Evening Update

Markets Recover, Led by More TARP News

Markets began the day lower after surprising housing data but have since recovered as TARP news continues to stream in. The US government has reportedly given several banks the go-ahead to repay the TARP funds they had borrowed, while another insurance company, Allstate, has declined to participate in the program. At the same time, Morgan Stanley has sold its remaining stake in MSCI Inc. in further preparations to repair its balance sheet and repay government funding. Treasuries are mixed following the housing data that showed new home starts and permits both unexpectedly fell to record lows. In other equity news, Home Depot topped earnings expectations, American Express announced reengineering initiatives, Medtronic matched profit expectations, while Saks reported a smaller-than-expected loss. Overseas markets were higher, boosted by a three year high in German investor confidence.

At 12:51 p.m. ET, the Dow Jones Industrial Average is up 0.2%, the S&P 500 Index is 0.3% higher, and the Nasdaq Composite is advancing 0.3%. Crude oil is $0.44 higher at $59.47 per barrel, wholesale gasoline is up $0.01 at $1.77 per gallon, while gold is up $8.85 at $927.10 per ounce.

US banking supervisors have begun talking to several major banks that wish to repay the funds they borrowed from the government’s Troubled Asset Relief Program (TARP), a Federal Reserve spokesperson confirmed today. Any announcements on returning the funds will come around the second week of June, the official said. CNBC is reporting that the government will set up guidelines for the return of the capital, and no one bank will be allowed to repay the funds separately, but rather approval will be granted in batches. Earlier this morning, the Financial Times reported that US authorities will allow five or six banks to repay the TARP loans received, including Goldman Sachs (GS $144), JPMorgan Chase (JPM $37), and American Express (AXP $26 ¹) citing people familiar with the matter. The amount of money the government could get back could be substantial. JPMorgan Chase has received $25 billion in aid, while Goldman took $10 billion, and American Express got $3.4 billion.

Goldman and American Express have yet to comment on the report but JPMorgan Chase CEO Jamie Dimon said the firm expects to repay taxpayer aid “in the next few weeks.” Dimon, speaking today at the firm’s annual shareholder meeting in New York, remarked that participating in the program “became a little more of a painful experience,” and that he “didn’t know what to expect” when he initially accepted the funds. The visa restrictions imposed on TARP recipients for hiring are a “complete and utter disgrace,” Dimon added. Shares of these 3 banks are mixed.

Morgan Stanley (MS $29), another bank seeking to repay TARP funds, sold its remaining stake in MSCI Inc (MXB $21) today, raising approximately $600 million. Morgan Stanley has already sold $5 billion of its own stock as it attempts to repair its balance sheet and pay the government back the $10 billion in funding it received last fall. MS is higher today while MXB is lower.

Insurer Allstate (ALL $27) is gaining ground after announcing it will decline to participate in the Treasury's TARP program, citing the firm’s "strong capital and liquidity positions." The announcement comes on the heels of last week's decision by the government to inject up to $22 billion into insurers from its TARP funds. Allstate’s CEO said in February that he didn’t “like the terms and conditions” of the program, which places tighter regulation on companies that participate, including restrictions on compensation and hiring of foreign workers. The stock is up nearly 5% following this announcement.

Dow member Home Depot (HD $25) posted 1Q EPS ex-items that fell about 15% to $0.35, but was seven cents above the Reuters estimate. Revenues declined 9.7% to $16.2 billion, which also topped the $15.8 billion consensus forecast. Same-store sales for the quarter fell 10.2%, featuring an 8.6% drop in the US, and the world's largest home improvement retailer said, "Our markets, and the consumer in general, remain under pressure." HD reaffirmed its full-year revenue and EPS guidance. Shares are lower after a big day yesterday that involved a better-than-expected earnings report from competitor Lowe’s Companies (LOW $20).

Fellow Dow member American Express (AXP $26 ¹) announced a new companywide reengineering initiative expected to produce cost benefits of approximately $800 million during the remainder of 2009. The plan includes the elimination of approximately 4,000 jobs, or about 6% of the current workforce, as well as reduced investment spending on marketing and business development, and further cutbacks in operating costs. The company explained, "While we have remained solidly profitable at a time when some parts of the card industry were incurring substantial losses, we continue to be very cautious about the economic outlook and are therefore moving forward with additional reengineering efforts to help further reduce our operating costs." AXP is trading lower.

Medtronic (MDT $32) reported fiscal 4Q EPS ex-items of $0.82, in line with the Street's estimate, as revenues declined 1% to $3.8 billion. The pacemaker manufacturer said it generated the second-straight quarter of free cash flow above $1 billion, due to its strong balance sheet management. MDT said it expects 2010 EPS ex-items to be in the range of $3.10-3.20, versus the Street's forecast for the company to report earnings of $3.20 per share. Separately, the company announced that it plans to reduce its global workforce by 1,500–1,800 employees. Medtronic also revealed that the firm has warned physicians through a “Dear Doctor” letter this week that there could be a wiring malfunction with 37,000 pacemakers implanted since 1997. Two reports of deaths may be linked to the defect, the letter said. MDT shares are trading down almost 8%.

Shares of upscale department store Saks (SKS $5) are up nearly 30% after the company reported a smaller-than-expected loss of $0.04 per share, versus the Street's expectation of a $0.26 per share loss. Revenues fell 26.9% to $621.3 million, and same-store sales dropped 27.6% for the quarter, as its Saks Fifth Avenue stores experienced continued weakness across all merchandise categories, geographies, and channels of distribution during the quarter. SKS said it expects same-store sales to decline in the low double digits for the full year.

Treasuries mixed as housing starts and building permits unexpectedly fall

Housing starts and building permits (chart) both unexpectedly fell to record lows in April, denting investor hopes that a rebound in the housing market is imminent. Housing starts fell 13% in April to a seasonally adjusted annual rate of 458,000. This marks the lowest level on record, with data going back to 1959. When compared to April of last year, starts were 54% lower. Economists surveyed by Bloomberg had been expecting a rise of nearly 2% in the index to a level of 520,000. Breaking down the data, construction of single family homes actually rose 3%, but work on multifamily homes – the typically more volatile figure – plunged 46%. March data was upwardly revised to 525,000.

Building permits, the more forward-looking indicator of future home construction, declined 3% to an annual rate of 494,000, the lowest level since records started in 1960. Permits had been expected to increase 3% to an annual rate of 530,000. Compared to the same period last year, building permits were 50% lower. March data was revised downward slightly to 511,000. It is important to note that these two data series have been somewhat volatile, influenced by large swings in multi-family starts and weather. Treasuries remain mixed.

Economic enthusiasm supports Europe

Stocks in Europe finished higher, led by financials and basic materials on optimism that the credit markets may be returning to normalcy and the global recession may have seen its worst days. Banks were up across the board on enthusiasm that US banks are strengthening after several firms appear to be getting closer to paying the government back the TARP funds they borrowed and after a key metric of credit market conditions improved. The three-month Libor rate—an interest rate at which banks borrow from each other in the short term—declined four basis points to 0.75%, suggesting that some of the lending apprehension of banking firms is dissipating and the credit markets, which are the lifeblood of the global economy, are improving. Additional support to economic sentiment came in the form of a key reading of investor confidence in Germany, Europe's largest economy. The German ZEW survey of economic sentiment rose from 13.0 in April to 31.1 in May, which topped the reading of 20 that economists surveyed by Bloomberg expected, and was the strongest level in about three years.