Evening Update

Markets Pull Back Slightly After Yesterday’s Jump

Stocks overcame early pressure to finish barely to the downside, on a day of light trading volume as snow pounds the U.S. East Coast. The text of Fed Chief Ben Bernanke’s House testimony on the Fed’s exit strategy generated early concern, as it provided no indication that economic conditions have improved enough to warrant the Fed to begin deployment of tools to rein in monetary policy as soon as some had expected. Tools suggested by the report include increasing the interest rate on banks’ holdings of reserve balances, as well as a possible hike in the discount rate. Conflicting reports continue to emerge out of Europe over whether a bailout is in store for debt-ridden Greece, as the EU meets tomorrow to discuss the issue. Treasuries finished the day lower, erasing earlier gains after reports showed an unexpected widening of the trade deficit and a decline in mortgage applications. In equity news, Dow member Walt Disney Co. reported earnings that beat Street estimates, while Sprint Nextel and Dean Foods both posted larger-than-expected losses for the quarter. In other news, Micron Technology acquired a privately held flash-memory product maker and New York Times Co. reported earnings that beat analysts’ estimates.

The Dow Jones Industrial Average lost 20 points (0.2%) to close at 10,038, the S&P 500 Index fell 2 points (0.2%) to 1,068 and the Nasdaq Composite declined 3 points (0.1%) to 2,148. In low volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $0.75 to $74.50 per barrel, wholesale gasoline was flat at $1.93 per gallon, and the Bloomberg gold spot price lost $5.80 to $1,072.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—gained 0.2% to 80.05.

Dow member Walt Disney Co. (DIS $3029) reported fiscal 1Q EPS ex-items of $0.47, compared to the $0.39 that Wall Street analysts had expected, with revenues increasing 1% year-over-year (y/y) to $9.7 billion, versus the Street’s forecast, which called for revenues to come in at $9.6 billion. Revenues at its media networks rose 7% y/y to $4.2 billion, its parks and resorts revenues came in flat versus last year at $2.7 billion, while its studio entertainment unit saw its revenues dip 1% to $1.9 billion. Shares finished the day slightly higher..

Sprint Nextel Corp. (S $3) announced a 4Q loss, ex-items, of $0.23 per share, compared to the $0.19 per share shortfall that analysts were anticipating, with net revenues declining 7% y/y to $7.9 billion, compared to the $8.0 billion that the Street was looking for. The company said it lost a total of 69,000 net retail subscribers during the quarter, but its y/y post-paid—the industry’s more highly coveted subscribers—gross subscriber addition improvement was the best in Sprint Nextel history. Shares were solidly lower.

Dean Foods Co. (DF $15) reported 4Q EPS ex-items of $0.31, six cents below the forecast of analysts, and revenues fell 3% to $3.0 billion, roughly inline with the Street’s forecast. The company said 4Q was a challenging finish to an otherwise highly successful year, with performance below its expectations. The food and beverage firm said its fresh dairy direct unit was impacted by retailer and competitive pressures that had been apparent through much of the year, which became “significantly” more pronounced, exacerbated by sharply rising commodities. DF issued 1Q and full-year 2010 EPS guidance that missed analysts’ estimates, saying the 1Q presents a “challenging overlap,” while the balance of the year the overlaps and commodity forecasts become “much less daunting.” Shares were sharply lower.

Micron Technology (MU $9) agreed to acquire Numonyx B.V., a privately held joint venture of STMicroelectronics NV (STM $8) and Intel Corp. (INTC $20) in an all-stock transaction valued at $1.27 billion. Numonyx primarily sells flash memory products–typically used to store software in cellphones and other products. The company said the deal should provide new technology and substantially boost revenues, possibly moving it up to #2 in the memory-chip market behind leader Samsung Electronics (SSNLF $651). Shares of MU finished lower.

New York Times Co. (NYT $11) announced 4Q EPS of $0.44, six cents above analysts’ forecasts, and revenue of $681.2 million, representing a decrease of 12% from the same quarter last year. The company reported that print advertising fell 20% and total ad revenue was down 15%, although these declines were slightly offset by an 11% increase in digital growth. Shares ended the day lower.

Bernanke testimony postponed but Street gets the text of the testimony

The Federal Reserve released the prepared text of Federal Reserve Chairman Ben Bernanke’s testimony before the House on unwinding emergency Fed liquidity programs, which has been postponed due to inclement weather in the nation’s capital. Bernanke wrote that although at present the US economy continues to require the support of “highly accommodative monetary policies,” at some point the Fed will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.

Bernanke reiterated that economic conditions are likely to warrant exceptionally low levels of the fed funds rate for an extended period of time, but in due course, as the expansion matures it will need to begin to tighten monetary conditions to prevent the development of inflationary pressures. The Fed Chief noted that it could increase interest on banks’ holdings of reserve balances, resulting in “significant upward pressure on all short-term rates.” Also, Bernanke noted that it could utilize reverse repurchase agreements—where the Fed sells a security to a counterparty with an agreement to repurchase the security at some date in the future—as a way to reduce the large quantity of reserves held by the banking system, to reduce the net supply of funds to the money markets, improving the Fed’s control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates. Bernanke’s testimony also said the Fed could begin to sell assets to shrink its balance sheet but “at least not until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.”

Bernanke’s remarks revealed that the sequencing of steps and the combination of tools that the Fed uses will depend on economic and financial developments. He pointed out that one possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. An interesting aspect of the release was where Bernanke noted that as a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the fed funds market has declined considerably, raising the possibility that the fed funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, Bernanke added, the Fed is considering the utility of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. “In particular, the Fed could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance,” the Fed Chairman outlined. Additionally, Bernanke revealed that the Fed may raise the discount rate, which is the rate the central bank charges banks for emergency loans and currently stands at 0.50%, which is a historically low level. The discount rate is typically kept three-quarters to a full percentage point higher than the fed funds rate, but that rule of thumb has been relaxed as the fed funds rate was lowered to between 0 and 0.25%. Bernanke said the Fed will consider a “modest increase” in the discount rate, but added that such an increase “should not be interpreted as signaling of any change in the outlook for monetary policy.”

Treasuries ended the day lower, with the yield on the 2-year note gaining 5 bps to 0.88%, the yield on the 10-year note 4 bps higher at 3.69%, and the yield on the 30-year bond up 5 bps to 4.64%.

Trade deficit unexpectedly widens

The trade deficit widened from an unrevised $36.4 billion in November to $40.2 billion in December, versus the Bloomberg estimate calling for the deficit to narrow to $35.8 billion. The gap is the biggest in a year, as imports increased 4.8%, and exports rose 3.3% to the highest level since October of 2008. Strength in oil prices led to imports outpacing exports as the average price per barrel rose $0.66 to $73.20, resulting in a total bill for crude oil imports rising from $17.81 billion to $20.28 billion.

In other economic news, the US MBA Mortgage Application Index dipped 1.2% last week, after the index, which can be quite volatile on a week-to-week basis, jumped 21.0% in the previous week. The decrease came as the Purchase Index fell 7%, offsetting a modest rise in the Refinance Index, which rose 1.4%. The average 30-year mortgage rate fell 7 basis points to 4.94% but remains above the record low of 4.61% that was reached at the end of March 2009.

Greek relief expectations highlight international news

Reports continue to surface that European officials are nearing the deployment of a plan to support the deficit issues in Greece, which have fueled concerns as of late about the impact of a possible debt default in the nation on the overall European economy as well as the global economic recovery. Several media reports had suggested that European governments and other regulators are in discussions pertaining to a plan to help Greece but no confirmation of the reports or any official announcement out of the Eurozone have been made on the issue. Tomorrow, the European Union is expected to hold its summit and there are conflicting reports that a plan for Greece is on the docket for discussion. Also, Eurozone finance ministers held a conference call to discuss Greece, but no plan is expected to result from the talks. Meanwhile, there were some economic reports in the region that were worth noting as industrial production in December for both France and Italy unexpectedly fell month-over-month (m/m), while industrial production in the UK rose more than anticipated.

Advance monthly retail sales postponed

A report on advance monthly retail sales for January was scheduled to be released tomorrow, but has been delayed until Friday due to inclement weather. Weekly initial jobless claims will be released tomorrow, with expectations of a decrease in claims to 465,000 from a previous reading of 480,000.

International economic releases tomorrow include Australian employment data, the German wholesale price index, and China will release new loans, money supply, and price index information sometime in the next two days.