Evening Market Update

Markets Seesaw, Finish Mixed

Stocks managed to pare early morning losses, but finished the day mixed, after optimism about the $1 trillion euro bailout package began to wear off, leaving concern over whether the debt-laden euro-nations can make longer term changes to move to fiscal sustainability. Domestic economic news was mostly positive, as wholesale inventories increased and sales jumped in March. Treasuries moved to the upside, although the long end of the curve finished slightly lower. In equity news, Priceline.com beat EPS estimates, but shares fell sharply after the company missed revenue forecasts and issued disappointing guidance. Meanwhile, Dow member Intel Corp’s CEO made some optimistic comments about future earnings and revenue, Toyota Motor Corp reported 4Q profits that exceeded analysts’ estimates, and Fluor Corp provided a mixed earnings report. Overseas, UK Prime Minister Gordon Brown announced his resignation, clearing the way for the Conservative Party to takeover leadership for the first time in 13 years.

The Dow Jones Industrial Average lost 37 points (0.3%) to close at 10,748, while the S&P 500 Index fell 4 points (0.3%) to 1,156, and the Nasdaq Composite was flat at 2,375. In moderately heavy volume, 1.5 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil fell $0.83 to $75.97 per barrel, wholesale gasoline was $0.02 higher at $2.19 per gallon, while the Bloomberg gold spot price jumped $29.98 to $1,233.08 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 84.51.

Priceline.com Inc. (PCLN $220) reported 1Q EPS ex-items of $1.70, four cents above the consensus estimate of Wall Street analysts, with revenues increasing 26.5% year-over-year (y/y) to $584 million, short of the $597 million that the Street was anticipating. PCLN said it maintained gross booking growth of over 50% y/y during the quarter, on strong gains in hotel room nights. However, shares were sharply lower on the revenue performance and as the company issued 2Q guidance that missed analysts’ expectations. PCLN said the Iceland volcano caused widespread disruptions in air travel which resulted in a significant increase in hotel room cancelations, while civil unrest in Thailand has substantially impacted its hotel reservations in the country, which is a key market in Asia. Moreover, the company said the sovereign debt concerns in Europe have resulted in a significant decline in the value if the euro versus the dollar, which adversely impacts its financial results expressed in dollars.

Dow member Intel Corp. (INTC $22) finished the day lower, even after the Wall Street Journal reported that the company’s CEO told analysts at a meeting that earnings and revenue should grow at a “low double-digit” combined average annual percentage growth rate over the next few years. The report cited the company’s CEO as saying, “We are on top of a growth engine.” The company also went on to say that unit sales of PC’s would double between 2010 and 2014, and that most of the growth will come outside the U.S., in countries such as China, India, Brazil and Indonesia. Despite the optimistic forecasts, INTC did not change its financial forecast for the current quarter.

Toyota Motor Corp. (TM $77) announced 4Q earnings after today’s closing bell in Asia that exceeded analysts’ expectations, as cost cutting and domestic demand helped limit the impact of the massive global recalls. However, TM gave cautious guidance for the current fiscal year, saying it expects operating profit to come in well below the consensus market forecast of analysts surveyed by Reuters.

Fluor Corp. (FLR $50) announced 1Q EPS of $0.76, two pennies above the Street’s forecast, but revenues declined 15.5% y/y to $4.9 billion, short of the $5.0 billion that analysts were expecting. The engineering and construction firm said its results were impacted by lower spending by its oil and gas clients, partly offset by growth in its power, government and industrial & infrastructure segments. FLR reaffirmed its full-year EPS guidance. Shares overcame early losses and finished higher.

Wholesale inventories increase and sales continue to outpace stockpiles

Wholesale inventories (chart) rose 0.4% in March month-over-month (m/m), versus the Bloomberg consensus, which called for a 0.5% advance, and February’s figure was unrevised at a 0.6% increase. The increase in inventories was paced by a 3.6% rise in stockpiles of metals and minerals and a 2.6% jump in computer equipment, helping durable goods inventories increase by 0.8%, while nondurable goods declined 0.2%, as a 5.1% fall in inventories of farm product and raw materials were down 5.1%, offsetting a rise in petroleum products of 1.7%. Meanwhile, sales rose 2.4%, bringing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to 1.13 months, from 1.16 in February. Sales continue to outpace the rise in inventories as the inventory to sales ratio has fallen from 1.39 in March 2009—the month where the equity markets posted the lows—supporting the outlook for GDP as additions to inventories—to try to keep up with sales—add to the broad measure of output. Also, the report bodes well for the outlook of the employment picture as improving demand for goods and the need to produce more to keep up with demand may prompt the need for more workers.

Treasuries ended the day mostly higher, although the long end of the curve lost ground. The yield on the 2-year note was down 2 bps to 0.84%, the yield on the 10-year note lost 1 bp to 3.53%, and the 30-year bond yield was 2 bps higher at 4.43%.

UK Prime Minister steps down, Chinese economic data mixed

After the close of the European markets, Gordon Brown said he would resign as Prime Minister of the UK, paving the way for the Conservative party to take control of the government. Brown’s Labour party had been attempting to form a coalition with the Liberal Democratic party, but those negotiations failed, ending the 13 year leadership of the Labour party. The Conservative government will be lead by David Cameron, who will be appointed as the new premier by Queen Elizabeth. The change of leadership ends days of haggling between the parties and political uncertainty, after last week’s election resulted in a “hung Parliament.” The Liberal Democrats will have to decide whether to join in a coalition with the Conservative party, or support a minority government. The formation of a coalition could help the UK make policy changes easier to pass and help it battle its budget deficit problems. In other news out of the UK, a report showed home prices rose much more than economists’ forecasts, while separate releases revealed a solid 2.0% m/m gain in March, compared to the 0.3% that was expected, and manufacturing production increased 2.3% m/m versus the 0.4% rise that was anticipated.

The optimism in the euro-zone that came from the weekend’s near $1 trillion financial rescue package was replaced by the reality that tough aggressive austerity measures must be implemented in order to move to sustainable long-term fiscal prosperity. Germany approved its contribution to the massive bailout package, as Reuters reported that the nation’s Cabinet approved 123 billion euros in loan guarantees to the coordinated euro-area financial rescue. Other economic reports in Europe consisted of an unrevised increase in German consumer prices for April, while wholesale prices increased more than expected m/m in April, while consumer prices in Sweden came in flat m/m in April.

In the Asia/Pacific region, reports showed China’s industrial production rose 17.8% y/y in April, short of the 18.5% gain that was anticipated by economists, but retail sales rose 18.5% y/y in April, topping the 18.2% that was forecasted. However, inflation and loan data dominated China’s economic docket, with gauges of both producer and consumer prices rising more than expected, while new yuan loans jumped to 774 billion, well above the 585 billion yuan forecast. Moreover, fixed asset urban investment rose more than anticipated and housing prices rose more than expected, all adding to some uneasiness that further government tightening to try to prevent property speculation and cool off the economy may be in the offing.

The lone release on tomorrow’s US economic calendar is the US MBA Mortgage Application Index, which rose 4.0% last week.

The international economic calendar will be busier, with releases including GDP in Germany, France, Italy and the euro-zone, as well as French CPI and UK jobless claims. Outside of Europe, India will release industrial production, while Brazil will announce its retail sales figures.