Evening Market Update

Riots in Greece, Losses in the Markets

After a sharp drop yesterday, equity markets continued their downward trend, as traders were jolted by footage of riots in the streets of Greece in response to the nation’s proposed austerity measures and a possible downgrade of Portugal’s debt by Moody’s. Stocks managed to rebound off their lowest levels of the session, as a larger-than-expected increase in the ADP Employment Change Report, a rise in mortgage applications and an expansionary reading in the ISM Non Manufacturing Index helped limit the downside. In equity news, Time Warner Inc. reported 1Q earnings that beat analysts’ expectations, while News Corp also posted a solid increase in quarterly revenue. Meanwhile, homebuilder PulteGroup Inc announced a smaller-than-expected loss, Garmin Ltd missed its top and bottom line projections, and InterMune Inc received word from the FDA that it will not be approving its lung treatment drug. Tire makers rounded out the equity news, as Cooper Tire & Rubber Co. posted profits that topped the Street’s expectations, but also announced that it has joined rival Goodyear Tire & Rubber Co. in raising its prices. Treasuries ended the day to the upside.

The Dow Jones Industrial Average decreased 60 points (0.5%) to close at 10,867, the S&P 500 Index fell 8 points (0.7%) to 1,166, and the Nasdaq Composite lost 22 points (0.9%) to 2,402. In heavy volume, 1.5 billion shares were traded on the NYSE and 3.0 billion shares were traded on the Nasdaq. Crude oil fell $3.02 to $79.72 per barrel, wholesale gasoline toppled $0.10 to $2.22 per gallon, and the Bloomberg gold spot price gained $4.70 to $1,175.97 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.9% to 84.10.

Time Warner Inc.(TWX $32) announced 1Q EPS ex-items of $0.61, compared to the $0.48 that the consensus of Wall Street analysts had called for, with revenues increasing 5% year-over-year (y/y) to $6.3 billion, roughly inline with the Street’s expectations. The company said it posted its biggest revenue gain in nearly two years as the advertising recovery benefitted its Time Inc. and Turner businesses, while home video sales aided its Warner Bros. unit. TWX raised the high end of its full-year EPS guidance. However, shares were lower.

Meanwhile, News Corp. (NWSA $15) reported a 19% y/y increase in revenue for 3Q, as EPS came in at $0.32, higher than the $0.22 analysts were expecting. The media company attributed the improvement to a rebound in advertising and the runaway success of “Avatar”, a production of the company’s film division, which raked in $2.7 billion in world-wide box office receipts. Shares of NWSA fell after it issued disappointing 4Q guidance, although it raised its full-year outlook.

Homebuilder PulteGroup Inc. (PHM $13) posted a 1Q $0.03 loss per share, compared to the $0.23 per share shortfall that the Street was looking for, with revenues surging 75% y/y to $1.0 billion, but falling short of the $1.2 billion that analysts expected. PHM said closings increased 77% but, “While expectations are for market conditions to remain relatively stable for the remainder of 2010, high resale inventory, particularly foreclosure inventory, expirations of the tax credit and weak consumer confidence could limit the pace of housing’s recovery for several more quarters.” PHM issues full-year guidance that topped analysts’ forecasts. Shares finished lower.

Garmin Ltd. (GRMN $7) reported 1Q EPS ex-items of $0.38, compared to the $0.42 that analysts were anticipating, with revenues down 1% y/y to $431 million, below the expectation that called for revenues at the navigation device maker to come in at $486 million. The company said its 1Q results were mixed but it views the overall trends in the business as positive indicators for the remainder of the year, and it reaffirmed its full-year guidance. Shares finished sharply lower.

InterMune Inc. (ITMN $11) was down over 70% after the US Food & Drug Administration (FDA) completed a review of its new drug application to treat lung disease and said there were one or more reasons that preclude the approval of the application at this time. ITMN said it was disappointed by the outcome as an FDA Advisory Committee recommended the approval of the drug on March 9th, and it will meet with the FDA as soon as possible to understand their point of view and to determine the most appropriate path forward.

Cooper Tire & Rubber Co. (CTB $21) announced 1Q EPS of $0.19, compared to analysts’ estimates of $0.14, and significantly higher than the $0.36 loss reported in the same quarter last year. The company recorded a 32% increase in revenues y/y on a sharp increase in sales, especially in its international unit. However, shares finished lower after CTB said that a 7.5% price increase on light-vehicle tires in North America, due to the rising cost of raw materials, will go into effect on June 1st. The announcement comes one day after rival Goodyear Tire & Rubber Co. (GT $13) said it will raise prices 6% on tires sold to consumers in the U.S. and Canada next month.

ISM stays in expansion mode and private sector payrolls increase

The ISM Non-Manufacturing Index was unchanged in April from March at the 55.4 level, marking the fourth month above the 50.0 level that separates expansion from contraction, but was slightly below the forecasted level of 56.0. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Monday and has been in expansion territory for nine months, with April’s 60.4 being the highest level since June 2004.

Underlying components in both reports were mixed, as the services new orders fell 4.1 points to 58.2 and employment contracted by 0.3 points to 49.5, the twenty-eighth month employment was in the contraction territory, while supplier deliveries and inventories grew. In contrast, the manufacturing report had strong gains in new orders and employment, while supplier deliveries and inventories fell.

The first piece of this week’s US labor data came in, as the ADP Employment Change Report showed private sector payrolls rose, increasing by 32,000 jobs in April, compared to the forecast of economists surveyed by Bloomberg, which called for a 30,000 increase. March’s figure was revised from a loss of 23,000 to a gain of 19,000. The week’s headlining employment report will come on Friday in the form of the Bureau of Labor Statistics’ release of nonfarm payrolls, with the Bloomberg survey of economists forecasting payrolls advanced by 189,000 jobs in April, and that the unemployment rate will remain at 9.7%. The ADP report does not include government payrolls, which are expected to receive a lift from census hiring, which is contributing to the solid forecast of job gains in Friday’s report.

In other economic news, the US MBA Mortgage Application Index rose 4.0% last week, after the index that can be quite volatile on a week-to-week basis, declined 2.9% in the previous week. The increase came amid a 13.0% jump in the Purchase Index, which more than offset a 2.1% decline in the Refinance Index. Moreover, the increase in the overall index came on a 6 basis-point decrease in the average 30-year mortgage rate, which declined to 5.02%, remaining above the record low of 4.61% that was reached at the end of March 2009.

Treasuries finished higher in response to some continued flight-to-safety buying on the uneasiness in the euro-zone. The yield on the 2-year note was down 7 bps to 0.87%, the yield on the 10-year note lost 5 bps to 3.54%, and the 30-year bond yield was 2 bps lower at 4.39%.

Protests add to unrest and uncertainty in Greece

Greece was again the focus on the international front, as pressure continued amid local protests as the debt-ridden nation faces aggressive austerity measures—including tax increases and wage cuts—to gain access to the 110 billion euro bailout package. The traditional response, at least initially, would be for the country whose debt level was excessive to have its currency devalue, helping boost the growth rate of the county in part by making its goods cheaper for other countries to purchase and, potentially, allowing it to grow its way out of the debt crisis. In Greece, however, this wasn't an option as it uses the euro as its currency, which is of course tied to continent as a whole. This hamstrung policymakers in Greece and helped lead to the crisis. Also, fears lingered regarding the potential spillover to other euro-area nations, exacerbated by Moody’s Investor Service placing Portugal’s credit rating on review for a possible downgrade. Moody’s cited the “recent deterioration of Portugal’s public finances as well as the economy’s long-term growth challenges.”

In economic news, euro-zone retail sales came in flat month-over-month (m/m) in March, compared to the increase of 0.1% that economists had expected, but fell by a smaller amount than anticipated on a y/y basis. Meanwhile, Services PMI in the euro-area, Germany, and France were all revised higher, while Construction PMI in the UK jumped much higher than expected. In other economic news, Spain’s industrial output posted a solid 6.8% y/y increase, but the nation’s Services PMI deteriorated to a level just above the 50 mark, which is the demarcation point between expansion and contraction.

In Asian/Pacific news, Australia reported a jump in the country’s building approvals in March, Hong Kong issued a report that showed the region’s Purchasing Managers Index improved in April, and India’s Services PMI improved for April.

The US economic calendar will be light tomorrow, with the only report being the weekly initial jobless claims, which are expected to decrease to 440,000 from a previous reading of 448,000.

On the international front, the ECB will announce its decision on interest rates, which are expected to be kept unchanged at 1.0%, the UK will report services PMI, and Germany will announce monthly factory orders for March. Other reports include Japanese vehicle sales, Canadian building permits, and Australian retail sales. The UK will also be holding parliamentary and general elections tomorrow.