Morning Market Update

Equity Markets Hover Near Flatline After Paring Early Losses

Stocks finished modestly lower, but well off the worst levels of the session, as crude oil prices reversed course at midday and closed below the flatline on a bearish crude oil inventory report and statements from OPEC suggesting that the threat to supply does not warrant an emergency meeting. However, concerns from the Middle East and Northern Africa continue, with reports of an explosion near a refinery in Libya suggesting further volatility in oil prices. Domestic economic news was light, as the only reports released were a larger-than-expected increase in wholesale inventories and a solid rise in mortgage applications. On the equity front, Texas Instruments lowered its 1Q revenue and earnings expectations, while Honeywell International raised its Q1 outlook, and Staples increased its quarterly dividend. Additionally, shares of Finisar Corp fell sharply on weak 4Q guidance and Boston Beer Co. failed to quench the Street’s revenue and earnings forecasts. Treasuries finished higher.

The Dow Jones Industrial Average fell 1 point (0.0%) to 12,213, the S&P 500 Index declined 2 points (0.1%) to 1,320, and the Nasdaq Composite lost 14 points (0.5%) to 2,752. In moderate volume, 871 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.86 to $104.16 per barrel, wholesale gasoline rose $0.07 to $3.02 per gallon, while the Bloomberg gold spot price increased $0.80 to $1,429.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 76.70.

Finisar Corp. (FNSR $25) finished down over 35% after the technology firm issued 4Q guidance that missed expectations. FNSR said results will be impacted by price negotiations with telecom customers, the shutdown of some customers for the Chinese New Year, inventory adjustments at some telecom customers, and a slowdown in business in China overall. The company said it expects 4Q revenues to be between $235-250 million, and EPS in a range of about $0.31-0.35. Analysts surveyed by Reuters were expecting the company to report 4Q revenues of $269 million and EPS of $0.48. The disappointing outlook is more than offsetting FNSR’s fiscal 3Q results, where its EPS ex-items of $0.47 matched expectations, while its revenues of $263 million exceeded the Street’s estimates of $259 million.

Texas Instruments Inc. (TXN $35) narrowed its 1Q revenue and EPS forecasts, saying revenues are expected to be in a range of $3.34-3.48 billion, compared to the company’s prior outlook of $3.27-3.55 billion. Also, TXN is anticipating 1Q EPS to be in the range of $0.56-0.60, versus previous expectations of between $0.54-0.62. Analysts surveyed by Reuters were expecting the company to post revenues of $3.41billion and EPS of $0.58. Shares were solidly lower.

Staples Inc. (SPLS $20) announced that the office products company will increase its quarterly dividend by 11% to $0.10 per share, payable on April 14, 2011, to shareholders of record on March 25, 2011. SPLS traded modestly higher.

Honeywell International Inc. (HON $57) reported that it expects 1Q revenues and EPS to be at the high end of the diversified technology and manufacturing firm’s previous guidance. The company said it continues to see strength in the global economic recovery and is confident in its outlook for 2011 and beyond. HON forecasts that revenues will be approximately $8.7 billion and EPS of about $0.80, compared to the Street’s estimates of $8.6 billion in revenues and EPS of $0.81. The company also reaffirmed its full-year 2011 outlook. Shares moved modestly lower.

Boston Beer Co. (SAM $90) posted 4Q EPS of $0.87, below the $0.90 that analysts had forecasted, with revenues increasing 8% year-over-year (y/y) to $116 million, also missing the Street’s expectations, which called for the specialty beer maker to post revenues of $119 million. Shares were down solidly. 

Wholesale inventories and mortgage applications rise

The economic calendar remains relatively light, with the lone major report on the docket being the release of wholesale inventories, which rose more than expected in January, increasing 1.1% month-over-month (m/m) compared to the 0.9% increase that economists surveyed by Bloomberg had expected. Sales increased 3.4%, with petroleum leading the way, rising 10.6%, along with autos, which gained 7.8%. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dropped to 1.13 in January from December’s 1.16 rate.

In other economic news, the MBA Mortgage Application Index rose by 15.5% last week, after the index that can be quite volatile on a week-to-week basis, fell 6.5% in the previous week. The increase came as a 17.2% rise in the Refinance Index joined a 12.5% gain in the Purchase Index. The advance in the overall index came even as the average 30-year mortgage rate increased 9 basis points to 4.93%, above the record low of 4.21% on October 8, 2010.

Treasuries finished higher, after showing little reaction to the inventory and mortgage data, as the yield on the 2-year note fell 3 bps to 0.69%, the yield on the 10-year note declined 8 bps to 3.47%, and the 30-year bond rate decreased 6 bps to 4.60%.

Meanwhile, the US Department of Energy (DOE) released its weekly inventory report, showing crude oil stockpiles rose by 2.5 million barrels, well above the increase of 1 million barrels that economists forecasted. Meanwhile, gasoline inventories fell much more than estimated, dropping by 5.5 million barrels, compared to the 1.5 million barrel decline that was expected. WTI crude oil prices are lower, while gasoline prices are rising solidly.

S&P cuts credit ratings of Greek banks

The European economic calendar was quiet again today, as the U.K. trade balance narrowed more than forecasts for January and German industrial production expanded more than economists had expected in January. However, euro-area debt crisis concerns flared back up after Moody’s Investors Service downgraded the credit ratings of a slew of Greek banks, and the director of European sovereign debt ratings at Standard & Poor’s warned that other countries in the euro-zone could have their sovereign credit ratings cut further, while noting that a Greek debt default is a “possibility,” per Bloomberg. Moreover, Portugal conducted a bond auction today, resulting in the debt-laden nation having to pay a higher yield compared to a prior auction of a similar maturity. But the auction results and ratings agency news did not appear to have a major impact on the peripheral euro-zone markets.

In Asia/Pacific, Japan’s machine orders grew more than economists had anticipated, while a read on Australian consumer confidence deteriorated and a report showed the nation’s home loans fell much more than estimated. Additionally, the Reserve Bank of New Zealand lowered its key interest rate to 2.5% from 3.0%, the first reduction in nearly two years, in an effort to stimulate an economy that was devastated by a deadly earthquake on February 22nd.

Tomorrow’s US calendar will yield weekly initial jobless claims, expected to rise to 376,000 from 368,000, and the trade balance, with the deficit forecasted to increase to $41.5 billion from $40.6 billion in January.

International releases tomorrow will include Japan’s final 4Q GDP and machine tool orders, Germany and China’s trade balance, French and UK industrial and manufacturing production, and Australia’s unemployment. In central bank action, the Bank of England meets where no change to rates or the asset purchase program are expected, while South Korea is anticipated to increase rates 25 bps to 3.00%.