Evening Market Update

Stocks Continue to Rise on Strength of Tech Earnings

The US equity markets finished higher today, again refusing to allow a laundry list of global concerns, including the Japanese nuclear threat, airstrikes in Libya and new European debt problems to dampen sentiment. Traders also showed little concern for an unexpected drop in US durable goods orders, while applauding a larger-than-expected decline in weekly initial jobless claims and optimistic earnings reports from tech companies, including Red Hat Inc and Micron Technology. In other equity news, Dow member Caterpillar issued some upbeat comments, while Best Buy beat the Street’s earnings forecast, but posted a decline in sales and issued a disappointing outlook for 2011. Treasuries finished the day lower and crude oil prices gave up early gains to finish to the downside.

The Dow Jones Industrial Average rose 85 points (0.7%) to 12,171, the S&P 500 Index increased 12 points (0.9%) to 1,310, and the Nasdaq Composite gained 38 points (1.4%) to 2,736. In moderately light volume, 871 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.59 to $105.16 per barrel, wholesale gasoline rose $0.03 to $3.04 per gallon, while the Bloomberg gold spot price decreased $9.65 to $1,427.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 75.70.

Best Buy Co. Inc. (BBY $30) announced 4Q earnings ex-items of $1.98 per share, well above the $1.85 consensus estimate of analysts surveyed by Reuters, even as revenues declined 1.8% year-over-year (y/y) to $16.3 billion, matching the forecast of the Street. The electronics retailer said same-store sales—sales at stores open at least a year—fell by 4.6% y/y, with entertainment hardware and software, as well as TVs, positing double-digit declines, as “current consumer demand in new television technologies had not yet emerged as a significant revenue driver.” Also, BBY said mobile computing sales declined, but mobile phones sales, as well as services and appliances gained ground. BBY issued full-year EPS guidance that missed expectations. Shares gave up an early gain and finished lower.

Dow member Caterpillar Inc. (CAT $108 ¹) was higher after the construction equipment maker said, “With business continuing to improve around the globe, we’re confident in our ability to deliver our 2012 goals and are focusing the company on our targets for 2015.” CAT added that by 2015, it will have made $5 billion in investments to increase production capacity

Red Hat Inc. (RHT $47) reported 4Q EPS ex-items of $0.26, above the $0.22 that analysts anticipated, with revenues increasing 25% y/y to $245 million, exceeding the $236 million that was expected. The open source solutions provider said it had record bookings and billings during 4Q. Shares traded sharply higher.

Micron Technology Inc. (MU $11) posted fiscal 2Q EPS of $0.07, four cents above the Street’s estimate, with revenues increasing 15% y/y to $2.3 billion, compared to the $2.1 billion that was expected by analysts. The chipmaker said revenue from sales of DRAM products—chips used in PCs and video game consoles—declined 6% quarter-over-quarter (q/q) due to a decline in selling prices, while revenue from NAND flash products—chips used in smartphones, digital cameras, and MP3 players—rose 8% q/q as higher volumes offset a decrease in prices. Shares were nicely higher.

Jobless claims decline, durable goods orders surprise to the downside

Weekly initial jobless claims decreased by 5,000 to 382,000, versus last week's figure which was upwardly revised by 2,000 to 387,000, and just below the 383,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, declined by 1,500 to 385,250, and continuing claims ticked lower by 2,000 to 3,721,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Meanwhile, durable goods orders unexpected declined, dropping 0.9% month-over-month (m/m) in February, compared to the 1.2% increase that was expected by economists, but January’s figure was upwardly revised to a 3.6% increase from a 2.7% gain. Also, ex-transportation, orders surprisingly fell, decreasing 0.6% in February, compared to the expectation of a 2.0% rise, but January’s figure was adjusted favorably, to a 3.0% decline, after the initial 3.6% drop that was reported. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, also defied expectations, falling by 1.3% in February, compared to the 4.3% increase that was anticipated, after dropping by a positively revised 6.0% in January—initially reported as a 6.9% decline.

The markets took the disappointing durable goods orders—goods meant to last at least three years—relatively in stride, possibly due to the volatile nature of the report, as illustrated by the steep upward revisions and the estimates of economists that were well off of the mark.

Meanwhile, today’s jobless claims data also supported sentiment that the US economy could begin to get healthier as the employment market, a remaining fly in the ointment of the recovery, is showing signs of improvement. Although claims fell modestly, they remain below the 400,000 mark and the four-week moving average sitting at the lowest level since July 2008, after climbing to over 640,000 in April 2009 in the wake of the financial crisis that led economy to a near depression.

Treasuries moved lower on the employment and durable goods data, as the yield on the two-year note rose 3 bps to 0.69%, the yield on the 10-year note was 6 bps higher at 3.41%, and the 30-year bond yield increased 3 bps to 4.48%.

Portugal faces resignation of PM and credit downgrade by Fitch

European economic news was highlighted by the resignation of Portugal’s Prime Minister Socrates, after the Parliament rejected his austerity plan, which along with a sovereign credit rating downgrade by Fitch ratings today, supported growing expectations that the troubled nation will seek a bailout from the euro-zone’s European Financial Stability Facility (EFSF). Also, Moody’s Investors Service downgraded its ratings on thirty smaller banks in Spain, which had its sovereign debt rating cut by the ratings agency earlier this month. Meanwhile, European policymakers began their two-day summit today, which was touted as the deadline for a final resolution on a “comprehensive package” to combat the euro-area’s debt crisis, but any final agreement is not likely amid rising political uncertainty and the lack of agreement among the key policymakers. Reuters reported that the deadline for an agreement to expand the EFSF has been delayed until mid-year.

In other European economic news, German and euro-zone PMI Manufacturing activity decelerated more than forecasted, while France’s manufacturing activity accelerated more than what was expected. Additionally, UK retail sales fell more than anticipated in February.

In Asia/Pacific, concerns about radiation leaks from the damaged nuclear facility in Japan hampered sentiment, although some reports suggest that companies will begin to restart production that has been halted following the massive earthquake and tsunami that hit north of Tokyo earlier in the month. After the close of trading in Asia, Hong Kong reported a narrower-than-estimated trade deficit as exports jumped more than twice economists’ expectations, to partially offset a solid increase in imports. Elsewhere, the Conference Board’s Leading Economic Index for Australia increased 0.1% in January, while New Zealand reported slightly stronger-than-anticipated 4Q GDP results.

Final reading of 4Q GDP to highlight tomorrow’s economic docket

Tomorrow brings the final look at 4Q Gross Domestic Product, the broadest measure of economic output, forecasted to be revised up to 3.0% from a 2.8% quarter-over-quarter (q/q) annualized rate, an acceleration from the 2.6% rate experienced in 3Q. The anticipated upward revision to GDP comes despite an expected unrevised reading of personal consumption, which was last reported at a 4.1% q/q rate. Inflation readings are also forecasted to be unchanged, with the GDP Price Index coming in at a slight 0.4% gain, and the core PCE Index, which excludes food and energy, forecasted at an increase of 0.5%. Given the backdrop of continued focus on the euro-debt crisis, Middle East tensions, and the tragedy in Japan, along with the market’s forward-looking nature, the report is not likely to foster a huge reaction.

The other release on tomorrow’s US economic calendar is the final University of Michigan Consumer Sentiment Index reading for March, expected to be revised modestly lower to 68.0 from the initial reading of 68.2, and relative to February’s 77.5 reading, which was the highest level since January 2008.

Releases on the international front will include the German import price index and IFO survey of business confidence, Italian retail sales, French consumer confidence and 4Q GDP, as well as Japanese CPI and department store sales.