Morning Update

Resiliency Amid Fed Exit Strategy and Greece Uncertainty

The bulls are showing some relative resiliency in afternoon action as stocks are paring losses, threatening to pierce the flatline, in the face of the Fed’s plan to tighten its extremely loose monetary policy and amid uncertainty regarding relief for Greece. The text of Fed Chief Ben Bernanke’s House testimony on the Fed’s exit strategy unnerved some on the Street as it gave no indication that economic conditions have improved enough to warrant the Fed to begin the deployment of tools to rein in monetary policy as soon as some had expected. Also, conflicting reports as to whether European officials will extend a life-line to help try to fix the Greek nation’s deficit problems are pouring in and traders are trying to gain some clarity on the issue. Treasuries are lower, erasing gains that followed early reports that showed an unexpected widening of the trade deficit and mortgage applications declined. In equity news, Dow member Walt Disney Co. posted better-than-expected fiscal 1Q results, while Sprint Nextel reported a larger-than-expected loss and Dean Foods missed and offered disappointing guidance. Overseas, Europe finished higher on the speculation about a potential bailout for Greece, but pared gains amid the aforementioned uncertainty.

At 12:50 p.m. ET, the Dow Jones Industrial Average is flat, while the S&P 500 Index and the Nasdaq Composite are declining 0.1%. Crude oil is up $0.13 to $73.88 per barrel, wholesale gasoline is down $0.01 at $1.92 per gallon, and the Bloomberg gold spot price is lower by $4.05 at $1,074.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 80.01.

Dow member Walt Disney Co. (DIS $3029) reported fiscal 1Q EPS ex-items of $0.47, compared to the $0.39 that Wall Street analysts had expected, with revenues increasing 1% year-over-year (y/y) to $9.7 billion, versus the Street’s forecast, which called for revenues to come in at $9.6 billion. Revenues at its media networks rose 7% y/y to $4.2 billion, its parks and resorts revenues came in flat versus last year at $2.7 billion, while its studio entertainment unit saw its revenues dip 1% to $1.9 billion. Despite the better-than-expected results, shares are lower.

Sprint Nextel Corp. (S $3) announced a 4Q loss, ex-items, of $0.23 per share, compared to the $0.19 per share shortfall that analysts were anticipating, with net revenues declining 7% y/y to $7.9 billion, compared to the $8.0 billion that the Street was looking for. The company said it lost a total of 69,000 net retail subscribers during the quarter, but its y/y post-paid—the industry’s more highly coveted subscribers—gross subscriber addition improvement was the best in Sprint Nextel history. Shares are solidly lower.

Dean Foods Co. (DF $15) reported 4Q EPS ex-items of $0.31, six cents below the forecast of analysts, and revenues fell 3% to $3.0 billion, roughly inline with the Street’s forecast. The company said 4Q was a challenging finish to an otherwise highly successful year, with performance below its expectations. The food and beverage firm said its fresh dairy direct unit was impacted by retailer and competitive pressures that had been apparent through much of the year, which became “significantly” more pronounced, exacerbated by sharply rising commodities. DF issued 1Q and full-year 2010 EPS guidance that missed analysts’ estimates, saying the 1Q presents a “challenging overlap,” while the balance of the year the overlaps and commodity forecasts become “much less daunting.” Shares are sharply lower.

Bernanke testimony postponed but Street gets the text of the testimony

The Federal Reserve released the prepared text of Federal Reserve Chairman Ben Bernanke’s testimony before the House on unwinding emergency Fed liquidity programs, which has been postponed due to inclement weather in the nation’s capital. Bernanke wrote that although at present the US economy continues to require the support of “highly accommodative monetary policies,” at some point the Fed will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.

Bernanke reiterated that economic conditions are likely to warrant exceptionally low levels of the fed funds rate for an extended period of time, but in due course, as the expansion matures it will need to begin to tighten monetary conditions to prevent the development of inflationary pressures. The Fed Chief noted that it could increase interest on banks’ holdings of reserve balances, resulting in “significant upward pressure on all short-term rates.” Also, Bernanke noted that it could utilize reverse repurchase agreements—where the Fed sells a security to a counterparty with an agreement to repurchase the security at some date in the future—as a way to reduce the large quantity of reserves held by the banking system, to reduce the net supply of funds to the money markets, improving the Fed’s control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates. Bernanke’s testimony also said the Fed could begin to sell assets to shrink its balance sheet but “at least not until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.”

Bernanke’s remarks revealed that the sequencing of steps and the combination of tools that the Fed uses will depend on economic and financial developments. He pointed out that one possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. An interesting aspect of the release was where Bernanke noted that as a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the fed funds market has declined considerably, raising the possibility that the fed funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, Bernanke added, the Fed is considering the utility of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. “In particular, the Fed could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance,” the Fed Chairman outlined. Treasuries have given up early gains and are lower.

Trade deficit unexpectedly widens

The trade deficit widened from an unrevised $36.4 billion in November to $40.2 billion in December, versus the Bloomberg estimate calling for the deficit to narrow to $35.8 billion. Strength in oil prices led to imports outpacing exports as the average price per barrel rose $0.66 to $73.20, resulting in a total bill for crude oil imports rising from $17.81 billion to $20.28 billion.

In other economic news, the US MBA Mortgage Application Index dipped 1.2% last week, after the index, which can be quite volatile on a week-to-week basis, jumped 21.0% in the previous week. The decrease came as the Purchase Index fell 7%, offsetting a modest rise in the Refinance Index, which rose 1.4%. The average 30-year mortgage rate fell 7 basis points to 4.94% but remains above the record low of 4.61% that was reached at the end of March 2009.

Greek relief expectations boost Europe

Stocks in Europe finished higher, led by financials amid increasing expectations that European officials are nearing the deployment of a plan to support the deficit issues in Greece, which have fueled concerns as of late about the impact of a possible debt default in the nation on the overall European economy as well as the global economic recovery. Several media reports had suggested that European governments and other regulators are in discussions pertaining to a plan to help Greece but no confirmation of the reports or any official announcement out of the Eurozone have been made on the issue. Tomorrow, the European Union is expected to hold its summit and there are conflicting reports that a plan for Greece is on the docket for discussion. Also, Eurozone finance ministers are conducting a conference call to discuss Greece, but no plan is expected to result from the talks. Nonetheless, Greece’s Athex Composite Index traded up 2.4%, following yesterday’s 5% jump on the expectations that relief is on the way. However, stocks did pare some gains as the US markets traded lower before the closing bell in Europe.

Meanwhile, there were some economic reports in the region that were worth noting as industrial production in December for both France and Italy unexpectedly fell month-over-month (m/m), while industrial production in the UK rose more than anticipated. In equity news, shares of ArcelorMittal (MT $36) came under pressure after the world’s largest steelmaker reported 4Q earnings before interest, taxes, depreciation and amortization fell 24% to miss the forecasts of analysts surveyed by Bloomberg, while it issued a cautious 1Q outlook. Also, BHP Billiton (BHP $71) was nicely higher after the company posted better-than-expected profits for the half year ended December 31st, but shares erased early gains and finished lower after it sounded a cautious tone regarding the global recovery. Britain’s FTSE 100 Index was up 0.4%, France’s CAC-40 Index traded 0.6% higher, Germany’s DAX Index advanced 0.7%, and Italy’s FTSE MIB Index rose 2.0%.