Morning Update

4Q Output Jumps to Soothe Some of the Bulls’ Recent Lumps

The bulls welcomed today’s larger-than-expected 4Q GDP report as stocks are moving solidly higher, as some of the economic concerns that have surfaced recently, which led yesterday’s solid decline and last week’s steep losses, are being soothed in late-morning action. The earnings calendar is in focus as Dow member Microsoft and Amazon.com both exceeded earnings forecasts. However, fellow Dow member Chevron posted a mixed profit report, and traders are reacting negatively to better-than-expected earnings from Honeywell International and Mattel Inc. Treasuries remain lower after extending losses following the GDP report and as the 4Q Employment Cost Index rose more than expected. Elsewhere on the economic front, Midwest manufacturing unexpectedly improved and consumer sentiment was revised higher than economists expected. Overseas, Asian markets followed yesterday’s decline in the US, while Europe is on the rebound.

At 11:04 a.m. ET, the Dow Jones Industrial Average is up 0.8 %, the S&P 500 Index is 0.7% higher, and the Nasdaq Composite is advancing 0.5%. Crude oil is up $0.66 to $74.30 per barrel, wholesale gasoline is up $0.02 at $1.94 per gallon, and the Bloomberg gold spot price is lower by $7.63 at $1,079.47 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% at 79.27.

Dow member Microsoft Corp. (MSFT 29) reported fiscal 2Q EPS, excluding the recognition of $1.7 billion in deferred revenue, which boosted earnings by $0.14 per share, of $0.60, compared to the $0.59 that Wall Street analysts had expected. Revenues rose 14% year-over-year (y/y) to a record $19.02 billion, while excluding the aforementioned revenue recognition, the figure was $17.31 billion, compared to the $17.8 billion that the Street had expected. The company said exceptional demand for its Windows 7 software led to the positive top line growth. Shares are lower.

Amazon.com (AMZN $131) reported 4Q EPS of $0.85, compared to the $0.72 that the street had expected, with net revenues jumping 42% y/y to $9.52 billion, versus the $9.04 billion that analysts had forecasted. AMZN said it expects 1Q net sales to be between $6.45-7.00 billion, compared to the $6.4 billion that analysts are expecting. Shares are nicely higher.

Dow member Chevron (CVX $74) reported 4Q EPS of $1.53, compared to the $1.70 that was expected, with revenues of $48.0 billion, above the $40.4 billion that had been expected. CVX said its upstream profits—exploration and production—jumped 27%, while its downstream results—refining—swung to a loss of $613 million in 4Q from a profit of $2.1 billion in 3Q, leading to its total 4Q earnings falling 37%. CVX said its upstream business benefited from higher crude oil prices compared to the same period last year, while its downstream business was impacted by low margins on the sale of gasoline and other refined products due to weak demand and excess supply worldwide. Shares are higher.

Honeywell International (HON $38) reported 4Q EPS of $0.91, one penny ahead of what analysts were expecting, with revenues falling 7% y/y to $8.1 billion, inline with the Street’s expectations. The company’s aerospace, automation and control solutions, and specialty materials units all posted sales declines in the quarter, while sales at its transportation systems group increased. HON said that while it continues to plan conservatively for 2010, it is encouraged by the improving order trends and stabilization in many of its end markets. The company reaffirmed its previously stated 2010 guidance of revenues between $31.3-32.2 billion and EPS in a range of $2.20-2.40, compared to the Street’s forecasts of revenues of $31.8 billion and EPS of $2.41. Shares are lower.

Mattel Inc. (MAT $19) reported 4Q EPS ex-items of $0.81, compared to the $0.68 that analysts had expected, with revenues increasing 1% to $1.96 billion, roughly inline with the Street’s estimate. The company said its sales in the US were down 2%, while international sales were up 3%. The company added that worldwide sales of its Mattel girls and boys brands gained 4% y/y, while its Fisher-Price brands fell 3%. MAT is lower.

4Q GDP jumps, employment costs increase more than expected

Advance 4Q Gross Domestic Product, the broadest measure of economic output, grew at a 5.7% annualized rate, higher than the 4.7% expected by the Bloomberg survey of economists, and an acceleration from the 2.2% growth reported in 3Q. Personal consumption advanced 2.0%, above the 1.8% forecast. Real final sales, which exclude changes in inventory, were 2.2% higher, versus the 1.5% that was reported in 3Q.

The GDP Price Index rose 0.6%, versus the 1.3% consensus forecast, while the core PCE Index, which excludes food and energy, gained 1.4%, versus expectations of 1.3% and the rate remains between of the Fed’s implied target of 1-2%. Treasuries are lower, but have pared some losses that came immediately following the report.

The increase in GDP was primarily driven by a positive contribution from inventories of 3.4%, as stocks of goods fell at a slower rate, as well as a 1.4% contribution from consumer spending, and a 0.8% contribution from capital spending on equipment and software, which rose at a 13.3% pace in 4Q, the most since 2006. Businesses cut payrolls at an extreme rate in the face of the crisis and productivity has soared – companies are squeezing more work out of fewer employees and are reluctant to hire with demand still at low levels. As an alternative to hiring more employees in response to an increase in demand, adding technology can be a lower cost way of producing more with the same number of employees, and with capital spending near a 45-year low as percentage of GDP, this could add to future economic growth.

Elsewhere, the final the University of Michigan’s Consumer Sentiment Index improved in January by a larger amount than initially reported, increasing from 72.8 in the preliminary report to 74.4, versus the Bloomberg forecast, which called for an increase to 73.0. The current conditions component of the report advanced from 81.0 in the initial release to 81.1, but the expectations component advanced solidly from 67.5 to 70.1. Inflation expectations were nearly unchanged with the one-year outlook remaining at 2.8%, while the five-year expectation rose slightly from 2.8% to 2.9%.

Meanwhile, Chicago PMI (chart), unexpectedly improved, increasing from a downwardly revised 58.7 in December to 61.5 in January, compared to the decline to 57.2 that was forecasted by economists. A reading of 50 is the demarcation point between expansion and contraction, and the reading was the highest since November 2005. The employment index rose to 59.8 in January, up sharply from the 47.6 it reached in December.

In other economic news the Employment Cost Index (chart) for 4Q rose 0.5%, above the Bloomberg consensus, which called for the index to rise by 0.4%. Both components of the index, wages and salaries and benefits, increased.

Europe rebounding from banking and government debt concerns

Stocks in Europe remain higher in late-day action, led by basic materials and technology issues as traders are seeking stocks in these issues that have been hit the hardest recently amid growing concerns about the continuation of the global economic recovery. Today’s US GDP report is also adding to the advance across the pond. Also, financials are higher to help out the advance, rebounding from yesterday’s sell-off on festering fears about the government debt in Greece—and now Portugal—along with renewed concerns about the UK after Standard & Poor’s said it doesn’t see the UK “among the most stable and low-risk banking systems globally.” The economic front in the region is in focus, as reports on UK consumer confidence and home prices in the region both showed better-than-expected improvement, while consumer prices out of the Eurozone rose by a smaller amount than economists surveyed by Bloomberg had anticipated, but at the fastest pace in almost a year, per Bloomberg. Moreover, the Eurozone unemployment rate in December increased from a downwardly revised 9.9% in November to 10.0%, compared to the forecast of economists, which called for the rate to increase to 10.1%.

There are some equity stories that are worth mentioning, as luxury car maker BMW (BAMXY $14) is moving higher after it provided an upbeat 2010 sales forecast and said it feels confident about posting a profit for 2009. Additionally, German consumer goods maker Henkel (HENKY $44) is modestly higher after it said it expects this year’s earnings to rise. Britain’s FTSE 100 Index is up 1.5%, while France’s CAC-40 and Germany’s DAX index’s are gaining 2.0%.

Asia declines as economic concerns continue to linger

Stocks in Asia were broadly lower following the slide in the US markets yesterday, led by weakness in technology issues, and lingering concerns about the global economic recovery. The impact of China’s recent efforts to rein in excess liquidity on the global recovery and growing worries about the health of government debt and the financial industry in Europe painted the uneasy backdrop in Asia. Japan was in focus amid reaction to a plethora of economic and earnings reports in the region. On the economic front, the Japanese jobless rate unexpectedly fell, the pace of decline in consumer prices moderated, industrial production rose less than anticipated, and vehicle production surged. On the equity front, the nation’s largest computer memory chip maker, Elpida Memory (ELPDF $20), fell solidly after posting profits that missed analysts’ forecasts, and Advantest (ATE $27) tumbled after the world’s largest memory-chip testing equipment maker forecasted a larger-than-expected full-year loss. Additionally, Nippon Steel (NISTY $37) declined after forecasting its first annual net loss in seven years, per Reuters, and Nintendo (NTDOY $37) came under solid pressure after the company said its quarterly profit fell 23%. Japan’s Nikkei 225 Index fell 2.1% amid the flood of data in the nation.

Elsewhere, other leading decliners in the Asia/Pacific region included Australia’s S&P/ASX 200 Index’s 2.2% drop amid the aforementioned global economic uneasiness, which damped the outlook for commodity demand to weigh on the resource-heavy nation. Meanwhile, South Korea’s Kospi Index’s 2.4% fall led the way as the weakness in tech shares overshadowed a report that showed the nation’s industrial production rose more than anticipated. Rounding out the day in Asia, Hong Kong’s Hang Seng Index dropped 1.2%, Taiwan’s Taiex Index decreased 0.7%, while the Shanghai Composite Index fell a modest 0.2% and India’s BSE Sensex 30 Index actually rose 0.3%.