Evening Update

S&P 500 Above 900 as Housing and Construction Data Positively Surprise

Stocks were solidly higher, and the S&P 500 is now in positive territory for the year, as traders reacted optimistically to strong economic reports on pending home sales and construction spending in the U.S., as well as a bullish manufacturing report in China, which fueled a strong rally in materials shares. Financials were the leaders on the upside today, despite reports that Bank of America, Citigroup and Wells Fargo are in need of additional capital. Following through on a campaign promise, the Obama administration is looking to close overseas tax loopholes. In earnings news, Sprint Nextel and Estee Lauder both beat expectations, while Tyson Foods reported a larger-than-expected loss. Elsewhere, Fiat announced its desire to acquire the European operations of General Motors and create a global auto giant and GM announced it hired an advisor to help it sell its Saturn division. Treasuries were mixed.

The Dow Jones Industrial Average rose 214 points (2.6%) to close at 8,427, the S&P 500 Index gained 30 points (3.4%) to 907, and the Nasdaq Composite advanced 44 points (2.6%) to 1,764. In heavy volume, 1.7 billion shares were traded on the NYSE, and 2.5 billion shares were traded on the Nasdaq. Crude oil gained $1.27 to $54.47 per barrel, wholesale gasoline rose $0.07 to $1.59 per gallon, and gold advanced $15.25 to $901.80 per ounce.

The Financial Times is reporting that Dow members Bank of America (BAC $9 ¹) and Citigroup (C $3) each are looking to raise more than $10 billion in fresh capital after preliminary stress test findings revealed that the banks could need the capital if the economy worsens. The report also mentioned Wells Fargo (WFC $20) and PNC Financial (PNC $43) as banks that would need to raise more capital unless they can persuade authorities that the assumptions used in the stress tests were too pessimistic. Bank of America, the biggest US bank by assets, issued a statement calling the Financial Times report “completely inaccurate”. BAC spokesman Scott Silvestri said today in an interview that the Fed has yet to give the bank a “final number” on how much capital it may need to raise. Elsewhere, the Associated Press reported midday that regulators told Wells Fargo to shore up their balance sheet. With the exception of BAC, none of the other banks commented on the matter. Bank stocks were higher despite the reports.

The final results of the U.S. government stress test of the 19 U.S. banks with assets greater than $100 billion will be released on Thursday, postponed from the an initial release date slated for today. Preliminary results were given to the banks privately on April 24, and the Fed released a white paper saying that most banks currently have capital levels well in excess of the amount required to be well capitalized. However, regulators said they believe “it is prudent for large bank holding companies to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized” over the next two years and be able to lend if such losses materialize. President Obama’s spokesman Robert Gibbs said today that the administration believes the banks will be able to raise capital in the private markets or sell assets to meet the capital needs. Regulators are expected to brief the banks on the final results and how they will be revealed tomorrow.

The Federal Reserve issued its quarterly senior loan officer opinion survey midday, which is based on responses from 53 domestic banks and 23 U.S. branches of foreign banks. The April survey showed that bank lending practices continue to remain tight, but slightly fewer respondents reported a tightening for the second consecutive survey. Within the survey, more banks reported tightening credit standards on residential mortgages, while standards on credit card loans were unchanged, and fewer respondents reported tightening standards on other consumer loans. Demand for loans from business and consumers continued to weaken, with the exception of prime mortgages. Lending to business, as represented by commercial real estate loans, as well as commercial and industrial lending (C&I), was also slightly less restrictive. About 65% of banks indicated they had lowered credit limits to either new or existing credit card customers, versus 45% in the January survey, and 40% noted a decrease in the size of C&I credit lines.

Italian automaker Fiat (FIATY $11) was higher after CEO Sergio Marchionne discussed his plans to create a car giant by purchasing Opel, the European unit of struggling US automaker General Motors' (GM $2). GM is trying to sell non-core assets as it struggles to avoid bankruptcy, and separately announced it hired an advisor to help it sell the Saturn brand by year-end. Shares of GM were unchanged.

Sprint Nextel (S $5) reported adjusted 1Q EPS of $0.03, versus the Reuters estimate which called for a loss of $0.04 per share for the quarter. Revenues fell 12% to $8.2 billion, but the company said the success of its monthly unlimited plan led to the largest sequential improvement in overall gross customer additions and net additions in Sprint Nextel's history. Shares rose.

Tyson Foods (TSN $12) announced a loss from continuing operations of $0.24 per share in the second quarter, larger than the expected loss of $0.06 per share, although management stated that charges of $0.19 per share were related to a change in the way some taxes are recorded and a plant closing. Sales in the period totaled $6.3 billion, down slightly from the same period a year ago. Tyson’s interim president and CEO Leland Tollett reported that he was “cautiously optimistic” about the outlook for the company, despite the currently challenging conditions. Tollett also stated that it is still too early to predict the impact on group operations from the H1N1 flu outbreak. The group has managed to improve its struggling chicken division, which posted an operating loss of $46 million, an improvement of $240 million versus last quarter. Management cited lower grain costs and more favorable chicken prices as leading factors behind the recovery. TSN shares were 10% higher.

Estee Lauder (EL $37) released 3Q results showing diluted EPS-ex items of $0.16, above the $0.05 that analysts were expecting. Net sales were down 10% to $1.7 billion. Management cited the global recession as negatively impacting results but noted that it believed the company to be gaining market share through the downturn. EL has brought in a new CEO and will cut 6% of its workforce as it looks to restructure its operations. Geographically, the Asia/Pacific division was the star performer with 4% growth, while Europe, Middle East & Africa was down 17% and sales in the Americas contracted by 9% during the quarter. The stock was up 19% following the release.

Pending homes sales and construction spending positively surprise, while offshore tax breaks targeted

Treasuries were mixed after two more positive surprises in economic data. The yield on the 2-year note added 3 bps to 0.94%, the yield on the 10-year note was unchanged at 3.15%, while the yield on the 30-year bond lost 1 bp to 4.06%.

Construction spending (chart) unexpectedly rose in March by 0.3%. This is an improvement over the downwardly revised figure of -1.0% in February and economists had been expecting a further decline of 1.6% in March. Growth in commercial and government projects eclipsed a continued decline in home building in the report.

Pending home sales also positively surprised, showing 3.2% growth in March, an acceleration from the 2% growth witnessed in February. Economists surveyed by Bloomberg had been expecting 0% growth. Pending home sales typically lead existing home sales by a month or two. 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. However, there are likely still not enough buyers in the market to absorb the supply of homes available for sale and we expect home prices to fall another 10% before reaching bottom. However, sales typically turn before prices, and rising home sales could get buyers off the sidelines.

In other news, President Barack Obama and Treasury Secretary Tim Geithner today proposed to raise $210 billion over the next decade by closing three tax loopholes used by companies with overseas operations and making it riskier for Americans to keep their savings in offshore banks. Following up on one of his campaign promises, Obama stated that he is now “finally ending the tax breaks for corporations that ship our jobs overseas.” 200 US companies and trade associations had signed a letter stating their opposition to the plan, complaining that it would leave them with an uneven playing field versus their international competitors, many of which are not required to pay taxes on their overseas entities.

The lone release on the economic calendar tomorrow is the ISM Non-Manufacturing Index, which is expected to post a reading 42.2, up from March’s 40.8. The report is expected to complement the 40.1 reading on the ISM Manufacturing Index released last Friday, which showed the economy continues to decline, but the pace of decline has slowed. The pace of decline is slowing in some indicators, while others continue to deteriorate - the path to recovery is unlikely to be a straight line. However, we are becoming more optimistic that the recession could end soon, despite the risk of a double dip down given the historic nature of this downturn and the policy response globally.