Evening Update

Markets Book Strong Gains in Historic Day

The third largest bankruptcy in US history was not enough to derail a strong rally fed by a plethora of reassuring economic data. With little equity news and no major earnings releases, investors had ample opportunity to survey today’s economic reports which started out with another increase in China’s manufacturing sector, and continued in the US with a surprising gain in personal income, a better-than-expected ISM Manufacturing figure, and a surprise increase in construction spending. The aforementioned bankruptcy from GM, which had been widely expected by investors, also resulted in a shake-up of the constituents of the Dow Jones Industrial Average, with GM and Citigroup being replaced by new components Travelers Companies and Cisco Systems. The day’s economic optimism spilled over to other markets with strong gains for commodities. Meanwhile, it was another brutal day for Treasuries as continued positive economic data and looming increases in US government indebtedness combined to cause traders to dump US debt obligations.

The Dow Jones Industrial Average rose 221 points (2.6%) to close at 8,721, the S&P 500 Index advanced 24 points (2.6%) to 943, and the Nasdaq Composite gained 54 points (3.1%) to 1,829. In moderately high volume, 1.5 billion shares were traded on the NYSE, and 2.6 billion shares were traded on the Nasdaq. Crude oil rose $2.27 to $68.58 per barrel, wholesale gasoline increased $0.02 to $1.92 per gallon, and gold declined $4.25 to $974.90 per ounce.

General Motors (GM $0. 75) filed for bankruptcy this morning and is the third-largest in US history and the largest-ever US manufacturing failure, according to Reuters. GM will receive an additional $30 billion in taxpayer funds to aid the restructuring of the 100-year-old automaker and the government plans to convert most of its $50 billion in loans to assume a 60% stake in the company. GM will be put through a "fast-track bankruptcy," which is expected to result in a new company in about 60 to 90 days. The Canadian government will contribute $9.5 billion in aid in exchange for a 12.5% stake in the automaker. GM plans to close 11 facilities and idle another 3 plants. President Barack Obama spoke today on the bankruptcy, reassuring the market that he has no interest in a long-term involvement of the government in running private companies. “What I have no interest in doing, is running GM," Obama said.

Following the bankruptcy of GM, two of the "big three" automakers will be in court-ordered restructuring and yesterday a bankruptcy judge approved the sale of nearly all of the US assets of privately-held Chrysler to a group led by Italian automaker Fiat (FIATY $11).

In related news, General Motors and Citigroup (C $4) have been removed from the Dow Jones Industrial Average and will be replaced with insurer Travelers Companies (TRV $42) and tech bellwether Cisco Systems (CSCO $20). Shares of TRV and CSCO were nicely higher, while Citigroup was under modest pressure. Additionally, the New York Stock Exchange said trading in GM shares will be suspended prior to the opening of trading tomorrow.

Ford (F $6) was one automaker that enjoyed positive sentiment today, finishing up over 5%. Ford released a statement today detailing plans to boost its North American vehicle production by about 10% to 460,000 cars and trucks.

Prudential Financial (PRU $39 ¹) released a statement today confirming that it is joining the stampede of financial firms shunning government funds. PRU announced plans to raise $1.25 billion by selling shares after the recent stock market rally has made it easier for companies to tap equity financing. CEO John Strangefeld had announced on May 7 that this move was possible, citing improving financial markets. Shares closed lower today.

Meanwhile, SunTrust Banks (STI $14) announced today “an acceleration of the company’s previously announced capital plan” to improve the bank’s Tier 1 capital ratio. STI said it plans to sell $1.4 billion of its common stock, raise $300 million of common equity from selling securities, and raise $250 million of common equity from buying back up to $1 billion of the firm’s existing preferred and hybrid securities. “We are on a clear path to achieve our previously announced capital objectives," SunTrust said in the statement. STI finished higher today.
Treasuries suffer sharp losses amid flood of favorable data

Treasuries finished sharply lower, with the yield on the 2-year note rising 4 bps to 0.95%, the yield on the 10-year note surging 21 bps to 3.67%, and the yield on the 30-year bond climbing 19 bps to 4.53%.

The ISM Manufacturing Index (chart) improved to 42.8 from 40.1 in April, and was higher than the 42.3 forecast by a Bloomberg survey of economists. The separation point between contraction and expansion is 50, and an increasing level in the index indicates the economy is contracting at a slower pace, with May experiencing the fifth-straight monthly improvement. While manufacturing continues to decline, the level of the index is consistent with growth in the overall economy, the first time in seven months. New orders continued to improve, to 51.1 in May from 47.2 in April, and is now at a level indicating growth, after 17 months of contraction. Employment remained stagnant, at 34.3, versus 34.4 in April and prices paid were 43.5 versus 32.0, indicating that prices continue to decline, but at a less rapid rate. Exports rose to 48.0 from 44.0, while imports were reported at 42.5 versus 42.0 the prior month. The customer inventories index showed that distribution channels are paring inventories to levels indicated as “too low” for the second straight month.

Companies cut stockpiles at a $91.4 billion rate during the first quarter, the fastest pace on record. This record fall in inventories will compel manufacturers to eventually have to accelerate production just to meet current demand. While lending standards are still restrictive, they have started to improve, which typically leads an improvement in capital spending.

Personal income unexpectedly rose 0.5% in April, versus the Bloomberg estimate of -0.2%, and March was revised from -0.3% to -0.2%. Personal spending declined 0.1% in April, slightly less than the expectation of -0.2%, while March's 0.2% decline was revised to a 0.3% drop. The savings rate jumped from an upwardly revised 4.5% to 5.7%.

Also, the PCE Price Index, which is released with the income and spending data, rose 0.4% year-over-year in April, in line with the consensus forecast, and March's gain was unrevised at 0.6%. The core PCE Price Index, which excludes food and energy, increased 0.3%, above expectations of 0.2%. Year-over-year, core prices moved 1.9% higher, matching the consensus of economists surveyed by Bloomberg.

Construction spending unexpectedly rose for the second-consecutive month and posted the biggest gain since last August, rising by 0.8% in April, and March's figure was revised slightly higher from 0.3% to 0.4%. Economists had been expecting a decline of 1.5% in April. Growth in manufacturing and lodging spending eclipsed declines in office and commercial outlays in the report.

Looking ahead, pending home sales data will be released tomorrow, with economists expecting a slowdown to 0.5% month-over-month growth in April after the 3.2% boost in March. Later in the week, the ISM Non-Manufacturing Index will be released on Wednesday, with Friday’s closely-watched labor report closing out the week