Evening Update

Markets Nearly Flat as Rally Stalls

Stocks managed to hang near the flat-line but finished lower after a two-day rally started the month off on a positive note as weakness in the financial and healthcare sectors was partially offset by gains in technology stocks. Treasuries finished the day lower after the ISM Non-Manufacturing Index showed a smaller-than forecasted improvement and the ADP Employment Change Report showed private sector payrolls fell by less than expected. In equity news, Dow component Pfizer beat the Street’s revenue forecast, but missed earnings estimates and gave disappointing guidance. In the media sector, Comcast, News Corp and Time Warner all topped earnings expectations. Toyota was again in the spotlight as recall fears continue, exacerbated by comments from the US Transportation Secretary about whether drivers should continue to drive their vehicles. In other equity news, VeriSign missed analysts’ profit projections, while MetLife beat its estimates but reported a significant decline in revenue.

The Dow Jones Industrial Average fell 26 points (0.3%) to close at 10,271, the S&P 500 Index lost 6 points (0.5%) to 1,097, and the Nasdaq Composite gained 1 point (0.04%) to 2,191. 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 $0.29 lower at $76.94 per barrel, wholesale gasoline rose $0.02 to $2.03 per gallon, and the Bloomberg gold spot price fell $5.05 to $1,109.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.5% to 79.38.

Dow member Pfizer Inc. (PFE $19) reported adjusted 4Q EPS of $0.49, one penny shy of the estimate of Wall Street analysts, but revenues jumped 34% year-over-year (y/y) to $16.5 billion, exceeding the $15.9 billion that the Street had anticipated. The company said it closed the Wyeth acquisition and immediately began the integration of its operations, and it remains excited about its more diverse product and pipeline portfolio, which it expects will result in improved opportunities for the company in 2010 and beyond. PFE expects 2010 EPS to be in a range of $2.10-2.20 and revenues between $67-69 billion, compared to analysts’ expectations of EPS of $2.27 and revenues of $67.5 billion. PFE also revised its 2012 outlook downward, citing divestitures of its animal-health business and the shift in revenues for its HIV products to the joint venture with GlaxoSmithKline (GSK $39). PFE finished lower.

Comcast Corp. (CMCSA $16) posted 4Q EPS ex-items of $0.29, excluding a $0.04 per share benefit, two cents above the forecast of analysts, while its revenues grew 2.9% y/y to $9.1 billion, above the $9.0 billion that the Street was expecting. The company said its revenues benefited from continued growth at its cable unit, which was partially offset by higher expenses at its programming and corporate segment. CMCSA’s cable segment revenues increased 2.6% to $8.6 billion, reflecting higher high-speed internet, Comcast digital voice and business services revenues, partially offset by lower advertising revenue as well as lower video revenue due to video customer losses and more moderate rate increases versus last year. Shares were lower.

Time Warner Inc. (TWX $28) announced 4Q EPS ex-items of $0.55, three pennies above the expectation of analysts, with revenues increasing 2% y/y to $7.3 billion, above the $7.1 billion that the Street had anticipated. The company’s networks unit revenues grew 4% and its filmed entertainment sales rose about 7%, while its revenues at its publishing unit fell 13%. TWX said it increased its regular quarterly dividend by 13.3% to $0.2125 per share. Shares ended lower.

News Corp (NWSA $14) reported fiscal 2Q EPS ex-items of $0.25, compared to the $0.19, with revenues increasing 10% y/y to $8.7 billion, above the forecast of analysts, which called for the company to report revenues of $8.2 billion. The parent of the Wall Street Journal and Twentieth Century Fox film studio said it saw growth at the filmed entertainment, television, cable network programming, newspapers and book publishing, partially offset by decreases at the direct broadcast satellite television unit and its other segments. NWSA said its filmed entertainment division’s operating income nearly tripled, reflecting several worldwide home entertainment successes, and including the launch costs for the worldwide release of Avatar, which has already garnered more than $2 billion worldwide, surpassing Titanic as the highest grossing film of all time. The company boosted its semi-annual dividend by 25% to $0.075 per class A and class B shares, and its CEO Rupert Murdoch said he has every confidence that the company is entering a new period of sustained growth. NWSA also increased its 2010 earnings guidance on stronger-than-expected results at its film, television, and newspaper businesses. Shares of NWSA were up solidly.

Walgreen Co. (WAG $35) finished lower after the company reported a 1.1% decline in January same-store sales—sales at stores open at least a year—compared to the 2.2% increase that analysts surveyed by Bloomberg had expected. WAG said pharmacy same-store sales were negatively affected by generic drug introductions and a lower incidence of flu compared with the same period last year. Pharmacy sales accounted for 66.2% of total sales for the month.

Shares of the world’s largest automaker Toyota Motor Corp. (TM $73) were down solidly again amid continued recall fears, exacerbated by reports that the US government is considering civil penalties against the company, and after the Japanese automaker said its North American and Japanese dealers had received several dozen complaints over insufficient braking on the company’s new Prius hybrid vehicle. Also, shares of the Japanese automakers came under further pressure after US Transportation Secretary Ray LaHood told owners of recalled TM vehicles to “stop driving it. Take it to a Toyota dealer because they believe they have a fix for it.” LaHood held a press conference after he made the comments before a House Appropriations subcommittee on transportation, saying he misspoke when he said stop driving them, and meant to say that if owners are in doubt about their vehicles, then they should take it into the dealership to have it diagnosed. TM responded to the comments, telling owners that if they have noticed a problem with their vehicles, then they should contact a dealer.

VeriSign Inc. (VRSN $23) was under pressure after reporting 4Q EPS ex-items of $0.31, three cents short of the consensus estimate of analysts, while revenues grew about 6% to $263 million, above the $260.7 million that the Street had anticipated. VRSN said revenue for its naming and authentication services—its core business—grew 2% versus the prior quarter.

MetLife (MET $35) reported 4Q EPS of $0.96, which beat analysts’ estimates by one cent, but profit fell 70% from the fourth quarter of last year and revenue fell 12% to $12.34 billion, below the $12.56 billion forecasted. The company also confirmed that it is talking with American International Group Inc. (AIG $24) about buying its American Life Insurance Co., but said a deal is not certain. Rumors of the deal first surfaced last month when The Wall Street Journal reported the two companies were in final negotiations of a deal valued between $14-15 billion. Shares of MET finished lower.

Services sector in expansion territory, private sector payrolls fall less than expected

The ISM Non-Manufacturing Index (chart) increased to 50.5 in January, lower than the forecast of 51.0, but moved back into expansion territory, with 50.0 being the level that separates expansion from contraction. December’s figure was revised down to 49.8 from the initially reported 50.1, as the ISM made its annual seasonal adjustment. Within the report, new orders improved to 54.7 from 52.0 in December, while employment increased to 44.6 from 43.6. The services sector has struggled to consistently post expansionary figures, while the manufacturing sector has been in expansion mode for six straight months. Manufacturing has been improving on export strength while the service sector is more domestic-driven, suffering from the weak state of consumer spending in the US. However, the cyclical nature of manufacturing tends to lead changes in the overall economy, with increased production resulting in job or wage gains, which filter through the economy in a positive feedback cycle, and economists are forecasting a gain in employment for Friday’s non-farm payrolls report.

Similar to the ISM Manufacturing Index, the price component increased further to 61.2 from 59.6, and was the strongest underlying component within the report. Traders are concerned about the prospect for inflation to occur due to money injected into the system by central banks around the world to fight the credit crisis, financed by ever-rising government debt, but deflation may be the bigger threat.

The ADP Employment Change Report was released and showed private sector payrolls fell by 22,000 jobs, less than the forecast that employers shed 30,000 jobs in January, and December’s figure was revised to a smaller-than-initially reported loss of 61,000, and January’s decline was the smallest since December 2007. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls increased by 10,000 jobs in January, and that the unemployment rate remaining at 10.0%.

In other economic news, the US MBA Mortgage Application Index jumped 21.0% last week, after the index, which can be quite volatile on a week-to-week basis, fell 10.9% in the previous week. The increase came as the Refinance Index surged 26.3%, and the Purchase Index rose 10.3%. The average 30-year mortgage rate dipped 1 basis point to 5.01% and remains above the record low of 4.61% that was reached at the end of March 2009.

Treasuries finished the day lower as the yield on the 2-year note rose 2 bps to 0.88%, the yield on the 10-year note gained 6 bps to 3.70%, and yield on the 30-year bond increased 7 bps to 4.63%.

Mixed sentiment on the international front

The economic front painted a mixed picture, with UK consumer confidence increasing more than expected, while the country’s Services PMI deteriorated more than expected, but remained in expansionary territory. Moreover, Eurozone retail sales unexpectedly came in flat, versus the forecast of economists, which called for a 0.4% month-over-month (m/m) increase, but the Eurozone Services PMI was unexpectedly revised higher for January. Elsewhere, final revisions to Services PMI’s in Germany and France were mixed with the German reading being unexpectedly revised higher, while the French report was surprisingly revised lower, but remaining in expansionary territory. Rounding out the busy Eurozone economic calendar, the first look at Italy’s Services PMI deteriorated more than anticipated—but held at a level indicating expansion—while Russia’s Services PMI fell from 53.4 in December to 51.9 in January. A PMI reading above 50 signals expansion.

Concerns about Greece’s debt waned after the European Commission said it is endorsing the country’s plan to cut its budget deficit. Greece proposed to slash its deficit from 12.7% of GDP to within the EU’s 3% limit by 2012, while announcing a fuel-tax increase and an expansion of a wage freeze to cover all public workers. The commissioner of EU Economic and Monetary Affirms said they “are giving confidence and supporting the Greek authorities”, but also added that “every time we observe slippages, we will ask the Greek authorities to adopt additional measures.”

Initial jobless claims and factory orders on tap for tomorrow

Major releases on the US economic calendar tomorrow include weekly initial jobless claims, which are expected to decline to 455,000 from a previous reading of 470,000 and December factory orders, which are also expected to rise 0.5% m/m, after a higher than expected increase of 1.1% last month.

On the international economic calendar, the Bank of England and the European Central Bank are both scheduled to release interest rate decisions. While both are forecasted to keep rates unchanged, some predict that the BOE will pause its 200 billion-pound bond purchase plan as well as halt spending with newly created money for the first time since its quantitative easing policy began last March. Other international releases include monthly factory orders in Germany, monthly retail sales and building approvals in Australia and Canadian building permits.