Morning Update

Positive Financial Profits Persist, but Advance Rests

Despite another better-than-expected profit report from the financial sector, courtesy of Dow member Bank of America, stocks are under solid pressure in early action as traders book profits from six-straight weeks of gains. Treasuries are higher amid the weakness in equities and the Leading Index is set to be released later today to kick off a relatively light week for economic data. Also, the pressure on stocks comes in the face of a $7 billion acquisition of Sun Microsystems by Oracle. In other equity news, Eli Lilly easily beat the Street's profit forecasts. Overseas, markets were mixed.

As of 8:52 a.m. ET, the June S&P 500 Index Globex futures contract is 15 points below fair value, the Nasdaq 100 Index is 26 points below fair value, and the DJIA is 135 points below fair value. Crude oil is down $2.39 at $50.08 per barrel, and gold is up $10.80 at $878.70 per ounce.

Dow member Bank of America (BAC $11) reported 1Q EPS of $0.44, well above the Reuters estimate of $0.04, on record revenue of $36 billion. The company said its recent acquisition of Merrill Lynch contributed more than $3 billion to net income and its earnings for the quarter exceeded all of its 2008 profit results. BAC added $6.4 billion to its loan loss reserves and said its key financial strength ratio of tangible common equity improved to 3.13%. The company's CEO Ken Lewis said its ability to post strong, positive net income for the quarter is extremely welcome news in this environment, and the company is especially gratified that its new teammates in Countrywide and Merrill Lynch had outstanding performance that contributed significantly to its success. BAC added that it continues to face extremely difficult challenges, driven by weakness in the economy and growing unemployment, but it continues to help revitalize the US economy through its efforts to reform mortgage lending, restructure home loans and mitigate foreclosures wherever possible.

Shares of Sun Microsystems (JAVA $7) are up solidly after Oracle (ORCL $19) announced that it has reached a definitive agreement to acquire JAVA for $9.50 per share in cash. Including JAVA's cash and debt, the deal is valued at about $7.4 billion. ORCL said the deal is expected to be accretive to its earnings ex-items by at least $0.15 per share in the first full year after closing. ORCL is lower.

Eli Lilly (LLY $34) reported 1Q EPS ex-items of $1.20, easily beating the Street's estimate of $0.99, as adjusted revenues increased 3% to $5 billion. The drug maker said despite the economic downturn, it delivered strong financial results in 1Q, including solid volume-based gains, while its gross margin benefitted from a stronger US dollar, which combined with prudent expense management, helped it achieve operating leverage and "robust earnings per share growth."

Leading Index on tap, but data for the week will be light

Treasuries are higher ahead of today's release of the Leading Index for March, which is expected to decline 0.2%. The economic calendar will be back-end loaded and relatively light this week, with a bias toward housing and manufacturing. The first report on housing for the week will be on Thursday, where existing home sales for March will be released and are expected to have fallen 0.9% month-over-month (m/m) to an annual rate of 4.68 million units, after rising 5.1% in February to 4.72 million units. Sales have been dominated by the rapidly falling prices afforded by foreclosures, which have accounted for 40-45% of transactions on average, after the Lehman Brothers collapse. On Friday, new home sales for March will be released, and it is expected that sales rose 0.9% m/m to an annual rate of 340,000, after rising 4.7% in February.

Sales have picked up in the areas with the steepest declines in prices, and prices continue to fall due to elevated inventories of homes available for sale. In February, average price for existing homes fell 15.5% from a year ago and 18.0% for new homes.

Durable good orders will be reported on Friday, and are expected to have fallen 1.5% m/m in March, after unexpectedly rising 3.4% in February. Ex-transportation, orders are forecasted to have declined by 1.2%, after advancing 3.9% in February. Manufacturers have been cutting production dramatically in response to falling demand, to preserve cash, cut costs, and lower inventory levels. Economic data continues to be volatile month to month. The economy is still contracting, and while the pace of decline is slowing in some indicators, others continue to deteriorate. It is probable that the path to recovery will incur bumps along the way.

Other releases on this week's economic docket include MBA mortgage applications on Wednesday and weekly initial jobless claims on Thursday.

Europe hits the wall as materials fall

Stocks in Europe are under solid pressure led by steep losses in basic materials issues as commodity prices fall, and weakness in financials is also exacerbating the decline. Basic materials are also being bogged down by a sharp loss in shares of Peter Hambro Mining (POGNY $17) after Russia's second-largest gold producer said it will not pay a dividend in the second-half of the year and announced a 43% drop in earnings for the year. In other equity news, shares of Allied Irish Banks (AIB $2) are up about 12% after the lender said it may sell some assets to boost its capital by 1.5 billion euros ($1.95 billion), and UBS (UBS $12) agreed to sell its Brazilian banking operations to the unit's former head for $2.5 billion to reduce risk and free up capital. Elsewhere, GlaxoSmithKline (GSK $31) is set to purchase privately owned Stiefel Laboratories for up to $3.6 billion aimed at diversifying its business by adding the dermatology firm.

Asia advances led by a jump in China

Stocks in Asia finished mostly higher led by a strong advance in China on comments from its Premier Wen Jiabao. The premier suggested the country's $585 billion stimulus effort was starting to yield results, saying the country's "rapid reaction in rolling out the stimulus package has resolved some prominent problems in the economy." Wen also said the government will continue its "proactive" fiscal policy while the People's Bank of China will maintain its "moderately loose" monetary policy. China's Shanghai Composite gained 2.1%, while Hong Kong's Hang Seng rose almost 1% on the optimism that followed the premier's comments, but the advance in shares of China Mobile (CHL $48) were limited after the world's largest wireless carrier posted 1Q net income rose 5.2% to 25.2 billion yuan ($3.7 billion) shy of the 26.5 billion yuan estimate of analysts surveyed by Bloomberg. In other equity news, Japan's number-two consumer finance firm, Promise (PMSEY $8), fell about 14% after warning that it will post a loss for the year ended March 31, versus a previous forecast that called for a profit, helping mute the advance in Japan as the Nikkei 225 Index gained 0.2%.