Morning Update

Markets Heading Higher

After a seesaw day of trading yesterday, markets are higher again in early action today. Traders are awaiting more insight into the Federal Reserve's strategy for combating the recession, as minutes from the most recent FOMC meeting will be released later today. In equity news, Bank of America has joined the flood of banks taking advantage of the recent improvement in market sentiment to sell new shares, as the company tries to make up for the shortfall of some $34 billion on its balance sheet that was uncovered in the US government's bank stress tests. In earnings news, Dow member Hewlett-Packard, the world's largest seller of PCs, released an in-line earnings report and reaffirmed its full year earnings outlook, while chip designer Analog Devices and discount retailer Target both beat earnings expectations. In economic news, mortgage applications rose last week and Treasuries are higher as traders await the release of the FOMC meeting minutes. Overseas, markets are mixed.

As of 8:45 a.m. ET, the June S&P 500 Index Globex futures contract is 6 points above fair value, the Nasdaq 100 Index is nearly unchanged, and the DJIA is 44 points above fair value. Crude oil is up $0.55 at $60.65 per barrel, and gold is up $7.15 at $932.20 per ounce.

Dow member Hewlett-Packard (HPQ $37) reported 2Q earnings ex-items of $0.86 per share, exactly in-line with analyst estimates as measured by Reuters. Hewlett-Packard, the world's largest seller of PCs, saw revenues drop 3% to $27.4 billion during the quarter, also matching analyst expectations. HPQ added that on a constant-currency basis, sales were actually up 3%, although CFO Cathie Lesjak stated that it's still "too tough to call" whether PC sales have hit a bottom yet. For full-year 2009, management maintained its earnings forecast of $3.76-3.88 per share. In terms of sales, management narrowed its guidance range from negative 2-5% to negative 4-5% growth this year.

Chip designer Analog Devices (ADI $21) posted 2Q earnings down sharply to $0.21 per share, from $0.45 in the same period a year ago. Still, this result was much better than the $0.09 EPS that analysts had been expecting. Revenues were down 27% to $474.7 million. President and chief executive Jerald G. Fishman commented that these results were "were better than planned as we benefited from increased sales to communications infrastructure and consumer customers, and a general abatement of inventory reductions by our customers." For the third quarter, ADI expects sales growth to be roughly flat on a sequential basis, and earnings from continuing operations should be between $0.17-0.19 per share. Analysts had been forecasting EPS of $0.11 for 3Q.

Phillips-Van Heusen (PVH $28) released 1Q EPS ex-items of $0.53. Sales fell 7% to $557 million, which exceeded the high-end of the company's guidance. Sales in the Calvin Klein licensing division rose 1%, while global licensee royalty growth was 6% on a constant-currency basis. PVH revised its full year earnings guidance by raising the low-end of the range. The company is now guiding to 2009 EPS between $2.05-2.30, excluding for approximately $10 million of pre-tax costs associated with the company's restructuring initiatives. Management expects "the difficult economic conditions will continue during the second and third quarters of 2009, with a moderate improvement taking place in the fourth quarter of the year."

Target (TGT $42) announced 1Q EPS fell 7% to $0.69, which was better than the average estimate of $0.60, as compiled by Bloomberg. Topline growth was nearly flat for the US's second-largest discount chain, with total revenues up 0.2% to $14.8 billion, while same-store sales growth in the company's retail segment was down 3.7%. Management had already preannounced earlier this month that results would be significantly higher than what Wall Street expected after management made moves to control expenses and reduce price discounts.

Bank of America (BAC $11 ¹) issued 825 million shares after yesterday's close, at an average price of $10.77 per share, which was slightly lower than Tuesday's closing price of $11.25. The stock has risen more than 250% from the 25-year low of $3.14 that was reached on March 6. BAC was able to raise $13.5 billion in yesterday's issue as the bank continues to address the gap of some $34 billion on its balance sheet, in accordance with directions from the US government after the recent bank stress tests.

Treasuries up as mortgage applications rise, Fed minutes yet to come

In economic news, The US MBA Mortgage Application Index rose 2.3% to 915.9 for the week ended May 15. This follows an 8.6% drop for the prior week, in an index that can be quite volatile on a week-to-week basis. The Refinance Index increased 4.5%, while the Purchase Index fell 4.4% to 254. The Mortgage Bankers Association (MBA) said the average 30-year mortgage rate declined again, falling 7 basis points to 4.69%, which is near the record low of 4.61% that was reached at the end of March.

The minutes from the April Federal Open Market Committee (FOMC) meeting will be released today at 2 p.m. ET. There were few changes made 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.

Also scheduled for today, Treasury Secretary Timothy Geithner will speak before a Senate panel on oversight of the TARP program.

European traders can't make up their minds

European markets are nearly unchanged and continue to oscillate between positive and negative territory in afternoon action, mirroring yesterday's up-and-down day of trading in the US. With little new news today, traders have time to reflect on the recent strong rally and how justified it is given data continues to show that Europe's economy is in decline. Recent figures showed a record decline in European GDP for the first quarter. In equity news, London Stock Exchange Group (LDNXF $11), the operator of the primary stock exchanges in both the UK and Italy, posted a net loss for the 12 months ended March 31 of 338 million pounds ($523 million), compared with a profit of \x(82)\x(a4)168 million in the year before. Results were hampered by a \x(82)\x(a4)484 million charge the company had to take to write down the value of the Borsa Italiana (Italy's main stock exchange), which was acquired in 2007. The stock is trading down moderately.

Mixed direction in Asia

Stocks in Japan were higher after Japan's GDP fell the most on record, but economists had been expecting an even worse result. The Topix Index and Nikkei 225 Index were both higher after data showed that Japan's GDP collapsed at a record 15.2% annual pace last quarter. Output fell 4% on a non-annualized basis, which was more than double the US's 1.6% contraction and was also worse than Europe's record 2.5% fall. Weak domestic demand was the largest negative contributor to the result, while exports also plunged and provided no support. As bad as the report was, investors had been prepared for even worse figures, with economists surveyed by Bloomberg predicting -4.3% growth quarter-on-quarter and -16.1% annualized growth. This quarter's low figure is also giving traders some hope that the bottom has been reached and the economy can show at least some improvement in 2Q off of this low base.

Elsewhere, markets in China and India sold off as investors ponder whether the recent strong rally has gone too far. China's Shanghai SE Composite Index and India's BSE Sensex 30 Index both lost some of their recent gains. Earlier this week, India's market had surged ahead over 17% due to nationwide elections that gave investors confidence that economy-boosting reforms are on the way. In equity news, Billabong International (BLLAF $8), Australia's largest surfwear maker, plunged 17% after it sold about A$230 million ($177 million) in new shares. The proceeds will be used to service the company's debt load. BLLAF has struggled recently as the recession puts a dent in company sales. Management has recently downgraded its full-year 2009 earnings forecast and decided to close some of its US stores as the company tries to weather the recession.