Evening Update

While Conviction Lacking, Relief Rally Posted

Markets fluctuated today as traders weighed the prospect of European Commission support for Greece, rallying early on news of an accord, selling off when the accord indicated “support” but lacked concrete measures to be undertaken, then edged higher as traders decided to focus on reports out of Asia, with Australia posting a strong gain in jobs, while China released inflation and lending information that were not as inflationary as rumored. After spending the past month selling off and analyzing the possible negative implications of sovereign debt highlighted by Greece’s problems, traders decided to book gains from shorting stocks and switch to the “glass half-full” view. The dollar fell, erasing an early gain, buoying energy and materials names, and Treasuries also reversed course as equities rose, ending lower amid a larger-than-expected decline in initial jobless claims. In earnings news, PepsiCo met earnings estimates despite a topline miss, while Activision Blizzard, Viacom Inc, and Allstate all bested Street forecasts. Elsewhere in equities, homebuilder Lennar announced a partnership with the FDIC to buy a portfolio of distressed loans with a face value over $3 billion, Philip Morris International announced a new $12 billion stock buyback program and better-than-expected earnings, while FirstEnergy Corp and Allegheny Energy Inc agreed to combine for roughly $4.7 billion.

The Dow Jones Industrial Average gained 105 points (1.1%) to close at 10,144, the S&P 500 Index rose 10 points (1.0%) to 1,078 and the Nasdaq Composite advanced 30 points (1.4%) to 2,177. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil rose $0.76 to $75.28 per barrel, wholesale gasoline was gained $0.01 to $1.94 per gallon, and the Bloomberg gold spot price increased $21.95 to $1,094.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 80.02.

PepsiCo Inc. (PEP $61) reported 4Q EPS of $0.90, matching the Wall Street estimate, with revenues increasing 4.5% year-over-year (y/y) to $13.3 billion, matching the Street’s forecast. The company said its total volume of snacks sold rose 1%, while its beverage volume fell 1%. North American beverage volume fell 5%, while beverage volume at its international division rose 3%, led by a 5% increase in its Asia, Africa and the Middle East unit. Its North American snacks volume was flat, while it saw a 4% increase in its international volumes. Again, the company’s Asia, Africa and the Middle East snacks volume led the way, jumping 13%. PEP said for the full-year 2010, it is targeting an 11-13% growth rate of its core EPS from $3.71 in 2009. Analysts are expecting the company to report full-year 2010 EPS of $4.16. PEP posted a modest gain.

Activision Blizzard (ATVI $11) announced 4Q EPS ex-items of $0.49, five cents above the consensus estimate of analysts, with revenues of $2.5 billion, also besting the Street’s forecast, which called for the video game publisher to post sales of $2.2 billion. Strong sales in its “Call of Duty” and “World of Warcraft” franchises helped the company exceed profit expectations. ATVI issued disappointing guidance but announced a $1 billion stock buyback program and it declared a dividend for the first time, saying it will pay a $0.15 per share annual dividend, helping its shares move solidly higher.

Viacom Inc. (VIA/B $28) posted 4Q EPS ex-items of $1.09, easily beating the $0.87 that analysts were expecting, but revenues declined 3% y/y to $4.1 billion, just shy of the $4.2 billion that the Street had anticipated. The media firm, which owns Paramount Pictures studio and cable channels including MTV and Comedy Central, said the decline in revenues was due to lower results in its media networks and filmed entertainment. In the quarter, ad sells fell 3% worldwide and 4% domestically, and the CEO said “We’re not out of the economic woods yet, particularly in certain international markets where the recovery is lagging the US” and added that US unemployment “continues to be a serious concern for all marketers.” Shares erased an early gain and were lower.

Allstate Corp. (ALL $29) announced 4Q EPS ex-items of $1.09, above the $1.02 that the Street forecasted, with revenues jumping 22.7% y/y to $8.1 billion, which matched analysts’ estimates. The company said its revenue growth reflected lower realized lower capital losses y/y, partially offset by decreases in net investment income and property-liability premiums. However, the company said its operating income grew 14%, reflecting improved results in both its property-liability and Allstate Financial units. Shares rose.

Lennar Corp (LEN $17) announced a partnership with the FDIC, wherein the homebuilder would contribute $243 million in cash in exchange for a 40% stake in a portfolio of 5,500 distressed residential and commercial real-estate loans from 22 failed banks. The FDIC will retain a 60% interest and is contributing $1.22 billion in capital, $365 million in equity and $627 million of debt financing at zero interest, and the portfolio has a face value of $3.05 billion. Lennar said it did “extensive due diligence” over the past four months, including making site visits, and that every loan was evaluated. The company expects the deal to add as much as $15 million to this year’s net income, followed by $20-30 million in the next fiscal year. According to a securities filing on the deal, the ways LEN can make money include getting the borrower to pay off the loan at a higher price than LEN paid; foreclose on the loan, seize the asset and sell it to a third party; or develop, redevelop and/or lease the site, followed by reselling it. The CEO said that acquiring and working out distressed loans was a large and profitable part of the company’s business during the last major real estate downcycle in the early 1990’s. Lennar’s Rialto Capital Advisors unit will manage the operations. Shares were nicely higher.

Philip Morris International (PM $49) was higher after the company announced a new stock repurchase program of $12 billion over three years, commencing in May, upon the early expiration of the current, two-year, $13 billion program in April. Also, the tobacco company posted 4Q EPS ex-items of $0.81, compared to the $0.79 that analysts had expected, with revenues coming in at $6.7 billion, topping the $6.5 billion forecast.

FirstEnergy Corp. (FE $39) and Allegheny Energy Inc. (AYE $24) announced that they have agreed to combine in a stock-for-stock transaction, creating a regional energy provider with approximately $16 billion in annual revenues. Under the terms of the agreement, AYE shareholders would receive 0.667 shares of FE stock in exchange for each share they own, bringing the value to AYE shareholders to $27.65 per share, or $4.7 billion in aggregate, based on yesterday’s closing prices of both stocks. FE will also assume about $3.8 billion in AYE debt. AYE was sharply higher and FE fell. Separately, FE posted 4Q EPS ex-items that topped analysts’ estimates.

Jobless claims fall

Weekly initial jobless claims (chart) fell, declining by 43,000 to 440,000, versus last week's figure which was revised upward by 3,000 to 483,000, and compared to the consensus, which called for claims to decrease to 465,000. The four-week moving average, considered a smoother look at the trend in claims, dipped by 1,000 to 468,500, and continuing claims dropped by 79,000 to 4,538,000, compared to the 4,600,000 forecast. Treasuries ended the day lower, with the yield on the 2-year note flat at 0.88%, the yield on the 10-year note 2 bps higher at 3.72%, and the yield on the 30-year bond gained 4 bps to 4.67%.

Greece deal confirmed, but concrete measures have yet to be announced

European officials announced that they have agreed to an accord to help Greece try to tackle its deficit problems and released a statement following a summit meeting Brussels, which it said all euro area members have a shared responsibility for the economic and financial stability in the area. “In this context, we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met. We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010,” the statement read. The release also communicated that, “Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.” The Commission said it will monitor the measures implemented by Greece along with the European Central Bank, and will propose needed additional measures, drawing on the expertise of the International Monetary Fund, with the first assessment to be completed in March.

European Council President Herman Van Rompuy said that solidarity for Greece was “not necessary today” as “Greece did not ask for any financial support” and European Commission President Jose Manuel Barroso added that “The question of pledges (to Greece) was not raised because the Greek government has not requested any financial support, which means the Greek government believe they do not need this financial support, that is why I think we should not now speculate about scenarios that are so far not present." All eyes are now on a gathering in Brussels of major Eurozone finance ministers on February 16 for any possible details regarding assistance for Greece.

In other economic news in the Eurozone, wholesale prices in Germany—Europe’s largest economy—increased 1.3% month-over-month (m/m) in January, following a 0.2% m/m gain in December, and y/y, wholesale prices were up 1.9% in the first month of the year. Also, Spain reported that its 4Q GDP contracted 0.1% m/m, matching expectations, and its y/y GDP contraction was 3.1%, slightly more than economists expected. Meanwhile, Sweden’s central bank left its benchmark lending rate unchanged at 0.25%, as was expected.

The Chinese government reported that consumer prices rose 1.5% y/y in January versus the 2.1% increase that economists had expected, and were up 0.6% month-over-month, decelerating from the 1.9% y/y and 1.0% m/m increases posted in December, soothing some concerns about an overheating economy, which the Chinese government has pledged to control through various actions aimed at minimizing excess liquidity. A separate report showed producer prices rose 4.3% y/y, above the 3.5% that was forecasted. We caution reading too much into any one month of inflation data, as seasonal factors, weather, and comparisons to a year prior are distorted due to easy comparisons to 2009, after crude prices collapsed in relation to the spike in prices in 2008.

The People’s Bank of China will “gradually guide monetary conditions back to normal levels from the counter-crisis mode,” it said in a quarterly monetary policy report on its Web site, adding a reference to ending an emergency stance for the first time. Elsewhere, China reported that its new yuan loans increased from 379.8 billion yuan in December, to 1,390 billion yuan in January, more than the 1,375 billion yuan that was expected, representing an increase versus December’s level, but down 14.2% y/y. Lending is typically heavily front-end weighted during a year, and the level of lending was below the high levels rumored over the past month and that were blamed for measures undertaken by the central bank to restrict lending.

China also gave an update on property prices in 70 cities across the country, which rose 9.5% in January from a year earlier, accelerating from the 7.8% posted in December, climbing the most in 21 months on the heels of high levels of credit extended in January, and in anticipation of tighter monetary policy.

Meanwhile, Australia reported an increase in employment of 52,700 in January, following the upwardly revised 37,500 advance in December, and well above the 15,000 gain forecasted by economists. Consequentially, the country’s unemployment rate unexpectedly fell, declining from 5.5% to 5.3%, versus the 5.6% that was projected. In other economic news, South Korea’s central bank kept its benchmark lending rate unchanged at 2.0%, which was expected.

Measure of consumer spending on tap to end the week

Advance retail sales for January will be released tomorrow, forecasted to rise 0.3% month-over-month (m/m), after falling 0.3% in December, while sales ex-autos are estimated to increase 0.5%, on the heels of a decline of 0.2% in December. The report was initially scheduled to be released on Thursday, but was delayed until tomorrow due to inclement weather in the nation’s capital.

Other releases on tomorrow’s US economic calendar are the preliminary January reading of the University of Michigan Sentiment Index, expected to rise to 75.0 from 74.4, while business inventories are forecasted to rise 0.2% in December after posting a 0.4% increase in November.

International economic releases tomorrow include the Japanese consumer confidence reading, Eurozone GDP figures and industrial production, and Indian industrial production.