Evening Update

Stocks Slip on Portugal Debt Woes

Markets were lower on the day as debt concerns continued in Europe, after Fitch downgraded the credit rating of Portugal and reports emerged that Greece will be going to the IMF for aid. On the domestic front, durable goods orders were inline with forecasts, while the prior month was revised higher, new home sales fell after being forecasted to rise, and the MBA Mortgage Application Index declined, but saw strength in the purchase component. Treasuries fell sharply on the economic news and after weak demand was seen in today’s 5-year note auction. In earnings news, General Mills reported better-than-expected earnings but disappointing full-year guidance, Lennar Corp announced positive quarterly results, Adobe Systems beat the Street’s EPS estimates and raised future guidance, while Darden Restaurants also surpassed expectations. In other equity news, Genzyme said it expects the FDA to take enforcement action at one of its manufacturing plants and Starbucks announced its first quarterly dividend and the extension of a stock buyback.

The Dow Jones Industrial Average lost 53 points (0.5%) to close at 10,836, the S&P 500 Index fell 6 points (0.5%) to 1,168, and the Nasdaq Composite was 16 points (0.8%) lower at 2,399. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $1.44 lower at $80.47 per barrel, wholesale gasoline was $0.04 lower at $2.22 per gallon, and the Bloomberg gold spot price fell $19.50 to $1,085.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.24% to 81.90.

General Mills (GIS $72) reported better-than-expected results as 3Q net income rose 15% to $0.96 per share on sales growth of 3% to $3.63 billion. The Street was expecting revenue of $3.6 billion and EPS of $0.93. The maker of Cheerios, Pillsbury and other brands saw its US retail business rise 3% with strength in cereals, which rose 6%, and a 15% increase in the snacks unit. GIS raised its full-year earnings forecast to $4.57 to $4.59 a share from $4.52 to $4.57, however shares were lower as the top end of the new guidance is below the $4.60 per share consensus earnings estimate.

Homebuilder Lennar Corp. (LEN $18) announced a net loss of $0.04 per share for the first quarter, on revenue $574.4 million, better than the analyst forecast of a loss of $0.32 per share on revenue of $566.9 million. CEO Stuart Miller said gross margin rose by 12.7% relative to a year ago to 19.2% on reduced construction costs and lower sales incentives and that other cost savings helped increase the overall operating margin to 3.4%, the highest in four years. The company said that it was on track to achieve profitability in 2010. Deliveries in the quarter were down 6%, but new orders rose 18%. LEN shares ended the day higher.

Adobe Systems (ADBE $37) reported 1Q EPS ex-items of $0.40 versus the $0.37 Street estimate, on revenue of $858.7 million, higher than the analyst forecast of $827.4 million. ADBE raised full-year EPS guidance to a range of $0.39-0.44 on revenues of $875-925 million, ahead of consensus estimates of $0.41 EPS and sales of $860.5 million. In commenting on the results, the company credited stability in the creative business as well as strength in Acrobat and Omniture solutions, and said that it was “bullish about the upcoming launches of Flash Player and Creative Suite.” Shares were higher.

Darden Restaurants (DRI $45) shares finished higher after the company announced 3Q EPS from continuing operations of $0.95 on revenue of $1.87 billion, higher than the forecast of earnings of $0.92 per share and sales of $1.85 billion. The company said that consumers responded stronger than expected to the launch of Red Lobster's annual "Lobsterfest" promotion, which the company didn't expect to be as robust since it was a premium promotion. Darden Chairman and Chief Executive Clarence Otis said the response was a sign that the casual-dining industry is slowly mending after a brutal recession. In an interview with Dow Jones Newswires, Otis said, "We've been expecting to see some early signs of recovery take hold and we've seen that,” and added that customer "visit erosion has slowed."

Genzyme Corp. (GENZ $55) shares were modestly lower after the company said that it expects the FDA to take enforcement action at its Allston, MA manufacturing plant to make sure products are made within regulations after the plant had a temporary shutdown last summer. Production is expected to continue, but the FDA action is expected to result in a consent decree, wherein a third party inspects and reviews operations for an “extended period” to ensure compliance, and could result in additional costs for the company. The plant is the sole-source for two of Genzyme’s top-selling drugs, Cerezyme for Gaucher’s disease, and Fabrazyme for Fabry’s disease.

Shares of Starbucks Corp (SBUX $25) were lower after the company announced its first ever quarterly dividend, of $0.10 per share, and added an additional 15 million shares to an existing share buy-back program, putting the total repurchase program at 23 million shares. The action comes after the company in January said it expected to determine how to distribute excess cash to shareholders in coming months.

Jabil Circuit (JBL $17) posted a 2Q EPS ex-items of $0.29, one cent higher than analysts’ expectations, and revenue of $3 billion, up 4.1% y/y. The supplier of circuit boards used in computers and automobiles also forecasted 3Q EPS of $0.30-0.36 and revenue of $3.1-3.3 billion, roughly in-line with the Street’s prediction. Despite the results, shares of JBL fell over 10% as the company noted weakness in its mobility segment as well as a 10% increase in inventories q/q.

Treasuries tumble, durable goods advance, new home sales fall

Treasuries moved substantially lower today following the Treasury’s auction of $42 billion in 5-year notes yielding 2.605%, fetching a bid-to-cover ratio of 2.55, which was the lowest level of demand since last September. The auction is the second of three to occur this week, following the $44 billion sale of 2-year notes yesterday and preceding tomorrow’s offering of $32 billion in 7-year notes. The lack of demand could reflect an increase in investor’s anticipation of an interest rates increase, which leads to a higher demand for corporate bonds and equities. Concern over European debt, the increase in supply and the increasing U.S. budget deficit have also weighed on the Treasury market. The yield on the 2-year note rose 6 bps to 1.03%, the yield on the 10-year note gained 15 bps to 3.83%, and the 30-year bond yield increased 12 bps to 4.72%.

New home sales hit a record low, with sales falling 2.2% month-over-month (m/m) in February to an annual rate of 308,000 units, compared to the expectation that sales would increase 1.9% m/m to an annual rate of 315,000 units. January’s results were upwardly revised to an annual rate of 315,000 units versus the 309,000 annual rate previously reported. The median price of a new home increased 5.2% year-over-year (y/y) to $220,500, the largest increase since September 2007, while inventory increased to 9.2 months of supply at the current sales rate.

Although new home sales account for a small portion of total home sales, they are viewed as a leading indicator of housing demand as sales are recorded as contracts are signed, versus existing home sales, which are recorded at closing and reflect contracts signed in prior months. While the tax credit was extended and expanded, sales have yet to rebound, but weak seasonality due to holidays and poor weather may have hampered buyers, and traders are giving the data a pass, with future reports likely to be more meaningful, although time is running out for home buyers, with April 30 the deadline to sign contracts in order to close before the June 30 expiration of the credit, and the uncertain trend in mortgage rates, with the Fed’s mortgage-backed security (MBS) purchase program set to end March 30.

Durable goods orders(chart) rose 0.5% m/m in February, slightly lower than the 0.6% forecast, while January was upwardly revised to a 3.9% advance from 3.0%, with the index now increasing for the third-straight month. , orders rose 0.9%, better than the 0.6% increase expected, and January’s 0.6% decline was unrevised. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, rose 1.1% in February, while January was negatively revised to a decline of 3.9% from the original 2.9% decrease. 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.

In other economic news, the US MBA Mortgage Application Index declined 4.2% last week, after the index, which can be quite volatile on a week-to-week basis, fell by 1.9% in the previous week. The decrease came amid a 7.1% decline in the Refinance Index, while the Purchase Index rose 2.7%. The drop in the overall index came as the as the average 30-year mortgage rate increased by 20 bps to 5.01%, remaining above the record low of 4.61% that was reached at the end of March 2009.

Greece and Portugal debt outweigh bullish economic data

European markets were generally lower after Fitch Ratings cut the credit rating for Portugal to ‘AA-’ with a negative outlook and the euro declined to a ten-month low after a German Finance Minstry official, who spoke on the condition of anonymity, said that Germany and France agreed to back an International Monetary Fund (IMF) role for aid to Greece. European Union officials begin a two-day summit tomorrow. Another German official yesterday, who also spoke on the condition of anonymity, said that German Chancellor Merkel set three conditions for supporting EU assistance: aid would be made available only if Greece couldn’t raise funds in financial markets, the IMF makes a substantial contribution and EU sanctions against deficit-limit violators are stiffened. In cutting the rating Fitch said “A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” and added that “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.” Fitch said that that further economic or fiscal underperformance this year or in 2011 may lead to another downgrade.

In economic news, Germany’s IFO Business Climate Index climbed more than forecast, reaching the highest reading since June 2008, as the 7% decline in the euro over the past three months has boosted the competitiveness of German exports and warmer weather may be boosting building activity and spending, which have been hampered by the coldest winter in 14 years. Broader measures of the euro-zone economy also strengthened, with the composite PMI index rising to 55.5 from 53.7, the fastest pace since August 2007, and nicely ahead of the consensus forecast of 53.8, with services, which account for 60% of the region’s gross domestic product, advancing to 53.7 from 51.8 and manufacturing increasing to 56.3 from 54.2.

UK finance minister Alistair Darling published his budget report midday today, unveiling plans to cut the deficit to 89 billion pounds ($132 billion) by April 2014 from 167 billion pounds this fiscal year. He said borrowing will fall to 163 billion pounds next year before declining to 74 billion pounds in 2014-15 and that he’ll stick to current spending plans for the fiscal year that starts next month, with a 2.2% increase in real terms. In a statement, Darling told Parliament, “This will mean debt is 100 billion pounds lower by 2013-14 than was expected at last year’s budget.”

In Asia/Pacific news, Japan reported that exports increased 45.3%, the fastest pace in 30 years in February, while imports rose 29.5%, the highest reading in three years. The result was the largest expansion in Japanese trade surplus since 1982, although the value of exports remains about one-third lower than the peak figure seen in March of 2008. The increase was partly due to favorable year-over-year comparisons, as last year’s February exports were down a record 49.4% due to global trade declines.

The U.S. economic calendar will be light tomorrow, as weekly initial jobless claims are the only report to be announced, and are expected to fall to 450,000 from a previous reading of 457,000.

The international economic calendar will yield German consumer confidence, as well as retail sales out of the U.K. and Italy.