Evening Update

Lackluster Action on Lack of Market Catalyst

With no economic reports or major equity news to spark the markets, stocks finished only fractionally lower in muted action, after spending most of the day rangebound, with traders seemingly satisfied in waiting for a plethora of major economic data due out later this week, with Fed Chairman Ben Bernanke’s semi-annual two-day testimony on Capitol Hill likely being the headlining act. In equity news, number-two home improvement retailer Lowe’s Companies posted a better-than-expected earnings report, Campbell Soup reported 2Q results that matched the Street’s expectations, while GlaxoSmithKline commented on an adverse recommendation of its diabetes drug. Even a couple of M&A reports weren’t able to influence sentiment, as Schlumberger Ltd. confirmed last week’s report of an $11 billion acquisition of oil-services firm Smith International Inc, and Thermo Fisher Scientific Inc has reportedly made a hostile bid for Millipore Corp. Treasuries finished the day mixed.

The Dow Jones Industrial Average fell 19 points (0.2%) to close at 10,383, the S&P 500 Index was 1 point (0.1%) lower at 1,108, and the Nasdaq Composite declined by 2 points (0.1%) to 2,242. In light volume, 944 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $0.25 higher at $80.31 per barrel, wholesale gasoline was up $0.03 to $2.12 per gallon, and the Bloomberg gold spot price lost $5.20 to $1,114.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 80.50.

Lowe’s Companies (LOW $23) reported 4Q EPS of $0.14, two cents above the consensus estimate of Wall Street analysts, with revenues increasing 1.8% year-over-year (y/y) to $10.2 billion, versus the Street’s forecast of $10.0 billion, with same-store sales—sales at stores open at least a year—declining 1.6%y/y. The world’s number-two home improvement retailer said its 4Q results suggest “the worst of the economic cycle is likely behind us,” and that improving same-store sales trends—including improvement in many bigger-ticket project categories—provides an encouraging sign that consumers are gaining the confidence to take on more discretionary projects. LOW said it expects 1Q EPS to be between $0.27-0.29, compared to the $0.33 that analysts are forecasting, while it raised its full-year EPS outlook and offered 2010 sales guidance that exceeded analysts’ expectations. Additionally, the company announced a $5 billion common stock repurchase plan. Shares were modestly lower after giving up early gains.

Schlumberger Ltd. (SLB $61) confirmed last week’s report by the Wall Street Journal that it will acquire Smith International Inc. (SII $41) for about $11.3 billion, saying that the two oil-services firms have approved a definitive merger agreement in which the companies would combine in a stock-for-stock transaction. Under the terms of the agreement, SII shareholders will receive 0.6966 shares of SLB, placing the value of SII shares at $45.84, based on the closing prices of both firms on February 18th. SLB said the acquisition—forecasted to be completed in the latter half of 2010—is expected to be accretive to EPS by 2012. SLB was down solidly, while SII was nicely higher.

Campbell Soup (CPB $33) reported fiscal 2Q EPS of $0.74, matching the Street’s forecast, with revenues increasing 1% y/y to $2.2 billion, roughly inline with analysts’ forecasts. CPB said its US soup sales decreased 8% y/y, while its condensed soup business, especially cooking varieties, and its broth business delivered solid performance and remained “well positioned in this economic environment.” CPB reaffirmed its full-year sales guidance, which it lowered last week. Shares were lower.

GlaxoSmithKline (GSK $37) traded lower after US drug safety reviewers recommended to the Food and Drug Administration (FDA) that the company’s diabetes drug Avandia be taken off the market, due to risks of heart attacks. GSK released a statement saying the increased risk of heart attacks has not been proven and said that the FDA “has ruled that Avandia remain available.” As well, GSK said that it has studied Avandia in more than 52,000 patients and none of its studies show a “statistically significant” association between the drug and heart attacks.

Citing a source familiar with the matter, Bloomberg is reporting that laboratory equipment maker Thermo Fisher Scientific Inc. (TMO $48) has made an unsolicited takeover bid for rival Millipore Corp. (MIL $87) of about $6 billion. According to Bloomberg, a deal could evolve as early as next week. Neither of the firms have commented on the report. TMO finished lower on the day, while MIL surged 21% on the news.
All is quiet on the economic front, but Bernanke testimony looms

Treasuries were mixed as there were no major reports on today’s docket. The yield on the 2-year note fell 5 bp to 0.87%, while the yield on the 10-year note rose 3 bps to 3.80%, and the yield on the 30-year bond gained 2 bps to 4.73%.

The economic calendar will yield plenty of reports that will fill the rest of the week, including a slew of reports on housing, the first revision in 4Q GDP, and manufacturing. However, in light of last week’s surprising increase in the Federal Reserve’s discount interest rate—a primary credit rate for banks to obtain short term loans from the Fed—from 0.5% to 0.75%, Fed Chairman Ben Bernanke’s semi-annual testimony on Capitol Hill may garner the most attention on the Street. The Fed continues to reiterate that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” and it was quick to point out that the increased discount rate was not a signal of any change in its outlook for the economy or for monetary policy, but sentiment seems skittish regarding the prospect of the Fed moving to a less accommodative policy. Any comments signaling when the Fed will begin to tighten monetary policy further by the Fed Chief will be closely scrutinized, especially after the rate action last week, which Bernanke hinted to a week earlier in his testimony before the House Financial Services Committee. Bernanke will be delivering his testimony before the House and Senate on Wednesday and Thursday, respectively.

Meanwhile, non-voting member of the Federal Reserve Janet Yellen noted in a speech today that “this is not the time to be removing monetary stimulus,” given that the economy is operating well below its potential and inflation is undesirably low. The Federal Reserve Bank of San Francisco President went on to say that the Fed is already unwinding the emergency programs it set up during the financial crisis and when the day comes to start raising rates again, it has the tools ready. “But, for the time being, the economy still needs the support of extraordinarily low rates,” she concluded.

International economic calendar muted as well

International economic news was relatively light today, with only a couple of reports out of Taiwan garnering some attention. The Asian nation exited its greatest recession on record reporting that 4Q GDP rose 9.22% y/y, above the 7.1% that economists polled by Bloomberg had anticipated, while the country’s unemployment rate fell for the fifth month to 5.73% in January, from 5.80% in December, but by a smaller amount than the 5.70% that was forecast.
Economic barrage begins tomorrow

The S&P/Case-Shiller Home Price Index will be reported tomorrow and is expected to decline by 3.1% y/y for December, which would mark the smallest decline since May 2007, compared to the 5.3% drop that it recorded for November. The index is also forecasted to increase by 0.1% month-over-month (m/m), which would mark the seventh-straight monthly increase. Despite the improving trend in price declines, there is some skepticism regarding the sustainability of the recovery in home prices amid the backdrop of the threat of rising foreclosures, the mid-year expiration of the home buyer tax incentives, and the impact on interest rates when the Fed ends its purchases of mortgage-backed securities (MBS) and begins to tighten monetary policy.

Also, on tomorrow’s US economic calendar is the Richmond Fed Manufacturing Index, forecast to rise to 1 in February from -2 in January, as well as the Conference Board Consumer Confidence Index with economists expecting a February reading of 55.0, down from January’s 55.9.

International economic releases include the CPIs from Italy and France, Germany’s Ifo Business Climate Index, while Japan will report its trade balance.