Evening Update

Stocks Tumble for Second Straight Day

Equity markets posted their worst performance in months today, as the financial sector was sent reeling by President Obama’s announcement of a proposal to limit the size and risk-taking of large financial companies. The announcement, combined with further concern that a higher-than-expected GDP and inflation reading out of China may lead to monetary policy tightening contributed to the negative sentiment. A surprising jump was seen in weekly initial jobless claims, as well as a larger-than-expected decline in business activity in Philadelphia. In equity news, Goldman Sachs reported earnings well above analysts’ estimates, while regional banks Fifth Third Bancorp, KeyCorp and Comerica reported better-than-expected earnings. Starbucks, eBay and UnitedHealth Group all topped the Street’s profit projections, while Panera Bread increased its 4Q EPS outlook. Treasuries ended the day higher.

The Dow Jones Industrial Average fell 213 points (2%) to close at 10,390, the S&P 500 Index dropped 22 points (1.9%) to 1,116, while the Nasdaq Composite lost 26 points (1.1%) to 2,266. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.9 billion shares were traded on the Nasdaq. Crude oil was $1.70 lower at $76.04 per barrel, wholesale gasoline decreased $0.06 to $1.98 per gallon, and the Bloomberg gold spot price fell $15.33 to $1,095.72 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 78.37.

Goldman Sachs (GS $161) reported 4Q EPS of $8.20, easily topping the estimate of Wall Street analysts, which expected the company to report earnings of $5.20 per share. Revenues were $9.6 billion, roughly inline with the $9.7 billion that the Street was expecting. The company’s investment banking revenues rose 58% year-over-year (y/y) and were 82% higher than 3Q, while its trading and principal investments fell from $10.03 billion last quarter to $6.41 billion in 4Q, but compared to negative net revenues of $4.36 billion in the same period last year. In a surprising move, the firm elected to not set aside any funds to their bonus pool for the fourth quarter, leaving the total amount available for employee compensation in 2009 at $16.2 billion, or 35.8% of revenue, down from 48% in 2008. The company’s CEO said that despite significant economic headwinds, it is seeing signs of growth and remains focused on supporting that growth by helping companies raise capital and manage their risks. He added that the reduction in compensation is a “recognition of the broader environment, resulting in our lowest ever compensation to net revenues ratio.”

Despite the favorable results, shares of GS gave up early gains and finished lower as the financial sector lead a solid decline in the equity markets, following a new proposal from the Obama Administration, which is aimed at reducing risk-taking and preventing another financial crisis. The proposal would prohibit banks from conducting proprietary trading operations—trading a firm’s own capital instead of using client assets—and owning and investing in hedge funds and private equity funds. The announcement follows last week’s proposal from the White House to tax large financial institutions in order to recoup losses from the government’s Troubled Asset Relief Program (TARP).

However, fellow financial firm Fifth Third Bancorp (FITB $12) was up solidly after reporting a 4Q net loss of $0.20 per share, compared to a loss of $0.31 per share that analysts forecasted. The company said that credit trends were better than expected and showed “encouraging signs of improvement,” with net charge-offs declining 6% to $708 million from 3Q, with improvement in both commercial and consumer loan losses. Moreover, the company said both early and late stage delinquencies declined significantly from the previous quarter. FITB added that it expects net charge-offs to decline again in 1Q and for its full year compared to the previous year, reflecting “relatively stable consumer trends” and lower commercial real estate losses. Other regional banks reporting earnings today were KeyCorp (KEY $7) and Comerica (CMA $36), who both posted narrowing 4Q losses that beat analysts’ expectations. KEY’s loss came in at $0.39 per share, compared to estimates of $0.40 and revenue of $1.12 billion, up 11% from last year. CMA reported a $0.28 loss, while analysts were expecting a loss of $0.49. Shares of both companies were higher.

Starbucks Corp. (SBUX $24) reported fiscal 1Q EPS ex-items of $0.33, topping the $0.28 forecast of analysts, with revenues increasing 4% to $2.7 billion, just above the $2.6 billion that was forecast. SBUX reported that its same-store sales—sales at stores open at least a year—rose 4%, driven by increased traffic and average ticket price. SBUX increased its full-year EPS outlook. Shares were higher.

eBay (EBAY $24) posted 4Q EPS ex-items of $0.44, four cents above the Street’s forecast, as revenues rose 16% y/y to $2.4 billion, slightly above the $2.3 billion that was expected by analysts. The company said it delivered double-digit revenue growth driven by exceptional performance at its PayPal unit and turnaround progress and momentum in its core eBay business. The company issued full-year EPS guidance that exceeded analysts’ expectations. Shares were up solidly.

UnitedHealth Group (UNH $33) reported 4Q EPS of $0.81, topping the Street’s forecast of $0.73, with revenues increasing 7% y/y to $21.8 billion, slightly above analysts’ expectations of $21.7 billion. The company said despite a challenging economy, 4Q showed continued momentum in health services businesses and public and senior health benefits programs, as well as ongoing success in containing medical and operating costs. However, the company said its 4Q medical care ratio—a key cost metric in the industry—rose 190 basis points y/y to 85.8%, but came in better than the company expected due to decreasing prevalence of H1N1, which together with a higher proportion of participants receiving care under unemployment-related benefit continuation programs, caused the full medical cost ratio to increase 50 basis points y/y to 84.0%. Shares ended the day lower.

Panera Bread (PNRA $73) was up solidly after the retail bakery-cafe increased it 4Q EPS guidance, now targeting between $0.94-0.95, including the net impact of $0.05 per share related to non-recurring charges from asset retirement activity in 4Q. PNRA said the increased outlook is a result of same-store sales trends during the period, as sales in October, November, and December grew 6.8%, 6.1%, and 9.6%, respectively. Analysts were expecting the company to report 4Q EPS of $0.88.

Jobless claims rise, Philly Fed Index declines more than expected, LEI improves again

Weekly initial jobless claims unexpectedly rose, increasing by 36,000 to 482,000, versus last week's figure which was revised slightly higher to 446,000, and compared to the consensus, which called for claims to decrease to 440,000. The four-week moving average, considered a smoother look at the trend in claims, rose to 448,250 from 441,250, and continuing claims declined by 18,000 to 4,599,000, compared to the 4,598,000 forecast.

The Philadelphia Fed’s Business Activity Index (chart) fell more than expected, declining to 15.2 in January from the upwardly revised unexpected jump to 22.5 in December, and compared to the Bloomberg survey of economists, which expected the index to decline to 18.0. The underlying components of general activity, new orders and shipments all remained in expansionary territory, but all fell slightly, and for the second-straight month, more firms reported an increase in employment than reported declines. December’s report was the first time since late 2007 that there were more increased employment reports than decreases. Additionally, expectations improved in January, and firms remain generally optimistic about growth over the next six months.

Treasuries were higher after overcoming early losses, as the yield on the 2-year note fell 4 bps to 0.83%, the yield on the 10-year note decreased by 5 bps to 3.60%, while the yield on the 30-year bond lost 3 bps to 4.50%.

Accelerated GDP and inflation figures in China highlight international news

Concerns that China may further rein in its monetary policy were exacerbated by today’s larger-than-expected 10.7% y/y growth in its 4Q GDP, the fastest pace of growth since 2007. Inflation also accelerated in December to a more-than-forecast 1.9%. China’s policy makers have made it clear that managing inflation expectations is a key objective, leading to increased speculation that the country’s central bank may raise interest rates sooner than expected. Other data released today out of China included December retail sales of 1.26 trillion yuan, up 11% from the November reading of 1.13 trillion, industrial production increasing at a slower pace of 18.5%, and producer prices climbing 1.7% in December, the first increase in twelve months.

In the Eurozone, the European Commission’s report that its January advance reading of manufacturing PMI in the region moved further into expansionary territory, increasing from 51.6 in December to 52.0 in January, exceeding the 51.9 reading that economists surveyed by Bloomberg had anticipated. However, a similar report showed service sector business activity expansion slowed. Other reports across the pond included a larger than expected reading of manufacturing PMI in Germany—Europe’s largest economy—while its growth in service sector activity slowed, and France’s manufacturing PMI matched expectations and its services component missed expectations. In Eurozone central bank news, the European Central Bank reiterated that it will likely keep its record low interest rates at current levels after it said the Governing Council expects the Euro area economy to grow at a moderate pace in 2010.

There are no major releases on the US economic calendar tomorrow. Internationally, economic releases include the German Import Price Index, UK retail sales and Eurozone Industrial New Orders.