Evening Update

Markets Mixed Heading Into Holiday Weekend

Stocks finished the session mixed after rebounding from large early morning losses due to a surprising rate hike in China and an unexpected drop in US consumer sentiment. A strong retail sales report helped to stage the afternoon recovery, as markets managed to close the week out higher. In equity news, Agilent Technologies and McAfee Inc. reported EPS that topped analysts' estimates, while Ingersoll-Rand's earnings came in lower than expected. In other news, Motorola announced that it will split into two separate publically traded companies next year, while heavily-traded Berkshire Hathaway joined the S&P 500 Index at the market close. Treasuries finished the day higher, while the dollar and commodities gained ground. All US markets will be closed on Monday in observance of President’s Day.

The Dow Jones Industrial Average fell 47 points (0.5%) to close at 10,097, the S&P 500 Index lost 3 points (0.3%) to 1,075, and the Nasdaq Composite increased 6 points (0.3%) to 2,184. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $1.03 lower at $74.25 per barrel, wholesale gasoline fell $0.05 to $1.93 per gallon, and the Bloomberg gold spot price declined $2.30 to $1,093.10 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.4% to 80.34. For the week, the DJIA gained 0.9%, while the S&P 500 Index increased 0.9%, and the Nasdaq Composite climbed by 2.0%.

Agilent Technologies (A $30) reported fiscal 1Q EPS ex-items of $0.38, above the $0.32 that Wall Street analysts were expecting, with revenues growing 4% year-over-year (y/y) to $1.2 billion, matching the Street's forecast. The company said the economic momentum that it began to see late-last year continued in its 1Q, orders for its electronic measurement were up 8% y/y, with solid demand from industrial, computer, and semiconductor groups. The company said it expects 2Q EPS ex-items to be between $0.38-0.42, and full-year EPS to be in a range of $1.65-1.70, compared to the $0.35 that analysts are forecasting for 2Q and the $1.73 that they are expecting for the full year. Shares were higher.

Ingersoll-Rand (IR $31) announced 4Q EPS ex-items of $0.48, short of the $0.53 that the Street was expecting, with revenues falling 10% y/y to $3.3 billion, which was inline with the consensus estimate of analysts. The air conditioning and climate control technology firm said while it continued to see challenges in some of its major end markets, it is also beginning to see improvement in markets that lead the recovery. The company said it expects 1Q EPS ex-items to be between $0.15-0.20, well below the $0.38 that the Street is forecasting. IR added that it is anticipating its full-year 2010 EPS ex-items to be between $2.20-2.60 on revenues in a range of $13.5-13.8 billion, compared to the Street’s forecasts of EPS of $2.30 and $13.5 billion for 2010. Shares were solidly lower.

McAfee Inc. (MFE $40) posted fiscal 4Q EPS ex-items of $0.64, one penny ahead of the expectation of analysts, with revenues jumping 24% y/y to $526 million, compared to the $515 million that was expected. The security software firm said its corporate revenue grew 30% y/y and its consumer revenue rose 15%. MFE said it expects 1Q EPS to be between $0.60-0.64 on revenues of $500-520 million. Analysts are forecasting 1Q EPS to be $0.63 and revenues of $507 million. Shares were higher.

Motorola Inc. (MOT $7) was solidly higher after it announced that it intends to separate into two independent, publically traded companies, one including its mobile devices and home businesses, with the other made up of its enterprise mobility solutions and networks businesses. MOT said its mobile devices and home businesses will target growth opportunities from the convergence of mobility, media and the internet, while the enterprise mobility solutions and networks businesses will focus on mission and business critical solutions for enterprise, government and wireless operators. MOT said it is targeting 1Q 2011 for its planned separation.

The class B shares of Berkshire Hathaway Inc. (BRK/B $77) were added to the S&P 500 Index after the market closed today, leading to over 110 million shares of the company being traded. The addition comes nearly a month after Berkshire completed a 50 to 1 stock split, bringing the price per share down significantly. The split was announced back in November of 2009 as part of a $26 billion deal to purchase Burlington Northern Santa Fe (BNI $100), which closed today. Shares of BRK/B finished higher.

Retail sales rise more than expected but consumer sentiment surprisingly slips

Treasuries finished higher, as the yield on the 2-year note fell 5 bps to 0.82%, the yield on the 10-year note lost 3 bps to 3.69%, and yield on the 30-year bond declined 2 bps to 4.65%.

Advance retail sales for January rose 0.5%, compared to the Bloomberg forecast of an increase of 0.3%, while December’s 0.3% decrease was revised to a 0.1% decline, and November's figure was modified to 2.0% from 1.8%. Sales ex-autos increased 0.6%, versus the expectation of an increase of 0.5%. The sales over the past three months rose 2.1%, and 2.3% ex-autos. Excluding autos, gasoline and building materials, the figure the government uses to calculate the consumer spending component of GDP, sales increased 0.8% in January and 1.4% over the past three months. The government uses data from other sources to calculate the contribution from the three categories excluded. Treasuries are higher following the report.

Elsewhere, the preliminary University of Michigan's Consumer Sentiment Index unexpectedly deteriorated, declining from 74.4 in January to 73.7 in February, compared to the increase to 75.0 that economists had expected. The current economic conditions component of the report increased from 81.1 to 84.1, while the economic outlook component fell from 70.1 to 66.9. Both the one-year and five-year inflation outlooks declined slightly to 2.7% and 2.8%, respectively.

In other economic news, December business inventories also surprised economists, decreasing 0.2%, compared to the forecast of a 0.2% gain, and November’s advance was revised to a slightly higher gain of 0.5% from the previously reported 0.4% rise. Sales advanced 0.9% month-over-month (m/m), resulting in the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-ticking lower from 1.27 months in November to 1.26 months in December.

China tries to pull lending reins

China continued efforts to rein in excess liquidity by increasing the bank reserve requirement—the amount of funds that institutions must set aside instead of lending out-by another 50 basis points (0.50%). The increase is the second in a month and comes after Chinese banks extended 19% of the year's lending target ($1.1 trillion) in the month of January and as property prices climbed to the highest levels in 21 months.

Europe released a plethora of economic reports today, in the wake of yesterday's pledge by the European Commission to stand behind Greece to help the debt-laden nation try to overcome its deficit problems. Also the International Monetary Fund joined the EC in lending support saying, "We stand willing and able to support Greece in ways that the Greek authorities think is appropriate," per Reuters. Multiple 4Q GDP reports came out across the pond, headlined by the Eurozone's report, which showed output in the 16-nation group rose 0.1% quarter-over-quarter (q/q), short of the 0.3% expansion that economists had expected. Other GDP reports showed output in Germany-Europe's largest economy-came in flat q/q, compared to the 0.2% that was expected. Moreover, France's GDP came in higher than expected, while Italy's GDP unexpected contracted and Greece's output contracted further. In other economic news, Eurozone industrial production unexpectedly fell m/m in December and Spain's consumer prices fell 1.0% m/m in January.

Greek debt relief and text of Bernanke's speech dominate the week

Another week went by where the equity front continued to deliver mostly better-than-expected earnings and seemed to be overlooked as the focus remained on global economic developments. This week was dominated by uncertainty regarding the impact on the overall European economy of a potential failure of the sovereign debt of Greece, and what-if any-support Eurozone leaders would lend to help the debt-ridden Greek country. The markets were held hostage by elevated volatility as headlines flew regarding relief for Greece and the equity markets began to price in the fact that some form of support was imminent. Sentiment was soothed and the equity markets received a boost after the European Commission confirmed the speculation, announcing that it has reached an accord to stand behind Greece. However, the lack of any details of any plan tempered some of the enthusiasm as the EC's statement suggested that Eurozone leaders are initially only willing to provide moral support and are looking to see more effort from Greece to try to tackle its deficit issues on its own.

The easing concerns about Greece helped stocks post modest gains, as the rate hike actions in China on Friday flared up a different set global economic recovery concerns and a solid advance was pared for the week.

Another event this week that kept the spotlight off of the equity front came from the release of the text of Federal Reserve Chairman Ben Bernanke's testimony that was he was supposed to deliver before the House Financial Services Committee. However, Bernanke, along with most in the Nation's Capital, was socked in by a blizzard that hit the east coast. Bernanke reiterated that economic conditions will likely warrant exceptionally low levels of the fed funds rate for an extended period of time, but laid out tools that it could deploy to tighten policy to prevent the development of inflationary pressures. Some of the tools that were noted included tweaking the bank reserve interest rates and deploying 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-to reduce quantity of bank reserves outstanding and put "significant upward pressure on all short-term rates." Also, the Fed Chief noted that before long, the Fed expects to consider a modest increase in the spread between the discount rate and the target federal funds rate, but this should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of its January meeting. Stocks initially sold off following the release, as the testimony suggested that economic conditions did not warrant the deployment of these tools as soon as some seemed to have expected.

Full slate of economic data on tap

Economic releases heat up on Wednesday, when housing starts for January will be reported, expected to show an increase of 4.1% m/m to an annual rate of 580,000 units, after falling 4.0% in December, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to decline 5.1% m/m in January after jumping 10.9% m/m in December. This report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather.

Industrial production will also be reported on Wednesday, anticipated to rise 0.8% m/m in January, after a 0.6% increase in December, while capacity utilization is expected to have risen to 72.6% from 72.0%.

Several readings on inflation will be released next week with the Producer Price Index (PPI) on Thursday expected to show prices at the wholesale level were up 0.8% m/m in January, after rising 0.2% in December. While food and energy are the smallest components of the inflation indexes, the volatility of their prices tends to explain a large portion of m/m changes. The core rate, which excludes food and energy, is expected to rise 0.1% after being unchanged in the prior month. The Consumer Price Index (CPI) follows on Friday, anticipated to have risen 0.2% m/m in January, after increasing 0.1% in December. Ex-food and energy, the core CPI rate is forecasted to have risen 0.2%, after a 0.1% increase in the prior month.

Traders will be closely monitoring the Federal Reserve's release of the minutes from the January Federal Open Market Committee (FOMC) mid-day Wednesday. There were no changes to interest rates in the last meeting and the Fed maintained the March expiration of the mortgage-backed security (MBS ) purchase program. In an interesting development, one member dissented at the meeting, believing that continuing to "pre-commit" to the "exceptionally low" levels of fed funds for an "extended period" was no longer warranted. By communicating their intentions regarding policy, the Fed influences expectations about future rates. Dudley of the New York Fed has defined "extended period" as equal to six months, and investors monitor the Fed’s language closely for clues as to the timing that the Fed may be contemplating for exit of monetary stimulus.

In addition to outlining non-conventional tools for exit, Fed Chief Bernanke's written statement this week 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. As such, the Fed is considering using another operating target to communicate the stance of policy for a time, such as the interest rate paid on reserves, in combination with targets for reserve quantities. Lastly, Bernanke indicated the Fed expects to increase the spread between the discount rate and the target fed funds rate, "before long." As these details have been disseminated via Bernanke's statement and digested by the market, with the exception of any changes to the MBS program, there may be little additional market moving news within the FOMC meeting minutes.

Other releases on the US economic calendar include the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, the import price index, initial jobless claims, the Index of Leading Economic Indicators, and the Philadelphia Fed’s Business Activity Index.

International economic releases include Japanese GDP, industrial production, machinery orders, leading indicators, department sales as well as the Bank of Japan's monetary policy meeting. Additionally, the UK releases CPI, and retail sales, and releases in Europe include German PPI and the Zew survey of investor sentiment, the Eurozone trade balance, consumer confidence, and preliminary PMI surveys for manufacturing and services for February. Canada will release manufacturing, wholesale and retail sales, CPI and leading indicators. Australia releases business confidence and leading indicators. Much of the Asian region will be on holiday for the week-long Lunar New Year celebration. The European Central Bank and the Reserve Bank of Australia release meeting minutes, and European finance ministers meet, and will likely continue to discuss Greece's ability to address its debt crisis.