Evening Update

Mixed Direction as Street Pauses for Reflection

Stocks finished mixed as traders continued to harvest gains in technology shares, while grappling with the impact on shareholder value of capital raising efforts by banks and whether or not there is still enough fuel in the tanks to continue the recent market rally. Automakers came under sharp pressure to exacerbate the decline in consumer discretionary issues after GM disclosed that six executives have dumped their stock holdings in the firm, and Ford announced that it intends to raise nearly $2 billion of new capital to help fund its retiree health care trust fund. In other equity news, MBIA, Winn-Dixie Stores, and Fluor, all beat expectations, and Bank of America was reported to have sold some of its stake in China Construction Bank. Elsewhere, Federal Reserve Chairman Ben Bernanke spoke last night about the bank stress tests and called the tests “encouraging.” Treasuries were slightly higher amid the uncertainty regarding the sustainability of the recent rally, and after a smaller-than-expected trade deficit.

The Dow Jones Industrial Average rose 50 points (0.6%) to close at 8,469, the S&P 500 Index declined 1 point (0.1%) to 908, and the Nasdaq Composite decreased 15 points (0.9%) to 1,716. In moderate volume, 1.6 billion shares were traded on the NYSE, and 2.5 billion shares were traded on the Nasdaq. Crude oil gained $0.29 to $58.79 per barrel, wholesale gasoline lost $0.01 to $1.67 per gallon, and gold increased $10.30 to $923.80 per ounce.

Dow component General Motors (GM $1) traded down over 20% after it was disclosed that six executives sold their holdings in the company. GM’s stock is now at the lowest level since 1933. The six executives named in the report included Vice Chairman of Product Development Thomas Stephens and GM North America President Troy Clarke, and all six executives sold their entire holdings in the company. This comes after comments yesterday from GM that a bankruptcy now looks “more probable” than previously thought. The ailing car maker expects to begin notifying its independent dealers this week about its plans for reducing its network of 6,246 stores in the US. The company’s most recent restructuring plan involves cutting the number of dealers by 42% to 3,605 by the end of next year.

MBIA (MBI $6) reported 1Q EPS of $3.34, including a $1.6 billion pretax unrealized gain and a $31.8 billion pretax realized gain, both on insured credit derivatives. This ended a string of five straight quarterly losses for the firm, and was ahead of the loss of $0.33 that had been expected by analysts polled by Reuters. MBIA, the country’s largest bond insurer by outstanding guarantees, said it did not write any new policies during the quarter as a result of downgrades to the company’s credit ratings by major ratings agencies in the last year. Management does not expect to write a significant amount of new business until the company’s ratings are upgraded, although MBIA’s president and CFO Chuck Caplin said the company’s balance sheet is strong and the firm has “ample resources to meet all expected obligations” in spite of the tough environment and mortgage-related risks they now face. However, shares moved sharply lower after relinquishing solid gains.

The Wall Street Journal reported that Dow member Bank of America (BAC $12 ¹) sold 6% of its stake in China Construction Bank (CICHF $1), the second largest lender in China, for over $7 billion, according to people familiar with that matter. BAC will retain about a 10.6% stake in the Chinese lender after the sale as it tries to improve its capital position after the US government's stress tests revealed that it needed to address about $34 billion in a capital gap. None of the parties involved commented on the report. BAC came under pressure.

For a compelling look inside the stress tests of the 19 largest US banks please read Schwab Center for Financial Research Senior Market Analyst Micelle Gibley's, CFA, article entitled Relief Following Resolution of the Bank Stress Tests. Michelle outlines the different avenues that firms can take to address their capital needs—including raising money from private investors—limiting the possibility of more government funding, which helped lead to the Street's positive reaction to last week's results. You can find Michelle's article at www.schwab.com/marketinsight.

Winn-Dixie Stores (WINN $15) released 3Q results showing that EPS grew 10% to $0.30, well above the $0.12 expected by analysts. Sales were up slightly year-over-year to $1.7 billion. WINN reported that same-store sales growth was 0.2% during the quarter, although management pointed out that the timing of the Easter holiday, which was included in the third quarter last year but not this year, held down sales growth. WINN raised its guidance for full year profit from $110-125 million to $145-152 million. WINN shares were up over 25%.

Fluor (FLR $46) published 1Q EPS of $1.12, up 50% year-over-year, and above the Street’s expectations of $0.93. Revenues increased 21% to $5.8 billion during the quarter. New projects in the oil and gas segment led to 29% growth in that division, offsetting a 23% decline in global services revenue which was partly caused by delays in plant shutdowns and turnaround orders. Despite the surprisingly strong result, management lowered its full year earnings guidance as new project awards were lower than expected. FLR now expects 2009 EPS to be between $3.80-4.10, down from the previous guidance of $3.90-4.20. This is still higher than the average analyst estimate of $3.76. Shares were higher.

Ford (F $5) announced that it intends to sell 300 million shares of its common stock, $1.8 billion using Ford’s last closing price, with the proceeds going partly to help fund its retiree health care trust. Ford, the only big three US automaker that has not accepted government aid, owes over $6 billion to the health care trust. Shares were down over 15%.

Trade Balance in focus

The trade balance (chart), increased but less than expected, rising in March for the first time in eight months to $27.6 billion, after declining to the smallest level since late 1999 in February. This was smaller than the gap of $29 billion that had been forecast by economists surveyed by Bloomberg. Meanwhile, the February data was revised upwards slightly from a gap of $26.0 billion to $26.1 billion. This lower-than-expected deficit may cause some traders to question the strength of US consumer spending. As the recession worsened in recent months, the deficit had been declining as US consumers tightened their belts and imports fell even faster than exports. However, recent data has shown a pick up in consumer sentiment and economists were expecting this to be reflected in a growing trade deficit. Treasuries were modestly higher amid the economic uncertainty on the Street. The yield on the 2-year note lost 1 bp to 0.88%, while the yield on the 10-year note was unchanged at 3.17%, and the yield on the 30-year bond declined 3 bps to 4.16%.

In other news, Fed Chairman Ben Bernanke discussed the bank stress tests last night, stating that initial indications are encouraging and many of the banks are “well ahead” in their plans for raising capital in private markets, reducing the odds that the US government will end up a larger owner of the banks. The Fed chief added that another positive sign resulting from the tests was the fact that several banks have announced plans to issue long-term debt not guaranteed by the Federal Deposit Insurance Corp. (FDIC), a requirement for banks to be able to pay back finds received by the Treasury's Troubled Asset Relief Program (TARP). Bernanke did caution though that it will be “some time” before we know how successful the tests really were. "We hope that in two or three years we will be able to reflect on the banking system's return to health with a sharply diminished reliance on government capital," he said.

Measure of consumer spending on tap for tomorrow

Tomorrow will bring the release of advance retail sales, which are expected to be flat month-over-month in April, after dropping a revised 1.2% in March. Ex-autos, sales are expected to have risen 0.2% in April, following a revised 1.0% fall in March. Consumer sentiment and spending have bounced back from the virtual lock down that occurred during late 2008.

Other releases on the economic calendar for tomorrow include business inventories, which are expected to have fallen 1.1% in March, the Import Price Index, forecast to increase by 0.6% in April, and MBA Mortgage Applications for the week ending May 8th.