Evening Market Update

Afternoon Rally Sends Stocks Into the Green

The equity markets managed to push higher late in the day, following a steep morning selloff due to increased fears out of Greece. Earnings were in focus again today, with most reports coming in above estimates, although some company’s announcements were overshadowed by disappointing guidance. Dow member Verizon Communications Inc. issued earnings that were in-line with expectations, but disappointing growth in the subscriber sector sent shares of the company lower. Meanwhile, Ebay and Qualcomm Inc both reported better-than-expected earnings, but issued disappointing guidance, while PepsiCo also beat top-line expectations but reported soft sales. Healthcare was the poorest performing sector today, led lower by weak full-year guidance from Baxter International Inc. Rounding out the earnings reports were Starbucks Corp and SanDisk Corp, which both topped profit projections and raised their outlooks. M&A news was also in focus today, as CenturyTel Inc agreed to acquire Qwest Communications International Inc, while US Airways Group Inc broke off merger talks with United Airlines. On the economic front, existing home sales rose more than forecast, producer prices increased more than expected and jobless claims fell by a smaller amount than was anticipated. Treasuries moved lower on the day.

The Dow Jones Industrial Average rose 9 points (0.1%) to close at 11,134, the S&P 500 Index gained 3 points (0.2%) to 1,209, and the Nasdaq Composite increased 14 points (0.6%) to 2,519. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.7 billion shares were traded on the Nasdaq. Crude oil was $0.05 higher at $83.73 per barrel, wholesale gasoline was up $0.01 at $2.30 per gallon, and the Bloomberg gold spot price fell $5.18 to $1,141.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 81.62.

Dow member Verizon Communications Inc. (VZ $29) announced 1Q EPS ex-items of $0.56, matching the consensus estimate of Wall Street analysts, as revenues grew 1.2% year-over-year (y/y) to $26.9 billion, which was also inline with analysts’ estimates. The company said its wireless unit Verizon Wireless—co-owned with Vodafone (VOD $23)—showed 1.5 million total net customer additions. However, shares finished lower as VZ’s wireless unit added 423,000 retail postpaid net customer additions, which missed the expectations of analysts. Postpaid customers are more profitable and highly coveted in the industry because they are customers that are under contract. Meanwhile, VZ’s FiOS internet unit added 185,000 customers, while its FiOS TV segment grew by 168,000 subscribers.

Ebay Inc. (EBAY $23) reported 1Q EPS ex-items of $0.42, one penny ahead of the Street forecast, with revenues growing 9% y/y to $2.2 billion, roughly inline with analysts’ forecasts. The e-commerce firm said its results were due to growth in its payments and marketplaces businesses, along with a positive impact from foreign currency movements against the US dollar. However, shares traded lower after the company issued 2Q guidance that missed the Street’s estimates.

Qualcomm Inc. (QCOM $39) reported fiscal 2Q adjusted earnings of $0.59 per share, three cents above the consensus estimate of Wall Street analysts, with revenues growing 8% y/y to $2.7 billion, slightly above the $2.6 billion that the Street was forecasting. Shares were lower after the maker of chips for wireless devices issued 3Q EPS and revenue guidance, which the midpoints of each range came in below what analysts are anticipating.

PepsiCo Inc. (PEP $65) announced 1Q EPS ex-items of $0.76, compared to the $0.75 that analysts were anticipating, with revenues growing 13% y/y to $9.4 billion, but just shy of the $9.5 billion that the Street was looking for. The company said its results benefitted from the acquisition of its two largest bottlers, volume gains in its worldwide snacks, its international beverage business, which showed growth in developing markets, and lower costs across its operations. PEP also said top-line trends are improving in North America. Shares were lower.

Starbucks Corp. (SBUX $27) posted fiscal 2Q EPS ex-items of $0.29, four cents above the consensus estimate on the Street, with revenues increasing 9% y/y to $2.5 billion, above the $2.4 billion that analysts expected. The company said its total same-store sales—sales at stores open at least a year—rose 7% y/y, driven by a 3% increase in traffic and a 4% increase in the average ticket price. Also, the coffee chain raised its full-year EPS outlook. SBUX traded nicely higher.

SanDisk Corp. (SNDK $42) reported 1Q EPS ex-items of $0.95, well above the $0.57 that analysts were expecting, with revenues up 65% y/y to $1.1 billion, versus the $990 million estimate on the Street, but down 12% compared to last quarter. The maker of flash memory cards, found in MP3 players, mobile phones, and digital cameras said it benefitted from mobile product sales which more than doubled compared to the same period last year. Shares were sharply higher after it issued 2Q revenue guidance that topped analysts’ forecasts while raising its full-year revenue guidance, saying it is “poised to benefit from flash memory demand in growth markets in 2010 and beyond.”

Baxter International Inc. (BAX $51) led the healthcare sector lower on the day after it reported Q1 EPS of $0.93, which was inline with analysts estimates, but cut its full-year guidance due to a slowing market for plasma-based medical products. The company said it now expects full-year sales to grow by 1-3%, down from a January forecast of 5-7%. Shares of BAX were down sharply.

In M&A news, Qwest Communications International Inc. (Q $5) and CenturyTel Inc. (CTL $35) have reached a definitive agreement, in which CTL will acquire Q in a tax-free, stock-for-stock transaction, which values Q at about $10.6 billion. Including the assumption of $11.8 billion in debt, the total enterprise value of Q is $22.4 billion. Under the agreement, Q shareholders will receive 0.1664 CTL shares for each Q share that they own, equivalent to $6.02 of CTL stock and representing a 15% premium to yesterday’s closing price of Q. CTL’s CEO said, “The combination will enhance our ability to deploy innovative IP products and high-bandwidth services to business customers, expand broadband availability and speed to consumers, and offer superior, differentiated video products.” CTL traded lower and Q was higher.

Elsewhere, US Airways Group Inc. (LCC $6) announced that it has discontinued recent discussions with the parent of United Airlines, UAL Corp. (UAUA $22), regarding a potential merger. LCC’s CEO said it remains the company’s belief that consolidation makes sense in an industry as fragmented as theirs, whether it involves LCC, as it leads to a more efficient industry better able to withstand economic volatility, global competition, and the cyclical nature of its industry. Shares of LCC were lower, while UAUA traded higher on the announcement.

Existing home sales rise, jobless claims fall, wholesale inflation increases

The Producer Price Index showed prices at the wholesale level rose 0.7% month-over-month (m/m) in March, after declining 0.6% in February. The average economist forecast surveyed by Bloomberg called for prices to rise by 0.5%. The increase for March was driven by a 2.4% rise in food prices, the largest increase since 1984. Meanwhile, the core rate, which excludes food and energy, increased 0.1% m/m, matching the forecast of economists. On a year-over-year basis, headline producer prices were 6.0% higher, while the core rate was up 0.9%. The release comes after the Consumer Price Index (CPI) last week showed a modest 1.1% y/y increase on a core basis, with the services sector, which accounts for two-thirds of the economy, showing a mere 0.8% y/y rise.

Excess supply in the economy is restraining increases in prices, as exemplified by factory utilization still 7.4% below the 20-year average, unemployment at 9.7%, and sluggishness in the housing market weighing on prices of housing, and low velocity of money (the rate that money multiplies through the economy as it is lent out).

Existing-home sales rose 6.8% m/m in March to an annual rate of 5.35 million units, better than the 5.3% increase to 5.29 million units forecasted, and February’s data was revised slightly lower. The median existing-home price rose 0.4% from a year ago to $170,700, while advancing 3.7% m/m, and the supply of homes increased by 1.5% m/m to 3.58 million units, equating to 8.0 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier.

The renewal of the tax credit attracted demand, with first-time buyers representing 44% of sales, and factors into the reason 75% of sales were for properties priced below $250,000. Distressed sales, which the National Association of Realtors (NAR), who releases the data, says typically sold at a 15% discount, were 35% of transactions, down from 45-50% a year ago. The crash in housing prices has attracted the interest of investors, who were 19% of transactions.

While inventory is 21.7% below the record reached in July 2008, concerns about future foreclosures adding to supply remain the risk to the housing market, as nearly 25% of homeowners owe more than the value of their home. The NAR noted that “Foreclosures have been feeding into the inventory pipeline at a fairly steady pace and are being absorbed manageably,” adding that they are selling quickly, especially in the lower-price ranges dominated by first-time homebuyers. The industry association believes that the stabilization of house values is adding to buyer confidence and will help the housing market “get back on its feet even as the tax credit impact disappears.”

In other economic news, weekly initial jobless claims fell by 24,000 to 456,000, versus last week's figure which was downwardly revised by 4,000 to 480,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 450,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 2,750 to 460,250, and continuing claims dropped by 40,000 to 4,646,000, compared to the decline to 4,600,000 that was anticipated.

Treasuries finished the day lower, as the yield on the 2-year note was up 3 bps to 1.02%, while the yield on the 10-year note gained 3 bps to 3.77% and the 30-year bond yield rose 2 bps to 4.64%.

Moody’s downgrade adds to Greek fears

Greece continues to talk with euro-area officials regarding a 45 billion euro bailout package, exacerbated by the EU’s statistics office saying that the debt-ridden nation’s deficit was 13.6% of the Greek GDP, which was up from an early April forecast from the government of 12.9%, per Bloomberg News. Also, Moody’s Investors Service lowered its credit rating on the Greek nation from A2 to A3, four grades above junk, adding to the negative backdrop, saying, “This decision is based on Moody’s view that there is a significant risk that debt may only stabilize at a higher and more costly level than previously estimated.” Moody’s also put a negative outlook on Greek debt, indicating that it’s more likely to lower it again than raise it or leave it unchanged. The uneasiness toward Greece caused yields on the Greek 2-year note to surge about 290 basis points to over 11%, while the 10-year Greek bond jumped 61 basis points to 8.78%.

In economic news, euro-zone Composite PMI unexpectedly improved to 57.3 in April, compared to the forecast of economists, which called for the gauge of service and manufacturing activity to remain at 55.9. The favorable read was aided by better-than-expected Manufacturing PMI in Germany and the Services PMI in France. Meanwhile, a separate report showed UK retail sales grew by a smaller-than-expected 0.2% in March m/m excluding autos and fuel. Elsewhere, euro-zone consumer confidence showed an unexpected improvement, while euro-zone government debt to GDP ratio jumped from 69.4% to 78.7% as of December 31. Back on this side of the pond, Canada released its survey of leading indicators, which increased 1.0% in March, compared to a 0.7% rise that economists were anticipating, and following a 0.8% increase last month.

Durable goods orders and new home sales on tap for tomorrow

Tomorrow’s US economic calendar will include the release of durable goods orders, which are expected to have increased by 0.2% in March, after increasing 0.5% in the previous month, which was the third-straight month of increases. New home sales will also be released, and economists are looking for a 5.5% m/m increase to an annual rate of 325,000 units, after hitting a record low in February following a surprising 2.2% m/m decrease to 308,000 units.

International releases include the first reading of 1Q GDP in the U.K., Japan’s all industry activity index, French consumer spending, retail sales out of Italy, and CPI and retail sales in Canada.