Evening Market Update

Earnings Fetch Green in Shortened Week

Stocks rose today, as traders continued to focus on earnings, with the technology sector a highlight for the week and headed by Apple Inc’s report today, as well as dividend increases by Dow members General Electric and Travelers Companies. While rising input costs were noted by consumer names McDonald’s and Yum Brands, Dow component American Express noted strong spending trends. Other notable earnings reports included better-than-expected earnings by Dow member DuPont, as well as Verizon Communications and Morgan Stanley. Treasuries were mixed on a sharp drop in the Philly Fed Index, an increase in the Leading Index and a smaller-than-expected decline in weekly initial jobless claims. Markets will be closed tomorrow in observance of Good Friday.

The Dow Jones Industrial Average gained 52 points (0.4%) to 12,506, the S&P 500 Index was 7 points (0.5%) higher at 1,337, and the Nasdaq Composite added 18 points (0.6%) to 2,820. In moderately light volume, 813 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.84 to $112.29 per barrel, wholesale gasoline was $0.03 higher at $3.31 per gallon, and the Bloomberg gold spot price increased $3.25 to $1,505.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.4% lower at 74.09. For the week, including dividends, the DJIA and the S&P 500 Index were 1.4% higher and the Nasdaq Composite gained 2.0%.

Apple Inc. (AAPL $351) reported fiscal 2Q EPS of $6.40, well above the $5.38 consensus estimate of analysts surveyed by Reuters, with revenues jumping over 80% year-over-year (y/y) to $24.7 billion, topping the $23.4 billion that the Street was looking for. In typical AAPL fashion, the company issued conservative guidance, with its 3Q outlook coming in below expectations. Shares rose. Elsewhere in technology earnings, cloud-computing enabler F5 Networks Inc (FFIV $107) reported better-than-expected earnings, coming on the heels of a string of strong reports from the sector this week.
Dow member General Electric Co. (GE $20 ¹) announced 1Q EPS ex-items of $0.33, five cents above the Street’s expectations, with revenues increasing 6% y/y to $38.4 billion, easily beating the $34.6 billion that analysts forecasted. Additionally, GE announced that it raised its quarterly dividend by $0.01 per share to $0.15. Shares closed lower after relinquishing early gains, as analysts pointed to core operating results that were marginally inline with expectations.

Travelers Companies Inc. (TRV $61) posted 1Q EPS ex-items of $1.89, north of the $1.52 that analysts projected, as revenues increased 4% y/y to $5.4 billion, compared to the expectaion of $5.3 billion. The Dow member also announced that it has raised its quarterly dividend by 14% to $0.41 per share. Shares rose.

DuPont (DD $56) achieved $1.52 per share in 1Q earnings, exceeding the $1.36 that the Street anticipated, with sales increasing 18% y/y to $10.0 billion, versus the $9.2 billion that analysts forecasted. The Dow component also raised its full-year EPS outlook. DuPont noted that sales in its largest segment, agriculture and nutrition, rose 18%, while other segments also posted strong growth. Regarding the automotive sector, DD said that global builds would be down 6% in 2Q but would rise 4% for the year. DD shares were higher.

American Express Co (AXP $47) reported 1Q EPS of $0.97, above the $0.93 Street expectation, and noted that customers increased spending by 17% relative to a year ago. The Dow component also noted that delinquencies fell, allowing it to set aside less for potential future losses. Shares of AXP rose.

Dow member McDonald’s Corp. (MCD $77) reported 1Q profits of $1.15 per share, compared to the $1.14 that analysts were expecting, as revenues rose 9% y/y to $6.1 billion, above the $6.0 billion that was forecasted on the Street. Global same-store sales—sales at stores open at least a year—increased 4.2% y/y. Shares fell as the company’s US profit margins were below analysts’ expectations amid higher food costs, which prompted the fast-food chain to increase its outlook for commodity inflation and announce that it plans to increase prices, “to offset some but not necessarily all, of the inflationary pressures.” Competitor Yum! Brands Inc (YUM $54) also reported earnings, echoing McDonald’s comments regarding the weak US market and higher-than-expected food costs, but said that they believed 2Q would be the low point for the US. YUM’s results in China outpaced McDonald’s and Yum noted that wage increases in China help drive sales. Shares of YUM were higher.

Verizon Communications Inc. (VZ $37) posted 1Q EPS of $0.51, one penny above analysts’ projections, with revenues roughly flat y/y at $27.0 billion, slightly above the $26.9 billion that the Street estimated. The Dow component said it is on track to meet its revenue and earnings objectives for the year. Shares were under some pressure as analysts were somewhat disappointed by trends in average revenue per subscriber (ARPU) and subscriber churn —the number of subscribers that discontinued their service.

Morgan Stanley (MS $26) announced 1Q EPS, excluding a discrete tax item and a loss in a Japanese securities joint venture, of $0.46, compared to the $0.34 that analysts were looking for, but revenues declined 16.5% y/y to $7.6 billion, compared to the $7.7 billion that the Street forecasted. MS was higher.

Jobless claims decline and Philly Fed tumbles, but leading indicators continued to rise

Weekly initial jobless claims declined by 13,000 to 403,000, versus last week's figure which was upwardly revised by 4,000 to 416,000, but were above the 390,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, rose by 2,250 to 399,000, while continuing claims dipped by 7,000 to 3,695,000, above the forecast of economists, which called for continuing claims to come in at 3,675,000.

Moreover, the  Philly Fed Manufacturing Index fell sharply, dropping from 43.4 in March—which was the highest since 1984—to 18.5 in April. Economists had expected the index to decline to 36.9, but the report continued to depict expansion in business activity as denoted by a reading above zero. The index fell as new orders dropped 21.5 points to 18.8, while shipments declined 5.8 points to 29.1 and prices paid declined from 63.8 to 57.1. Also, inventories decreased to 1.7 from 12.0 and employment declined 5.9 points to 12.3. In a special question this month, 80% of respondents noted that the Japan crisis had no effect on the availability of raw materials or other products.

However, the Conference Board’s Leading Economic Indicators (LEI) for March rose slightly more than expected, increasing 0.4% month-over-month (m/m), compared to the 0.3% rise that economists expected, following an upwardly revised 1.0% gain in February. This was the ninth-straight monthly advance for the index, led by increases in building permits, pace of deliveries, and a favorable yield curve.

Treasuries were mixed following the economic data and earnings, with the yield on the two-year note flat at 0.66% and the yield on the 10-year note down 1 bp to 3.40%, while the 30-year bond rose 1 bp to 4.47%.

Please note that all US markets will be closed tomorrow in observance of the Good Friday holiday.

Mixed economic reports overseas

International economic reports were mixed, highlighted by a report that showed business confidence in Germany—Europe’s largest economy—declined for a second-straight month in April, with the Ifo Business Climate Index declining to 110.4 from 111.1 in March, compared to the drop to 110.5 that economists forecasted. The two consecutive monthly drops came after reaching a record high in February, as concerns about the impact of higher oil prices dampened sentiment. But there were some favorable reports that were released in the region, as UK retail sales unexpectedly increased m/m in March, while a separate report showed UK public sector net borrowing rose at a level below forecasts.

Elsewhere, Reuters reported that Bank of Japan Governor Mishimura said that supply constraints resulting from the natural disaster are likely to ease around autumn and beyond, and Australia reported that 1Q producer prices were hotter than economists’ forecasts. Back in the Americas, Canadian retail sales rose for the first time in three months in February.

Earnings season ramps up to propel stocks over fiscal concerns

The beginning to the holiday-shortened week looked as though the US equity markets were in for a third week in the red, as Standard & Poor’s downgraded the outlook for the credit rating of the US, but did reaffirm the US AAA credit rating. However, stocks posted solid gains on the week as 1Q earnings season provided the bulk of the bulls’ sustenance, sweetened by some better-than-forecasted housing data in the form of housing starts and building permits, as well as existing home sales. Technology reports led the optimism as Dow member Intel Corp. (INTC $21) trounced analysts’ earnings and revenues forecasts, and Yahoo Inc. (YHOO $17) bested the Street’s expectations, complimented by Friday’s blowout results from Apple Inc.

Fed to pursue new communication policy next week, but message likely the same

Next week brings more data on the housing market, with Monday’s new home sales, expected to gain 12.0% m/m in March to an annual rate of 280,000 units after dropping 16.9% in March to a new record low of 250,000. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales uses closings. Tuesday follows with the release of the S&P/CaseShiller Home Price Index, forecasted to show a 0.4% decline m/m and 3.2% decrease y/y in February.

The week caps off with Friday’s first reading of 1Q gross domestic product (GDP), expected to grow at a 1.8% quarter-over-quarter (q/q) annualized rate, slowing from the 3.1% pace in the fourth quarter. The largest component of GDP, personal consumption, is expected to grow 2.1% in 1Q, after advancing 4.0% in 4Q. With regard to inflation readings, the GDP Price Index is expected to rise 2.5%, and the core PCE Index, which excludes food and energy, is forecasted to increase 1.3%.

However, the focus for investors next week will be Wednesday’s conclusion of the two-day Federal Open Market Committee (FOMC) meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or to the $600 billion asset purchase program, commonly known as quantitative easing, or QE2. The statement will be released earlier than usual, at 12:30 p.m. EST, as it will be followed by the first post-statement news conference and Q&A session led by Fed Chair Bernanke beginning at 2:15 p.m. EST.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to increase 2.0% in March after falling 0.9% m/m in February, while ex-transportation, orders are forecasted to have grown 2.2% m/m after decreasing 0.6% in February. The week also includes Consumer Confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and pending home sales.

International economic releases due out next week include Japan’s retail sales, jobless rate, household spending, CPI, industrial production and housing starts, Australian CPI, leading index and home prices, South Korea’s 1Q GDP, and China and South Korea’s leading indexes. Releases from Europe will include UK 1Q GDP and consumer confidence, euro-zone industrial new orders, and German CPI, import prices and unemployment. Back in the Americas, Mexico releases retail sales. The central banks of Japan and New Zealand meet, while no changes are expected from either, and the Bank of Brazil releases minutes from its last meeting.