Evening Update

Bears Claw Back to Erase Yesterday’s Gains

Stocks fell sharply on a day marked with numerous earnings reports, as the upward trend seen yesterday was reversed. Global concerns weighed on US markets as China continues to take steps to curb growth by reining in lending, which strengthened the dollar and hurt commodities. Adding to the day’s negative sentiment was a housing starts report that fell more than anticipated, which caused concerns about the housing recovery and overshadowed an increase in building permits. In equity news, Bank of America and Morgan Stanley missed earnings estimates, while fellow banking giant Wells Fargo posted an unexpected 4Q profit. Other banks reporting positive earnings figures were Bank of New York Mellon, State Street, US Bancorp and M&T Bank, while Hudson City Bank matched analysts’ estimates. IBM exceeded profit expectations, but failed to satisfy the Street with its future guidance. Rambus and Samsung settled their litigation battle over memory chips. Brinker International, Cree and Coach Inc. all exceeded profit projections, while CSX and American Airlines fell short of revenue forecasts. Treasuries finished the day higher.

The Dow Jones Industrial Average fell 122 points (1.1%) to close at 10,603, the S&P 500 Index dropped 12 points (1.1%) to 1,138, while the Nasdaq Composite lost 29 points (1.3%) to 2,291. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $0.43 lower at $77.32 per barrel, wholesale gasoline decreased $0.02 to $2.04 per gallon, and the Bloomberg gold spot price fell $26.75 to $1,111.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.1% to 78.36.

Dow member Bank of America (BAC $16 ¹) announced a 4Q net loss of $0.60 per share, including the one-time $4.0 billion negative impact associated with repaying funds to the government’s Troubled Asset Relief Program (TARP), and compared to the loss of $0.53 per share that Wall Street analysts had forecasted. Revenue net of interest expense came in at $25.4 billion, missing the Street’s expectation of $26.8 billion. BAC said credit quality showed signs of improvement compared to the prior quarter, although credit costs remained high as global economic conditions remained challenging. The company’s net charge-offs were $1.2 billion lower than the prior quarter—declining sequentially for the first time in nearly four years—and its provision for credit losses was $10.1 billion, down $1.6 billion from last quarter. Shares overcame early pressure to end higher.

Meanwhile, Wells Fargo (WFC $28) reported 4Q EPS of $0.08, compared to the consensus of analysts, which called for the company to post a $0.01 per share loss, with revenues of $22.7 billion, versus the $22 billion that was anticipated. WFC said its 4Q credit results were in line with its expectations and losses remained elevated, but a more favorable economic outlook and improved credit statistics in several portfolios further increase its confidence that its credit cycle is turning, provided economic concerns do not deteriorate. WFC’s 4Q net charge-offs were $5.4 billion compared to $5.1 billion in 3Q, while its allowance for credit losses during 4Q increased by $500 million compared to 3Q. Shares were lower.

Elsewhere in the financial industry, Morgan Stanley (MS $31) reported 4Q EPS of $0.14, compared to the $0.36 that analysts had expected, as revenues were $6.8 billion, compared to the $7.8 billion that was anticipated. MS tradied lower.

A plethora of other reports from the financial front are also garnering attention, as Bank of New York Mellon (BK $30), State Street (STT $46), US Bancorp (USB $25) and M&T Bank Corp. (MTB $78) all traded higher after posting better-than-expected earnings reports, while Hudson City Bancorp (HCBK $14) was lower after it matched the profit projections on the Street.

International Business Machines (IBM $134) reported 4Q EPS grew 10% versus last year to $3.59, topping the Street’s forecast of $3.47, as revenues rose 1% year-over-year (y/y) to $27.2 billion, also exceeding the average analyst forecast of $27.0 billion. The Dow member’s global services and software sales both grew by 2%, while its systems and technology revenue declined 4%. The company issued full-year 2010 EPS guidance of at least $11.00, compared to analysts’ forecasts, which are calling for the company to post full-year earnings of $10.89 per share. Despite the upbeat results, shares were lower as some analysts were expecting more favorable guidance and some are booking profits from the steep gains in the stock in the past year.

American Airlines (AMR $8) announced a 4Q 2009 net loss of $347 million, or $1.24 per share, versus analysts’ estimates of a $1.21 loss per share. The company attributed the loss to fewer flights, fewer passengers and rising fuel costs, but also noted that international flying expanded modestly for the year with a 5% increase in international bookings. AMR’s CEO said “The fuel crisis of 2008 was replaced by the worst recession in decades, which hurt travel demand severely, and tightened capital markets. Yet, we took steps to address those challenges by bolstering our liquidity and financial flexibility and remained disciplined with capacity.” Shares finished higher.

Coach Inc. (COH $35) reported fiscal 2Q EPS of $0.75, three cents above the consensus estimate of analysts, with revenues of $1.1 billion just above the $1.0 billion that was forecasted. COH said its holiday results bode well for the future and it was especially pleased by the strengthening of its North American retail businesses during the holiday season, as revenues from new and existing increased by 16% and same-store sales—sales at stores open at least a year—rose 3%. The company said its direct-to-customer sales rose 14% versus last year, however, indirect sales fell 8% due primarily to reduced shipments into US department stores. Shares of SSNLFwere also higher.

Rambus Inc. (RMBS $23) was up sharply after the company announced that it has reached an agreement with Samsung Electronics (SSNLF $656), settling all claims between the two firms regarding licensing RMBS’ memory chip patent portfolio. As part of the agreement, SSNLF will pay RMBS a total of $900 million over five years and both firms announced a renewed collaboration relating to a new generation of memory technologies. Both firms said in a joint statement that they are pleased to resolve their differences and move forward. Shares of SSNLF are also higher.

Brinker International (EAT $17) was higher after the parent of Chili’s restaurants posted fiscal 2Q EPS ex-items of $0.29, easily topping the $0.15 that analysts had expected, with revenues of $782 million, also exceeding the $766 million that the Street had projected. 2Q same-stores sales fell 3.1% y/y, but were a smaller decline than the 4.5% y/y drop that was seen in the same period last year.

CSX Corp. (CSX $47) was the first major rail company to report 4Q results and the company posted earnings of $0.77 per share, one penny ahead of the Street’s forecast, with revenues down 13% versus last year to $2.3 billion, compared to analysts’ estimates of $2.4 billion. The company said the revenue decline was driven by a 7% overall decline in volume as growth in the intermodal and automotive sectors was more than offset by declines in coal and merchandise. CSX also noted that lower fuel prices led to decreased fuel surcharge recovery. Shares were down solidly.

Cree Inc. (CREE $63) was up over 17% after the semiconductor material manufacturer reported fiscal 2Q EPS of $0.38, above the $0.30 that analysts had expected, with revenues of $199.5 million, topping the $187 million that was projected on the Street. The company’s revenues represented a 35% increase versus last year and an 18% advance compared to 1Q. The company said LED lighting adoption continues to gain momentum and its near-term focus is on factory execution and capacity expansion. CREE also issued 3Q guidance that is well above analysts’ estimates, as it is expecting EPS between $0.41-0.44, with revenues in a range of $215-225 million. The Street is forecasting 3Q EPS of $0.29 on revenues of $190 million.

Wholesale prices rise, housing starts and building permits mixed

Treasuries were higher on the inflation and housing reports today, as the yield on the 2-year note fell 1 bp to 0.88%, the yield on the 10-year note decreased by 4 bps to 3.67%, while the yield on the 30-year bond lost 5 bps to 4.54%.

Housing starts for December were reported, and the release showed starts declined 4% month-over-month (m/m) to an annual rate of 557,000 units, below economists’ expectations of a 0.3% decrease to 572,000, and also down from an upwardly revised 580,000 last month. Meanwhile, building permits unexpectedly jumped, growing 10.9% m/m to an annual rate of 653,000 from last month’s upwardly revised 589,000. The expectation was for a decrease to 580,000 units. Building permits are one of the Leading Economic Indicators compiled by the Conference Board, as they are a gauge of potential future construction and economic growth.

The Producer Price Index showed prices at the wholesale level rose 0.2% m/m in December, after advancing 1.8% in November, higher than the average forecast of economists surveyed by Bloomberg that called for prices to come in flat. The increase was driven by higher prices for food, which rose 1.4%, while prices for energy goods fell 0.4%. Meanwhile, the core rate, which excludes food and energy, were flat compared to the forecast for a 0.1% increase. On a year-over-year (y/y) basis, headline producer prices were 4.4% higher, and the core rate rose 0.9%. Year-over-year comparisons will start to rise, due to easy comparisons, where headline wholesale prices fell 0.9% in 2008. However, the ex-food and energy component increase of 0.9% was the smallest annual gain since 2002, and the prospect for increases in prices at the core level remains subdued due to excess slack in many areas of the economy: factory production capability, individuals looking for employment, and housing supply.

In other economic news, the US MBA Mortgage Application Index, rose 9.1% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 14.3% in the previous week. The increase came amid a 13 basis-point drop in the average 30-year mortgage rate to 5.00% versus the previous week, and as the Refinance Index advanced 10.7%, supporting the rise in the overall application gauge. Meanwhile, the Purchase Index also contributed to the increase, rising 4.4%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

China clamps down on lending

In an effort to slow the pace of lending, China announced that it will limit overall credit growth in 2010 to 7.5 trillion yuan and has asked some banks to halt new lending for the remainder of January. Some reports predict that the Chinese banking system has already extended nearly 1.5 trillion yuan in new credit during the first two weeks of the month. The action comes after last week’s decision to raise reserve requirements for Chinese banks by 50 basis points, to 16 percent. Banking regulator Liu Mingkang said that some banks were asked to slow lending because they failed to meet regulatory requirements, but also acknowledged that new loans so far this year have been “relatively high.” He also said that the China Banking Regulatory Commission plans to impose new leverage and liquidity ratios on the nation’s banks. China will continue to be in focus tomorrow as it releases a slew of data, including 4Q GDP, PPI, CPI, retail sales, industrial production and fixed asset investment. Economic data out of Europe offered little help to sentiment as results were mixed, with German producer prices unexpectedly declining m/m in December and Italian industrial orders increasing more than expected m/m in November, while jobless claims in the UK fell more than expected for December. Additionally, concerns about the impact of Greece’s sovereign debt on Euro area entities continues to weigh on investor sentiment across the pond.

On the US economic calendar tomorrow, initial jobless claims will be reported, with a consensus estimate of a decrease to 440,000. The Philadelphia Fed Business Outlook Survey for January will also be released, with estimates that the index declined to 18.4. The Conference Board Leading Economic Indicators Index rounds out the reports, with an estimate of a 0.7% increase for the month of December.