Evening Update

Stocks Enjoy Late-Day Rally

Stocks were flat with little action for most of the day as currency and commodity markets hogged most of the Street’s attention. However, a late-day rally just before the closing bell allowed bulls to book gains of approximately 1%. Several economic reports were released this morning with an upwardly revised 1Q GDP reading and another sign that consumers are getting more confident offsetting a disappointing regional Fed survey. The reports contributed to renewed economic enthusiasm and resulted in sharp losses for the US dollar and a strong day for commodities. In equity news, a 60% drop in earnings from Tiffany & Co. and a disappointing outlook from Cintas contrasted with better-than-expected earnings from Novel and Dell, while in the never-ending saga of Detroit auto makers, Fiat’s bid to acquire GM’s Opel unit appeared to fall through, although Magna is reported to be close to closing a deal of its own to purchase the business. Treasuries had a strong day, reversing some of the losses from earlier in the week, following the day’s economic reports.

The Dow Jones Industrial Average rose 97 points (1.1%) to close at 8,500, the S&P 500 Index gained 12 points (1.4%) to 919, and the Nasdaq Composite advanced 23 points (1.3%) to 1,774. In moderate volume, 1.9 billion shares were traded on the NYSE, and 2.5 billion shares were traded on the Nasdaq. Crude oil gained $1.23 to $66.31 per barrel, wholesale gasoline rose $0.02 to $1.93 per gallon, and gold gained $19.50 to $978.95 per ounce. For the week, the DJIA gained 2.7%, the S&P 500 Index rose 3.7%, and the Nasdaq Composite advanced 4.9%.

Dell Inc. (DELL $12) reported 1Q EPS ex-items of $0.24, one penny ahead of the Reuters estimate, as revenues fell 23% to $12.3 billion. The computer manufacturer said signals about the demand environment are mixed, but it is preparing for what it believes will be a powerful replacement cycle, with virtualization and managed services playing larger roles. Looking ahead, the company said indicators of global IT demand remain mixed, and the broader environment is still challenging. On a conference call with analysts, Dell's chief financial officer said the company does not believe there is enough momentum to call a bottom. The stock was up following this announcement.

Upscale jeweler and retailer Tiffany & Co. (TIF $28) reported 1Q EPS fell 60% to $0.20, one penny shy of the Street's forecast, as revenues dropped 22% to $523 million and same-store sales fell 21% for the quarter. The company said it is now one month into its 2Q and, although it is still too early to draw any conclusions, it is seeing a lessening rate of year-over-year total sales decline. TIF reaffirmed its full-year EPS outlook. Shares were modestly higher in spite of the miss.

Shares of J. Crew Group (JCG $25) were over 20% higher after the retailer reported 1Q EPS ex-items of $0.34, easily topping analysts' estimate of $0.11, as revenues rose 2% to $346 million. The company said although its earnings were lower than last year, it did experience an improved trend in its business. The company issued an unexpected outlook for EPS between $0.08-0.12, versus the Street's forecast that called for the company to report a loss of $0.03 per share.

Reuters is reporting that Canadian auto parts group Magna International (MGA $32) has reached an agreement in principle to acquire General Motors' (GM $1) European subsidiary Opel, according to a source with knowledge of the matter. The deal still needs to be approved by the German government, at which point it may rescue the German automaker from the ravages of the bankruptcy of GM, which is widely expected to be announced on Monday. GM, Magna, and Opel have not confirmed the report, while the German Economy Minister said there is no guarantee that a deal on Opel will be reached today. This announcement follows news that Italian automaker Fiat (FIATY $1) has pulled out of its negotiations to purchase the GM European unit. GM’s stock was down over 30% to close below the $1 level – a level it has not seen since 1933.

Meanwhile, the New York Times is reporting that struggling auto parts manufacturer Delphi (DPHIQ $0.09) could soon emerge from bankruptcy protection, citing an unnamed source. This news comes a day after Visteon (VSTN $0.06), the largest supplier to Ford (F $6), announced its own bankruptcy filing. Delphi, which was once a part of GM, and has operated in bankruptcy since 2005, could see some of its assets re-acquired by General Motors, the source reported. Delphi did not comment on the report.

Novel (NOVL $4) released 2Q EPS ex-items of $0.08, above the consensus analyst estimate of $0.06. Revenues fell almost 9% to $216 million, with maintenance and subscription revenue increasing 5%, but software licenses down 32%, and professional and training services down 33%, respectively. Management was able to cut operating expenses 12% during the quarter, so profitability actually increased despite the revenue shortfall. Looking to the future, NOVL management noted that they expect to maintain “double-digit non-GAAP operating margins” for the full year 2009. Shares traded lower over 5% today.

Cintas Corp. (CTAS $23) was under pressure after issuing guidance that was below Street forecasts. CTAS reported that it expects to earn $0.34-37 per share in the fourth quarter, excluding some one-time items. The average estimate from analysts surveyed by Bloomberg is $0.47.

Consumer sentiment, 1Q GDP both upwardly revised, Chicago PMI disappoints

Treasuries turned higher and held those gains following the release of today’s economic reports. The yield on the 2-year note fell 5 bps to 0.92%, while the yield on the 10-year note lost 16 bps to 3.45%, and the yield on the 30-year bond decreased 15 bps to 4.34%.

Preliminary Gross Domestic Product (chart), fell 5.7% quarter-over-quarter (q/q) in 1Q, a larger contraction than the Bloomberg forecast of a 5.5% annualized drop, but an improvement from the 6.1% decline in the initial reading of output for the first quarter of the year. The upward revision to the preliminary numbers was primarily due to upward revisions of private nonfarm inventory investment. Due to delays in getting some data, the Commerce Department releases three readings of each quarterly GDP figure, with this being the second, and the final GDP revision for 1Q to be released on June 25. Also included in today’s report, personal consumption rose 1.5%, less than the 2.2% advance initially reported, and worse than the 2.0% that was expected. One of the largest detractors to the nation’s output was business inventory, which fell $91.4 billion after falling $25.8 billion last quarter, subtracting 2.34 percentage points from the overall GDP figure. Real final sales, designed to measure GDP excluding inventory changes, remained at a decline of 3.4%. One of the bright spots in today’s data was corporate profits, which increased 3% compared to last quarter - the first increase in almost two years.

The GDP Price Index rose 2.8%, compared to a gain of 2.9% which was previously reported and forecasted to remain. The core PCE Index, which excludes food and energy, increased 1.5%, in line with the estimate, and the rate sits between the Fed’s implied target of 1-2%.

Following the 6.3% drop in 4Q GDP, the 5.7% tumble in 1Q GDP marks the sharpest contraction in the nation’s economy in well over 20 years. This also marks the third straight quarter of negative growth – the first time that has happened since 1974-75. However, it is expected that GDP reports in coming quarters will show some improvement as two factors weighing heavily on first quarter output – falling inventory and reduced government spending – are likely to improve. However, today’s weaker-than-expected personal consumption growth supports fears that the impact of consumers paying down their historic debt levels and saving more will likely keep a lid on economic growth and could even result in a W-shaped cycle (a "double-dip" recession).

Final University of Michigan's Consumer Sentiment Index (chart) for May increased more than expected again, rising from 67.9 in the preliminary report to 68.7, versus the 65.1 posted in April. The Bloomberg forecast called for an increase to 68.0. The index sits at a level not seen since September—before the collapse of Lehman Brothers, which led to November's lowest reading since 1980. In addition to the overall sentiment improvement, survey results showed consumer expectations rose as well. The director of the report said, compared with the state of the economy six months ago, consumers have indeed regained a good measure of confidence. The report suggests consumers are becoming more optimistic amid the recent improvements in financial markets and illustrates recent enthusiasm that the worst of the global recession may be behind us.

In other economic news, the Chicago PMI (chart) unexpectedly declined to 34.9 in May from 40.1 in April, and below the expected figure of 42.0. The disappointing reading took some of the luster off of April's surprising jump, which was the best reading in this data point since last September. A reading below 50 in the PMI signals a continued contraction.

Economic data and Treasury action dominate short week

The lion's share of attention in the equity news focused on the auto sector, as this week's gloom du-jour in the group revolved around the expected bankruptcy of General Motors. Although the Street has been aware of the increased probability that GM will follow fellow big three automaker Chrysler into court-ordered restructuring, this week's failure of Visteon, the US auto parts supplier that was once a part of Ford, served as a reminder of what an unsupported liquidation of one of the industry’s large auto makers could mean for the rest of the industry—and sentiment was soured.

However, the markets found most of their direction from outside the equity front. After coming back from a long holiday weekend, stocks received support by an unexpected jump in consumer confidence to the highest level in eight months, which sparked a solid advance, helping overcome early uneasiness that stemmed from a decline in Asia amid geopolitical concerns in North Korea. But the week that started off with solid gains appeared to be in danger of succumbing to the red tape as the Street seemed to be unnerved by a $35 billion auction of Treasury notes that found strong demand from indirect bidders, which includes foreign banks who have been postulated would pull back from U.S. Treasuries. Treasuries sold off following the auction—pushing the yield on the 10-year note to the highest level of the year—and took the equity market down with them amid trepidation about the ongoing drumbeat of further government debt issuance, heightened by last week’s outlook downgrade of the U.K. by Standard & Poor’s. Not even Moody’s Investor Service saying that the U.S. government’s Aaa credit rating is stable, “even with a significant deterioration” in the nation’s debt position, helped soothe sentiment. But the uneasiness seemed to be short lived as the next session brought another successful auction of Treasuries, but bonds gained ground this time around to push yields lower, sending equities into the green as traders were relieved somewhat from concerns that the recent run-up in yields could hamper a recovery in the equity markets. Stocks finished the week higher—helping the S&P 500 Index post the third consecutive monthly gain—supported by strength in commodity-related shares amid relatively improving signs of economic life, led by a solid gain in energy shares as crude oil prices moved well above $66 per barrel.

Readings on economic activity and employment for May on tap

The ISM Manufacturing Index will be released on Monday and is expected to improve to 42.3 in May from 40.1 in April, indicating a slowing rate of contraction in the economy, and would represent the fifth-straight monthly improvement. The compliment index, the ISM Non-Manufacturing Index, will be reported on Wednesday, and is expected to rise to 45.0 in May from 43.7 in April from 40.8, and would mark the third-straight monthly improvement. The separation point between contraction and expansion is 50. Non-manufacturing activity represents approximately 76% of the U.S. economy, and services comprise 68% of the index.

While imports and exports have fallen, exports seem to be leveling off at a higher level than imports. The ISM Manufacturing Index is more sensitive to exports than the economy as a whole and exports appear to be rebounding faster than domestic demand, as U.S. consumers are saddled with record amounts of debt, and are increasingly embracing saving over spending. While the U.S. consumer’s 25-year experiment in debt-fueled consumption may finally be over, there’s another consumer waiting in the wings: Asia’s emerging economies are presently in the best position to take some of the global consumption power from the United States. With foreign sales comprising 41% of S&P 500 revenues, U.S. companies with a high export bias could benefit from this emerging trend.

Nonfarm payrolls will be reported on Friday, and the expectation is that payrolls fell 521,000 in May, a decrease from the 539,000 level reported in April. The unemployment rate is forecasted to increase to 9.2% from 8.9%, in line with the consensus forecast. The four-week average of initial jobless claims has come down from peak levels, but the impact of the automotive industry’s problems is just starting to come into play, with job losses expected from auto suppliers, dealers and manufacturers.