Evening Market Update

Earnings Dominate Focus, Can’t Lift Stocks Beyond Flatline

The equity markets ended the day mixed as numerous earnings reports were accompanied by an absence of economic releases. Most companies reported positive results, but the lack of upward market movement indicates that investors may be becoming accustomed to better earnings, or are expecting more than analysts are forecasting. Multiple members of the Dow released better-than-expected first quarter results, including Boeing Co, United Technologies Corp, AT&T and McDonald’s Corp, although AT&T was hurt by slowing subscriber growth in a key unit. Shares of Apple Inc traded higher after the company announced solid 2Q EPS, while Yahoo also managed to beat on the top-line but missed revenue forecasts. In the financial sector, Wells Fargo & Co. and Morgan Stanley both exceeded the Street’s earnings and revenue expectations, while regional banks Huntington Bancshares Inc and Keycorp both improved significantly, compared to last year. Rounding out the earnings news was EMC Corp, which exceeded EPS estimates and raised full-year guidance, while Visa Inc. agreed to acquire CyberSource Corp for $2 billion. Treasuries finished higher as mortgage applications rose.

The Dow Jones Industrial Average rose 8 points (0.1%) to close at 11,125, the S&P 500 Index lost 1 point (0.1%) to 1,206, and the Nasdaq Composite increased 4 points (0.2%) to 2,505. 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 $0.02 lower at $83.83 per barrel, wholesale gasoline was up $0.01 at $2.29 per gallon, and the Bloomberg gold spot price rose $6.65 to $1,147.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 81.18.

Apple Inc. (AAPL $259) reported fiscal 2Q EPS of $3.33, well above the $2.46 consensus of Wall Street analysts, with revenues surging almost 50% year-over-year (y/y) to $13.5 billion, compared to the $12.1 billion that the Street was looking for. The company sold 8.75 million iPhones in the quarter, up 131% y/y, 10.89 million iPods, a 1% y/y increase, and 2.94 million Mac computers, a 33% unit increase y/y. In typical fashion, the company issued conservative guidance, saying it expects 3Q revenue to be between $13.0-13.4 billion, and EPS in a range of $2.28-2.39. The Street is forecasting 3Q revenues of $13.1 billion and EPS of $2.70. AAPL was solidly higher.

Dow member Boeing Co. (BA $74 ¹) reported 1Q EPS of $0.70, compared to $0.63 that analysts were forecasting, with revenues declining 8% y/y to $15.2 billion, roughly inline with the Street’s forecast. BA’s CEO said, “With clear progress on the 787 and 747-8, solid financial performance and marked improvement in our customer outlook, we continue to draw on the positive momentum we saw at the end of 2009.” The company said it continued its flight testing of its 787 Dreamliner and it expects to deliver the first aircraft in 4Q 2010. BA expects full-year EPS to be between $3.50-3.80, including the previously disclosed $0.20 per share charge related to healthcare legislation. Analysts are expecting the company to post full-year EPS of $3.83. BA traded solidly higher.

Fellow Dow member AT&T Inc. (T $26) announced 1Q EPS ex-items of $0.59, above the $0.54 that was forecasted by analysts, with revenues coming in mostly flat y/y at $30.6 billion, just shy of the $30.7 billion that the Street was anticipating. The company posted a 1.9 million net gain in total wireless subscribers, with a 3.3 million net increase in 3G postpaid integrated wireless devices on its network, and a 255,000 net increase in wireline broadband connections. However, shares finished lower as the company added 512,000 net retail postpaid—customers under contract who are more highly coveted in the industry—wireless subscribers, which was down 43% y/y and the smallest addition since 2004, according to Reuters.

Meanwhile, McDonald’s Corp. (MCD $70) posted 1Q earnings ex-items of $1.03 per share, compared to the $0.96 per share that analysts were anticipating, with revenues increasing 10% y/y to $5.6 billion, above the $5.5 billion that the Street had forecasted. Global same-store sales—sales at stores open at least thirteen months—at the Dow component rose 4.2%, led by gains in Europe of 5.2% and 5.7% in Asia/Pacific Middle East and Africa, while its US sales increased 1.5%. MCD was slightly higher.

Rounding out the day for the Dow, United Technologies Corp. (UTX $76) posted 1Q profits ex-items of $0.98, eight cents above the estimate of analysts, with revenues declining 1% y/y to $12.1 billion, versus the $12.3 billion that had been expected. The industrial conglomerate raised the low end of its previous full-year profit guidance and traded to the upside.

Morgan Stanley (MS $32) announced 1Q EPS of $1.03, much higher than the $0.58 that analysts were expecting, with net revenues jumping from $2.9 billion to $9.1 billion, compared to the $8.0 billion that was expected. MS’ performance benefitted from an almost 200% surge in sales and trading revenues, which reflected the effect of the improvement in its debt-related credit spreads in the prior year and higher results in its fixed income unit. Shares were higher.

Wells Fargo & Co. (WFC $33) reported 1Q EPS ex-items of $0.50, above the $0.42 that was forecasted on the Street, with revenues increasing 2% y/y to $21.4 billion, which was shy of the $21.8 billion that the Street forecasted and shares were lower. However, the company said its credit businesses are believed to have “turned the corner” as its provisions for loan losses—an expense to cover losses—declined by $583 million versus last quarter and are expected to continue to decline over the course of 2010. WFC also said its net charge-offs—loans that the company does not expect to be repaid—declined to $5.3 billion, down from $5.41 billion last quarter.

Regional banks were also in focus today, led by Huntington Bancshares Inc. (HBAN $7), which reported a 1Q profit of $0.01 per share, its first gain in more than a year and solidly higher than the $0.15 loss analysts were expecting. Revenues jumped 10% y/y and the bank said it expects to remain in the black for the entire year. Keycorp (KEY $9) reported a 1Q loss of $0.11 per share, compared to the Street’s estimates of a $0.30 per share loss, as performance was helped by a 0.8% increase in revenue and reduced loan-loss provisions. Shares of both companies were higher.

Yahoo Inc. (YHOO $17) reported 1Q EPS ex-items of $0.15, six cents above the forecast of analysts, with revenues after traffic acquisition costs declining 2.6% y/y to $1.1 billion, short of the $1.2 billion that was anticipated. The world’s second largest internet search engine said its search share has stabilized and it grew display advertising by 20% y/y. In a conference call with analysts, the company’s CEO said the economy continues to improve and advertisers’ “purse strings are starting to loosen up.” Shares were solidly lower.

EMC Corp. (EMC $20) posted 1Q earnings ex-items grew 63% y/y to $0.26 per share, two cents above the consensus estimate of analysts, with revenues growing 23% y/y to $3.9 billion, above the $3.7 billion that was anticipated. The IT infrastructure firm said it saw its customers move forward with “increased confidence,” focusing not only on cost cutting initiatives, but beginning new innovative projects in their traditional and virtual data center infrastructures. EMC raised its full-year guidance and shares were higher.

In M&A news, credit card transaction processor Visa Inc. (V $93) announced that it has entered into a definitive agreement to purchase electronic payment, risk management and payment security solutions firm CyberSource Corp. (CYBS $26), for $26.00 per share, or about $2.0 billion paid in cash. V was lower, while CYBS was up solidly.

Mortgage applications rise to highlight short economic docket

The lone release on today’s economic calendar was the US MBA Mortgage Application Index, increasing 13.6% last week, after the index, which can be quite volatile on a week-to-week basis, fell 9.6% in the previous week. The advance came amid a 15.8% jump in the Refinance Index, and a 10.1% gain in the Purchase Index. Moreover, the increase in the overall index came on a 14 basis-point decrease in the average 30-year mortgage rate, which fell to 5.04%, remaining above the record low of 4.61% that was reached at the end of March 2009. Treasuries finished the day higher, as the yield on the 2-year note was down 1 bp to 1.00%, while the yield on the 10-year note lost 6 bps to 3.74% and the 30-year bond yield fell 6 bps to 4.62%.

Conditions for Greece’s use of rescue package highlight international news

In European financial news, talks began between debt-ridden Greece and officials from the EU, European Central Bank, and the International Monetary Fund (IMF) to discuss conditions that would allow the nation to tap into the recently agreed upon 45 billion euro financial rescue package. Greece has been trying to raise sufficient capital in the open markets, but soaring rates that it has to pay to entice market participants have caused some uneasiness and if Greece can not adequately fund its capital need in the open market, the aforementioned fund will need to be used. Per Bloomberg News, the Greek Finance Minister said, “There is no chance that Greece will be left hanging in the month of May, whether borrowing from the market or borrowing from our partners,” adding that the talks could take more than 10 days. On the economic front, UK jobless claims fell by 32,900 in March, compared to the decline of 10,000 that economists’ surveyed by Bloomberg had forecasted, and the minutes from the last Bank of England monetary policy meeting showed policymakers voted unanimously to keep its main lending rate unchanged at a record low of 0.5%, while keeping its bond purchase program on hold. The minutes did reveal that “there was a range of views among committee members about how the balance of risks to inflation and activity had altered”, indicating concern about accelerating inflation, which was above the government’s 3% limit in March.

In other international economic news, the Bank of Thailand kept its benchmark interest rate unchanged at 1.25% for the eighth-straight policy meeting, while Japan’s Leading Index for February was revised higher from 97.9 to 98.5.

Readings on inflation and housing market on economic calendar

Tomorrow’s release of the Producer Price Index (PPI) is expected to show prices at the wholesale level were up 0.5% month-over-month (m/m) in March, on the heels of a 0.6% decline in February, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.1% the prior month. On a year-over-year basis, the PPI is expected to show a 6.0% increase on a headline basis, but only a 0.9% increase at the core level. The release comes after the Consumer Price Index (CPI) last week showed a modest 1.1% y/y increase on a core basis.

The report on existing-home sales will also be reported, and is expected to show a 5.2% m/m increase in March to an annual rate of 5.28 million units. Sales of existing homes reflect closings from contracts entered one to two months earlier. Pending home sales data from February showed the first increase in sales since the renewal of the tax credit, up 8.2% m/m, a leading indicator of this report, with differences relative to sales rates due to timing or other closing issues.

The trend in the economy has shown continued improvement, and inflation trends continue to be benign, keeping the Fed on hold for now.

The other release on the US economic calendar is weekly initial jobless claims, expected to decline to 450,000, down from 484,000 the prior week.

International releases include euro-zone services and manufacturing PMI readings, as well as consumer confidence, UK retail sales and Canada’s index of leading economic indicators.