Morning Update

Home Improvement Profit Report Adds Support

Stocks are higher in morning action as sentiment on the Street is finding some support by better-than-expected top and bottom line results from the world's second largest home improvement retailer, Lowe's Companies. A couple of corporate action plans are also headlining equity news, as AIG announced that it plans to take its Asian insurance unit public, and State Street announced a common stock and bond offering in an attempt to pay back the government the funds it borrowed. Treasuries are mixed, while the economic calendar will be relatively light this week. Overseas, markets are mixed as India surged following a nationwide election.

As of 8:50 a.m. ET, the June S&P 500 Index Globex futures contract is 8 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 70 points above fair value. Crude oil is up $1.45 at $57.79 per barrel, and gold is down $1.20 at $930.10 per ounce.

Lowe's Companies (LOW $18) 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.

American International Group (AIG $2) announced 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.

In actions aimed at paying back funds that it received as part of the Troubled Asset Relief Program (TARP), State Street (STT $39) 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.

Light economic week titled toward housing and the Fed

Treasuries are mixed as there are no major economic reports due out this morning. The economic week will be relatively light and will be biased toward the housing sector, kicking off with today's afternoon release of the National Association of Home Builders Index of builder confidence, which is expected to improve from 14 in April to 16 in May. A reading below 50 means most respondents still view conditions as poor.

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.

Inventories of new homes for sale have been declining as homebuilders have pulled back on construction, facing tough competition from the discounted prices that foreclosures on existing homes provide. The Fed has said that there is only limited scope for housing activity to fall further. Sales of new and existing homes have stabilized in recent months, due in large part to home purchase tax credits and housing affordability at a near-40-year high.

The minutes from the April Federal Open Market Committee (FOMC) meeting will be released on Wednesday. There were few changes made in the statement at the April 29 meeting, with the Fed keeping rates unchanged and maintaining prior programs to purchase up to $1.25 trillion of agency mortgage-backed securities, up to $200 billion of agency debt and up to $300 billion of Treasury securities. The Committee said that while the economic outlook had improved modestly since the March meeting, they remain concerned about deflation and expect economic activity to remain weak for a time, despite an eventual gradual resumption economic growth.

The timing and amount of Treasury purchases has been under close scrutiny, and some market participants believed the “line in the sand” for purchases was 3.0% on the 10-year Treasury. However, Fed Chair Ben Bernanke later clarified the Fed’s stance, saying "We're not trying to target a particular interest rate," adding "Our objective is to provide more liquidity into the system and to help private credit markets,” and credit spreads have been declining. Bernanke also has noted that the housing market has shown some signs of bottoming. The 10-year Treasury yield has moved beyond the 3.0% mark and the Fed has not yet moved to counteract that rise, and a continuation of that trend could short-circuit a rebound in the housing market and could also reverse some of the market's gains. Any additional insight from the meeting minutes on the Fed’s outlook for the economy and asset purchase programs will be scrutinized by the market.

Other economic releases for this week include Wednesday's release of MBA Mortgage Applications, while Thursday's reports on initial jobless claims, the Philly Fed’s Business Activity Index, and the Leading Indicators Index will round out the week.

Elsewhere, US Treasury Secretary Timothy Geithner will be busy this week as he will deliver multiple speeches, starting with today's event at the National Press Club, followed by his TARP testimony to the Senate Banking Committee on Wednesday, and Thursday's testimony in front of the House Financial Services Subcommittee.

Europe higher as financials gain ground

Stocks in Europe are higher in afternoon action, led by solid gains in financials, but the advance is being limited by weakness in commodity-related issues. Lloyds Banking Group (LYG $5) is higher after the UK mortgage lender said it will redeem 4 billion pounds ($6.1 billion) of preference shares held by the British government, while the company’s chairman announced that he plans to step down next year. In other equity news, Europe's largest automaker, Volkswagen (VLKAY $60) has called off merger talks with Porsche (POAHY $7), as a spokeswoman said there is currently no atmosphere for constructive talks. Porsche said that although a meeting scheduled for today had been canceled, negotiations will resume.

Asia mixed as Japan declines but India soars

Stocks in Asia finished mixed as traders reacted to news from the corporate front, while political news in India supported a surge in stocks for the region. Japan's Nikkei 225 Index dropped 2.4% and the broader Topix Index fell 2.5% as continued strength in the yen versus the dollar weighed on exporters who rely heavily on sales in the US, putting pressure on Asia's largest economy. The corporate sector offered little to soothe sentiment with shares of Panasonic (PC $15) fell almost 8% as traders reacted to its late-day announcement on Friday that it expects an annual net loss of 195 billion yen ($2.05 billion)—its second-straight annual loss—which came in larger than the 110 billion yen that had been forecasted by analysts. Elsewhere, Mizuho Financial Group (MFG $5) declined about 4% after it posted its first net loss in six years, according to Bloomberg, and said it plans to raise as much as 800 billion yen by selling stocks and preferred securities. Meanwhile, India's BSE Sensex 30 Index jumped over 17% amid economic reform enthusiasm after Prime Minister Manmohan Singh's Congress party won nationwide elections.