Evening Update

Relative Optimism Offsets Fed Economic Pessimism

Stocks finished the session in the green as traders took a relatively upbeat attitude in the face of cautious commentary as 1Q earnings season unofficially commenced with Alcoa's larger-than-expected loss but an in-line sales performance. The bulls overcame a dose of late-day pressure stemming from a reduced economic outlook that was revealed in the release of the minutes from the Federal Reserve's monetary policy meeting. Helping fuel the resiliency, homebuilder Pulte Homes announced an acquisition of rival Centex, mortgage applications rose for the fifth-straight week, Bed, Bath & Beyond posted a better-than-expected profit report, and the SEC said it aims to restrict the ability to sell shares short. In other earnings news, Family Dollar Stores reported an in-line quarter and raised guidance, Ryder System gave a gloomy assessment of the economy and technology companies Juniper Networks and F5 Networks reported preliminary earnings that were in-line with estimates. Life insurance companies moved higher, despite the Treasury Department clarifying a report that TARP money would be extended to the sector is simply part of the existing rescue plan for bank holding companies. Wholesale inventories fell and Treasuries were mixed.

The Dow Jones Industrial Average rose 48 points (0.6%) to close at 7,837, the S&P 500 Index gained 10 points (1.2%) to 825, and the Nasdaq Composite increased 29 points (1.9%) to 1,591. In light volume, 1.3 billion shares were traded on the NYSE, and 1.8 billion shares were traded on the Nasdaq. Crude oil rose $0.87 to $50.02 per barrel, wholesale gasoline was unchanged at $1.46 per gallon, and gold lost $1.10 to $881.10 per ounce.

Dow component Alcoa (AA $8) posted a 1Q loss ex-items of $0.61 per share versus the estimate of a loss of $0.56 per share. Revenues were $4.15 billion versus the expectation of $4.08 billion. The company cited the continuing economic downturn and a 26% decline in metal prices. However, the company said that they moved to strengthen their balance sheet and reduce costs. CEO Kleinfeld said that China would be the only market where demand for aluminum doesn’t drop this year as the country’s $585 billion stimulus package takes effect. Aluminum stockpiles have risen for 19 straight weeks according to Bloomberg, and Alcoa’s CEO said that “excessive customer destocking cannot continue at the current pace.” Shares traded higher after overcoming midday pressure.

Pulte Homes (PHM $10) announced an agreement to buy fellow homebuilder Centex (CTX $9) for $3.1 billion in stock. Centex holders will receive 0.975 shares of PHM for each share of CTX they own. Based on the 4/7 closing price of PHM, the transaction is valued at $10.50 per CTX share. The companies said they will have a combined $3.4 billion in cash as of 3/31, and plan on retiring more than $1 billion in debt by year-end. Centex CEO Eller said there’s “no way to call the bottom” and Pulte CEO Dugas said he’s “cautiously optimistic about the housing market.” Shares of CTX surged, and PHM shares were down.

Bed Bath & Beyond (BBBY $32) traded over 20% higher after the company reported 4Q EPS of $0.55, higher than the company’s guidance of $0.40 – 0.46 earnings per share and the Street estimate of $0.44 per share. Same-store sales fell 4.3%, compared with guidance of a mid-single digit percentage decline. Analysts cite lower-than-expected gross margin deterioration and better inventory levels for the higher earnings and say the bankruptcy and departure of Linen’s N Things as a competitor may have helped, but was a small competitor, representing approximately 2% of the market.

Family Dollar Stores (FDO $35) reported 2Q EPS of $0.60, in line with the consensus estimate, and revenues of $2.0 billion. The company had previously previewed the quarter’s results, which included a rise in same-store sales of 6.4%. FDO noted that they have benefitted from the increase in budget-minded consumers in the current economic environment, as well as improving merchandise quality and shopability of their stores. Management guided for 3Q EPS of $0.54-0.58, and 2009 EPS of $1.90-2.00, higher than analyst estimates of $0.51 and $1.90, respectively. FDO shares were higher.

Technology stocks were higher after several companies in the sector reported in-line quarters. Juniper Networks (JNPR $18) reported preliminary 1Q revenue below prior guidance but said that lower expenses would bring EPS in line with prior guidance F5 Networks (FFIV $25) said that its 2Q EPS would be in line with guidance, despite revenue below guidance. Shares of both firms finished higher.

Shares of Ryder System (R $24) fell sharply after the logistics and truck leasing company cut its 1Q EPS forecast to $0.22-0.24 per share ex-items, much lower than its earlier forecast of $0.40-0.50 per share. The company said that the prolonged freight recession is expanding beyond the transactional commercial rental product line and is now impacting the full service lease and contract maintenance product lines. Ryder said that the overall economic environment deteriorated throughout the first quarter and that they expect the current worsened economic environment to continue throughout the remainder of 2009.

Life insurers pared early gains after a Wall Street Journal story, reporting the Treasury Department had decided to extend TARP funds to life-insurance companies, was clarified by Treasury spokesman Andrew Williams as being no different than the existing rescue plan for bank holding companies.

Better economic data, but Fed minutes shows a lowered economic outlook

In economic news, the US MBA Mortgage Application Index rose 4.7% to 1250.6 for the week ended April 3, marking the fifth-straight gain. The Refinance Index advanced 3.2% to 6813.5, and the Purchase Index also rose, gaining 11% to 297.7. The Mortgage Bankers Association said the average 30-year fixed loan rose to 4.73% from 4.61% the week before, which was the record low rate since the weekly MBA survey began in 1990.

The Commerce Department said that wholesale inventories fell 1.5%, after wholesalers’ sales rose for the first time in eight months, by 0.6%—bringing the inventory-to-sales ratio down from 1.34 in January to 1.31 in February. The Bloomberg survey of economists expected inventories to decline by 0.7%.

The Securities and Exchange Commission (SEC) held a meeting today to discuss proposals intended to weaken the ability of investors to drive down prices when stocks are falling. Short sellers, who sell borrowed shares in the bet that they can buy back the shares later at a lower price, have been blamed for exacerbating price declines. Under examination is the “uptick rule,” which until July 2007 required short sellers to wait for a rise, or uptick, in a stock price before selling the shares. The SEC is exploring five proposals that fall under two approaches, one applying on a market-wide, permanent basis, and the other being a security-specific, temporary approach that uses circuit breakers either alone or in combination with an uptick rule. The SEC will hold a roundtable discussion on May 5 to further vet out the proposals and is seeking industry comments.

Midday the minutes from the March FOMC meeting were released, and detailed the discussion leading up to the historic move by the Fed to expand its balance sheet by $1.15 trillion, through a combination of $300 billion in Treasury purchases and an additional $750 billion in mortgage-backed securities. The staff revised down its economic outlook, now expecting real GDP to flatten out gradually in 2H 2009 and expand slowly in 2010, and said that the unemployment rate would rise more steeply into early next year before flattening out. The committee said it “sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” The committee noted that “credit conditions remained very tight, financial markets remained fragile and unsettled, with pressures on financial institutions generally intensifying” in 2009. They cited the potential adverse feedback effect of reduced employment and production on consumer spending, as well notable declines in foreign economic activity on U.S. exports. They did not view a rise in housing starts as the beginning of a new trend, but some noted that there was only limited scope for housing activity to fall further. Looking beyond the very near term, they felt there were a number of market forces and policies in place that would eventually lead to economic recovery.

The committee agreed that “substantial additional purchases of longer-term assets” would be appropriate, across a range of assets, although there was not consensus on the preferred size of purchases. The participants remarked that Treasury purchases would influence rates across a variety of long-term debt markets, while minimizing the Fed’s influence on specific markets. The Fed seemed to weigh improved consumer spending in January and February against concerns over declining household wealth, rising savings near-term and higher unemployment, as well as credit market stress. Some credit spreads have started to widen again, and keys to a long-lasting recovery are the degree to which private money enters credit markets and the return of confidence that is so vital to their functioning. Treasuries were mixed, after gaining ground in late-day action after the release of the Fed minutes. The yield on the 2-year note rose 1 bp to 0.92%, while the yield on the 10-year note lost 5 bp to 2.85%, and the yield on the 30-year bond decreased 6 bps to 3.66%.

Tomorrow, the week will end with a couple reports on trade and a key reading on employment conditions. The Import Price Index and the trade deficit are expected to increase by 0.9% and remain unchanged at $36.0 billion, respectively. Also, weekly initial jobless claims are set to be released and expected to fall by 9,000 claims to 660,000. Please note, all US markets will be closed on Friday in observance of Good Friday and tomorrow, the bond market will close at 2 p.m. ET