Evening Update

The Street Reconsiders Last Week’s Sell-Off

After losing over 3% last week, markets surged ahead today as traders regained their sense of optimism. Among the issues that held the Street’s focus today was a lower-than-expected drop in profits from Lowe’s Companies – the world’s second-largest home improvement retailer – and an announcement that State Street is joining the list of US banks that are raising capital in an attempt to repay the government funds they have borrowed. Markets started off the day on a positive note after the Indian stock market was up over 17% following elections in that country. In other news, department store Dillard's posted an unexpected 1Q profit, struggling insurer AIG announced that it plans to spin off its Asian unit, GM’s slim hopes of avoiding bankruptcy took another hit as the UAW urged members to write the Obama administration and request job-saving changes to GM’s restructuring plan, and Corning’s CFO gave investors an optimistic LCD outlook. Treasuries were lower after a home builder confidence report showed conditions have improved since May and Treasury Secretary Tim Geithner said that although the economy is stabilizing, unemployment will not soon turnaround.

The Dow Jones Industrial Average gained 235 points (2.9%) to close at 8,504, the S&P 500 Index rose 27 points (3.0%) to 910, and the Nasdaq Composite increased 52 points (3.1%) to 1,732. In light volume, 1.2 billion shares were traded on the NYSE, and 2.0 billion shares were traded on the Nasdaq. Crude oil climbed $2.69 to $59.03 per barrel, wholesale gasoline increased $0.08 to $1.76 per gallon, and gold fell $12.50 to $919.30 per ounce.

Lowe's Companies (LOW $20) reported 1Q EPS fell 22% to $0.32, seven cents above the Reuters forecast, as revenues of $11.8 billion came in 1.5% lower versus last year but topped analysts' expectations. Same-store sales for 1Q declined 6.6% and the world's second largest home improvement retailer said the economic pressures on consumers remain intense, and bigger ticket projects continue to be postponed as consumers watch the economic climate and housing market dynamics very closely. However, the company's CEO said in recent weeks it has seen consumer confidence improve, housing turnover show signs of a bottom in certain markets, and home prices slow their decline. The company issued EPS guidance for 2Q and raised its full-year profit outlook, which both came in above the Street's estimates. LOW was up strongly today, as was competitor Home Depot (HD $26), which will release its earnings report before the market opens tomorrow.

In actions aimed at paying back the $2 billion in funds that it received as part of the Troubled Asset Relief Program (TARP), State Street (STT $42) announced that it plans to commence a public offering of senior notes, which will not be guaranteed under the Federal Deposit Insurance Corporation (FDIC)—a requirement to be eligible to pay back TARP funds. Additionally, STT announced that it also commenced a public offering of its common stock and $1.5 billion in proceeds are expected. Meanwhile, STT said that as a result of adding $22.7 billion in fixed-income investments onto its balance sheet, it expects to record a $3.7 billion loss this year. As a result, the company lowered its full-year operating EPS guidance to a range of $4.25-4.50—which includes $0.75 per share of interest income from the fixed income assets it added to its balance sheet. Excluding the interest income, STT's full-year EPS forecast is short of the $3.83 that analysts had expected. Nonetheless, shares were solidly higher.

American International Group (AIG $2) was higher after announcing that it will accelerate steps to position its Asian life insurance organization, American International Assurance Company (AIA Group), as an independent entity and will seek a public listing on an Asian stock exchange. The company's CEO said the company believes that a public listing for AIA Group would be in the best interest of all stakeholders, including US taxpayers, policyholders, employees, and distribution partners.

Shares of department store Dillard's (DDS $10) were sharply higher after it reported an unexpected 1Q profit ex-items of $0.09, versus the Street' s forecast that called for a net loss of $0.18 per share. Revenues fell 12% to $1.5 billion and same-store merchandise sales declined by 13% versus last year. The company said the results were due to aggressive efforts with regard to inventory management, expense reduction, and cash conservation. DDS noted that its inventory management resulted in improved gross margin from retail operations by 150 basis points.

Corning (GLW $14) CFO Jim Flaws spoke at an investor meeting today, making positive comments on current operations. GLW confirmed it is on pace to reach its goal of 18% LCD growth this year. Flaws also reassured investors that the industry’s traditional boom/bust cycle will not rear its head this year and result in an oversupply of LCD glass inventory. “We are planning on a build this quarter, but we are not expecting an increase like last year,” Flaws said.

Dow member General Motors(GM $1) got some more bad news as it races to meet its June 1 restructuring deadline. In an e-mail message sent out to UAW members late Sunday night, the union repeated its opposition to GM’s plans to close 16 US manufacturing plants and cut 21,000 jobs. Union leaders used the letter to encourage members to write to President Barack Obama and ask him to implement job-saving changes to the restructuring plans currently being discussed. “We need President Obama and his auto task force to stand up for the interests of American workers and retirees in the restructuring negotiations," the UAW said in its message. GM did not comment on the matter.

Stocks in India that also trade in the US, such as Infosys (INFY $35), ICICI Bank (IBN $29), and Tata Motors (TTM $9), traded strongly ahead after positive election results in that country sent stocks soaring. India's BSE Sensex 30 Index jumped over 17% amid economic reform enthusiasm after Prime Minister Manmohan Singh's Congress party won nationwide elections. TTM was up nearly 20%, IBN was ahead over 25%, and INFY gained almost 10% today.

Treasury Secretary Tim Geithner spoke today at the National Press Club in Washington, affirming that although the economy has stabilized, many people will not be able to tell it immediately. “Unemployment is going to keep increasing for a while. It’s not going to feel better for a long time for millions of Americans,” Geithner said. Answering questions about what has become a heated issue – executive pay – Geithner eased investor concerns that the government could more actively intervene in the private sector by influencing salaries at private businesses. “We shouldn’t be setting broad caps, I think we should be trying to get the incentives better,” Geithner said, adding “we had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk, and that’s something that’s preventable.” This mirrors comments made by the FDIC’s Sheila Bair on Friday in an interview with Bloomberg television where Bair articulated “I don’t think prescriptive rules or dollar limits are appropriate. I do think principles about long-term performance and not rewarding risky behavior with short-term profits - I think those types of principles should be embraced by bank management.”

Home builder confidence improves, Treasuries move lower

The National Association of Home Builders Index of builder confidence was released today, showing an improvement from a level of 14 in April to 16 in May. This reading was inline with the expectation of economists surveyed by Bloomberg. A reading below 50 means most respondents still view conditions as poor.

Treasuries traded lower based on today’s equity rally. The yield on the 2-year note rose 5 bps to 0.90%, while the yield on the 10-year note added 8 bps to 3.22%, and the yield on the 30-year bond increased 10 bps to 4.18%.

Housing starts and building permits will be released tomorrow, with starts in April expected to rise nearly 2.0% to an annual rate of 520,000. Building permits, the more forward-looking indicator, are expected to rise 2.7% to an annual rate of 530,000. The two data series have been somewhat volatile on a month-to-month basis, influenced by large swings in multi-family starts and weather. While March housing starts fell 10.8%, the more relevant single-family start number rose 0.6% in February and was flat in March.