Evening Update

The Rally Marches On

Markets fluctuated today before bulls won out in the end and all three major US stock indices booked gains of less than 0.5%. Bulls battled selling pressure from traders looking to book profits from the recent strong rally, with most of the day’s positive sentiment coming on the back of this morning’s surprisingly strong housing report. The Street was again inundated with banks detailing their capital raising plans today, with Morgan Stanley, JPMorgan Chase, American Express, Bank of America, and Goldman Sachs all making announcements. The US auto industry continued to make headlines after GM wasted no time leaping into its streamlining plans – announcing a deal to sell Hummer and indicating strong buyer interest in its Saab and Saturn brands as well. GM and Ford both saw better-than-expected sales in their monthly report for May. Rounding out the day’s stock news was a sales miss from Walgreens, a dividend increase from Cardinal Health, increased earnings guidance from Pepsi Bottling Group, and a counter-offer to acquire Data Domain.

The Dow Jones Industrial Average rose 19 points (0.2%) to close at 8,741, the S&P 500 Index advanced 2 points (0.2%) to 945, and the Nasdaq Composite gained 8 points (0.4%) to 1,837. In average volume, 1.4 billion shares were traded on the NYSE, and 2.4 billion shares were traded on the Nasdaq. Crude oil fell $0.03 to $68.55 per barrel, wholesale gasoline increased less than $0.01 to $1.93 per gallon, and gold increased $6.38 to $981.65 per ounce.

In order to satisfy a supervisory condition to pay back the government loans that it received from the TARP, Morgan Stanley (MS $30) announced that it plans to raise $2.2 billion in common equity. MS said, while approval for repayment has not been granted, it believes that upon completion of this capital raise it will have satisfied the criteria for fully redeeming the TARP preferred capital and expects to redeem it before the end of June. Additionally, Dow members JPMorgan Chase (JPM $35) and American Express (AXP $25 ¹) reported plans to raise $5 billion and $500 million in common equity, respectively, to comply with the TARP repayment prerequisite that company's demonstrate access to the equity capital markets. Shares of MS were higher, with JPM and AXP lower.

Meanwhile, fellow Dow component Bank of America (BAC $11 ¹) was modestly higher after announcing that it has raised almost $33 billion towards the $33.9 billion capital buffer identified by the Federal Reserve's capital assessment program and now believes it will comfortably exceed that number. BAC's chief financial officer said the company is pleased to have nearly reached its goal this quickly, and BAC also said it could issue up to an additional 296 million common shares.

Rounding out the day’s financial sector announcements, Goldman Sachs (GS $143) sold about $1.91 billion, or a 0.9% stake, in Industrial & Commercial Bank of China (IDCBY $31) to help raise capital in hopes of paying back the US government the TARP loan it received. GS shares finished the day lower.

Walgreen Co. (WAG $32) was higher even after the drug and retail firm reported same-store sales—those open at least a year—increased 1% for May, falling short of the Thomson Reuters estimate, which called for a 2.2% increase. Also, WAG's pharmacy same-store sales rose 1.5%, missing the Street's forecast of a 3.5% increase, as sales were negatively impacted by 4.5 percentage points due to generic drug introductions in the last 12 months. However, comparable store sales for its front-end general merchandise increased 0.2%, which topped analysts' expectations that called for a 0.2% drop.

Cardinal Health (CAH $33) announced a 25% increase in its regular quarterly dividend to $0.175 per share, or $0.70 per share on an annualized basis. CAH noted that it remains committed to dividend expansion as a means to signal confidence and strength in the cash generated by its businesses. Shares were solidly lower, dropping over 10%.

General Motors (GMGMQ $0.61) announced that it has reached an agreement to sell its Hummer brand. The purchase price is approximately $500 million, CEO Fritz Henderson said in bankruptcy court documents. Although GM did not name the buyer, the New York Times is reporting it to be the privately-owned Chinese company Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., citing an unnamed source. Neither company has confirmed this report. GM sold almost 30,000 of the vehicles in the US in 2008, down over 50% from the level of 2007. GM is also looking to sell other brands as it attempts to restructure its operations in bankruptcy proceedings. Management noted today that they have 16 buyers interested in the Saturn brand, while three parties have expressed interest in the Saab brand.

Meanwhile, monthly sales data for the auto industry was released today. Ford (F $6) shares finished over 5% higher after it reported that its monthly sales fell over 20% year-over-year in May, but increased 20% from the level of April, bringing its market share to the highest level in three years. Auto industry tracking firm Edmunds had predicted a drop of 29% for Ford sales in May. At the same time, General Motors sales data showed a plunge of approximately 30% from the same month last year, although this was better than the 37% drop that had been forecast by Edmunds. May sales for GM were 11% higher than in April, making this its best sales month so far this year.

Pepsi Bottling Group (PBG $34) was up after raising its guidance for the rest of the year. PBG now expects to earn $0.70-74 next quarter, and for the full-year it now expects to earn $2.30-2.40, which is an increase of 10 cents from its previous outlook. Management said in a statement that they are "beginning to see favorable trends” both within the bottling sector, and in commodity and currency markets, that are aiding the current operating environment.

Data storage company EMC Corp (EMC $13) has stepped into the merger discussions over Data Domain Inc. (DDUP $32), making an offer of $30 per share, or $1.8 billion in total. This all cash offer comes less than two weeks after NetApp (NTAP $20) made a cash and stock offer worth approximately $26 per share for DDUP. Shares of Data Domain surged ahead nearly 20% today, bringing them above the level of EMC’s offer price in expectation that a takeover battle for the company could ensue. EMC’s CEO noted that he had been interested in buying Data Domain prior to the NetApp announcement. Neither DDUP nor NTAP commented on the offer.

Shares of DeVry Inc. (DV $47) finished with gains of approximately 5% after Standard & Poor’s announced that DV will be replacing the now-bankrupt GM in its S&P 500 Index.

Pending home sales surge, Treasuries head mixed directions

Treasuries finished the day mixed after fluctuating midday, with the yield on the 2-year note rising 1 bp to 0.95%, the yield on the 10-year note declining 5 bps to 3.63%, and the yield on the 30-year bond falling 5 bps to 4.49%.

Pending home sales unexpectedly surged to continue the recent trend of relatively better-than-expected data from the economic front, jumping 6.7% in April on top of the 3.2% advance posted in March. Economists surveyed by Bloomberg had forecasted a 0.5% increase for this indicator of the pipeline of existing home sales. Pending home sales have gained ground for the third-straight month and the chief economist for the National Association of Realtors said, "Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market," as a catalyst for improving conditions on the housing front. However, they caution that while existing home inventories—which need to be chewed through before substantial recovery in the market can ensue—are off their peak levels, they will likely renew an upward trajectory, as foreclosure moratoriums and legislative mandated delays have ended and unemployment continues to rise. The pending home sales report showed that the Northeast regional index surged 32.6% and the Midwest increased 9.8% versus last quarter, while the South decreased 0.2%.

The ISM Non-Manufacturing Index for May will be reported tomorrow and is expected to rise to 45.0 from 43.7 in April. The separation point between contraction and expansion is a reading of 50. The report will complement the 42.8 reading on the ISM Manufacturing Index released on Monday, which showed manufacturing continues to decline, but the pace of decline has slowed. While manufacturing continues to decline, the level of the ISM Manufacturing Index is consistent with growth in the overall economy, the first time in seven months, and new manufacturing orders improved to 51.1 in May, now at a level indicating growth, after 17 months of contraction.

The ADP Employment Change Report will also be released, and the expectation is that large private sector employers shed 525,000 jobs in May, an uptick from the 491,000 job loss in April. This report has gained in market importance, as another read on the employment situation, despite somewhat volatile results that have not been a particularly accurate predictor on the labor report, due out Friday.

Also on tap for tomorrow are reports on factory orders and MBA Mortgage Applications.