Evening Update

Bulls Extend Streak to Eight of the Last Nine

Wall Street has now finished higher for eight of the last nine sessions, with a small setback last Friday the one blemish on an otherwise faultless two week record. Traders got more reason to be optimistic on the economic recovery today after industrial production data surprised on the upside. Similar to yesterday’s retail sales report, the “cash-for-clunkers” program distorted the data somewhat but was not the sole explanation for the improvement as most sectors posted their second-straight month of small gains in manufacturing output. In equity news, M&A activity came to the forefront again with Brazilian food giant JBS announcing two deals that will transform it into the world’s largest meat producer. At the same time, Adobe Systems reported that it has struck a deal to acquire web analytics firm Omniture in a $1.8 billion deal. In other equity news, consumer goods producer Fortune Brands was higher after reaffirming its full-year outlook, chip designer Rambus improved its prediction for 3Q sales growth, agriculture equipment maker AGCO tumbled after lowering its guidance, and Anadarko Petroleum announced a major oil discovery off the coast of West Africa. Meanwhile, Treasuries ended mixed after another benign inflation report, a drop in mortgage applications, and an improvement in homebuilder confidence.

The Dow Jones Industrial Average was up 108 points (1.1%) to close at 9,792, the S&P 500 Index increased 16 points (1.5%) to finish at 1,069, and the Nasdaq Composite advanced 31 points (1.5%) to 2,133. In moderate volume, 1.6 billion shares were traded on the NYSE and 2.7 billion shares were traded on the Nasdaq. Crude oil climbed $1.58 to $72.51 per barrel, while wholesale gasoline was up $0.06 at $1.85 per gallon, and the Bloomberg gold spot price added $10.48 to $1,018.03 per ounce.

Adobe Systems (ADBE $33) reported fiscal 3Q EPS ex-items of $0.35, one penny ahead of the Street’s forecast, as revenues fell 21% to $698 million, which topped the $687 million that analysts had forecasted. Separately, the software company announced that it will acquire fellow software firm Omniture (OMTR $22) for about $1.8 billion. ADBE will commence a tender offer to acquire all of the outstanding common stock of OMTR for $21.50 per share in cash – a 45% premium to their average closing price in the last 30 trading days. Omniture is an internet business that helps companies track user behavior across various websites, and Adobe said it hopes to combine that web analytics technology with its software to help its customers “more effectively monetize their content and applications online.” ADBE was lower and OMTR was over 25% higher following the announcement.

Fortune Brands (FO $45) was up nicely after the consumer goods company reaffirmed its full-year EPS ex-items target of between $2.00-2.30 and maintained its free cash flow guidance for the year. The parent of brands including Jim Beam and Titleist golf balls said, “While consumers remain very cautious and the US housing market remains challenged, we’re encouraged by improvements in key economic measures, including consumer confidence and sales of new and existing homes.” The company added that its 3Q order patterns are tracking to its expectations and it is continuing to gain share in key product categories.

AGCO (AGCO $29) was down roughly 10% after the manufacturer of agricultural equipment said it now expects net sales to decline between 23-25% versus last year, or to $6.3-6.5 billion and EPS to range from $1.30-1.50. AGCO had previously expected sales between $6.5-6.8 billion and EPS to range from $2.00-2.25 for the year. Analysts are expecting the company to report full-year revenues of $6.7 billion and earnings of $2.06 per share. The company also issued 3Q guidance that came in below expectations. AGCO said during 3Q, it is experiencing lower-than-anticipated levels of demand in its European operations, especially in important markets of Germany, France, and the UK, and it is making more aggressive cuts in its production than previously discussed to reduce inventories.

Anadarko Petroleum (APC $65) – the second-largest producer of natural gas in the US - was up almost 10% after announcing a major discovery off the coast of West Africa. The well was drilled to a total depth of 18,500 feet in 5,900 feet of water, and initial results suggest a “very significant” reservoir, the company said. When drilling began, the company had estimated less than a 25% chance of success. Management did not disclose how much oil they believe is recoverable from the well, simply stating that they only choose to drill in areas with potential for at least 150 million and possibly as much as 1 billion barrels of crude. Perhaps even more significantly though, the company said it believes the field could be one of a string of reservoirs stretching across four countries – from Ghana to Sierra Leone, across the Ivory Coast and Liberia.

Texas-based Pilgrim’s Pride (PGPDQ $6) was over 10% higher after it confirmed today that it will be acquired by Brazilian food producer JBS (JBSAF $3). JBS will pay $800 million in cash to acquire a 64% equity stake in the company, and the deal also includes paying off Pilgrim's Pride's creditors in full, as well as a distribution of new stock to current shareholders, implying a total company value of approximately $1.25 billion. Existing shareholders will receive shares totaling 36% of the company, worth approximately $450 million. Pilgrim’s Pride was the US’s largest chicken producer before it was pushed into bankruptcy in 2008, struggling under a large debt load that came after it acquired a competitor. Meanwhile, JBS – already one of the largest producers of beef and pork in the US – will now have a foothold in the poultry market to match. This acquisition must still be approved by antitrust authorities, and regulators blocked an earlier attempt by JBS to acquire National Beef Packing Co, a $560 million deal that regulators feared would have caused pricing concerns for consumers and producers. Separately, JBS announced a deal to acquire Brazilian rival Bertin, the second-largest beef producer in the country. Once both deals close, JBS will become the top meat producer in the world, with annual revenue of more than $30 billion, according to Reuters.

Rambus (RMBS $18) was higher after the semiconductor chip designer raised its guidance for 3Q sales, citing increasing royalty payments as customers make more chips. Revenue is now expected to be between $27-28 million, up from an earlier outlook of $22-25 million, the company said. At the same time, operating expenses are now forecasted to be in a range of $41-44 million, lower than a previous projection of as much as $49 million. CEO Harold Hughes told investors that semiconductor shipments have risen following an “overcorrection” earlier this year, while the drop in expenses is partly attributable to a fall in engineering spending.

Consumer prices rise slightly more than expected

Industrial production (chart) increased 0.8% in August, stronger than the forecasted growth of 0.6%. At the same time, the Fed revised up its previously announced figure for July from a 0.5% expansion to 1.0%. This now makes two consecutive months of gains for the industrial sector, after shrinking nearly every month since December 2007. Total industrial production in August was still almost 11% below its level of a year earlier, however, and the index still sits at just 97.4% of its 2002 average level, showing that conditions remain depressed, in spite of the month-over-month improvement.

Similar to other recent economic data, the government’s subsidies in the auto sector distorted the underlying trend somewhat, but that was not the sole explanation for the improvement as industrial production still increased 0.4% after subtracting out the jump in car production. In fact, every major market group posted an increase from July to August, and every sector except for utilities has now seen two-straight periods of month-over-month growth, so the auto industry is not the only segment of the US economy where manufacturing is showing signs of life.

Meanwhile, the growth in production caused the capacity utilization index to improve to 69.6% in August, beating the 69.0% forecast, as last month’s data was revised up slightly from 68.5% to 69.0%. Capacity utilization has now improved for two consecutive months after the recession drove the index down to a record low level of 68.1% in June. Similar to the industrial production data, capacity utilization is showing early signs that it has finally hit bottom, although the index continues to sit at a very depressed level at more than 11% below the 1972-2008 average, illustrating how much slack in the economy remains.

Elsewhere, the Consumer Price Index (chart) showed prices were slightly higher than expected in August, rising 0.4% compared with the 0.3% expectation. The core rate, which strips out food and energy, rose just 0.1% though, to match the Street's forecast. Food and energy constitute approximately 20% of the CPI basket, and the Fed generally excludes them when setting its monetary policy as they tend to be volatile and are often driven more by global macroeconomic conditions rather than any underlying inflationary pressures within the US. Today’s benign inflation data, combined with yesterday’s subdued reading in the core Producer Price Index, provide little impetus for an immediate change in the Fed’s easy money policy.

In other economic news, the US MBA Mortgage Application Index fell 8.6% last week after advancing 17.0% in the previous week, in an index that can be quite volatile on a week-to-week basis. The decline was attributed to the Refinance Index, which fell 7.4%, and a decrease in the Purchase Index, down 10.3%, along with an increase of 6 basis points in the average 30-year mortgage rate to 5.08% versus the previous week. Although the average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March, the rate remains below the 5.82% level it sat at a year ago.

Lastly, the NAHB Housing Market Index—a measure of homebuilder confidence—was released in afternoon action, and showed an improvement to 19 in September from 18 in August, which was inline with analyst predictions. A reading below 50 means most respondents still view conditions as poor, so conditions in the industry remain somewhat dismal, but the improvement is notable as the index is back to the highest level since May 2008 as record affordability levels and government support for first-time buyers have helped to stem the slide in home sales in recent months.

Treasuries were lower following the full economic calendar. The yield on the 2-year note rose 5 bps to 0.98%, the yield on the 10-year note added 1 bp to 3.47%, and the yield on the 30-year bond decreased 1 bps to 4.26%.

Economic data expected to show continued improvement in housing market

Housing starts for August are expected to have risen 2.9% month-over-month (m/m) to an annual rate of 598,000 and building permits, the more forward-looking indicator of homebuilding, are forecasted to have increased 3.4% m/m to an annual rate of 583,000. Housing starts and permits data can be volatile on a month-to-month basis, influenced by weather and changes in the multi-family segment. However, single-family starts and permits have been trending higher since January. Building permits are one of the 10 leading economic indicators tracked by the Conference Board.

Sales of new and existing homes have also been rising and prices declines appear to be moderating. Increasing sales and traffic are giving homebuilders more conviction in a recovery, and combined with the low number of units available for sale, providing homebuilders the confidence to resume building and the opportunity to reshape their offerings to fit changing consumer spending behaviors and credit conditions that have a bias toward smaller and more affordable homes.

Other releases on tomorrow’s economic docket include weekly initial jobless claims, expected to have risen to 555,000 from 550,000 the week prior, and the Philadelphia Fed’s Business Activity Index, which is expected to rise to 8.0 in September from 4.2 in August. A reading of zero depicts conditions are neither expanding nor contracting.