Evening Update

Resiliency in the Face of Economic Uncertainty

After spending most of the day below the flatline amid concerns about where the global economy stands, stocks showed some late-day resiliency, erasing losses to finish slightly higher. Energy and materials stocks were the worst performers amid the skittishness surrounding the economy, while solid gains in consumer staples and health care issues helped buoy the major markets. Treasuries finished mixed following a better-than-expected reading of the ISM Non-Manufacturing Index. GM has received approval from a bankruptcy court judge to sell its assets into a new government-owned company, while the ongoing takeover battle for computer storage manufacturer Data Domain heated up after EMC raised its offer price. Elsewhere, Rio Tinto said it is selling its American food packaging business to Bemis, LDK Solar offered disappointing revenue guidance, and several US companies are in Russia to detail investment plans in the country as part of a summit between President Obama and Russian President Dmitry Medvedev.

The Dow Jones Industrial Average rose 44 points (0.5%) to close at 8,325, the S&P 500 Index gained 2 points (0.3%) to 899, while the Nasdaq Composite declined 9 points (0.5%) to 1,787. In moderate volume, 1.1 billion shares were traded on the NYSE, and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $2.56 to $64.17 per barrel, wholesale gasoline decreased $0.05 to $1.74 per gallon, and gold declined $6.10 to $924.90 per ounce.

General Motors (GMGMQ $0.70) is making progress towards a timely exit from bankruptcy proceedings after a judge approved the ailing automaker’s plan to sell its assets to a new government-backed firm. Under the proposed plan, the government will own about 61% of the new firm, with the Canadian government holding a 12% stake, and the remainder split between union workers and former bondholders. Following the closing of the sale, the government-backed firm will change its name to General Motors Company and continue to operate under GM's historic corporate and sub brands. Today’s announcement comes as the Obama administration has threatened to withdraw its financing of the reorganization if GM has not completed its bankruptcy proceedings by Friday. GM shares were down over 10% today.

Data Domain (DDUP $34) traded higher after EMC(EMC $13) raised its takeover offer by more than 10% to $33.50 per share, or about $2.1 billion net of DDUP's cash. Data Domain has been the subject of a struggle between EMC and competitor NetApp (NTAP $19), with both companies vying to acquire the computer storage maker. DDUP’s board had said that EMC’s previous offer was inferior to that of NetApp due to breakup fees and other deal protections in EMC’s bid. Today’s proposal removes those protections. NetApp's CEO said the company's board would weigh its options, in response to the sweetened EMC bid, and would provide an update shortly. NTAP added that it continues to believe that its offer is superior to EMC's offer.

Rio Tinto (RTP $148) announced that it is selling its American food packaging business to Bemis (BMS $26) for $1.2 billion. RTP acquired the assets as part of its 2007 purchase of Canadian aluminum producer Alcan. The deal will help the indebted miner improve its balance sheet position, and Bemis grow its revenue base from $3.8 billion to $5.3 billion. Bemis traded up 5% on the announcement, while Rio Tinto was down over 5% today.

LDK Solar(LDK $10) was sharply lower as traders reacted to the solar wafer manufacturer's announcement late Thursday that it expected to record between $215-225 million in 2Q revenues, which came in below the Reuters forecast for the company to report revenues of $250 million. The company, however, did raise its wafer shipment outlook for the same period but the news did little to soothe the revenue disappointment.

Several American business leaders are in Russia to attend a Kremlin summit between President Barack Obama and Russian President Dmitry Medvedev. While business links between the nations is not the sole purpose of the talks, a host of US companies such as Deere & Co. (DE $38), PepsiCo (PEP $57), and Boeing (BA $41 ¹) will announce investment deals in Russia totaling more than $1.5 billion during the visit. Agricultural machinery manufacturer John Deere expects to invest $500 million in the next six years in the country, while beverage group PepsiCo boosted its cumulative investment in Russia to over $4 billion in the next three years from $3 billion. Boeing plans to announce a joint venture with VSMPO-Avisma, the world’s biggest titanium producer, according to Reuters, citing an unnamed source. Shares of DE and BA were lower, but PEP moved higher.

Other US companies expected to attend the meetings include commodity producers, such as Alcoa (AA $9), which came under heavy pressure amid the weakness in materials issues and ahead of its earnings report, due out after the close on Wednesday—the unofficial launch of 2Q earnings season (earnings calendar). As traders search for evidence supporting a continuation in the recent economic recovery, the upcoming earnings cycle could go a long way in tipping the scales one way or another for the economic sustainability argument.

Liz Ann noted that we are still transitioning from the liquidity-driven phase to the earnings-driven phase of the market rebound. "Although S&P 500 earnings estimates continue to look ugly, it's becoming more clear that the bar might now finally be set sufficiently low for companies to start exceeding those expectations during reporting season," she adds. In September of last year, Thomson Financial showed a consensus estimate for 2009's second quarter earnings of $25.49 and for full-year 2009 of $102.83. Today, those estimates are $14.16 and $58.71, respectively. Liz Ann doesn't expect much market lift as we go through 2Q earnings season, but a more-clear picture could begin to be evident by next quarter—that's the point comparisons to year-earlier reports begin to get easier and easier.

Treasuries remain mixed after reading on the services sector

The ISM Non-Manufacturing Index(chart) for June rose to 47.0 from 44.0 in May, better than the 46.0 expected by economists. The separation point between contraction and expansion is a reading of 50. The index for new orders rose to 48.6 from 44.4. Employment improved to 43.4 from 39.0, demonstrating a smaller rate of contraction in employment. Prices paid moved to 53.7 from 46.9, indicating an increase in prices paid during the month. This is the first time the price index has registered above 50 since October 2008. Inventory sentiment remains poor, with 67.0% of respondents saying their inventory levels are too high. New export orders rose to 54.5 from 47.0, the first time the index indicated growth since September 2008, while import orders were reported at 47.0.

Treasuries were mixed following the report. The yield on the 2-year note fell 5 bps to 0.93%, while the yield on the 10-year note was unchanged at 3.50%, and the yield on the 30-year bond was up 2 basis points to 4.34%. Tomorrow, there are no major economic reports set to be released.