Evening Update

Disappointing Data Rains on Bulls’ Parade

News that unemployment in the US continues to rise, combined with a disappointing Fed regional survey helped to send stocks lower today. Just a day after the Fed lowered its economic forecast for the US, the UK saw its credit outlook lowered and markets were forced to consider the impact of deteriorating financial positions for many of the world’s largest governments. Treasuries started out the day higher but soon dove lower as investors prepared for the potential of more aggressive borrowing from the US government. The lone bright spot in economic data today was continued improvement in the Index of Leading Economic Indicators, but that was not enough to stop the broad-based sell-off in equity markets. Overlooked on the day were more earnings reports showing that corporate losses continue to come in less than analysts had originally feared. Hormel Foods, Barnes & Noble, and GameStop all turned in solid earnings reports, although GameStop management lowered its sales outlook. Rounding out the day’s news, two more stress-tested banks revealed capital raising initiatives, the UAW reported an agreement with General Motors with regards to retiree medical obligations, and GMAC LLC has reportedly been granted another cash injection of taxpayer funds.

The Dow Jones Industrial Average lost 130 points (1.5%) to close at 8,292, the S&P 500 Index fell 15 points (1.7%) to 888, and the Nasdaq Composite dropped 33 points (1.9%) to 1,695. In moderate volume, 1.4 billion shares were traded on the NYSE, and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $1.08 to $60.96 per barrel, wholesale gasoline decreased $0.01 to $1.80 per gallon, and gold rose $15.90 to $954.55 per ounce.

Hormel Foods Corp. (HRL $34) reported fiscal 2Q EPS of $0.59, nine cents ahead of the Reuters estimate. Sales during the quarter were $1.6 billion as revenue growth was flat versus the same period last year. The food company said its grocery products segment delivered increases in revenues and profits, with strong sales of canned meats and Mexican products, while its Jennie-O turkey segment continued to rebound despite difficult market conditions with lower commodity meat prices than last quarter. As a result of the better-than-expected first half, management now anticipates full-year EPS to be in the upper end of its previous guidance range of $2.15-2.25. Analysts are expecting HRL to report full-year profits of $2.24 per share. The stock finished higher.


Barnes & Noble (BKS $25) reported a smaller-than-expected net loss of $0.04 per share, compared to the Street's forecast of a $0.15 per share loss. BKS said better-than-expected revenues of $1.1 billion, along with favorable gross margins and a continuous focus on expense management were responsible for the better-than-expected results. Management raised its full-year EPS guidance and issued a 2Q earnings outlook that exceeded analysts' expectations. Shares finished up moderately.

Shares of GameStop (GME $23) finished over 15% lower after the video-game outlet issued 2Q EPS guidance that came in below analysts' expectations and lowered its full-year same-store sales outlook. GME said the reduced sales outlook is due to declining new game console unit sales. The company reported 1Q EPS ex-items of $0.43, which topped the consensus by one penny.

Regions Financial (RF $4) fell over 15% after Alabama’s largest bank sold 400 million shares at $4 each. RF was one of the 10 banks mandated by the US government to raise capital after the conclusion of stress tests, with authorities identifying a $2.5 billion shortfall in its capital position. The $4 price of the offering was approximately 18% lower than yesterday’s closing price. Regions Financial raised approximately $1.85 billion in gross proceeds in total, with about 80% coming from the common stock offering and the rest from a mandatory conversion of preferred shares.

Fifth Third Bancorp (FITB $7), who has a $1.1 billion capital shortfall of its own to address, also fell today after issuing a statement detailing plans to raise capital. The Cincinnati-based bank plans to sell as much as $750 million in common stock and raise approximately $1.1 billion in additional capital by converting preferred shares. The stock lost approximately 10%.

The UAW has announced a deal with General Motors (GM $2) that will reduce the $20 billion obligation to fund retiree medical obligations. The agreement still needs to be approved by the 60,000 members of the union, and exact details of the accord are being withheld until then. GM had proposed to pay approximately half of the $20 billion it owes, while giving the union a 39% equity stake in the company in exchange for the other half. If GM is unable to reach an agreement with all of its stakeholders – including its bondholders – by June 1 it will likely be forced into bankruptcy. GM’s stock jumped ahead over 30%.

The Wall Street Journal is reporting that GMAC LLC will receive more than $7 billion in additional government funding, with a second installment of another $7 billion to potentially come later, citing people familiar with the matter. The struggling auto lender has already received $5 billion in loans from taxpayer funds, but a failed bank stress test earlier this month mandated the company raise $11.5 billion within the next six months. The US government already holds 5 million GMAC shares and has used that control to tell the firm that it must extend its financing services to customers of now-bankrupt Chrysler. Neither the government nor GMAC LLC commented on the matter.

Dow member Boeing (BA $43 ¹) held its yearly investor meeting today and the world's number two aircraft maker said it is facing pressure on both sides of its business but it will continue to reshape itself and its 787 airliner remains on track for its first flight this quarter. BA's management added that the company continues to actively grow its international defense business. BA reaffirmed the company's full-year profit forecast of between $4.70-5.00 per share, and said the firm is not anticipating deep declines in profits in the future. The company's finance chief added that there are adequate sources of financing available this year and its commercial plane unit is expected to be the topline growth driver. Shares were lower.

In M&A news, Network Appliance (NTAP $18) announced that it will acquire all of the outstanding shares of Data Domain (DDUP $24) for $25 per share in cash and stock, valued at approximately $1.5 billion, net of Data Domain's cash. The deal follows NTAP's fiscal 4Q earnings report, in which it posted EPS ex-items of $0.31, versus the Street's consensus of $0.23. Shares of both firms were higher.

OpenTable (OPEN $32), a restaurant reservation system, raised $60 million in an IPO today that priced at $20 – higher than the estimated price range of $16-18 – and shares climbed nearly 60% higher in the first day of trading. This marks just the seventh IPO in the US this year.

Unemployment continues to rise, leading indicators better than expected

Treasury Secretary Timothy Geithner testified before a House of Representatives Appropriations subcommittee today and expressed some of the Treasury’s views on needed regulatory reform. Among the ideas the Treasury is reported to be considering is a new agency to provide “stronger rules to protect consumers” of financial products. Geithner added that lack of adequate oversight was one reason that “consumer protections were evaded so easily" prior to the recent financial crisis.

Weekly initial jobless claims (chart) fell to 631,000, although economists surveyed by Bloomberg had expected a larger improvement to 625,000. Simultaneously, last week's figure was upwardly revised by 6,000 to 643,000. The four-week moving average fell by 3,500 to 628,500, and continuing claims advanced again to another record, rising 75,000 to 6,662,000, ahead of the forecast of 6,650,000. The rise in unemployment is not altogether surprising as companies continue to announce job cuts in an attempt to save costs and improve profitability. American Express (AXP $24 ¹), Medtronic (MDT $32), and Hewlett-Packard (HPQ $34) all announced layoffs this week, while news out of Detroit continues to be bad as General Motors and Chrysler have recently announced substantial dealership closings.

The Philly Fed Manufacturing Index (chart) improved from -24.4 in April to -22.6 in May. A reading of zero suggests conditions are neither contracting nor expanding. New orders declined from -24.3 to -25.9 but employment improved from -44.9 to -26.8. Prices received rose from -41.4 in April to -33.8 in May and prices paid showed improvement, narrowing from -31.5 to -22.8. Although the gauge of mid-Atlantic manufacturing improved for a fourth consecutive month in May, the Street had expected better results, with the consensus forecast being a rate of contraction of just -18.0.

The Index of Leading Economic Indicators (chart) rose 1.0% in April, topping the 0.8% increase that economists surveyed by Bloomberg expected, and March's decline was revised from -0.3% to -0.2%. The largest negative contributors were building permits and a drop in the money supply. However, these negative contributions in the index were offset by benefits from an increase in stock prices, consumer expectations, and a favorable interest rate spread.

European credit ratings were in focus today after Standard & Poor's lowered its credit outlook on the UK from "stable" to "negative," citing the country’s deteriorating financial position as the government’s debt load could soon be larger than the size of the country’s GDP. UK stocks finished down over 2% and the British Pound initially suffered a sharp sell-off before eventually recovering after the two other main ratings agencies – Moody’s and Fitch – both reaffirmed their “stable” outlook for the UK. If the UK were to lose its AAA rating, it would become the fifth Western European nation to do so since the financial downturn, following Ireland, Spain, Portugal, and Greece.

Treasuries were under pressure after starting the day higher. The yield on the 2-year note rose 2 bps to 0.86%, while the yield on the 10-year note added 17 bps to 3.36%, and the yield on the 30-year bond increased 18 bps to 4.33%.

There are no major economic reports scheduled to be released tomorrow as bond markets will see a shortened day of trading ahead of the three-day Memorial Day weekend.