Evening Update

Little Surprise in Fed Rate Decision

Stocks rallied late in the day, leading all three major indexes to post modest gains, following the Federal Reserve’s monetary policy announcement, in which it kept its target for the fed funds rate unchanged, as expected, and maintained its intention to keep rates at this level for an extended period. However, the accompanying policy statement did show one Fed member cast a dissenting vote on whether to keep the “extended period” language in the policy statement. Treasuries finished the day lower but showed little reaction to the Fed announcement as the short-to-mid end of the curve lead the decline. In equity news, Dow members Boeing and United Technologies beat earnings estimates, while fellow Dow component Caterpillar missed on the top line and provided cautious guidance for the future. Elsewhere, Yahoo and ConocoPhillips each posted profits that beat analysts’ forecasts, while Apple unveiled the iPad, their new tablet computer. Toyota Motor Corp also announced that it will suspend production and sales in the US of eight models tied to a recall for sticking accelerator pedals.

The Dow Jones Industrial Average rose 42 points (0.4%) to close at 10,236, the S&P 500 Index gained 5 points (0.5%) to 1,098, and the Nasdaq Composite increased 18 points (0.8%) to 2,221. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil was $1.06 lower at $73.65 per barrel, wholesale gasoline lost $0.03 to $1.94 per gallon, and the Bloomberg gold spot price fell $9.55 to $1,088.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 78.73.

Dow component Caterpillar (CAT $53 ¹) reported 4Q EPS ex-items of $0.41, compared to the $0.28 that Wall Street analysts had forecasted, while revenues fell 39% year-over-year (y/y) to $7.9 billion, missing the Street’s consensus estimate of $8.1 billion. CAT said it continues to see signs of economic improvement, particularly in China and most developing countries and it is seeing signs of improvement in North America, Europe and Japan, but these economies remain weak and have not rebounded as quickly as developing countries. The company said it expects EPS for 2010 to be about $2.50 at the mid-point of it sales range, which is expected to be up 10-25% from $32.4 billion in 2009. Analysts are expecting the company to report 2010 EPS of $2.71 and revenues of $36.1 billion. CAT shares traded solidly lower.

Boeing (BA $62 ¹) announced 4Q EPS of $1.75, compared to the $1.36 that analysts had forecasted, led by a 9.4% y/y increase in revenues to $17.9 billion, above the $17.6 billion that the Street had forecasted. The Dow member said challenges ahead are significant and its focus areas for 2010 are to certify and deliver the 787 and 747-8 aircrafts and further reposition its defense, space and security business. The company issued 2010 EPS guidance that missed analysts’ expectations, “reflecting the previously announced 777 production rate reduction, reduced scope on Army modernization and missile defense programs, and some consideration for development program and market risks.” Shares were higher.

Dow member United Technologies Corp. (UTX $68) posted 4Q EPS ex-items of $1.23, compared to the consensus estimate of analysts, which called for the company to report $1.14. Revenues at the industrial conglomerate fell 5% y/y to $14.1 billion, but above the $13.8 billion that the Street had expected. The company said it closed the year with solid performance in the face of continuing difficult end markets, but its “relentless” focus on costs across the business contributed to strong margin expansion in the quarter. UTX also affirmed its 2010 outlook of 7-13% earnings growth. Shares finished lower.

Yahoo (YHOO $16) reported 4Q EPS ex-items of $0.15, four cents above the Street’s forecast, as revenues came in at $1.3 billion, an 8.5% y/y decline, excluding traffic acquisition costs, just above the consensus forecast of $1.2 billion. YHOO said the 4Q marked a strong finish to 2009, as it saw demand for premium display advertising improve significantly, and grew owned and operated search advertising revenue sequentially for the first time since 3Q of 2008. The company said it expects operating earnings to be between $90-110 million, compared to the Street’s forecast of $113 million. Shares were lower.

Apple (AAPL $208) shares finished higher after unveiling its new tablet computer, called the iPad, which features a 9.7-inch display and will be available in late March, at a base price of $499. CEO Steve Jobs said “iPad is our most advanced technology in a magical and revolutionary device at an unbelievable price.”

ConocoPhillips (COP $50) reported 4Q EPS ex-items of $1.16, four cents above analysts’ expectations, with revenues declining from $44.9 billion to $43.6 billion, compared to the $40.5 billion that analysts were anticipating. COP said its results benefitted from improved crude oil prices and lower costs across the company, which partially offset low worldwide refining margins, volumes and natural gas prices. Shares ended the day lower.

Toyota Motor Corp. (TM $80) finished solidly lower in Japanese trading and postied a sizeable decline in US action as the world’s largest automaker announced that it will suspend production and sales in the US and Canada of eight models tied to a recall for sticking accelerator pedals, which has led to the company recalling over 2 million vehicles recently. TM will temporarily stop selling the RAV4, Highlander, Sequoia, Corolla, Camry, Avalon, Matrix, and Tundra vehicles.

Fed offers no surprises except one dissenting vote

The Federal Open Market Committee (FOMC) concluded their two-day monetary policy meeting and as expected, the Committee kept the fed funds target rate unchanged at a level between 0-0.25%. The Committee’s accompanying policy statement reiterated that the Fed continues to anticipate that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Also, the Committee did not change the size or the timing of its asset purchase programs, saying that “The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.” On the overall economy, the Fed said information received since it last met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Interestingly, there was a dissenting vote by Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Ben Bernanke was reappointed as Chair of the FOMC today in a vote of the FOMC committee. His 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. The Senate is scheduled to vote tomorrow and if Bernanke receives at least 60 votes, it will clear the way for a second Senate vote later in the week that will only require 51 votes for his reappointment. If he is not confirmed by January 31, then the Vice Chair, Donald Kohn, would serve as the acting Chair.

Treasuries finished lower, as the yield on the 2-year note rose 5 bps to 0.90%, the yield on the 10-year note was 3 bps higher at 3.64%, and yield on the 30-year bond was flat at 4.55%.

New home sales unexpectedly fall, despite extension and expansion of tax credit

New home sales fell 7.6% month-over-month (m/m) in December—the lowest level in eight months—to an annual rate of 342,000 units, compared to the expectation that sales would increase 3.0% m/m to an annual rate of 366,000 units. November’s results were upwardly revised to a 9.3% loss and an annual rate of 370,000 units versus the 11.3% decline previously reported. The median price of a new home fell 3.6% year-over-year (y/y) to $221,300, while rising 5.2% m/m. Inventory of new homes for sale fell to 231,000 units, representing 8.1 months of supply at the current sales rate.

The decline in sales in December may have been due to sales pulled forward a result of the initial expiration of the tax credit, particularly at the new home buyer level, concentrated in sales below $300,000. However the expansion of the tax credit to existing homeowners, who tend to trade up and buy more expensive homes, as well as a decline in new home buyers, may have been a factor in the increase of sales in higher-priced homes, with homes greater than $300,000 comprising 34% of sales versus an average below 25% over the prior five months. While new home sales are a small percentage of the market, they are viewed as a timely indicator of sales, as they are based on signings, while existing home sales are tallied from closings, and reflect contracts signed one to two months earlier.

In other economic news, the US MBA Mortgage Application Index fell 10.9% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 9.1% in the previous week. The decrease came amid a 2 basis-point increase in the average 30-year mortgage rate to 5.02% versus the previous week, and as the Refinance Index fell 15.1%, pressuring the overall application gauge. Meanwhile, the Purchase Index also contributed to the decrease, declining 3.3%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March 2009.

Fears of Japan following in Greece’s footsteps highlight international news

China continued its efforts to rein in lending, as its banking regulator told lenders to increase scrutiny of property loans by strictly following real estate lending policies. It also called for banks to “reasonably control” lending growth, in an attempt to prevent asset bubbles from forming. News out of Japan, the world’s number two economy, also raised concern as Standard & Poor’s lowered its outlook on the country’s debt to negative from stable. The move signals the risk of an actual downgrade of Japan’s debt in the future, which would raise the cost of borrowing in that country. The major credit rating agencies already downgraded the ratings of Greece, leading to increased concerns about the safety of government debt among the world’s developed countries. In other international economic news, France’s consumer confidence unexpectedly improved in January, while a report on German consumer prices showed a larger-than-expected m/m decline in January.

Durable goods order and initial jobless claims on the docket tomorrow

Tomorrow the economic calendar will yield the release of durable goods orders for December, which are forecast to rise 2.0%, while excluding the volatile component of transportation, orders are expected to rise 0.5%. The durable goods report depicts demand for products that are meant to last at least three years and certain components of the report can be good indicators used to determine the health of business spending. A strong report can suggest that corporations as well as households are feeling more optimistic about the economic outlook and may be increasing their propensity to consume. With business inventories severely lean, and as 4Q earnings season so far showing relatively improving conditions and outlooks, any uptick in demand could force companies to replenish their stockpiles of goods on hand, which could resuscitate hiring, feeding the positive feedback loop.

Other reports include the Chicago Fed National Activity Index, which is expected to decline to -0.40 from a -0.32 reading in November and weekly initial jobless claims, which are expected to decrease to 450,000 from a previous level of 482,000. Additionally, President Obama will be giving his State of the Union speech tonight.

On the international calendar tomorrow, the Eurozone reports business and consumer confidence, while Germany and Brazil release their monthly unemployment rates.