Evening Update

Markets Fall on Disappointing Jobs Data and Greek Concerns

Stocks managed to pare some early losses, but still finished lower as traders were hit with another disappointing increase in initial jobless claims and resurfacing concerns in the eurozone about Greece. In equity news, Dow member Coco-Cola Co. agreed to acquire the North American operations of its largest bottler, Coco-Cola Enterprises, while fellow beverage maker Dr. Pepper Snapple Group reported a positive outlook on 2010. Better-than-expected earnings reports were received from H.J. Heinz, Kohl’s and Express Scripts, while Cablevision systems missed its EPS forecast but managed to swing a quarterly profit. Shares of Palm Inc. took a hit after the company issued warnings about its full-year revenues. Treasuries finished the day higher following the aforementioned jobless claims report and an unexpected drop in durable goods orders after excluding transportation orders. Federal Reserve Chairman Ben Bernanke concluded the second day of his semi-annual monetary policy testimony before Congress, noting that the use of credit default swaps to destabilize a country is counterproductive.

The Dow Jones Industrial Average fell 53 points (0.5%) to close at 10,321, the S&P 500 Index was 2 points (0.2%) lower at 1,103, and the Nasdaq Composite lost 2 points (0.1%) to 2,234. 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 $1.79 lower at $78.21 per barrel, wholesale gasoline was down $0.05 to $2.04 per gallon, and the Bloomberg gold spot price gained $8.55 to $1,106.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.19% to 80.70.

Dow member Coca-Cola Co. (KO $55) announced that it has reached an agreement to acquire its largest bottler Coca-Cola Enterprises’ (CCE $25) North American operations in a deal valued at about $12.2 billion in cash and including debt. CCE will pay its shareholders, excluding the 34% stake owned by Coco-Cola, a special one-time cash payment of $10 per share. The deal, which is expected to close in the fourth-quarter of 2010, allows Coca-Cola to convert passive capital into active capital and gives it control over its investment in North America to accelerate growth, according to the company’s CEO. Also, CCE agreed in principle to purchase KO’s bottling operations in Norway and Sweden for $822 million, and acquire the right to buy a 83% stake in its German bottling business in the near future. KO traded lower, while CCE was sharply higher.

In related beverage industry news, Dr. Pepper Snapple Group (DPS $32) announced 4Q EPS of $0.44, one penny ahead of the Street’s forecast, with revenues flat ex-items year-over-year (y/y) at $1.4 billion, roughly inline with the expectation of analysts. The company said a 4% increase in sales volume and lower ingredient costs were partially offset by higher sales of value items and the loss of certain contract manufacturing. DPS was much higher after it issued full-year EPS guidance that exceeded analysts’ forecasts, and amid optimism resulting from the Coca-Cola acquisition.

Palm Inc. (PALM $7) was down sharply after the struggling mobile device maker issued a warning about its full-year revenue and said its 3Q revenues are expected to come in well below analysts’ forecasts. PALM said it expects full-year 2010 revenues to be well below its previously forecasted range of $1.6-1.8 billion, on lower order volumes, and the deferral of orders for future periods from carriers, due to the slower-than-expected consumer adoption of its products. The company said it expects 3Q revenues ex-items to be between $300-320 million, compared to the Street’s forecast, which is calling for the company to report revenues of $424.7 million.

H.J. Heinz Corp. (HNZ $46) announced fiscal 3Q EPS of $0.83, six cents above the Street’s forecast, with revenues increasing almost 13% year-over-year (y/y) to $2.7 billion, roughly inline with analysts’ expectations. The condiment company said organic sales—excluding the impact of foreign exchange and acquisitions and divestitures—of its top 15 brands generated better than 5% growth, with emerging markets delivering more than 15% organic sales growth. HNZ said it is on track to meet its recently increased full-year EPS outlook. HNZ finished lower.

Kohl’s Corp. (KSS $54) reported 4Q EPS of $1.40, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 8.5% y/y to $5.7 billion, inline with the Street’s forecast. The retailer said its same-store sales—sales at stores open at least a year—rose 4.5% y/y. The company said it gained market share in a difficult environment, while it had a “significant” improvement of its margins through strong inventory management and well managed expenses. However, KSS said consumers continue to be financially strained and are looking for value, and as a result, it is planning conservatively in its sales expectations, inventory levels and expenses. Shares were higher despite the company issuing 1Q EPS guidance that missed analysts’ forecasts.

Shares of Express Scripts (ESRX $95) were solidly higher after the company announced 4Q EPS ex-items of $0.97 and revenue of $8.2 billion, beating the Street’s estimate of $0.90 per share and revenue of $7.4 billion. Profits increased 8% y/y, while the revenue increase was 49% over last year and the company issued a strong forecast for 2010. The drug-benefits manager’s profit was somewhat offset by the costs associated with its acquisition of NextRx, which was completed in December of 2009.

Cablevision Systems Corp (CVC $24) reported 4Q EPS of $0.26, ten cents lower than analysts estimated, but shares traded higher as the company reported strong revenue and free cash flow growth. The quarterly profit comes after weak year-earlier results that were impacted by the acquisition of the Long Island newspaper Newsday. CVC noted that cable television subscribers fell due to increased competition, but that was offset by increases in digital video and high-speed internet subscribers. The company also recently completed its spin-off of Madison Square Garden Inc. (MSG $19), a move intended to provide investors with a clear separation between the cable business and its entertainment properties.

Durables mixed, jobless claims rise again

Durable goods orders jumped by 3.0% in January, versus the 1.5% rise that had been forecast, and December’s 0.3% increase in orders was upwardly revised to a gain of 1.9%. Ex-transportation, orders were down 0.6%, compared to the 1.0% growth forecast, but December’s figure was favorably revised from a 0.9% increase to a 2.0% advance. Monthly orders data of goods intended to last at least three years can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, fell 2.9%.

Despite the surprising jump in the headline figure—which was due to a 15.6% surge in transportation equipment—digging into the report, some key components may be causing some concern. The unexpected decline in orders excluding transportation was disappointing as three out of the last four months this component had posted solid gains of 2.0% or more, but the strong revision to December’s number may have soothed some of the sting. Peeling the onion back further, new durable goods orders excluding defense and aircraft—considered a good gauge of the willingness of the consumer to utilize discretionary income on big ticket items—fell 1.4%, teaming up with the aforementioned drop in the proxy for business spending, possibly casting some doubt that the improvement in the manufacturing sector is strong enough the spark the need for employers to hire more workers to meet demand. This sentiment may have been exacerbated by today’s unsettling jobless claims report.

One other aspect of today’s report worth noting was that inventories of manufactured goods fell for the thirteenth-straight month, led by computers and electronic products, suggesting that stockpiles continue to be chewed through, potentially lowering the point at which increasing demand triggers production and eventually benefits the employment front.

Weekly initial jobless claims rose by 22,000 to 496,000, versus last week's figure which was revised upward by 1,000 to 474,000, and compared to the consensus, which called for claims to decline to 460,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 6,000 to 473,750, and continuing claims rose by 6,000 to 4,617,000, compared to the 4,570,000 forecast. However, the Labor Department attributed some of the unexpected increase to a backlog of claims, due to the snow storms that ravaged the Mid-Atlantic region earlier this month.

Also, Federal Reserve Chairman Ben Bernanke concluded his two-day two-day semi-annual monetary policy report before Congress this morning, providing testimony before the Senate Banking Committee. The Fed Chief did not provide any different testimony compared to yesterday’s report in front of the House, in which he 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.

However, traders paid attention to today’s Q&A session, which followed his testimony. The Fed Chief discussed looking into the activities of major US firms with regard to derivative transactions involving Greece. He said the Fed is looking into “a number of questions” related to Goldman Sachs (GS $155) and other companies and their derivatives arrangements with Greece, and he said the Securities and Exchange Commission (SEC) is also looking into the issue. Bernanke responded to a question about the usefulness of these derivatives in hedging, saying they are useful, but “obviously using these instruments in a way that intentionally destabilizes a company or country is counterproductive.”

Treasuries were higher, as the yield on the 2-year note was down 4 bps to 0.82%, the yield on the 10-year note declined 5 bps to 3.64%, and the yield on the 30-year bond lost 6 bps to 4.58%.

Greek debt concerns back in focus

Concern about debt-ridden Greece highlighted international news today, courtesy of yesterday’s warning by Standard & Poor’s, saying that it could downgrade Greece’s debt rating by one or two notches within a month, exacerbated by Moody’s Investors Service saying that its ratings on the nation hinge on the success of the country’s fiscal reform plans. The international economic front provided a plethora of reports, headlined by an unexpected deterioration in eurozone economic confidence from a revised reading of 96.0 in January to a February reading of 95.9, lower than the 96.4 reading analysts were expecting. Other releases included a surprisingly sharp drop in 4Q UK total business investment, and Germany’s unemployment change increased by a smaller amount than expected. In other economic news across the pond, Sweden’s consumer confidence improved and its producer prices rose more than anticipated, Switzerland’s employment level in 4Q ticked lower, Italy’s business confidence improved by a larger amount than forecasted, Spain’s producer prices rose more than forecasted, and France’s producer prices increased more than expected and its consumer confidence unexpectedly deteriorated.

Measures of national economic growth and housing market health due out

Existing-home sales will be reported tomorrow, expected to have increased 0.9% m/m in January to an annual rate of 5.5 million units. The report comes on the heels of a sharp decline in new home sales reported yesterday, which are seen as a more current picture of the state of the housing market as sales are recorded as contracts are signed, while existing home sales reflect closings from contracts entered one to two months earlier. The monthly figures have been distorted by the end of the initial tax credit at the beginning of November, which was subsequently extended and expanded mid-November, as well as holiday seasonality and weather. Despite new home sales falling 11.2% in January versus the expectation of a 3.5% gain, the subdued market action seemed to imply the view that the data is “noisy,” but if continued negative data is received from the housing market, doubts about the sustainability of the economic recovery will likely increase.

The second reading on the nation’s economic output will also be released tomorrow, with economists expecting 4Q Gross Domestic Product (GDP) growth to be unrevised at 5.7% quarter-on-quarter annualized. The initial figures showed personal consumption growing 2.0%, while real final sales, which exclude changes in inventory, were 2.2% higher. In terms of inflation measures, the GDP Price Index rose 0.6%, while the core PCE Index, which excludes food and energy, gained 1.4%.

The increase in GDP was primarily driven by a positive contribution from inventories of 3.4%, as stocks of goods fell at a slower rate, as well as a 1.4% contribution from consumer spending, and a 0.8% contribution from capital spending on equipment and software, which rose at a 13.3% pace in 4Q, the most since 2006.

Other reports on tomorrow’s US economic calendar include the Chicago Purchasing Manager Index, expected to decline to 59.7 in February from 61.5, while the final February reading of the University of Michigan consumer sentiment survey is expected to rise to 73.9 from 73.7.

Internationally, Japan retail sales, housing starts, industrial production, and CPI will be reported, while the eurozone will report CPI and the UK and India announce GDP.