Morning Update

Stocks Slip on Portugal Downgrade and Greece Woes

Stocks are poised to move lower today, as positive corporate earnings news is being outweighed by a credit ratings downgrade of the debt of Portugal and reports Greece will be going to the IMF for aid, pressuring the euro to the benefit of the US dollar. In earnings news, General Mills reported earnings and revenue ahead of Street expectations, while raising guidance yet again, and homebuilder Lennar reported better-than-expected results and new order growth of 18%. In economic news, Treasuries are lower after durable goods orders were reported inline and the prior month was upwardly revised, the headline MBA Mortgage Applications Index fell, but purchases rose within the report, while new home sales are expected to be released at 10 a.m. ET. European shares moved lower after Fitch downgraded Portugal during the trading session and Asia posted a modest advance on bullish corporate news.

As of 8:42 a.m. ET, the June S&P 500 Index Globex future and the Nasdaq 100 Index future are both 5 points below fair value, and the DJIA is 35 points below fair value. Crude oil is down $1.36 to $80.55 per barrel, and the Bloomberg gold spot price is lower by $14.70 to $1,088.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.8% to 81.87.

General Mills (GIS $73) 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% and raised its full-year earnings forecast to $4.57 to $4.59 a share from $4.52 to $4.57. Within categories, strength was seen in cereals which rose 6%, and a 15% increase in the snacks unit.

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%.

Durable goods advance, mortgage index falls but purchases rise, new home sales on tap

Durable goods orders rose 0.5% month-over-month (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. Ex-transportation, orders rose 0.9%, better than the 0.6% increase expected, and January’s 0.6% decline was unrevised. 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.

The economic recovery has been led by manufacturing, as businesses allowed inventories to plunge by a record amount, using existing stockpiles to fulfill orders. With demand returning, albeit at low levels, this type of behavior was unsustainable, and manufacturers returned to production. While factory utilization has rebounded, at 72.7% in January, it remains 7.9% below the longer-term average, and combined with little upward pressure on wages due to high unemployment, restrained housing costs, and low velocity of money (the rate that money multiplies through the economy as it is lent out), there is little threat of inflation in the near-term.

New home sales will be released at 10 a.m.ET, and are expected to show a 1.9% m/m increase in February to an annual rate of 315,000 units and are considered a more timely indicator of conditions in the housing market than existing home sales, as they reflect contract signings. The m/m increase in new home sales would be the first since October, as sales dropped off in November with the initial expiration of the tax credit, which was later extended and expanded in scope.

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.

Europe declines as Greece and Portugal debt outweigh bullish economic data

European markets are 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 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.

Later today, the UK finance minister Alistair Darling is set to publish its budget report and Darling said his pre-election budget today will resist calls to increase spending, while putting off measures to curb a record deficit until after the U.K. election. In recent weeks, Darling has said he’ll use better-than-forecast tax receipts to scale back borrowing, seeking to provide some reassurance to markets concerned about the deficit and level of debt in the country, with some worried that the UK’s credit rating is in jeopardy.

Financials are mixed with shares of Deutsche Boerse (DBOEY $7) higher after the German stock exchange operator said it will cut 3% of staff and shift jobs outside Germany as part of a broader cost-cutting move to save 150 million euros by 2013, while shares of Man Group Plc (MNGPY $4) are lower after the hedge fund firm said assets under management have fallen further to $39.1 billion, as clients continued to withdraw their cash following poor performance from its flagship AHL fund. In other equity news, shares in industrial group Fiat SpA (FIATY $13) are higher on media reports that the company is planning more-than-expected job cuts of 5,000 in Italy and that the company may spin off its car activities sooner than thought this summer.

Asia posts modest advance

Shares in Asia were moderately higher as positive corporate news was weighed down by some risk aversion over the situation in Greece. Japan's Nikkei average finished 0.4% higher, and the yen fell relative to the US dollar, but gains were limited by the yen's rise relative to the euro. Major banks slipped after the government said it plans to scale back privatization of Japan Post and roughly double the limit on Japan Post's deposits and insurance, raising concerns about outflows from private banks. Nintendo Co Ltd (NTDOY $40) soared nearly 9% in Japanese trading after the video game maker said it plans to launch a new model of its DS handheld game gear that allows users to play 3D games without requiring the use of special glasses. China Unicom (CHU $12) fell after the country's No.2 mobile carrier said it would issue a commercial paper worth 15 billion yuan ($2.2 billion) on March 30. Financials received a boost after the Bank of China (BACHY $13) reported better-than-expected earnings after the close yesterday and the Shanghai Composite and Hong Kong’s Hang Seng Index both rose 0.1%.

Elsewhere, Australia’s sovereign wealth fund, Future Fund, ended talks with two Canadian pension funds on joining a A$6.8 billion ($6.23 billion) bid for Transurban Group (TCL AU A$5), sending shares of Australia’s largest toll-road owner lower, and comes after the company rejected a A$5.25 per share offer from the Canadian funds on Nov. 5. The company today said discussions with the Canadian funds took place in the week of March 15 and that no further proposal has been received. China National Offshore Oil Corp. will buy liquefied natural gas from BG Group Plc’s (BRGYY $89) Queensland Curtis venture in Australia’s largest export deal for the fuel. The companies signed an agreement in Beijing today to supply 3.6 million metric tons of LNG annually over 20 years starting 2014, Australian Energy Minister Martin Ferguson said in a statement. The value of the deal would fluctuate with the price of crude oil, and be $40 billion at $70 a barrel, according to the BG Chief Executive Officer. Australia’s S&P/ASX 200 gained 0.3%.