Evening Update

Bernanke Testimony Sends Markets Higher

Stocks finished the day higher as traders reacted favorably to Fed Chairman Ben Bernanke’s semi-annual testimony on Capitol Hill. Bernanke told congress that low interest rates are still needed to support the economy, which helped ease concern over last week’s boost in the discount rate. The report overshadowed a drop in new home sales to a record low and a decrease in mortgage applications. In equity news, H&R Block warned that 2010 performance will be weaker than expected due to a decrease in total tax returns prepared, while Toll Brothers posted a narrower loss than analysts had forecasted. Saks Inc, TJX, Hertz Global and J.M. Smucker all posted earnings that topped expectations, and R.R. Donnelley & Sons Co announced an agreement to acquire communications services firm Bowne & Co.

The Dow Jones Industrial Average rose 92 points (0.9%) to close at 10,374, the S&P 500 Index was 11 points (1.0%) higher at 1,105, and the Nasdaq Composite gained 22 points (1.0%) to 2,236. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $1.21 higher at $80.07 per barrel, wholesale gasoline was up $0.03 to $2.09 per gallon, and the Bloomberg gold spot price lost $7.00 to $1,096.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.05% to 80.81.

H&R Block (HRB $17) was down sharply after the tax services provider said its total tax returns prepared through February 15th were down 6.3% compared to the prior year period, resulting in the company saying that its previously announced guidance for 2010 “will not be reached.” The company said it believes industry fillings are down significantly due to the recession and sustained high levels of unemployment, which is also contributing to a greater shift to do-it-yourself tax preparation methods among first-half clients.

Toll Brothers (TOL $19) reported a fiscal 1Q loss of $0.25 per share, narrower than the $0.35 loss that analysts had forecasted, with revenues falling 20% y/y to $326.7 million, but above the $325 million that the Street had anticipated. The luxury homebuilder said its building deliveries declined 10% y/y to 596 units, while net signed contracts rose by 98% and its cancellation rate fell from 37.1% last year to 6.7%. The company’s CEO said, “We believe the housing market is still in choppy waters but the seas are getting calmer.” Shares were lower.

Saks Inc. (SKS $7) reported adjusted 4Q EPS of $0.06, compared to the loss of $0.02 per share that Wall Street analysts had expected, with revenues falling 3.4% year-over-year (y/y) to $811 million, compared to the $799 million that the Street had anticipated. SKS said a substantial improvement in its gross margin and diligent expense control helped it post a modest 4Q profit, in spite of a 4.8% decrease in 4Q same-store sales—sales at stores open at least a year. Shares finished slightly higher.

TJX Companies (TJX $41) reported 4Q EPS of $0.94, three cents above the expectation of analysts, with revenues increasing 10% y/y to $5.9 billion, compared to the $5.98 billion that the Street was forecasting, with same-store sales increasing 12% y/y. The discount retailer said every division delivered top-and-bottomline results “well above plan,” driven by a large increase in transactions as it attracted new customers from all income levels with its value. The parent of TJ Maxx and Marshalls stores added that it aggressively managed its inventories which, combined with cost reduction programs, helped fuel strong increases in profitability. TJX issued 1Q EPS guidance that exceeded the Street’s estimates, while the midpoint between its full-year earnings outlook is above analysts’ forecasts. Shares were solidly higher.

Hertz Global Holdings (HTZ $10) announced 4Q EPS ex-items of $0.06, five pennies above the consensus forecast of analysts, with revenues decreasing 2.7% y/y to $1.7 billion, matching the Street’s forecasts. The company said its performance during the quarter was based on continued improvement in the US car rental business—its largest market—and further reduced overall costs. HTZ shares were lower as the company offered disappointing 2010 guidance.

J.M. Smucker (SJM $59) reported 3Q EPS ex-items of $1.17, twelve cents higher than analysts’ forecasts and a 34% improvement over the previous year. The food producer increased revenue 2% to $1.21 billion and raised its forecast for the year to project earnings of $4.07 per share and revenue of $4.6 billion, The company’s biggest business, retail coffee production, saw sales jump 9.1% and profit rise 62% over the previous year and announced an agreement with Green Mountain Coffee Roasters (GMCR $84) for GMCR to manufacture certain coffee brands owned by SJM in single-serving portion packs for Keurig single-cup brewers. Shares of SJM were lower.

On the M&A front, R.R. Donnelley & Sons Co (RRD $21) agreed to acquire marketing communications services firm Bowne & Co (BNE $11) in an all cash deal valued at approximately $481 million, or $11.50 per share. The acquisition, which is expected to be completed in the second half of the year, will extend the range of services that RRD has to offer, as BNE specializes in digital one-to-one printing services for healthcare, transactional communications, financial services and marketing communications. Shares of both companies traded higher.

New home sales fall to record low, Bernanke takes to the Hill

New home sales hit a record low, with sales falling 11.2% month-over-month (m/m) in January to an annual rate of 309,000 units, compared to the expectation that sales would increase 3.5% m/m to an annual rate of 354,000 units. December’s results were upwardly revised to a 3.9% loss and an annual rate of 348,000 units versus the 7.6% decline previously reported. The median price of a new home fell 2.4% year-over-year (y/y) to $203,500, and dropped 5.6% m/m. Inventory of new homes for sale increased to 234,000 units, representing 9.1 months of supply at the current sales rate. The bulk of the sales continued to come from lower priced homes as about 70% of the total sales were for homes priced under $300,000.

Although new home sales account for a small portion of total home sales, the report was disappointing as new home sales are viewed as a leading indicator of housing demand as sales are recorded as contracts are signed, versus existing home sales, which make up the lion’s shares of total sales and are recorded at closing and reflect contracts signed in prior months. January’s sales decline was the third-straight monthly drop, suggesting that the November extension and expansion of the home buyer tax credit, affordability, and relatively low mortgage rates are doing little on the new home front. Also, the outlook for home sales is uncertain as the Fed is set to end its purchases of mortgage-backed securities (MBS), which could put some upward pressure on interest rates. It will be interesting to see if the seasonally strong spring season for home sales and the possible reemerging demand from the extended tax credits will help mitigate some of the looming headwinds that face the housing market.

Meanwhile, Federal Reserve Chairman Ben Bernanke’s began his first leg of his two-day semi-annual monetary policy report before Congress, providing testimony before the House Financial Services Committee. The Fed Chief reiterated that, “The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Bernanke also maintained that the Fed continues to anticipate that its MBS purchases program will be completed by the end of March, and that in light of substantial improvements in the functioning of most financial markets, it is winding down the special liquidity facilities it created during the crisis.

In other economic news, the US MBA Mortgage Application Index declined 8.5% last week, after the index, which can be quite volatile on a week-to-week basis, fell 2.1% in the previous week. The decrease came as the Purchase Index fell 7.3%, teaming up with a decline in the Refinance Index, which dropped 8.9%. Also, the average 30-year mortgage rate rose 9 basis points to 5.03%, remaining above the record low of 4.61% that was reached at the end of March 2009. Treasuries are nearly unchanged in morning action.

Treasuries were mostly higher, as the yield on the 2-year note was down 2 bps to 0.86%, the yield on the 10-year note was flat at 3.68%, and the yield on the 30-year bond lost 1 bp to 4.62%.

Economic reports out of Germany highlight international news

Multiple economic reports in the Eurozone were in focus, with consumer confidence in Germany—Europe’s largest economy—declining by a smaller amount than anticipated, while the nation’s 4Q GDP remained unrevised at a flat reading compared to last quarter, as strength in German exports was offset by weakness in private consumption. Elsewhere, Italy’s retail sales in December were flat m/m, compared to a slight gain that was forecasted by economists, while Eurozone industrial new orders unexpectedly rose, increasing 0.8% m/m in December, versus the expectation of a 1.0% drop. Also, November’s 1.6% advance was revised to a 2.7% gain m/m.

Durable goods orders on the docket tomorrow

Tomorrow the economic calendar will provide the durable goods orders report for January, forecasted to increase 1.4% on the headline level, while excluding transportation, orders are expected to increase 1.0%. Durable goods are used as an indicator of manufacturing activity as they pertain to goods intended to last over three years. Also, after stripping out certain volatile components such as aircraft, autos, and defense orders, the report can be good proxies for business spending and consumer confidence as the data can signal the demand for capital by corporations and the willingness of the consumer to shell out discretionary funds on big ticket items. The forecast for orders after stripping out transportation would be the third-straight monthly advance, which could point to some support for the employment picture as increasing demand for goods could force corporations, which have been running with severely low inventories, to begin to hire more workers to keep up with this demand. Moreover, any replenishments in inventories that may result could provide a boost to GDP.

The only other report on the US economic calendar tomorrow is weekly initial jobless claims, which are expected to decrease to 460,000 from a previous reading of 473,000 and the monthly house price index. The international economic calendar tomorrow includes French consumer confidence and PPI, Italy’s business confidence report, Germany’s unemployment rate, total business investment out of the U.K, Eurozone consumer confidence and Australia’s conference board leading index.