Evening Market Update

Markets Focus on Earnings

The equity markets were able to continue the upward momentum by posting modest gains amid a plethora of favorable earnings reports. Highlighting the earnings docket were better-than-expected results from Goldman Sachs Group Inc, which helped to sooth some of the sting that came from Friday’s fraud allegations from the SEC. Several Dow members reported earnings that exceeded analysts’ forecasts, including IBM, Coca-Cola, and Johnson & Johnson, while Harley-Davidson Inc posted profits that bested expectations, Coach beat the Street and doubled its dividend, but Delta Air Lines Inc reported a net loss that matched and revenues were below forecasts. Outside of earnings, Dow member Procter & Gamble Co upped its quarterly dividend. Treasuries finished the day mixed as there were no major economic reports scheduled to be released today.

The Dow Jones Industrial Average rose 25 points (0.2%) to close at 11,117, the S&P 500 Index gained 10 points (0.8%) to 1,207, and the Nasdaq Composite added 20 points (0.8%) to 2,500. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $0.72 higher at $83.85 per barrel, wholesale gasoline was up $0.03 at $2.28 per gallon, and the Bloomberg gold spot price rose $2.75 to $1,138.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 81.04.

Goldman Sachs Group Inc. (GS $162) reported 1Q EPS of $5.59, compared to the $4.05 that Wall Street analysts had expected, with revenues rising 36% year-over-year (y/y) to $12.8 billion, compared to the $11.0 billion that the Street was anticipating. The company benefitted from the performance in its fixed income, currency and commodities unit, which had its revenues rose 13% y/y to $7.4 billion, reflecting strong performances in credit products, mortgages an currencies. The conference call with analysts that followed the results was dominated with questions regarding Friday’s fraud allegation from the Securities and Exchange Commission (SEC), with GS’ co-general council saying that the company would not intentionally mislead clients, and that the company was “very disappointed” in the SEC charges. Shares finished lower.

Dow member International Business Machines (IBM $129) reported 1Q EPS of $1.97, four cents above the Street’s forecasts, with revenues rising 5% y/y to $22.9 billion, compared to the $22.7 billion that the Street was looking for. The company said it drove “significantly improved” revenue growth rates from last quarter across its businesses and geographies. IBM raised its full-year profit outlook, but shares were under pressure after the tech firm said its signed services contracts declined 2% y/y to $12.3 billion.

Fellow Dow member Coca-Cola Co. (KO $54) announced 1Q EPS ex-items of $0.80, six pennies above the consensus forecast of analysts, with revenues increasing 5% y/y to $7.5 billion, compared to $7.6 billion that the Street was forecasting. KO said the economic recovery in emerging markets continues to outpace the rest of the world as Eurasia and Africa unit case volume grew 11% y/y, leading a total unit case volume increase of 3%, but North American volume falling 2% y/y. Shares were lower.

Also, Dow component Johnson & Johnson (JNJ $66) posted 1Q EPS ex-items of $1.29, compared to the $1.27 that analysts were expecting, with revenues increasing 4% y/y to $15.6 billion, matching the expectation of analysts. However, JNJ lowered its full-year EPS outlook to reflect recent changes in foreign currency exchange rates and incorporate the impact of recently enacted health care reform legislation. JNJ was modestly lower.

Delta Air Lines Inc. (DAL $13) reported an adjusted net loss of $0.23 per share, inline with analysts’ estimates, with total operating revenues increasing 2% y/y to $6.8 billion, compared to the $7.0 billion Street forecast. Revenue per available seat mile—a key industry metric of revenue—rose 8% y/y but cargo revenues fell 5%, reflecting the shutdown of dedicated freighter flying. The airline said it expects positive revenue trends to continue and to be “solidly profitable in the June quarter.” The company also said that its losses through Monday totaled about $20 million, due to the European flight disruptions from the volcano ash out of Iceland. Shares are lower.

Harley-Davidson Inc. (HOG $35) was up more than 7% after the maker of motorcycles reported 1Q EPS of $0.29, compared to the $0.25 that analysts were forecasting, with revenues declining 19% y/y to $1.04 billion, roughly inline with the Street’s forecasts. The company said its retail motorcycle sales decline moderated and it is seeing “directional improvement” in its dealers’ sales as it enters the key selling season.

Coach Inc. (COH $42) reported 1Q EPS of $0.50, compared to $0.36 in the same period a year ago, and above the $0.46 forecasted by analysts, with revenues jumping 12% during the quarter to $830.7 billion. The luxury hand-bag an leather-goods maker said it saw more robust discretionary spending, as same-store sales—stores open at least a year—rose 5.1% in the US, while comparable store sales increased at a double-digit rate in China. COH also doubled its quarterly dividend to $0.15 per share, and authorized a share repurchase program of $1 billion through June 2012.

Outside of earnings, Procter & Gamble Co. (PG $63) declared an increase in its quarterly dividend from $0.44 per share to $0.4818 per share, representing a 9.5% increase. The dividend from the Dow component will be payable on or after May 17, 2010. Shares relinquished an early gain and ended slightly lower.

Economic calendar yields to earnings season

Treasuries were mixed as today’s economic calendar was void of any major releases, allowing the attention on Wall Street to focus on the plethora of earnings reports that were out today. The yield on the 2-year note was up 2 bps to 1.01%, while the yield on the 10-year note lost 3 bps to 3.79% and the 30-year bond yield fell 3 bps to 4.67%. Treasury yields have turned higher recently and the 10-year note has threatened the 4% mark.

Possible rate signal in Canada?

The Bank of Canada left its benchmark interest rate unchanged at 0.25%, but the policy statement released with its decision suggested the nation may be nearing an increase in borrowing rates. The BoC removed its “conditional commitment” to keep its target rate at its current level until the end of the second quarter on 2010, adding that, “With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 percent inflation target.“

In European economic news, the German ZEW Survey of Economic Sentiment Index dominated a full slate of reports across the pond, as it rose from 44.5 in March to 53.0 in April, compared to the modest rise to 45.1 that economists surveyed by Bloomberg had forecasted. A separate report showed German producer prices increased 0.7% m/m in March, above the 0.5% anticipated. Consumer prices in the UK rose 0.6% m/m during March, double economists’ expectations, Spain’s trade balance narrowed by a larger amount than forecast, the euro-zone current account deficit widened, and Italian industrial orders unexpectedly fell 0.4% in February, far short of expectations for a gain of 1.5%. Elsewhere, Sweden’s central bank left its benchmark interest rate at 0.25%.

In the Asia/Pacific region, Hong Kong’s unemployment rate declined more than expected in March, falling from 4.6% in February to 4.4%, compared to the 4.5% that was forecasted. Meanwhile, India’s central bank raised its interest rates for a second time in a month, while the Reserve Bank of Australia released the minutes from its latest monetary policy meeting where it raised its benchmark interest rate for the fifth time in six meetings, and noted that while the Australian economy was “benefiting significantly” from developments in the resources sector, these “would also pose challenges,” and various measures of inflation expectations were around or a little above their average levels. In other economic news in the region, export orders in Taiwan rose more than expected to 43.66% y/y in March.

The only item on tomorrow’s US economic calendar is the MBA Mortgage Applications Index, while the international docket is also fairly light, with Japan’s leading index and trade balance slated for release.