Evening Market Update

Stocks Plunge as Fear Reigns Supreme

Disappointing economic news on the domestic front and continuing fear that Europe’s debt crisis could spread around the world combined to send the equity markets solidly lower today, as the major indices are now negative for the year. The volatility index climbed to its highest level in a year, reflecting growing fear in the markets, and investors sought safer havens, sending Treasuries higher. The day started off with news of an unexpected decline in the US Index of Leading Economic Indicators, and got worse on word of the largest jump in US jobless claims in three months. In equity news, multiple technology firms reported better-than-expected earnings, including Applied Materials, Autodesk and Computer Sciences, while Symantec announced the acquisition of the identity and authentication division of VeriSign. Elsewhere in equities, Sears Holdings beat earnings estimates, but a revenue miss sent shares tumbling, while Staples, Dollar Tree and Williams-Sonoma all bested the Street’s expectations.

Semiconductor-equipment maker Applied Materials (AMAT $13) announced 2Q EPS of $0.22, two cents above the Street estimate, on revenues of $2.3 billion versus the consensus forecast of $2.25 billion. New orders rose 22%, resulting in a backlog of $2.99 billion at quarter-end. The company said that "Global demand for computing and consumer electronics is giving our customers the confidence to make significant capacity additions, fueling what we believe will be a multiyear growth cycle," prompting the company to raise its estimate of industry capital spending to a range of $26-28 billion from its previous estimate of $21-23 billion. AMAT gave 3Q EPS guidance of $0.22-0.26 on revenue of $2.25-2.42 billion, ahead of the Street’s $0.20 EPS and $2.21 billion revenue estimates. AMAT was lower.

Security software company Symantec (SYMC $15) said it has reached an agreement to acquire the identity and authentication division of VeriSign (VRSN $27) for $1.28 billion, including a majority stake in VeriSign Japan. Symantec expects the transaction to be $0.09 dilutive to fiscal 2011 EPS. VeriSign said the deal allows the company to focus on its growing internet infrastructure services business. Shares of both companies were lower.

Design-software company Autodesk (ADSK $28) reported 1Q EPS ex-items of $0.29, above the consensus estimate of $0.26, on revenue of $474.6 million, while the company’s forecast was for revenue of $420-440 million. The company, best known for its AutoCAD software, said that the results reflect continued improvement in the demand environment and robust growth in international geographies, particularly in Asia Pacific, and while it is optimistic about delivering margin expansion this year, it is tempered with “appropriate concern regarding the uncertainty of the European economy,” as Europe represented 42% of 1Q revenues. Autodesk gave up early gains and traded lower.

Information technology services company Computer Sciences Corp (CSC $48) reported 4Q EPS of $1.66, well ahead of the Street’s $1.48 EPS forecast. The company said that it booked $4.3 billion in new business during the quarter, led by its managed-services segment, bringing the full year result to $19.2 billion. CSC gave a forecast for the fiscal 2011 year of an EPS range of $5.30-5.40, above the consensus forecast of $5.21 earnings per share. Shares were lower.

Office-products retailer Staples (SPLS $21) announced adjusted 1Q earnings of $0.28 per share, one cent above the estimate, on revenue of $188.8 million, and raised the lower-end of its full year earnings guidance to $0.18-0.20 per share while reiterating sales growth of low-single digits on a percentage basis. On the conference call to discuss the results, the company said that it saw more traffic from consumers than small business in the quarter, and the CEO noted that he believed the economic recovery would be slow and steady, with “some chops in the middle,” but that he was “a little more optimistic” than in the last few quarters. Shares finished lower.

Sears Holdings Corp (SHLD $89) traded sharply lower despite the company reporting 1Q earnings of $0.16 per share that was two cents higher than the Street, while revenue of $10.05 billion missed the $10.21 billion estimate. The results benefitted from the third-straight increase in same-store sales at Kmart and the first increase in same-store sales at Sears in several years as the company partnered with state agencies to sell energy-efficient appliances.

Dollar Tree (DLTR $62) shares were higher after the company posted 1Q earnings of $0.92 per share before a $0.19 inventory-related charge, besting the Street’s estimate of $0.84, as revenue gained 13% to $1.35 billion on same-store sales growth of 6.5%. The company noted an increase in both traffic and average ticket size and raised its full-year guidance to earnings of $4.29-4.50 per share on sales of $5.67-5.8 billion, versus the previous forecast of $3.96-4.23 EPS on sales of $5.59-5.76 billion, while the consensus estimate is for full-year earnings of $4.22.

Williams-Sonoma (WSM $29) shares advanced after the retailer reported 1Q EPS of $0.18, six cents above the consensus estimate, as revenue and same-store sales both gained 17%. Last month the company said it was seeing a “tailwind” and was gaining market share. Based on the results, the company is raising its 2Q guidance to a range of $0.16-0.20 EPS, but said it would wait to update 3Q and 4Q forecasts until the next earnings release to have “more visibility to the sustainability of the trends” that drove 1Q results.

Jobless claims jump, Philly Fed and Leading Indicators due up later today

Weekly initial jobless claims gained 25,000 to 471,000, versus last week's figure which was upwardly revised by 2,000 to 446,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, added 3,000 to 453,500, and continuing claims fell by 40,000 to 4,625,000, compared to the decline to 4,605,000 that was anticipated. The jump in claims was the largest rise in three months, and a Labor Department spokesman said there were no special factors behind the advance.

The Conference Board released Index of Leading Indicators (LEI) for April, which fell 0.1%, after posting twelve-straight monthly increases and as the forecast was for a rise of 0.2%. The decline was paced by negative contributions from building permits, supplier deliveries, money supply and jobless claims, which more than offset positive contributions from the yield curve, stock prices and the average workweek. Conference Board economist Ken Goldstein said that the results suggest “a recovery that will continue through the summer, although it could lose a little steam.”

The Philly Fed Manufacturing Index was also released this morning, showing an increase in business activity in the mid-Atlantic region, as the index improved to 21.4 in April from 20.2 in March, with a reading of zero being the demarcation point between expansion and contraction, and the forecast was for a reading of 21.3. Within the report, new orders fell while shipments and the employment index rose. Earlier this week, the Empire Manufacturing Index, a measure of manufacturing in the New York region, fell in May to a level of 19.11, well below the estimates of a slight decrease to 30.00, from the previous month’s level of 31.86.

Federal Reserve Governor Daniel Tarullo gave testimony before the House Financial Services subcommittees on the international response to the European debt problems. Tarullo said Europe’s debt crisis poses a threat to the U.S. and world economies, mainly due to reductions in trade and as banks incur losses on European investments. He added that uncertainty and risk aversion could raise borrowing costs and force asset sales by banks that could drive down prices, leading to a worst-case scenario of a disruption similar to the US credit crisis that followed the bankruptcy of Lehman Brothers. The Fed believes that “such a development is unlikely”, but the Fed Governor added that the “swoon in global financial markets earlier this month suggests that it is not out of the question.” Tarullo concluded the testimony by warning that Europe’s experience “is another reminder, if one were needed, that every country with sustained budget deficits and rising debt – including the US – needs to act in a timely manner to put in place a credible program for sustainable fiscal policies.”

Treasuries moved solidly higher on the disappointing jobless claims report and weakness in stocks. The yield on the 2-year note was down 7 bps to 0.71%, the yield on the 10-year note lost 15 bps to 3.22%, and the 30-year bond yield was 15 bps lower at 4.10%.

Merkel says euro area will stick together, BOJ begins policy meeting

Europe was reminded of its continued government debt concerns by yet another protest in the streets of Greece. A day after Germany imposed a ban on naked short selling—the selling of a security without owning or obtaining the approval to own the security—of 10 of the nation’s financial institutions and some derivative securities on euro-area government bonds, German Chancellor Merkel gave more modest commentary, noting that politicians are “no financial experts,” while previously condemning “destructive” markets. Merkel said that markets are asking “to what extent will the euro area hold together,” and that the clear answer was “Yes, we’re sticking together because this common currency is of such great importance to us, offers each member country so many advantages” and is a condition for Europe’s common market to keep working.

In the UK, the coalition government outlined measures aimed at spurring growth, saying that Royal Bank of Scotland Group Plc(RBS $13) and Lloyds Banking Group (LYG $3) would set net lending targets, and the government is pledging to simplify the tax system and deliver the “most competitive corporate tax regime” of any major economy by stripping away rules on exemptions and tax breaks while tackling avoidance so that the corporate rate could be lowered.

In economic news, UK retail sales rose 0.1% month-over-month, the third-straight month of gains, while the expectation was for a decline of 0.1%. In Germany, PPI gained 0.8% m/m, higher than the 0.6% expected by economists and Italian industrial orders gained 1.0%. Euro-zone consumer confidence declined in May, falling to -18 from an April reading of -15, which was a lower than the drop to -16 that was predicted.

In Asian/Pacific news, Japan reported nominal GDP growth of 1.9% annualized in 1Q, boosted by a 3.0% decline in the GDP deflator. GDP was primarily driven by export growth, while domestic consumption and business spending slowed, prompting the finance minster to say that he expects the Bank of Japan (BoJ) to support the economy with “flexible and appropriate” monetary policy and that officials must be “cautious” about calling the recovery self-sustaining. The BoJ began their two-day policy meeting today, where economists are expecting the central bank to keep the benchmark rate at 0.1%.

Meanwhile, the Chinese National Development and Reform Commission said that real estate prices had reached a plateau in some cities and that speculators are exiting, with transactions in some cities beginning to decrease in mid-April. Singapore reported that GDP grew at a 38.6% annualized pace, while Taiwan grew 13.3%, the fastest pace in more than 30 years, as relations with mainland China boosted economic growth. India’s government agreed to more than double the price of gas produced from fields awarded to state companies and Thailand’s market remained closed amid continued violence.

There are no major economic reports on the US economic calendar tomorrow.

On the international front, Germany will report its 1Q GDP, Canada will announce its CPI and retail sales, while the Bank of Japan will continue its two-day policy meeting, and Japan will release its leading index and all-industry activity index.