Evening Update

Markets Recover From Midday Weakness

Stocks were little changed today despite upgraded guidance from Family Dollar Stores, Pepsi Bottling Group, and Tractor Supply Company. Markets had to overcome another weak day in commodity markets, as the price of oil continues to retreat back from highs of $73 per barrel last month to almost $60 per barrel today as investors question if the price has gotten ahead of fundamentals in the sector. This weakness weighed on shares of energy and materials stocks and kept markets in the red for most of the day. Trading was relatively light overall as investors were mostly in wait-and-see mode ahead of Alcoa’s earnings report, which will be released after the closing bell today. Traders have been cautious to act ahead of second quarter earnings season, which will shed some light on whether US companies will be able to grow their earnings outside of aggressive cost cutting. Meanwhile, government debt auctions continue to go well, as today’s 10-year auction drew stronger-than-anticipated investor interest. Treasury yields fell further after the auction and after it was announced that consumer credit contracted less than had been expected during May. In other equity news, Las Vegas Sands is trying to raise capital, NRG Energy rejected Exelon’s hostile takeover offer, Amgen received positive results in its osteoporosis drug trial, and Google revealed an operating system that will compete against Microsoft.

The Dow Jones Industrial Average rose 15 points (0.2%) to close at 8,178, the S&P 500 Index lost 1 point (0.2%) to 880, and the Nasdaq Composite advanced 1 point (0.1%) to 1,747. In relatively light volume, 1.4 billion shares were traded on the NYSE, and 2.5 billion shares were traded on the Nasdaq. Crude oil fell $2.79 to $60.14 per barrel, wholesale gasoline lost $0.10 to $1.63 per gallon, and gold was off $15.50 to $909.18 per ounce.

Family Dollar Stores (FDO $31) reported fiscal 3Q EPS rose 35% to $0.62, three cents above the Reuters estimate, as revenues grew 8.3% to $1.8 billion. The discount retailer said same-store sales increased 6.2%, with the consumables category being the strongest during the quarter. The company also raised its full-year guidance, now calling for EPS of $2.03–2.07, compared with April’s view of $1.90– 2.00, and the average analyst estimate of $2.00 as compiled by Bloomberg Management noted that shoppers are relying on discount retailers such as Family Dollar more due to the recession. “As a result, we continue to gain market share,” CEO Howard Levine said. Shares were up more than 10%.

Pepsi Bottling Group (PBG $34) reported 2Q EPS ex-items of $0.78, five pennies ahead of the Street's forecast, but revenues of $3.3 billion fell short of analysts' expectations. The distributor of Pepsi-Cola said its ability to execute an effective global pricing strategy, and achieve robust cost and productivity savings helped it deliver strong results. PBG also said it benefitted from improved carbonated soft drink trends in the US, as well as encouraging developments in the commodity and foreign currency markets. Management said it expects its full-year EPS ex-items to be towards the high end of its prior guidance of $2.30-2.40. Analysts are expecting the company to report EPS of $2.37 for 2009. Shares were down slightly.

Shares of Tractor Supply Company (TSCO $45) were over 10% higher after the farm and ranch retailer said 2Q sales grew 5.4% to $947 million, while adjusted same-stores sales declined 1.7%. TSCO said it expects 2Q EPS to be in the range of $1.48-1.50, versus the Street forecast which called for the company to earn $1.24 per share. Management credited adjustments to its marketing program – focused on direct marketing instead of television ads – as one of the factors that led to the outperformance. The company also raised its full-year EPS forecast, with same-store sales growth now expected to be flat compared to the 2% decline that was previously forecast, while EPS should be in a range of $2.78–2.92, relative to the original guidance of $2.58–2.74 and the average analyst estimate of $2.64. CEO Jim Wright commented that the consumer environment remains difficult, but the company is focusing on core consumable products as opposed to big ticket items in order to offset that weakness.

Las Vegas Sands' (LVS $7) CEO announced plans to raise between $3-4 billion. The casino operator said it is considering several options to raise these funds, including a potential IPO of its Macau assets in Hong Kong, according to an interview given to Reuters. Reuters also reported that the company's chief denied reports that the firm is considering a bond issue in the US. Shares were down less than 5%.

NRG Energy (NRG $23) has rejected a sweetened bid from Exelon Corp (EXC $48), a hostile takeover offer that would have created the US’s largest electricity generator. NRG called the offer too low, stating that if EXC would “properly recognize” the value in NRG, it would increase its offer “by a substantial amount.” NRG also took the opportunity to raise its 2009 EBITDA guidance by $325 million to $2.5 billion, primarily as a result of its recent acquisition of Reliant Energy’s Texas retail power business, which it says will generate EBITDA of $400 million in 2009. Shares of both NRG and EXC have sold off in recent trading as investors began to doubt that the proposed deal would go through, with NRG losing more than 10% of its value.

Amgen (AMGN $60) was up almost 15% after it said its experimental osteoporosis drug, denosumab, met its primary and secondary endpoints in a pivotal Phase 3 trial and demonstrated superior efficacy compared to Novartis' (NVS $40) treatment Zometa. AMGN said its treatment did a better job of delaying fractures and other serious bone complications in patients with advanced breast cancer.

Google (GOOG $402) announced that the world's number-one internet search engine is preparing to launch its Google Chrome Operating System for computers, taking aim at operating system giant and Dow member Microsoft (MSFT $23). Google's new system, which will initially target low-end portable PCs called notebooks, would be based on its Chrome Web browser and available to consumers in the 2H 2010. The company said it is designing the system to eventually power full-size PCs as well. The key aspects of the operating system are said to be its speed, simplicity, and security. Shares of GOOG were higher, while MSFT was unchanged.

Fall in consumer credit is smaller than expected, key auction for Treasuries

Treasuries moved higher after today's strong auction of $19 billion of 10-year notes, which received a bid-to-cover ratio of 3.28. The yield on the 2-year note slid 6 bps to 0.90%, the yield on the 10-year note lost 16 bps to 3.29%, and the yield on the 30-year bond gave back 13 bps to 4.18%. Treasury yields are a key benchmark rate used to help set many consumer lending rates. Strong demand for government debt could bring down the yield on Treasuries and could soothe some concerns that have crept up since mid-March that higher lending rates could thwart a recovery in the economy.

In economic news, the Federal Reserve announced that consumer credit fell by just $3.2 billion in May, well short of the $8.8 billion contraction that economists had expected. Although the drop was smaller than expected, it does mark the fourth-straight decline, the longest stretch since the seven consecutive months of declines witnessed in 1991. It must be noted though that the Fed’s measure of consumer borrowing does not include mortgage or home equity loans – one of the most effected portions of the lending sector.

The MBA Mortgage Application Index rose 10.9% for the week ended July 3, off of a seven-month low, following the prior week's decline of 18.9%, in an index that can be quite volatile on a week-to-week basis. The advance was attributed to the Refinance Index, which gained 15.2%, and a 6.7% increase in the Purchase Index. The Mortgage Bankers Association (MBA) said the average 30-year mortgage was unchanged at 5.34%, still solidly above the record low of 4.61% that was reached at the end of March.

Elsewhere, crude oil prices continued to fall even after the Energy Information Agency reported its oil inventory report, which showed stockpiles fell by 2.9 million barrels, a larger decline than Reuters forecast that called for a 2.4 million barrel draw. Contributing to negative sentiment, OPEC today released its 2009 World Oil Outlook, which revealed the organization does not foresee consumption of oil returning to the 31 million barrels per day level of 2008 until 2013. OPEC Secretary General Abdullah al-Badri told a news conference that the recession continues to negatively impact demand, commenting “I hope this will bottom out in 2009, and then the demand will pick up afterward.” The report also mentioned that “the high prices observed in 2008 led undoubtedly to some demand destruction.” Crude oil prices reached their all-time high of almost $150 per barrel last July, before plummeting to almost $30 per barrel in December and since recovering to trade near $60 per barrel today.

At the same time, the IMF today updated its expectations for the world economy. Global economic output is now expected to contract by 1.4% in 2009, slightly faster than the 1.3% decline the organization had forecast previously. On the other hand, global growth in 2010 is now forecast at 2.5%, an improvement from the previous projection of 1.9% given in April. “The global economy is still in recession, but we’re inching towards the recovery,” the IMF said, while adding that it is “much too early” to withdraw government stimulus efforts. The IMF expects most of the recovery in 2010 to be driven by emerging economies such as China and India, which are forecast to grow by 8.5% and 6.5%, while developed economies such as the US, Europe and Japan aren’t expected to return to sustained growth until the second half of next year. The US economy is forecast to grow 0.8% in 2010 according to the IMF.