Evening Update

Confidence Saps the Bulls

Despite some favorable earnings reports out of the retail sector from Dow member Home Depot, Target, and Macy’s, and a manufacturing report returning to expansionary territory, stocks succumbed early to an unfavorable German business confidence reading and finished near the worst levels of the day as a much larger-than-expected decline in the US Conference Board’s Consumer Confidence Index exacerbated the negative sentiment. Treasuries ended higher amid the pressure in the equity markets and the aforementioned confidence reports, and following a year-over-year decline in the S&P/Case-Shiller Home Price Index. In other equity news, Brocade Communications Systems missed revenue projections and cut its full-year outlook, Nordstrom fell short of earnings forecasts, and Tenet Healthcare issued 2010 EPS guidance that failed to meet analysts’ expectations.

The Dow Jones Industrial Average fell 101 points (1.0%) to close at 10,282, the S&P 500 Index was 13 points (1.2%) lower at 1,095, and the Nasdaq Composite declined by 29 points (1.3%) to 2,213. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $1.45 lower at $78.86 per barrel, wholesale gasoline was down $0.05 to $2.07 per gallon, and the Bloomberg gold spot price lost $12.14 to $1,102.11 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.7% to 80.90.

Dow member Home Depot (HD $31) reported 4Q EPS ex-items of $0.24, seven cents above the consensus estimate of Wall Street analysts, with revenues dipping 0.3% year-over-year (y/y) to $14.6 billon, above the $14.1 billion that the Street had expected. The world’s largest home improvement retailer said its same-store sales—sales at stores open at least a year—grew 1.2% y/y, but same-store sales in the US were down 1.1%. The company increased its quarterly dividend by 5% to 23.63 cents per share, and it announced full-year EPS guidance that topped analysts’ estimates. HD was higher.

Target (TGT $50) posted 4Q EPS of $1.24, above the estimate of analysts, which called for the retailer to report EPS of $1.16, with revenues rising 3.2% y/y to $20.2 billion, matching the Street’s forecast, as same-store sales ticked higher, rising 0.6%. TGT said its quarterly results for its retail segment were well above its expectations due to stronger-than-expected holiday sales, combined with well-controlled inventories and disciplined expense controls. The company added that in 2010, it expects guest traffic trends and sales of discretionary categories to benefit from a continued modest recovery in the economy, and it believes it will continue to gain profitable market share. For the company’s credit card unit, it saw its bad debt expense fall 43% as the segment swung to a profit compared to last year. Shares were modestly lower.

Macy’s (M $19) announced that its 4Q earnings ex-items were $1.40, topping the $1.32 that analysts were anticipating, but sales declined 1.1% y/y to $7.8 billion, which matched the Street’s forecast. The department store said its same-store sales were down 0.8% y/y, which was better than its previous guidance. The company said 4Q represented a “clear-cut improvement” in sales trends, aided by a 26.6% increase in online sales and a significant rebound at Bloomingdale’s. The company added that it expects this momentum will continue in 2010, but it does see little meaningful near-term improvement in macro-economic conditions. M sees full-year EPS to be between $1.55-1.60, compared to the $1.57 that analysts are expecting. Shares were higher.

Nordstrom (JWN $36) reported 4Q EPS of $0.77, two cents shy of the consensus estimate of Wall Street analysts, but revenues rose 10.3% y/y to $2.5 billion, inline with the Street’s forecasts, with same-store sales rising 6.9% y/y. JWN issued full-year EPS guidance, which projected earnings in a range of $2.35-2.55, versus the Street’s expectation for the company to post full-year EPS of $2.41. Shares were able to overcome early pressure and finished modestly higher.

Brocade Communications Systems (BRCD $5) posted fiscal 1Q EPS of $0.19, four cents above the projection of analysts, with revenue jumping 25% y/y to $539.5 million, but below the $548 million that the Street had expected. Shares were sharply lower following the disappointing sales results and after the company cut its full-year guidance.

Tenet Healthcare Corp. (THC $5) announced 4Q EPS of $0.04, compared to the $0.01 that analysts were anticipating, with revenues rising 3.9% y/y to $2.3 billion, roughly inline with the expectations of analysts. However, shares were lower after the company said total hospital admissions fell 0.9% y/y and it issued 2010 EPS guidance that missed analysts’ forecasts.

Home prices declines, but pace continues to improve, while consumer confidence plunges

The S&P/Case-Shiller Home Price Index was released showing a decline in home prices of 3.08% y/y in December, versus the -3.1% that had been expected by economists surveyed by Bloomberg. Also, on a month-over-month (m/m) basis, home prices rose by 0.32%—marking the seventh-straight monthly increase—topping the increase of 0.1% that was anticipated. Fourteen out of the twenty markets that are used to construct the index posted gains to lead the advance. Las Vegas posted the largest y/y drop in home prices, falling 21%, followed by 11% and 10% declines in Tampa and Detroit, respectively. The best performer was San Francisco, as it saw a gain in home values of 4.8%. Although the report suggests that conditions in the housing market are improving, there are some pending headwinds that could derail the recovery. The threat of rising foreclosures, still elevated unemployment, and the expected mid-year expiration of the home buyer tax incentives could apply pressure to home prices in 2010.

Meanwhile, the Conference Board released its consumer confidence (chart) report, which failed to increase for the fourth-straight month, falling to 46.0 in February, compared to the expectation of a decline to 55.0. January’s reading was upwardly revised to 56.5. The headline number fell as respondents’ gauge of the present economic situation being “good” decreased, while those saying conditions are “bad” increased. Also, those saying jobs are “hard to get” rose, while those saying jobs are “plentiful” decreased. The report also revealed that expectations of improvement for the next six months fell and those anticipating worsened conditions rose.

In other economic news, the Richmond Fed Manufacturing Index improved in February from January’s decline, improving from -2 to 2, moving back to a level depicting business activity is expanding. Broad indicators of activity—shipments and new orders—both posted improvements with orders moving further into positive territory, while the employment component deteriorated.

Treasuries moved higher on the heels of the disappointing measure of business confidence in Germany and gained ground following the unsatisfactory consumer confidence reading in the US. The yield on the 2-year note was down 6 bps to 0.83%, the yield on the 10-year note decreased 11 bps to 3.69%, and the yield on the 30-year bond lost 10 bps to 4.63%.

German Ifo survey disappoints

The German Ifo Business Climate Index decreased to 95.2 in February from 95.8 in January below the expectations of economists, which called for the index to increase to 96.1. The reading marked the first time in ten months that the index did not post an advance and the current assessment component of the index also posted a surprising decline, falling to 89.8 in February from 91.2 in the month prior, while the expectations for the next half year unexpectedly improved to 100.9 in February from 100.6 in January. The Ifo is based on monthly surveys of responses from firms in manufacturing, construction, wholesaling and retailing, in which they are asked to give their assessments of the current business situation and their expectations for the next six months. These responses are transformed into the Business Climate Index. The Ifo Institute for Economic Research said retailers “experienced a setback” in February, reporting a “considerably worse” business situation in February compared to January, and that weather conditions “strongly constrained” construction activity, both of which contributed the bulk of the pressure on the index. The deterioration in confidence among businesses in Europe’s largest economy could pose a threat to the overall recovery in the Eurozone, which has hit a snag recently amid the uncertainty regarding the debt problems in Greece and the potential ripple effect on the Euroarea and abroad of a default of the debt-ridden nation. However, one month does not make a trend, so the index is worth keeping an eye on as 2010 progresses.

In other economic news across the pond, consumer prices in France declined by 0.2% m/m in January, a smaller amount than the 0.3% fall expected.

It was another relatively light economic day in the Asia/Pacific region, with Taiwan reporting its current account balance increased by a larger amount than anticipated, and consumer prices in Hong Kong rose 1% y/y, matching economists’ expectations. Elsewhere, the minutes from the Bank of Japan’s last monetary policy meeting showed policymakers were concerned about maintaining market confidence in its ability to conduct fiscal and monetary policy, in light of the increasing uneasiness regarding ballooning global debt, describing its fiscal condition as “serious.”

Additional housing data on tap tomorrow

Tomorrow’s economic calendar will yield the latest in the series of housing data for January, with new home sales, forecasted to increase 3.5% m/m to an annual rate of 354,000 units. New home sales are a more current reading on activity in the housing market, reflecting contract signings and the extension and expansion of the home buyer tax credit will likely be a factor in the amount of contracts signed to purchase new homes. In December, new home sales unexpectedly fell 7.6%, but bad weather and the holidays may have drained the will of homebuyers to actively pursue new dwellings to end 2009, so we will see if the New Year brought buyers out in the market. Another piece of housing data will also be released in the form of MBA mortgage applications for last week, which dipped lower by 2.1% in the previous period.

Also on the docket for tomorrow, Federal Reserve Chairman Ben Bernanke will begin his two-day semi-annual monetary policy report before Congress, beginning with his report before the House Financial Services Committee. After the Fed Chief provided testimony two-weeks ago, in which he foreshadowed last week’s surprising increase in the Fed’s discount rate—a primary credit rate for banks to obtain short term loans from the Fed—Bernanke’s comments may carry some extra weight on the Street. Traders will be looking for any comments on the timing of Fed asset sales and if the Committee still plans to end its purchases of mortgage-backed securities (MBS) as these actions could have important implications on interest rates and the recovery in the housing market. Also, traders will be looking for any clues pointing to any possible changes to the Fed’s outlook that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Internationally, Germany will issue the second release of 1Q GDP as well as a consumer confidence measure, Italy will report retail sales, and Eurozone industrial orders will be published.