Weekend Summary

Traders Search for Direction in Volatile Session

Stocks were reactive in a volatile session on Friday, where the Dow fell over 160 points mid-day, moving in the opposite direction of the US dollar, which reversed course in the last hour of trading and both stocks and the US dollar ended higher on the day. The US dollar has experienced an inflow of funds as traders move away from the euro zone on concerns about government debt in the region and the ability of debt to be repaid while deficits and interest rates to fund the debt grow higher. The labor report out of the US showed an unexpected decline in jobs and hampered sentiment, despite having some underlying positive indicators for future job growth. Equity news was generally positive, with Aetna's earnings miss standing in contrast to an earnings beat by Tyson Foods, and UPS and Marriott made positive dividend announcements. Elsewhere, Air Products and Chemicals offered to acquire Airgas Inc for about $7.0 billion, while Toyota Motor Corp gave an apology for its recall issues. Treasuries were higher as traders were wary of risk-based trades.

The Dow Jones Industrial Average rose 10 points (0.1%) Friday to close at 10,012, the S&P 500 Index gained 3 points (0.3%) to 1,066, and the Nasdaq Composite increased 17 points (0.7%) to 2,141. In heavy volume, 1.6 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil was $1.95 lower at $71.19 per barrel, wholesale gasoline fell $0.06 to $1.89 per gallon, and the Bloomberg gold spot price gained $3.18 to $1,066.88 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.5% to 80.34. For the week, the DJIA lost 0.6%, while the S&P 500 Index fell 0.7%, and the Nasdaq Composite declined by 0.3%.

Aetna (AET $30) reported 4Q EPS ex-items of $0.40, two cents shy of the consensus estimate of Wall Street analysts, with revenues rising 9% year-over-year (y/y) to $8.7 billion, compared to the Street's forecast of $8.6 billion. AET said it saw a lower commercial underwriting margin, due to a significant increase in commercial medical costs, partially offset by an increase in health care premiums. The company added that entering 2010, a weak economy and high unemployment levels remain challenging. The company said its 4Q medical costs ratio-the portion of its premiums that go to pay patient medical costs-increased from 81.8% a year ago to 85.4%, but was lower than the 85.6% that was seen in the previous quarter. AET said its 2010 EPS outlook is forecasted to come in a range of $2.55-2.65, compared to the Street’s forecast of $2.83. However, shares were higher.

Tyson Foods (TSN $15) reported fiscal 1Q EPS of $0.42, compared to the $0.18 that analysts were expecting, with revenues increasing 1.5% to $6.6 billion, inline with the Street's forecast. The meat producer said all operating segments were profitable, with its beef, pork, and prepared foods continuing to execute well, while its chicken unit is beginning to show the improvement it has been working toward. Shares were nicely higher.

United Parcel Service (UPS $57 ¹) reported that it will increase its regular quarterly dividend from $0.45 per share to $0.47 per share, on all outstanding Class A and Class B shares. The package delivery firm said its outlook for a "gradual economic recovery" and the expectation of strong performance in 2010 justifies this dividend increase. Shares gave up an early gain and were lower.

In related news, Marriott International (MAR $26) announced that it has reinstated its quarterly cash dividend of $0.04 per share. The company paid a stock dividend in lieu of the cash payout in 2009, which allowed it to reduce debt and MAR said the reduction in its liabilities allowed it to return to a cash dividend. MAR traded higher.

In M&A news, Air Products and Chemicals (APD $69) announced that it has made an offer to acquire rival firm Airgas Inc. (ARG $60) for $60.00 per share in cash, a 38% premium to ARG’s closing price yesterday, for an approximate value of $7.0 billion, including the assumption of $1.9 billion in the company's debt. APD said the acquisition is expected to be accretive to its earnings and the combination would create the leading global industrial gas company. ARG confirmed it has received the offer and will review the proposal. ARG was sharply higher and APD was solidly lower.

Shares of Toyota Motor Corp. (TM $72) managed to gain ground in Japanese trading and were higher in the US, stemming the recent tumble on recall concerns, even amid reports that the company will announce a recall of its Prius Hybrid cars. The company held a press conference today and apologized for the recall issues and said it is still considering measures regarding its Prius vehicles.

Labor report misses modestly, market focused on risk aversion

Treasuries finished solidly higher as traders continued to move away from higher risk trades amid continuing concerns about the sovereign debt in the Eurozone. The yield on the 2-year note fell 8 bps to 0.80%, the yield on the 10-year note lost 11 bps to 3.59%, and yield on the 30-year bond declined 11 bps to 4.53%.

Nonfarm payrolls fell by 20,000 jobs in January, compared to the Bloomberg estimate, which called for a 15,000 increase in jobs. Also, December was revised from -85,000 to -150,000 but November’s 4,000 gain-the first since December 2007-was upwardly revised to 64,000. The unemployment rate-derived from a separate survey than the nonfarm payroll figure-fell below 10%, declining to 9.7%, versus the consensus forecast for it to remain at 10.0%. Average hourly earnings rose 0.3%, slightly above the Street's forecast of a 0.2% increase, and average weekly hours rose to 33.3, compared to the forecast calling for it to remain at 33.2.

Late in the day, a report from the Federal Reserve showed that US borrowers reduced consumer credit for the eleventh-consecutive month in December, the longest streak of declines since record-keeping began in 1943 according to Bloomberg. Total consumer debt outstanding was reduced by $1.7 billion, smaller than the $10 billion decline expected, while data for November was revised to a drop of $21.8 billion versus the previously announced decline $17.5 billion. Within the report, revolving debt, such as credit cards, fell $8.5 billion, while debt such as auto and mobile-home loans rose by $6.8 billion. The Fed's report doesn't cover lending secured by residential real estate.

European debt worries continue to dominate discussion and market action

Spain released some economic data today, which showed that industrial output fell 1.5% y/y in December, and the Spanish central bank said the nation's GDP in the final quarter of 2009 will probably decrease 0.1%, contracting for the seventh-straight quarter. Spain has been suffering the aftermath of a debt-fueled housing construction boom that resulted in household debt as a percentage of GDP to grow to be one of the highest in the euro region, according to data from the European Central Bank, and unemployment at 19.5% adds to the economy's woes. As a result, growth is slated to be one of the slowest in the euro region, with the International Monetary Fund estimating the economy will contract 0.6% in 2010, while the euro region is forecasted to grow 1.0%.

In other European economic news, a report showed UK producer prices rose more than expected month-over-month (m/m) in January and industrial production in Germany-Europe's largest economy-unexpectedly fell, dropping 2.6% m/m in December, compared to the 0.6% gain that was anticipated.

Canada joined the US in releasing employment data today, with the country posting a stronger-than-expected gain in jobs of 43,000 in January, led by part-time positions for youth, pushing the unemployment rate down to 8.3%. Full-time positions gained 1,400, while part-time employment increased by 41,500.

In economic news in the Asia/Pacific, Japan released a preliminary reading of the Leading Index for December, which rose more than expected to 94.0 from 91.0 in November. Elsewhere, the Reserve Bank of Australia released its quarterly monetary policy statement, in which it said the economy will grow at an annual pace of 3.25%, while factoring in a 75 basis point increase in its benchmark lending rate. Also, the RBA’s statement said it is likely that borrowing costs will be increased further over time to ensure that inflation stays within the central bank's target range of 2-3%.

Volatility the word of the week

The bulls welcomed February's arrival-looking for a fresh start after a disappointing month of January-rallying amid a plethora of favorable global manufacturing data, headlined by the sixth-straight monthly increase in the US ISM Manufacturing Index. Moreover, a rebound in pending home sales-a gauge of the pipeline of existing home sales-coupled with an unexpected profit from homebuilder D.R. Horton (DHI $13), added to the overall enthusiasm on hopes that the housing market may be on the mend to add some further support to the global economic recovery. This left the bulls in command and it seemed as if the biggest source of disappointment on the Street was that Punxsutawney Phil saw his shadow and we are in for another six weeks of winter.

However, after a pause in the equity markets on hump day amid a smaller-than-expected increase in the ISM Non-Manufacturing Index and on a larger-than-expected drop in private sector payrolls according to the ADP's Employment Change Report, sentiment reversed and the early enthusiasm was replaced with pessimism. The brunt of the blow to sentiment came from growing sovereign debt concerns out of Europe as the deficit problems that have tormented the outlook for the debt of Greece spilled over to other elevated-deficit Eurozone nations such as Spain and Portugal, resulting in a surge in key rates used to price the cost to insure the debt of these nations to record highs. Speculation ramped up about the implications of a failure of the debt of these countries on the entire Eurozone economy and the global economic recovery, to take the global markets hostage. Moreover, fears began to emerge about the ripple effects on developed nations outside of Europe, including the US, taking the wind out of the bulls' sales, turning a promising start to February on Wall Street into another week of declines for the New Year. The dollar moved solidly higher on flight-to-quality buying and commodity prices, especially gold and oil, fell sharply.

Equity news was overshadowed by the aforementioned sovereign debt concerns out of the Eurozone, as earnings reports that continued to exceed analysts' forecasts and a plethora of better-than-expected retail sales reports had little impact on soothing sentiment toward the global economy. However, the abrupt change in sentiment was not enough to mask the pressure of massive recall issues on Toyota Motor Corp.

Measure of consumer spending on tap

Advance retail sales for January will be released next Friday, forecasted to rise 0.3% month-over-month (m/m), after falling 0.3% in December, while sales ex-autos are estimated to increase 0.4%, on the heels of a decline of 0.2% in December. The consumer discretionary sector tends to underperform as recoveries mature. Economists are expecting growth in 1Q to decelerate to 2.7% from 5.7% in 4Q, and leading economic indicators are likely to peak this year. As the group was a leading sector on the upside in anticipation of economic growth, it also tends to lead to the downside, and we believe the market could see more muted and volatile performance going forward.

Other releases on the economic agenda next week include the MBA Mortgage Application Index, wholesale inventories, the trade balance, initial jobless claims, business inventories and the University of Michigan consumer sentiment.

International economic releases include Japanese machine tool orders and consumer confidence, French and UK industrial production, the German wholesale price index, and GDP releases out of the euro zone. China will release new loans, money supply, and trade information ahead of the Chinese New Year holiday where markets will be closed for a week beginning February 15. Australia releases its employment data and a survey on consumer confidence.