Evening Update

Stocks Jump as Consumers More Confident

Stocks looked set to continue their slide after renewed geopolitical concerns in North Korea sent Asian stocks lower overnight. However, a surprisingly large improvement in consumer confidence – back to the highest level in eight months – spurred a large rally that saw all three major US indexes gain over 2%. Consumer and technology stocks were among the big gainers today as traders looked past another dire reading from the S&P/Case-Shiller Home Price Index. In equity news, the General Motors saga continues as the UAW was quoted as saying that the US government will provide “massive” additional financing to the struggling automaker. This comes after reports that GM’s bond holders are planning to reject the restructuring proposal that would have seen them exchange their bonds for a 10% stake in a reorganized company. Elsewhere, biotech firm United Therapeutics received FDA approval for its hypertension drug, Goodyear announced further restructuring plans, and Bank of Montreal revealed a positive earnings surprise, while also announcing a staff reduction. Treasuries were lower amid the renewed economic enthusiasm that also led a rebound in commodity prices.

The Dow Jones Industrial Average gained 196 points (2.4%) to close at 8,473, the S&P 500 Index rose 23 points (2.6%) to 910, and the Nasdaq Composite increased 58 points (3.5%) to 1,750. In moderate volume, 1.4 billion shares were traded on the NYSE, and 2.1 billion shares were traded on the Nasdaq. Crude oil rose $0.78 to $62.45 per barrel, wholesale gasoline increased $0.01 to $1.85 per gallon, and gold fell $5.05 to $953.75 per ounce.

Dow member General Motors (GM $1) was repeatedly in the news today. Most recently, the Wall Street Journal is reporting that the UAW has agreed to a reduced stake in the reorganized firm. Earlier plans called for the UAW to receive a 39% stake in the company in exchange for the obligations they are owed by GM. The revised agreement would give the UAW a 17.5% common equity stake, along with $6.5 billion in preferred stock and a $2.5 billion note to be repaid in installments until 2017. Also making headlines was a comment from the UAW that the government has committed to "providing massive additional financial support to assist GM in completing its restructuring," This comes after news earlier today that the Canadian Auto Workers union (CAW) ratified its cost-saving labor agreement with GM that will freeze pension payments until 2015 and pay newly hired employees less. GM faces a looming June 1st government deadline which will likely lead to bankruptcy unless a deal can be reached that is satisfactory to all stakeholders.

Still posing a sticking point in the negotiations is the need to convince GM bondholders to accept an equity stake in the reorganized firm in exchange for the $27 billion in outstanding bonds they hold. Reuters is reporting that GM will fall well short of the 90% approval from bondholders that it must receive by a deadline that expires at midnight tonight. According to people familiar with the matter, so far only a “low-single-digit” percentage of bondholders have agreed to tender their bonds, and most of that has come from retail investors. An ad hoc committee of large GM bondholders has referred to GM’s offer as “neither reasonable nor adequate” and proposed a 58% stake in the reorganized firm, in contrast to the 10% stake that GM has offered them. GM’s stock ended the volatile day almost unchanged after recovering from heavy losses earlier in the day. GM declined to comment on either of today’s reports.

Shares of United Therapeutics (UTHR $74) were over 10% higher after the biotechnology firm announced that the US Food and Drug Administration (FDA) has approved its orally administered drug ADCIRCA for treatment of pulmonary arterial hypertension. The treatment is indicated to improve exercise ability in some patients and UTHR has licensed the rights to develop, market, promote and commercialize ADCIRCA from Eli Lilly (LLY $35).

Bank of Montreal (BMO $39) released 2Q EPS ex-items of C$0.93, better than the average estimate of C$0.88 from 13 analysts surveyed by Bloomberg. Revenues rose 1% to C$2.7 billion. The Canadian bank’s Tier 1 Capital Ratio, a measure of balance sheet strength, improved to 10.7%. Management noted that “conditions remain challenging” but that BMO’s strong financial position allows them to take advantage of conditions in the form of opportunistic acquisitions such as the Canadian life insurance business that was acquired during the quarter. The firm also announced a plan to cut about 1,100 jobs. The stock moved ahead over 5% on this strong earnings report.

Goodyear Tire & Rubber Co. (GT $12) posted solid gains after the tire manufacturer announced over 800 layoffs at its plant in Amiens, France. Separately, the firm said it is considering closing its farm tire businesses in Europe, the Middle East, Africa and Latin America, while continuing to produce farm tires in Asia. These changes come as the firm seeks to restructure its production to make the firm more cost competitive, with a goal of removing between 15-25 million units from its production capacity over the next two years. Goodyear’s management cited the “uncompetitive costs” of the French plant as explanation for the job cuts and added that “reaching a union agreement to modernize the operation proved impossible.”

Treasuries fall as consumer confidence improves more than expected

Treasuries were lower amid the renewed economic optimism. The yield on the 2-year note rose 3 bps to 0.92%, while the yield on the 10-year note added 9 bps to 3.54%, and the yield on the 30-year bond increased 10 bps to 4.49%.

The Consumer Confidence Index (chart) unexpectedly jumped from an upwardly revised 40.8 in April to 54.9 in May, well above the estimate of 42.6. The index sits at the highest level in eight months, and along with the improved overall reading, consumer confidence about the present situation and expectations for the next six months improved. The Director of the Conference Board Consumer Research Center said the index indicates that current conditions have moderately improved, and while confidence is still weak by historical standards, as far as consumers are concerned "the worst is now behind us." Consumer confidence and expectations have begun to rise, an important piece to the recovery. Additionally, while still restrictive, lending standards have started to improve, and typically lead an improvement in consumer and capital spending.

In other economic news, the Richmond Fed Manufacturing Index moved into a level that depicts expansion for the first time in twelve months, moving from -9 in April to 4 in May. A reading of zero is the separation point between expansion and contraction. Strong increases in shipments and new orders led to a sharp rebound. Elsewhere, the Dallas Fed Manufacturing Index improved from a decline of -31.6% in April to -21.5% in May.

The S&P/Case-Shiller Home Price Index fell 18.7% year-over-year (y/y), in March, worse than the 18.3% decline expected and after falling 18.6% in February. The index is a three-month rolling average representing 20 major cities, and has been falling at a slower rate in recent months. The index has fallen 32.2% from its peak in 2006. As a result, average home prices across the U.S. are at similar levels to what they were in 4Q 2002. On a month-over-month basis, prices fell 2.2%, the same decline as occurred in February. On the basis of prices, the national housing market is still declining, but real estate is local, and there is variability in particular markets, with nine of the 20 metro areas showing record annual declines, but another nine encountering smaller declines. On a month-over-month basis, three areas experienced increases in prices.

Home sales data for April is expected to improve

Existing home sales for April will be reported on Wednesday, and the forecast is for sales to rise 2.0% month-over-month (m/m) to an annual rate of 4.66 million units, after falling 3.0% in March and rising 4.9% in February. Pending home sales have risen two months in a row, and are a leading indicator for this data series. According to the National Association of Realtors (NAR), sales of lower-priced homes trended up in March, driven by the $8,000 tax credit for first time buyers, who accounted for 53% of March transactions. Lower prices afforded by distressed property sales, consisting of foreclosures and short sales, have attracted bargain hunters, and accounted for 50% of transactions in March.

The other release on tomorrow’s economic calendar is the MBA Mortgage Applications Index.