Evening Update

Traders Take Profits in Light Trading

Stocks were moderately lower in light volume and profit-taking was seen after stocks hit new 2009 highs last week. Traders were cautious after the strong run in shares and ahead of the Federal Reserve meeting that concludes with a statement release mid-day Wednesday, where the Fed’s exit strategy from the asset purchase programs intended to stimulate the economy will be examined. Commodity names were the session’s losers, as the dollar was slightly higher and a report showed a month-over-month decline in oil demand in China. A fifth-straight gain in the Index of Leading Economic Indicators was largely shrugged off, as components of the index were largely previewed by prior releases. Technology shares were among the session’s relative winners, being flat on the day, after an announcement from Dell of an acquisition for services and consulting provider Perot Systems for a 68% premium Elsewhere, Lennar posted a larger loss but noted a 19% increase in quarter-over-quarter bookings, Potash Corp of Saskatchewan lowered full-year EPS guidance while Activision Blizzard reiterated 2009 guidance, and the government issued a report on the for-profit education industry that was less negative than expected. AIG continued in the news, after a proposal to decrease the government’s stake in the company was presented by former CEO Hank Greenberg and a government report noted some improvement in conditions at the company. Treasuries were mixed.

The Dow Jones Industrial Average lost 41 points (0.4%) to close at 9,779, the S&P 500 Index fell 4 points (0.3%) to 1,065, while the Nasdaq Composite gained 5 points (0.2%) to 2,138. In light volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil fell $2.33 to $69.71 per barrel, while wholesale gasoline lost $0.08 to $1.75 per gallon, and the Bloomberg gold spot price declined $6.80 to $1,006.80 per ounce.

Dell Inc. (DELL $16) announced that it has reached a definitive agreement to acquire information technology services and business solutions firm Perot Systems (PER $30) in a transaction valued at approximately $3.9 billion. Under the terms of the deal, DELL will acquire all outstanding Class A common stock of PER for $30 per share in cash—about a 68% premium over Friday’s closing price—and this transaction is not subject to a financing condition. Dell said the purchase would be modestly dilutive to first year earnings, and won’t add to earnings until the fiscal year ending January 2012. In two years, Dell said it expect to cut 6-8% of $4 billion in combined costs for the two companies. Perot’s revenues come largely from two verticals, with nearly half of its revenue coming from the health-care industry and a quarter from the government sector. The move follows the purchase of Electronic Data systems by rival Hewlett-Packard (HPQ $46) last year. PER was sharply higher, while DELL retreated.

Homebuilder Lennar (LEN $16) reported a 3Q loss of $0.97 per share, larger than the $0.46 per share loss that the Street had expected, as revenues fell 35% to $721 million, also short of the $774 million that had been expected. LEN noted that its results included a $0.42 per share charge related to valuation adjustments and other write-offs. The company said its cancelation rate improved from 27% the same period a year ago to 19% in 3Q. While year-over-year comparisons remain lower, backlog dollar value of $647 million improved 19% from 2Q 2009.

LEN management said ”During the third quarter, the overall housing market continued its road back to recovery as more confident homebuyers took advantage of increased affordability,” adding that “consumer sentiment has significantly improved as homebuyers have recognized that the residential housing market is stabilizing.” The company said that in order to capitalize on the improvement in the sales pace, they increased home starts in the quarter, which will lead to higher deliveries in 4Q. The company added that assuming the economy continues to stabilize, it believes its improved sales environment, increasing pre-impairment gross margins and ability to leverage its expenses should enable it to return to profitability in fiscal 2010. LEN shares fell.

Shares of the world’s largest fertilizer firm, Potash Corporation of Saskatchewan (POT $93), were lower after it revised its full-year earnings guidance after the close on Friday. POT said EPS for the year is expected to be between $3.25-3.75 from a previous range of $4.00-5.00 per share. The company said the change primarily reflects lower-than-forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world. POT said it will continue to keep a tight rein on its production until demand returns. Management noted that decisions to use fertilizer today “inevitably impact crop yields – and soil needs – for years to come,” saying that they expect a significant rebound in potash demand in 2010. 3Q earnings are expected to be at the low end of its previous outlook, which is between $0.80-1.20 per share. Analysts were expecting the company to report EPS of $0.93 for 3Q, and $4.16 per share for the full year.

Shares in for-profit education companies, such as Apollo Group (APOL $75), Strayer Education (STRA $222), and Corinthian Colleges (COCO $20), rose after the Government Accountability Office (GAO) issued an assessment of the industry that was not as negative as anticipated. While higher default rates on federal loans were noted for the for-profit universities, they were attributed to the higher percentage of lower-income students. The GAO suggested greater admissions oversight to ensure qualified students are being admitted, in accordance to regulations regarding passing skills tests and holding valid high school diplomas to qualify for loans.

Videogame maker Activision Blizzard (ATVI $12) shares were higher as the company reaffirmed 2009 guidance despite announcing the delayed launch of a racing game, citing strong demand for other products.

American International Group (AIG $48) shares surged higher after news that former CEO Hank Greenberg presented a proposal to the House Oversight and Government Reform Committee to restructure the terms of the government’s bailout of the company. The proposal calls for the government’s stake to decrease to 20% from 80%, lowering the interest rate on loans owed to the government, and extending the term of the loan. A spokesman for AIG said that the company is “open to constructive efforts…that assist the company in restoring value to shareholders and repaying the taxpayer.”

Elsewhere, the GAO issued a report on AIG, noting some improvement in the health of the company, but said it was too early to determine if AIG could restructure its businesses and repay taxpayers. The GAO said that the $26 billion gap between withdrawals and deposits in the life and retirement services unit had shrunk to $3 billion in 2Q and that the unit and property/casualty unit had maintained capital levels above the minimum requirements.

Fed meeting gets this week’s top billing

The Index of Leading Economic Indicators (chart) rose 0.6% in August, just shy of the 0.7% increase that economists surveyed by Bloomberg expected, but July’s advance was revised from 0.6% to 0.9%. Of the ten subcomponents that make up the LEI, the largest negative contributor was the money supply but it was more than offset by a solid improvement in slower vendor deliveries, while stock prices and a favorable interest rate spread also contributed to the increase. This was the fifth-straight gain in the index and the Conference Board said the indicators are consistent with the view that after a severe downturn, a recovery is very near, but the pattern of that recovery is more uncertain.

Treasuries were higher following the report, but closed mixed. The yield on the 2-year note lost 2 bps to 0.98%, while the yield on the 10-year note was unchanged at 3.47%, and the yield on the 30-year bond was flat at 4.22%.

The LEI release kicks off what may be a key week on the economic front, which will yield details regarding the health of the housing market and manufacturing sector with Thursday’s report on existing home sales, followed by new home sales and durable goods orders on Friday. However, the report that will likely grab the lion’s share of the Street’s attention this week’s will be the two-day Federal Open Market Committee (FOMC) meeting, which begins tomorrow and concludes with the release of its statement mid-day Wednesday. No changes are expected to interest rate policy at the meeting. The only change made at the August meeting was that the Fed extended the timing of the Treasury purchase program to the end of October. Traders will also be watching for any hints of changes to the mortgage-backed security purchase program. After this week, the next FOMC meeting is not scheduled until November 4th.

The sole scheduled economic release on tomorrow’s calendar is the Richmond Fed Manufacturing Index, where the assessment of regional economic conditions are seen to have improved to 16 from 14 during September, and follows the progress reported last week in the Empire Manufacturing Index and the Philly Fed Business Activity reports. A reading of zero marks the separation between expansion and contraction in economic activity.