Evening Update

Markets Whipsaw in Final Hour

After spending most of the day in positive territory, stocks moved decisively lower to finish slightly in the red despite a better-than-expected consumer confidence report and a plethora of earnings results from Dow members and the tech sector that were generally better than expected, as investors remained cautious about China’s role in the economic recovery. Apple and Texas Instruments both topped profit expectations, as did Johnson & Johnson and DuPont, while Verizon Communications matched. Also on the earnings front, US Steel reported a larger-than-expected loss, while VMware beat expectations and provided upbeat guidance. Elsewhere, GM inked a deal to sell its Saab unit to Spyker Cars, NV. In other economic news, home prices slipped year-over-year in November, but the pace of declines moderated and the Richmond Fed Manufacturing Index improved moderately. Treasuries gave up early gains and were mostly flat.

The Dow Jones Industrial Average fell 2 points (0.03%) to close at 10,194, the S&P 500 Index lost 5 points (0.5%) to 1,092, and the Nasdaq Composite shed 7 points (0.3%) to 2,203. In moderately light volume, 1.1 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $1.50 lower at $74.71 per barrel, wholesale gasoline lost $0.03 to $1.97 per gallon, and the Bloomberg gold spot price fell $0.45 to $1,097.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 78.49.

Dow member Verizon Communications (VZ $30) reported 4Q EPS ex-items of $0.54, matching the estimate of Wall Street analysts, with revenues of $27.1 billion—a 9.9% year-over-year (y/y) increase—which also matched expectations. The company’s wireless unit, Verizon Wireless, which it jointly owns with Vodafone (VOD $22)—added 2.2 million total net customer additions and its wireline business grew by 153,000 customers each for its internet and TV units. Shares were lower.

The Travelers Companies (TRV $50) posted 4Q operating EPS of $2.12, versus the consensus estimate of $1.49, with revenues increasing 11% y/y to $6.5 billion, topping the Street’s forecast of $5.3 billion. The Dow member said throughout the year its underwriting results were strong and its high quality investment portfolio continued to perform well. The company said its retention rates remained high and the impact of renewal rate changes on premiums remain positive across all three of its business segments. TRV said it expects 2010 EPS to come in at a range of $5.20-5.55, versus the consensus estimate of analysts, which is calling for the company to report full-year EPS of $5.56 for 2010. Shares were higher.

DuPont (DD $31) announced 4Q EPS ex-items of $0.44, three pennies ahead of what the Street was expecting, with sales up 10% y/y to $6.4 billion, above the $6.2 billion that was forecasted. The Dow member said volume grew 10%, with increases in all regions. DD raised its 2010 earnings forecast by five cents to a range of $2.15-2.45, versus analysts’ expectations of $2.26. Shares were modestly lower.

Dow component Johnson & Johnson (JNJ $63) posted 4Q EPS ex-items of $1.02, five cents above the consensus of Wall Street analysts, with revenues growing 9% y/y to $16.6 billion, compared to the $15.7 billion that was expected. JNJ said it expects full-year 2010 EPS ex-items to be between $4.85-4.95, compared to the $4.94 that the Street is forecasting. Shares were lower.

Apple Inc. (AAPL $206) reported fiscal 1Q EPS of $3.67, compared to the $2.07 consensus of analysts, with revenues jumping 32% to $15.68 billion, versus the $12.1 billion that was expected. Sales of Macintosh computers rose 33% y/y on a per unit basis, sales of iPhones rose 100% versus last year, while sales of iPods declined by 8%. AAPL issues 2Q guidance that topped analysts’ expectations. Shares ended higher on the day.

Texas Instruments (TXN $23) announced 4Q EPS of $0.52, compared to the $0.49 that analysts were anticipating, with revenues of $3.00 billion, roughly inline with the $2.98 billion that the Street forecasted. TXN said in 4Q, demand was strong across end markets without the usual holiday slowdown. TXN added that with demand continuing to be solid and inventories well below historical levels, its outlook for 1Q reflects the likelihood of sequential growth instead of the typical seasonal decline. Shares finished lower.

Shares of US Steel (X $50) ended the day nearly 12% lower after the company posted a 4Q loss of $1.86 per share, compared to the $1.44 per share loss that was expected by analysts. However, revenues rose 19% quarter-over-quarter (q/q), which topped the Street’s estimate of $3.1 billion. The company said it saw a modest improvement in 4Q compared to last quarter, mainly due to higher average realized prices, increased shipments and higher utilization rates for its flat-rolled operations, driven primarily by North American automotive ad service center markets. X said it expects a loss “in line” with 4Q’s shortfall as gradually improving business conditions are not yet fully reflected in its operating results. Analysts are expecting the company to post a $0.44 per share loss for 1Q.

VMware Inc. (VMW $47) reported 4Q EPS ex-items of $0.31, beating the Street’s consensus by five cents, as revenues rose 18% y/y to $608 million, also besting forecasts, which called for revenues of $554 million. Shares of the technology firm jumped sharply higher after it said that while the economy is slowly recovering, it has improved near-term visibility as customers move forward with their IT investments, issuing 1Q and full year revenue guidance that topped analysts’ forecasts. Shares ended the day up 12%.

After returning to the table following negotiations that failed in November, General Motors has agreed to sell its Saab unit to Dutch sports-car maker Spyker Cars NV. According to the agreement, Spyker will pay $74 million in cash and $326 million in preferred shares for the 72-old Swedish brand, subject to a 400 million euro ($564 million) loan from the European Investment Bank, guaranteed by the Swedish government. Also, citing a person familiar with the matter, Bloomberg reported that the deal also hinged on GM’s demand that Russian businessman Vladimir Antonov, Spyker’s chairman and largest shareholder, leave the company. If all goes according to the agreement, the deal is expected to close in February.

Fed meeting begins, home prices report is mixed, consumer confidence increases

The S&P/Case-Shiller Home Price Index release showed a decline in home prices of 5.3% y/y in November—the smallest y/y decline since September 2007—versus the -5.0% that had been expected, and the rate of decline in home prices has been improving for approximately ten months according to S&P/Case-Shiller. Seasonally adjusted, prices were up 0.2% in November over October, compared to the 0.3% that was expected, but marking the sixth-consecutive monthly increase. David Blizter, Chairman of the Index Committee at S&P sounded a note of caution, noting that, “While we continue to see broad improvement in home prices as measured by the annual rate, the latest data show a far more mixed picture when you look at other details.” He points out that only 5 of the 20 markets saw price increases in November versus October, and that four of the markets—Charlotte, Las Vegas, Seattle and Tampa—posted new low index levels. However, on an annual basis, markets in Dallas, Denver, San Diego and San Francisco have finally entered positive territory, something that has not been seen in at least two years, adding to the mixed picture. Blitzer concludes that on balance, while the data show that home prices are far more stable than they were a year ago, “there is no clear sign of a sustained, broad-based recovery.” Also, the sustainability of the housing recovery could be impacted by the threat of rising foreclosures, expiration of tax incentives in the first half of 2010, and end of the Fed’s mortgage-backed security purchase program in March.

Meanwhile, the Conference Board released its consumer confidence (chart) report, which increased for a third-straight month, rising to 55.9 in January, above the expectation of 53.5. Also, December’s reading was upwardly revised to 53.6. The headline number rose as respondents’ gauge of the present economic situation increased from an upwardly revised 20.2, to 25.0, and expectations for the next six months climbed to 76.5, from 75.9—the highest since October 2007.

In other economic news, the Richmond Fed Manufacturing Index improved from last month’s unexpected decline into negative territory, improving from -4 in December to -2 in January. Broad indicators of activity—shipments and new orders—both posted improvements with orders moving into positive territory, while the employment component deteriorated.

Treasuries initially jumped following the confidence report, but finished near the flatline. The yield on the 2-year note fell 1 bp to 0.80%, the yield on the 10-year note was 2 bps lower at 3.61%, and yield on the 30-year bond was flat at 4.55%.

China reining in more liquidity

Amid China’s renewed pledge to fight excess liquidity to stem the formation of asset bubbles, Bloomberg reported that Bank of China, Ltd has ceased extending new corporate loans in the Shanghai area, except for customers who have repaid their liabilities, and China Construction Bank Corp has curtailed new lending once a monthly quota has been reached, citing people familiar with the matters. The actions follow the People’s Bank of China’s, the nation’s central bank, move to require banks to raise their reserve requirements—the amount of deposits banks hold on reserve.

Economic reports in Europe mixed

A report out of the UK showed the European nation exited the recession, as advance 4Q GDP rose 0.1% quarter-over-quarter (q/q), compared to a 0.2% decline in 3Q. Economists polled by Bloomberg were expecting a 0.4% advance. A 0.1% expansion in the services component, which makes up 76% of GDP, and a 0.4% rise in manufacturing were able to lift Britain out of the grip of its longest recession ever recorded. However, a gauge of business confidence in Germany—Europe’s largest economy—showed a better-than-expected reading. The Ifo Institute’s Business Climate Index reached an 18-month high of 95.2 in January, besting the 95.1 forecast of economists, and following the slightly downwardly revised 94.6 it reached in December. In a separate report, Germany’s import prices unexpectedly rose 0.5% month-over-month (m/m) in December, above the flat reading forecast by economists.

In other economic news across the pond, France’s consumer spending rose 2.1% in December, easily topping forecasts of a 0.6% gain, while Italy’s consumer confidence missed estimates and its retail sales came in unexpectedly flat in November.

Japan credit rating lowered, BoJ leave rates unchanged

Standard & Poor’s lowered its outlook on Japan’s AA sovereign credit rating to “negative”, citing “The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected.” Japan’s National Strategy minister, Yoshito Sengoku, said the shift in S&P’s outlook should be “a wake-up call” to the government. Elsewhere, the Bank of Japan kept its key its benchmark lending rate unchanged at 0.10%, as expected, and vowed to continue its fight against deflation, saying in its statement that deflation will moderate more than anticipated “due mainly to the rise in oil prices.”

New home sales and Fed meeting highlight tomorrow’s economic releases

The last in the series of housing data for the month will be released tomorrow, with new home sales forecasted to increase 3.0% month-over-month (m/m) in December to an annual rate of 366,000 units, after falling in three of the past four months, highlighted by an 11.3% decline in November. Existing home sales, which reflect closings from contracts entered one to two months earlier, tumbled 16.7% m/m in December to an annual rate of 5.45 million units, while new home sales are a more current reading on activity in the housing market, reflecting contract signings. The extension and expansion of the home buyer tax credit may have spurred demand during December, but the month is typically slow while consumers are busy with holiday activities, and the buying process typically takes several weeks before a contract is signed. Housing market data will likely be volatile for several months with the Fed tapering off purchases of mortgage-backed securities (MBS) ahead of a March conclusion, which may result in rising mortgage rates, as well as the end of the tax credit this spring.

Markets will be focused on the mid-day statement released upon the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. No changes are expected to interest rate policy at the meeting, but the focus for investors is any clues about the timing of when the Fed expects to begin increasing rates, focusing on the language used by the Fed with regard to the “extended period” for keeping rates at an exceptionally low rate. Additionally, at the December meeting, several FOMC participants indicated support for increasing the size of the MBS purchase program, so any changes in language regarding this program will also be scrutinized, and there is talk of the potential for the Fed to increase the rate paid on excess reserve balances.

Ben Bernanke’s term as Chairman of the Federal Reserve is scheduled to expire January 31, and fervor over his reappointment has been on the mind of traders. While it is unclear when a vote by Congress will take place, if he is not confirmed by January 31, then the Vice Chair, Donald Kohn, would serve as the acting Chair. However, Bernanke is likely to be reappointed as Chair of the FOMC, which is determined by a vote of the FOMC committee.

The other report on tomorrow’s US economic calendar is the MBA Mortgage Applications Index. Additionally, President Obama will be giving his State of the Union speech after the market close tomorrow night.

International economic news releases include Japan’s trade balance, the German consumer price index (CPI), French business and consumer confidence, Canadian CPI and manufacturing sales, as well as the Australian CPI and leading index. Brazil’s central bank meets to discuss monetary policy, with no changes expected for the benchmark SELIC rate, currently at 8.75%.