Evening Update

Markets Lose Ground Late in the Trading Day

Stocks notched early gains from positive earnings reports and an optimistic jobless claims report, but fell back to the flat-line late in the day after an agreement on debt relief for Greece was met with criticism from the European Central Bank President. In earnings news, Best Buy reported better-than-expected earnings and raised its guidance, while Qualcomm Inc increased its forecasts and ConAgra Foods Inc announced EPS that met analysts’ expectations. Rounding out the earnings releases were Red Hat, which issued mixed results, and Lululemon Athletica which beat the Street’s estimates on strong same-store sales. In other equity news, reports emerged that the US government might begin to sell off its 27% stake in Citigroup and Schlumberger announced plans to acquire a private French company. Treasuries ended the day mostly to the downside after the third note auction of the week, extending the solid losses seen yesterday.

The Dow Jones Industrial Average gained 5 points (0.05%) to close at 10,841, the S&P 500 Index fell 2 points (0.2%) to 1,166, and the Nasdaq Composite was 1 point (0.06%) lower at 2,397. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.6 billion shares were traded on the Nasdaq. Crude oil was $0.27 lower at $80.34 per barrel, wholesale gasoline was $0.01 lower at $2.21 per gallon, and the Bloomberg gold spot price gained $4.40 close at $1,091.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.38% to 82.15.

Best Buy (BBY $43) shares were higher after the company reported 4Q earnings of $1.82 per share on $16.55 billion in revenues, beating Street estimates of $1.79 per share in earnings and $16.0 billion in sales. The company’s guidance is also higher than analyst forecasts, with fiscal 2011 EPS of $3.45-3.60, versus the Street at $3.34. Sales growth of 12% year-over-year (y/y) was driven by a comparable store sales gain of 7.0%, an increase in the average ticket, low double-digit growth in notebook computers and high single-digit sales in flat-panel televisions, as well as low double-digit growth in mobile phones. The company believes it grew market share domestically by 260 bps y/y.

Qualcomm Inc (QCOM $42) boosted its 2Q earnings guidance to $0.56-0.58 per share on revenue of $2.55-2.65 billion, after issuing disappointing guidance in January of $0.49-0.53 earnings per share and $2.4-2.6 billion in sales. Analyst estimates are currently for $2.57 billion in revenues and $0.52 EPS. The company, primarily known for mobile-phone semiconductors, noted favorable volume and product mix in its chipset business for the increased forecast. Shares finished higher.

ConAgra Foods Inc (CAG $25) announced 3Q EPS from continuing operations of $0.44, inline with the analyst estimate of $0.44, on revenue of $3.1 billion, lower than the $3.15 billion estimate. Sales at the consumer-foods unit, CAG’s largest, rose 2.2% amid strong performance for Banquet, Chef Boyardee and Hunt’s brands, among others, while the commercial-foods segment fell 6.3% amid lower flour costs that were passed on to customers. The company noted that it ramped up couponing to draw consumers to new products. Profit growth of 19% on a comparable basis in the consumer foods segment outpaced commercial food profit growth of 6%. The company said it continues to expect full-year fiscal 2010 EPS ex-items to approach $1.73, while the consensus forecast is for $1.75. Shares were lower.

Red Hat (RHT $29) were lower after the company reported 4Q EPS of $0.17 on a comparable basis with the $0.16 consensus estimate, as revenue grew 18% y/y to $195.9 million, higher than the $193 million forecast. The company said that new subscriptions were up 21% and that renewals were strong, and that it was benefitting from government demand. RHT also announced a new share repurchase program of up to $300 million. In media comments after the results as shares of the company declined, the CEO said that he believed that analysts misunderstood the deferred revenue metric, as the $646 million in future business booked by the company was hurt by $20 million due to weakness in the euro, muddling results. However, fiscal 2011 earnings guidance issued by the company of $0.71-0.74 also fell short of the analyst earnings estimate of $0.76.

Citigroup Inc (C $4) announced that it will commit to participate in the second-mortgage modification program as part of the U.S. government’s Home Affordable Mortgage Program. The program is designed to help struggling homeowners to lower payments on second mortgages such as home-equity loans and lines of credit. Additionally, Bloomberg is reporting that the U.S. Treasury intends to sell its 27% stake in Citigroup, using a preset trading plan that locks the government into a schedule for selling its shares, according to people with direct knowledge of the matter. The program may be announced as early as next month and would bring the bank closer to exiting the government’s Troubled Asset Relief Program (TARP). Shares traded higher on the day.

Lululemon Athletica (LULU $40) shares were higher after the maker of yoga wear and other athletic apparel reported 4Q EPS of $0.40 on revenue of $161 million, higher than the Street earnings estimate of $0.29 on sales of $144 million. Same-store sales – sales of stores open at least a year – rose 29% on a constant-dollar basis, versus the company’s forecast of a rise in the mid-teens, after the company experienced good results in an expanded running line, as well as initiatives to add value to products through technical functionality and new fabrics without increasing prices.

Schlumberger (SLB $61) announced it has acquired private French company Geoservices in a $1.07 billion deal, including net debt. The oilfield services company said that the combination of its “real-time downhole formation sampling measurements with Geoservices’ drilling mud analysis will help customers better identify and react to drilling hazards.” Shares finished lower.

Jobless claims ease and Bernanke discusses exit policy before Congress

On the jobs front, weekly initial jobless claims declined by 14,000 to 442,000, versus last week's figure which was revised lower by 1,000 to 456,000, and compared to the consensus, which called for claims to decline to 450,000. The four-week moving average, a less volatile measure than weekly claims, declined by 11,000 to 453,750, and continuing claims fell by 54,000 to 4,648,000, and the prior estimate was revised higher, while the forecast was for 4,562,000 in continuing claims. However, today’s release includes changes as part of an annual revision to methodology to calculate claims, and a Labor Department economist said that initial claims would have been 453,000 had the revisions not been made.

Federal Reserve Chair Ben Bernanke testified before the House Financial Services Committee today on the strategy for exiting monetary policy, in a hearing originally scheduled for February 10 that was postponed due to a snowstorm. The Fed released Bernanke’s prepared testimony that day, and today’s formal comments reference that statement while updating on recent developments. Today Bernanke said that, “The economy continues to require the support of accommodative monetary policies.” The central bank chief added that they have been “working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.” Bernanke said that as the expansion matures, the Fed would need to tighten to prevent the development of inflationary pressures, adding that raising the interest rate paid on funds deposited at the Fed, term deposits, which are analogous to certificates of deposit, as well as reverse purchase agreements that temporarily drain cash from the system, will be among tools the Fed will use to tighten credit. Bernanke said that the use of reverse repurchase agreements and the term deposit facility together would allow the Fed to drain “hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.” The Fed chief added that if necessary, “as a means of applying monetary restraint,” the Fed has the option of redeeming or selling securities from its balance sheet.”

During the Q&A session, Bernanke said that the “extended period” is not fixed, but depends on how the economy evolves. With regard to the Fed’s balance sheet, Bernanke said the long-term aim is to reduce it below $1 trillion, and to eventually sell mortgage-backed securities gradually to get back to an all-Treasury portfolio “within a reasonable amount of time.” In commenting on the fiscal deficit for the US, the Fed chief said that the fiscal outlook is “somewhat dark” over the medium term, but that it was neither desirable nor possible to remove the deficit soon, and that the Fed had no plans to monetize US debt.

Treasuries moved mostly lower today, furthering yesterday’s move to the downside, after the Treasury auctioned off $32 billion in 7-year notes yielding 3.374%. The auction was the last of three to occur this week, following the $44 billion sale of 2-year notes Tuesday and $42 billion in 5-year notes sold yesterday. Concern over European debt, the increase in supply and the increasing U.S. budget deficit have weighed on the Treasury market recently. The yield on the 2-year note fell 1 bp to 1.08%, the yield on the 10-year note gained 3 bps to 3.88%, and the 30-year bond yield increased 3 bps to 4.76%.

Greek debt solution creates rift, UK reports positive consumer spending reports

France and Germany agreed to bring in the International Monetary Fund to assist Greece with its debt issues, although the decision was met with opposition from the European Central Bank. The announcement came as leaders from the 16-nation euro-zone began a two-day meeting in Brussels to discuss the contingency plan. Under the agreement, each euro-zone country would provide non-subsidized loans to Greece based on its stake in the ECB, leading to a European contribution of approximately half the loans, while the remaining portion would be provided by the IMF, only if Greece runs out of options, according to a French official. ECB president Jean-Claude Trichet expressed his opposition to the plan, saying that “if the IMF or any other authority exercises any responsibility instead of the eurogroup, instead of the governments, this would clearly be very, very bad.” The French-German contingency plan seemed to satisfy the Greek government, as spokesman George Petalotis said it “covers us fully” and sends a “message of stability”.

Trichet’s criticism of the plan calls into question the coordination between the central bank and the individual governments since the onset of the world financial crisis in 2008. German Chancellor Angela Merkel noted that a last resort would be when a euro-area county’s “access to financial markets is exhausted,” wherein emergency aid would include “joint bilateral measures in the euro zone.” Merkel said, “A good European is not necessarily one who rushes to assist,” and that, “A good European is one who abides by the European treaties and national law and thus sees to it that the euro zone’s stability isn’t harmed.” She also called for tougher penalties on future deficit “trickery,” referring to the misrepresentation of prior Greek government statistics

Elsewhere in international news, strong consumer spending news was reported in the form of UK retail sales jumping 2.1% m/m, higher than the 0.8% forecast. The increase was the largest since May of 2008 and lead by an 11.2% jump in sales at household goods stores and a 9.1% increase in textile sales. Excluding fuel, the sales figure rose 1.6%, the most since June of last year. However, Italy reported that its retail sales fell 0.5% m/m, while economists were expecting a gain of 0.1% from the euro-zone’s third-largest economy. German consumer confidence held steady in April, ending five months of declines. Rounding out the reports from abroad was Brazil, whose unemployment rate rose to 7.4% in February, less than the 7.6% that was predicted, but slightly higher than last month’s reading of 7.2%.

Final reading on 4Q GDP growth in the US due out tomorrow

Tomorrow brings the final reading on Advance Gross Domestic Product (GDP) for 4Q, the broadest measure of economic output, and considered a proxy for corporate profits. Economists are expecting no changes to the growth rate of 5.9%, on personal consumption growth of 1.7%, and a GDP Price Index of 0.4%, while core PCE (personal consumption expenditures) grew 1.6%.

The prior reading of 4Q GDP was boosted by a slower pace of inventory consolidation, which added 3.9% to GDP, as well as 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%, and consumer spending contributed 1.2%.

The other release on the US economic calendar is the final March reading of the University of Michigan consumer sentiment survey, forecasted to increase to 73.0 from the initial reading of 72.5, down from February’s reading of 73.6.

International economic releases tomorrow include the Japanese consumer price inflation, UK business investment and Australia’s leading indicator index.