales by a month and today’s report on home prices kicked off the week’s focus on the housing sector, as Wednesday will bring the January existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to fall 1.5% m/m to an annual rate of 5.2 million units. The decline comes after sales surged 12.3% in the month prior, with single-family sales increasing 11.8%. Moreover, Thursday will bring the release of new home sales, which calculates sales of single-family homes based on signings instead of closings, and is considered a more timely indicator of conditions in the housing market, expected to fall 8.1% in January to an annual rate of 303,000 after spiking by 17.5% m/m in December.

Meanwhile, the Conference Board’s  Consumer Confidence Index  improved more than expected, jumping from an upwardly revised 64.8 in January—from an initial reading of 60.6—to 70.4 in February, compared to the increase to 65.0 that was expected. This was the highest level since February 2008 and the underlying components of the report showed sentiment toward the present situation, expectations, and the labor differential—the amount of consumers saying jobs are plentiful minus those saying jobs are hard to get—all improved.

Additionally, the Richmond Fed Manufacturing Index unexpectedly improved, increasing from an unrevised 18 in January to 25 in February, compared to the unchanged reading expected by economists. Expansion in manufacturing activity, as noted by a reading above zero, accelerated as new orders volume, shipments, order backlog, and wages all improved solidly, while the number of employees increased to a reading of 16, but the average workweek declined from 20 to 17.

Treasuries finished higher following the data as the exacerbated Middle East uneasiness fostered some flight-to-safety buying. The yield on the two-year note was 5 bps lower at 0.71%, the yield on the 10-year note was down 11 bps to 3.46%, and the yield on the 30-year bond fell 9 bps to 4.60%.

In addition to tomorrow’s existing home sales report, the MBA Mortgage Application Index will be released.
World markets rattled by Middle East clashes

Tensions in the Middle East, particularly in the oil-producing nation of Libya, moved a notch higher after Reuters reported that production of more than 8% of Libya’s 1.6 million barrels of oil per day have been halted as a result of the violent anti-government protests, citing trade sources, and that the nation has declared “force majeure”, a contractual clause freeing both parties of an oil contract from liabilities or obligations in light of an extraordinary event. The resulting surge in the price of crude was tempered a bit, however, as an OPEC official said the organization stood ready to meet any shortage should any disruptions occur.

Economic events across the pond took a back seat to the heightened unrest in the Middle East, but there were some pieces of data worth mentioning, as a gauge of consumer confidence in Germany—Europe’s largest economy—unexpectedly improved, and a read of Italian consumer sentiment increased by a larger amount than economists forecasted. Moreover, the UK reported some favorable budget data, with the region posting the largest surplus in January since July 2008 on a surge in government revenue, per Bloomberg.

The geopolitical concerns in the Middle East also weighed on sentiment in the Asia/Pacific region, amid a lack of economic news in the region. The negativity was further exacerbated by Moody’s Investor Service changing its outlook on Japan’s debt rating from stable to negative.

Tomorrow’s international economic calendar will offer a number of reports to add to traders’ plates, with France and Italy releasing CPI figures, the euro-zone providing industrial orders numbers and the Bank of England releasing the minutes from its last monetary policy meeting. Further east, Japan will report its trade balance, Australia will release wage figures and Hong Kong will report 4Q GDP.