Evening Update

East Coast Snow Dampens Trading and Market Action

Trading volume was moderate as many on the east coast were preoccupied with heavy snowstorms and stocks ended modestly higher on the day, despite a large decline in existing home sales and a revision to US 4Q GDP, that on the surface improved, but excluding changes in inventories, was adjusted lower. In equity news, Gap Inc posted a string of positive news including an earnings beat, an increased dividend and new share repurchase program. Elsewhere, AIG posted an adjusted $7.2 billion loss and engineering firm Flour missed Street forecasts and lowered its outlook. In M&A news, Thomas H. Lee Partners announced the intention to acquire fast-food firm CKE Restaurants Inc. In other economic news of the day, consumer sentiment was revised modestly lower and the Chicago PMI unexpectedly improved. Treasuries were higher.

The Dow Jones Industrial Average rose 4 points (0.0%) to close at 10,325, the S&P 500 Index was 2 points (0.1%) higher at 1,104, and the Nasdaq Composite gained 4 points (0.2%) to 2,238. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $1.49 higher at $79.66 per barrel, wholesale gasoline rose $0.04 to $2.19 per gallon, and the Bloomberg gold spot price gained $10.35 to $1,116.70 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.5% to 80.39. For the week, the DJIA and the S&P 500 Index decreased by 1.0%, and the Nasdaq Composite fell by 1.4%.

Gap Inc. (GPS $22) reported 4Q EPS of $0.51, one penny ahead of the expectation of Wall Street analysts, with revenues rising 4% year-over-year (y/y) to $4.2 billion, inline with the Street's forecast. The retailer said its earnings results were driven by improved sales and continued margin improvement, while progress at its Old Navy division helped it end with a much-improved economic model and strong balance sheet. GPS issued a 2010 earnings forecast that exceeded the Street's forecasts. Separately, the retailer said it plans to increase its annual dividend by 18% to $0.40 per share and it authorized an additional $1 billion share repurchase plan. Shares were solidly higher.

In M&A news, CKE Restaurants Inc. (CKR $11) reported that it has entered into a definitive merger agreement under which private equity firm Thomas H. Lee Partners will acquire the parent of Carl's Jr. and Hardee's fast food chains for approximately $928 million, including the assumption of debt. CKE stockholder will receive $11.05 per share in cash for each share held. Also, under the agreement CKR will actively solicit superior proposals from third parties for a period of 40 days, through April 6, 2010. CKR was up nearly 25%.

Bailed out insurance firm American International Group (AIG $25) reported an adjusted 4Q loss of $7.2 billion. The loss for the quarter included $6.2 billion in expenses related to paying back the Federal Reserve Bank of New York and $2.3 billion to strengthen its loss reserves in its commercial insurance unit. The company’s main insurance businesses weighed on results, while its financial products division and higher investment income helped limit the losses. The company's CEO said the company "is not out of the woods yet," but it now has the framework for repaying the US taxpayers. However, shares were solidly lower after the company also warned that if management’s forecasts come in materially different from reality, it could need additional support from the government.

Fluor (FLR $43) reported 4Q EPS of $0.82, six cents below the consensus estimate of the Street, with revenues falling 10% y/y to $5.5 billion, roughly inline with expectations. The construction and engineering firm said it benefited from growth in its power, government and industrial and infrastructure segments, offset by declines in its oil and gas and global services. FLR was lower on the earnings shortfall and as the company slashed its 2010 EPS outlook.

Home sales disappoint while GDP excluding changes in inventory revised lower

Treasuries were higher, as the yield on the 2-year note was down 1 bp to 0.81%, the yield on the 10-year note declined 1 bp to 3.62%, and the yield on the 30-year bond lost 1 bp to 4.56%.

In economic news, existing-home sales fell 7.2% month-over-month (m/m) in January to an annual rate of 5.05 million units, lower than the 0.9% increase to 5.50 million units forecasted by a Bloomberg survey of economists, while December's figure was upwardly revised to a decline of 16.2% from the initially reported 16.7% fall. The median existing-home price was unchanged from a year ago at $164,700, while falling 3.4% m/m, and while the supply of homes fell slightly, the months of supply increased to 7.8 months due to the slower current sales pace.

The National Association of Realtors (NAR), who releases the data on sales of previously occupied homes, said that there is still some delay between shopping and closing on deals, and buyers who entered the market after the tax credit extension have only recently begun to offer contracts. While the NAR said the decline was not encouraging and raises concerns on the recovery, they believe sales will pick up in late spring. Distressed sales were 38% of transactions, down from the 45-50% of a year ago, but up from the 30% in the summer. The crash in housing prices has attracted the interest of investors, who accounted for 17% of transactions, up from 15% in December, and the NAR said that buyers who need a mortgage have been losing out to all-cash offers, particularly for foreclosed homes.

Also, the second look at 4Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 5.9% annualized rate of growth, compared to the 5.7% initial report and estimate, while 3Q rose by 2.2%. The estimate of GDP today is based on more complete data than was available a month ago. Personal consumption advanced 1.7%, below the 2.0% forecast and initial reading. Real final sales, which exclude changes in inventory, were 1.9% higher, versus the 2.2% that was originally reported.

The GDP Price Index rose 0.4%, versus the 0.6% consensus rise of economists surveyed by Bloomberg. The core PCE Index, which excludes food and energy, gained 1.6%, versus expectations of 1.4%. The Fed believes inflation will remain subdued, at rates between 1-2% from 2010 through 2012, and believes that 1.75-2% is the range consistent with the dual mandate of price stability and maximum employment over the longer-term.

Revisions to the initial reading on GDP were driven by a higher contribution from inventories, which added 3.9% to GDP, as stocks of goods fell at a slower pace, as well as an upward revision to capital spending on equipment and software, which contributed 0.9% and rose at an 18.2% pace in 4Q, the most since 2006. Meanwhile, net exports added 0.3%, as exports increased at a 22.4% pace and imports (a subtraction from GDP) gained 15.3%.

Meanwhile, the final University of Michigan consumer sentiment survey for February deteriorated slightly from the preliminary reading of 73.7 to 73.6, down from January's 74.4 reading, and just short of the 73.9 that economists were anticipating. The current economic conditions component of the report was revised lower to more than offset the upward revision to the economic outlook component of the release. The report showed the one-year inflation outlook was left at 2.7%, while the five year outlook dipped from the initial 2.8% that was reported to 2.7%.

Elsewhere, Chicago PMI unexpectedly improved, increasing from 61.5 in January to 62.6 in February, compared to the decline to 59.7 that was forecasted by economists. A reading of 50 is the demarcation point between expansion and contraction, and the reading was the highest since April 2005. The employment index fell to 53.0 in February, down from the 59.8 it reached in January, while supplier deliveries jumped and order backlogs gained ground.

UK GDP revision and Greece deficit in focus

The Wall Street Journal, citing a senior government official, is reporting that the European Union is pushing Greece to adopt additional austerity measures amounting to 4 billion euros ($5.42 billion) to reduce its deficit, while Greece believes a 2-2.5 billion euro reduction is sufficient. Greece has pledged to reduce its deficit as a % of GDP from 12.7% to 8.7% by the end of 2010. Greek officials are expected to have additional meetings with senior European officials next week to discuss the final package.

The British government revised its 4Q GDP figure from a 0.1% quarter-over-quarter (q/q) gain to a 0.3% advance, compared to the 0.2% revised reading expected by economists. The figures are reported on a different basis than in the US, where q/q growth is accounted for on an annualized rate. The upward revision was driven by the biggest gain in services growth since 1Q 2008, at 0.5%, as well as industrial production at 0.4% and manufacturing rising 0.8%. Within other components in the report, consumer spending rose 0.4% and government spending gained 1.2%, while fixed capital investment fell 3.1%. Also, a separate report showed UK consumer confidence unexpectedly improved in February, which helped offset a report that showed home prices in the nation fell unexpectedly. The Bank of England lowered its forecast for GDP growth last week to 1.4% from 2.2% and the government is under pressure ahead of a general election that must be held before June.

In other economic news across the pond, Eurozone headline consumer prices declined 0.8% month-over-month (m/m) in January to match expectations, while core CPI, excluding food and energy, rose 0.9%. Elsewhere, Italian producer prices grew more than anticipated, and Swedish retail sales rose more than forecasted.

Muted move on mixed data

The major equity markets finished modestly lower for the week, failing to post a material move away from the unchanged mark despite some volatile swings as traders grappled with a mixed bag of events, which clouded the outlook for the prosperity of the global economic recovery. Greece concerns resurfaced, flaring up worries about the impact of a default of the Greek nation’s debt on the broader eurozone economy and the potential ripple effects on the global recovery. These concerns were exacerbated by Standard & Poor's saying that it could downgrade Greece's debt rating by one or two notches within a month, and Moody's Investors Service saying that its ratings on the nation hinge on the success of the country's fiscal reform plans. Meanwhile, disappointing readings of consumer confidence in the US and business confidence out of Germany added to the uneasiness outlook for the global economy. The rest of the economic reports that sapped the conviction of traders came from the US in the form of an unexpected jump in weekly initial jobless claims-to the highest level since November-while new home sales surprisingly fell to a record low, teaming up with Friday's existing home sales report to cast some doubt that the housing market is on the mend. The bulls couldn't catch a break from the economic calendar, as even a much larger-than-expected rise in durable goods orders was met with trepidation as the headline number was overshadowed by declines in orders, after excluding the volatile components, depicting a clearer picture of the health of business and consumer spending.

However, losses for the week were limited amid several better-than-expected earnings reports from major retail firms and as traders reacted positively to Federal Reserve Chairman Ben Bernanke’s semi-annual monetary policy testimony before Congress. Bernanke reiterated that the Fed continues to anticipate that economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period." The comments soothed concerns that the Fed was nearing further tightening its monetary policy, which were stoked last week after it surprisingly increased the discount rate. Moreover, the continued increase in M&A activity helped minimize the red ink for the equity markets, with Dow member Coca-Cola Co. (KO $53) agreeing to acquire its largest bottler Coca-Cola Enterprises’ (CCE $26) North American operations in a deal valued at about $12.2 billion in cash and including debt, and Schlumberger Ltd. (SLB $61) confirmed that it will acquire fellow oil-services firm Smith International Inc. (SII $41) for about $11.3 billion.

Busy economic week ahead highlighted by employment data

The ISM Manufacturing Index will be released on Monday, forecasted to fall modestly to 57.8 in February from 58.4 in January. January's result was surprisingly strong, increasing more than expected on a surge in the production component, while orders and employment also rose. Regional surveys on manufacturing activity in February improved, despite the poor weather that has been hitting many parts of the country, shutting down many eastern cities over the course of two heavy snowstorms. Meanwhile the ISM Non-Manufacturing Index has been more volatile on a month-to-month basis, fluctuating around the 50 level that separates contraction versus expansion in the economy. The ISM Non-Manufacturing Index is expected to increase to 51.0 from 50.5, which would be the highest level since the recession began, and will be released on Wednesday. Manufacturing has been stronger on export strength while the service sector is more domestic-driven and has been, suffering from the weak state of consumer spending in the US.

The Federal Reserve releases its Beige Book mid-day Wednesday. The report offers anecdotal data depicting business conditions from all twelve Federal Reserve Districts across the nation in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for March 16. Traders will likely be focusing on housing market commentary, as the Fed's mortgage-backed security (MBS) purchase program is scheduled to conclude at the end of March.

Wednesday will also bring the ADP Employment Change Report, where the forecast is that private sector employers shed 10,000 jobs in February after declining by 22,000 in January. The ADP report overstated job losses relative to the government’s nonfarm payrolls report for five-straight months before nearly equaling the Labor Department figure the last two months, but with gains expected in government payrolls over the next several months, the two reports will start diverging.

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting payrolls fell by 50,000 in February, after declining 20,000 in January. The unemployment rate is estimated to increase to 9.8% from 9.7% in January. Jobs data will start getting a boost from the government, as the Census Bureau has said it expects to hire 181,000 workers from January to March and 971,000 in the following three months, peaking in May, where they are anticipating adding 500,000 workers.

Other releases on next week's busy US economic calendar include personal income and spending, construction spending, pending home sales, MBA Mortgage Applications, initial jobless claims, factory orders, and consumer credit.

The international economic calendar will also be heavy, including Eurozone and UK PPI, and manufacturing and services PMI reports, Eurozone CPI, employment, GDP, and retail sales, German factory orders. In the Americas, Canada releases GDP and building permits, while Brazil announces manufacturing PMI and industrial production.

In the Asia/Pacific region, announcements include Japan's vehicle sales and employment, China's manufacturing PMI, and Australian retail sales and building approvals.

Additionally, several central banks will be meeting to discuss monetary policy, including the Bank of Canada, Bank of England, the European Central Bank, and the Reserve Bank of Australia.