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Posted: 2/9/10 1:15 PM ET

Extending Gains as Greece Debt Worries Wane

After a disappointing late-day slide yesterday, stocks are recovering those losses and are erasing some of the red ink that has accrued to start the year as sovereign debt concerns in the Eurozone are being eased by speculation European officials may be nearing a plan to help Greece attempt to get its deficit issues under control. The optimism regarding possible relief for Greece was amplified by a report from Reuters that a senior German ruling coalition said Eurozone governments have decided to, in principle, to help Greece and that various options were being considered. But CNBC reported that a German government spokesperson categorized the reports as unfounded. The dollar is under pressure versus the euro and other major currencies, pausing from its recent rally, helping boost commodity-related issues and the overall advance in the equity markets. Some focus is on the Dow Jones Industrials as a couple of members of the blue chip index announced results, with Coca-Cola Co. matching earnings expectations and exceeding revenue projections, while McDonald’s announced that global January same-store sales bested analysts’ forecasts despite a decrease in the US. In other equity news, Electronic Arts Inc. missed the Street’s profit estimate and it issued a disappointing guidance, Toyota expectedly announced another recall, and Pulte Homes posted a wider-than-expected loss. Treasuries remain lower, holding onto losses following an unexpected drop in wholesale inventories. Overseas, Europe finished higher, finding some support from the aforementioned waning concerns about Greece’s deficit problems.

At 12:57 p.m. ET, the Dow Jones Industrial Average is 1.7% higher, the S&P 500 Index is up 1.4%, and the Nasdaq Composite is gaining 1.2%. Crude oil is up $1.79 to $73.68 per barrel, wholesale gasoline is up $0.05 at $1.94 per gallon, and the Bloomberg gold spot price is higher by $13.65 at $1,076.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.8% at 79.68.

Dow member Coca-Cola Co. (KO $54) reported 4Q EPS of $0.66, matching the estimate of Wall Street analysts, with revenue increasing 5% year-over-year (y/y) to $7.5 billion, above the $7.2 billion that the Street expected. The company said it had strong worldwide unit case volume growth of 5%, driven by international volume growth, but North American volume declined 1%. Shares are nicely higher.

Fellow Dow component McDonald’s Corp. (MCD $63) reported January global same-store sales—sales at stores open at least thirteen months—rose 2.6%, versus the 1.4% analyst estimate, as sales in its Europe segment, as well as its Asia/Pacific, Middle East and Africa unit were both up 4.3%, while sales in the US were down 0.7%. Shares are higher.

Electronic Arts Inc. (ERTS $16) reported fiscal 3Q EPS ex-items of $0.33, two cents below the Street’s forecast as revenues fell 23% y/y to $1.35 billion, matching the expectations of analysts. The video game software maker said it is growing market share in its packaged goods business—publishing of video games—and its digital businesses continue to grow rapidly. Shares are under solid pressure after ERTS issued 4Q and 1Q EPS guidance that missed analyst expectations, and its initial fiscal full-year 2011 sales and EPS outlooks also fell short of expectations.

Toyota Motor Corp. (TM $75) rebounded in Asia and is higher in the US after it expectedly announced that it will recall about 437,000 of its new Prius and other hybrid cars to fix braking issues, adding to the over 8 million vehicles that have been recalled recently, due to unintended acceleration. However, following the announcement, Moody’s placed TM’s senior unsecured long-term credit rating on review for a possible downgrade.

Pulte Homes (PHM $11) reported a net loss of $0.31 per share, compared to the loss of $0.19 per share that the Street had expected. PHM said the results included significant charges for goodwill, land, mergers, and mortgage repurchases, which were partially offset by income tax benefits. Excluding these charges, PHM said its results would have been approximately breakeven. The company said its revenue increased 6% y/y to $1.7 billion, compared to the $1.5 billion that the Street forecasted. PHM said its net new home orders increased 113% y/y to 3,748 homes and closings rose 13% to 6,200 homes, but average selling price fell 7% to $258,000. Shares are under pressure.

Wholesale stockpiles surprise to the downside

Wholesale inventories (chart) unexpectedly fell, decreasing 0.8% in December month-over-month (m/m), versus the Bloomberg consensus, which called for a 0.5% advance, and November’s 1.5% increase was revised to a 1.6% advance. Petroleum inventories increased 3.6%, computer equipment jumped 6.6% and professional equipment gained 2.5%. However, automotive inventories fell 2.5%, apparel dropped by 3.6%, and farm products decreased 4.5%. Sales rose 0.8%, bringing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to 1.12 months from 1.14. Treasuries remain lower, holding onto losses following the report.

Director of Market and Sector Analysis, Brad Sorensen, CFA describes in his latest Schwab Sector Views: Developments Warrant Changes, that we believe the economic recovery might be entering a new, more subdued phase after the sharp V-shaped rebound seen in 2009. As a result, Brad cautions that that some of the enthusiasm seen toward the more economically sensitive areas of the market, such as industrials, might wane a bit, leading to performance more in line with the market. However, Brad points out that we’re not overly negative on the group, as both China and the United States—along with many other countries—have targeted improving infrastructure as a major recipient of stimulus funds that have yet to be fully spent. Also, he notes that inventories in much of the manufacturing area are extremely low, leading to the possibility of a demand-inspired rebuilding phase. Read more of Brad’s sector recommendations at www.schwab.com/marketinsight.

Europe moves higher amid optimism for relief for Greece

Stocks in Europe finished higher amid growing optimism regarding the possibility that Eurozone officials could offer some sort of action plan to try to help alleviate the sovereign debt concerns by helping Greece get its deficit under control. Speculation of a potential Greek deficit relief plan came earlier in the day after European Central Bank President Jean-Claude Trichet left Australia earlier than expected in order to attend an EU summit. However, the ECB said the plans were purely because of logistics and Trichet changed his plans in order to catch a connecting flight so he did not miss the summit, which he had already had been scheduled to attend. Following the close of trading in Europe, Reuters reported that a senior German ruling coalition said Eurozone governments have decided to, in principle, help Greece and that various options were being considered. However, CNBC reported that a German government spokesperson called the reports of possible aid unfounded. Schwab’s Chief Investment Strategist Liz Ann Sonders offers analysis of global debt in her latest article Debt: What Is and What Should Never Be, located at www.schwab.com/marketinsight. Liz Ann notes that rising public sector debt is threatening to long-term economic stability. She points out that the United States' public debt-to-GDP number is high (84%) and rising (set to jump to more than 90% this year). “We're not the worst though; there are a couple of countries with even higher figures: Japan (182%) and Greece (119%),” Liz Ann adds, and “that if you look at total credit-market debt (not just government), the numbers are really glaring.”

The advance was limited by the impact of a solid decline in shares of UBS (UBS $13) as the Swiss bank’s first quarterly profit since 3Q 2008 was offset by the company announcing that client outflows at its wealth management unit rose more than expected. Moreover, shares of SAS (SASDF $0.65) were down almost 30% and traded among the biggest losers in Eurozone trading after the airline firm posted a larger-than-expected 4Q loss and said it will try to raise about 5 billion kronor in a share sale. However, shares of Swatch Group (SWGAF $245) traded nicely higher to help markets advance after the world’s largest watchmaker by sales reported full-year profits that exceeded analysts’ estimates, while issuing a favorable outlook, saying its is aiming for the “best result we have ever had in 2010,” per Reuters.

In economic news, the trade balance in Germany—Europe’s largest economy—came in smaller than expected, as imports rose more than economists surveyed by Bloomberg had forecasted, offsetting a surprising increase in exports. Also in Germany, the final reading of consumer prices were left unrevised as expected at a 0.8% increase y/y and a 0.6% decline month-over-month (m/m). Meanwhile, a separate report showed the UK’s trade deficit came in larger than anticipated. Britain’s FTSE 100 Index was 0.4% higher, France’s CAC-40 and Germany’s DAX Indexes both traded 0.2% in the green, and Greece rebounded, with its Athex Composite Index closing 5.0% higher.

Schwab Center for Financial Research - Market Analysis Group

©2010 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for
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