Evening Update

Strong Weekly Gain Ends in a Whimper

Despite a high volume of shares traded, driven by quarterly quadruple witching, where four equity contracts in the futures and options markets expire, the session was lackluster, with markets ending slightly higher. The day caps a week of strong economic news and stock gains, with most US markets up 2%, hitting new 2009 highs on Wednesday, and the Nasdaq posting a positive year-over-year return. News was relatively quiet today, outside of a smaller-than-expected 1Q loss but disappointing 2Q revenue guidance for Palm, a dividend raise by Texas Instruments and obesity drug trial results from Arena Pharmaceuticals. American Airline parent AMR Corp. continued in the news, updating guidance after yesterday’s liquidity raise and joining British Airlines in discussions with Japan Airlines regarding alliance partnerships. There were no major economic reports today and Treasuries were lower.

The Dow Jones Industrial Average was rose 36 points (0.4%) to close at 9,820, the S&P 500 Index added 3 points (0.3%) to 1,068, and the Nasdaq Composite gained 6 points (0.3%) to 2,133. In heavy volume, 2.3 billion shares were traded on the NYSE and 3.0 billion shares were traded on the Nasdaq. Crude oil fell $0.62 to $71.85 per barrel, while wholesale gasoline lost $0.02 to $1.83 per gallon, and the Bloomberg gold spot price declined $6.80 to $1,006.80 per ounce. For the week, the DJIA rose 2.2%, while the S&P 500 Index and the Nasdaq Composite added 2.5%.

Mobile device maker Palm (PALM $14) reported a fiscal 1Q net loss ex-items of $0.10 per share, much smaller than the $0.25 per share loss that analysts had expected, as adjusted revenues came in at $360.7 million, well above the $289.1 million forecast. The company said it is making “significant” progress with its transformation and it is launching more Palm webOS products with more carriers and turning its sights toward growth. Palm issued 2Q revenue guidance of $240-270 million, well below the Street’s expectations of $347 million, and said it expects full-year revenue to be inline with analysts’ forecasts. Separately, the company announced that it intends to offer approximately 16 million shares of common stock and plans to use the net proceeds for working capital and general corporate purposes. Shares were lower.

Texas Instruments (TXN $24) reported that it plans to raise its quarterly cash dividend by one penny to $0.12 per share. This is the sixth consecutive year the company has increased its dividend. TXN shares were higher.

AMR Corp. (AMR $9) gave back some of yesterday’s steep gains after the parent of American Airlines said it expects mainline revenue to fall between 14.5-15.5% year-over-year in 3Q, mainline traffic and capacity in September to fall 16.4% and 9.7%, respectively versus August levels, and costs for 3Q to come in at 12.28 cents per available seat mile, compared to its full-year forecast of 12.06 cents. AMR added that it expects to end 3Q with cash and short-term investments of at least $3.7 billion, including approximately $1.2 billion in cash related to yesterday’s announcement that it obtained $2.9 billion in liquidity.

Separately, British Airways PLC (BAIRY $39) confirmed that it, along with AMR’s American Airlines and other members of the Oneworld alliance, are in talks Japan Airlines (JALSY $10), in competition with Delta Air Lines (DAL $9), who is discussing a small equity stake in JAL, to add a Japanese partner to the SkyTeam alliance. Shares of Japan Airlines rose, while British Airways and Delta fell.

Biotechnology company Arena Pharmaceuticals (ARNA $5) said its experimental obesity drug Lorcaserin failed to reach the guidelines set by the US Food and Drug Administration, although it did meet the primary goals of a second late-stage drug trial. The year-long trial found that patients who took Lorcaserin twice a day, on average, lost 5.9% of their body weight, compared with a 2.8% weight reduction in patients taking a placebo. The 3.1 percentage-point difference fell short of the FDA’s guideline calling for a 5 percentage-point difference in weight loss in patients who took the drug versus those that took the placebo. ARNA plans to submit a US regulatory application in December. Shares reversed early losses and were trading higher, after executives on a conference call to discuss the results indicated they felt the results were strong enough to obtain regulatory approval.

Treasuries lower amid dormant economic docket

Treasuries were lower and there were no major economic reports today. The yield on the 2-year note rose 6 bps to 1.00%, the yield on the 10-year note increased 9 bps to 3.47%, and the yield on the 30-year bond added 6 bps to 4.23%.

Recovery argument remains alive with stocks reaching new highs for 2009

The economic front provided the greener pastures for the bulls to graze on, with retail sales for August jumping well above the Street’s forecasts—delivering some needed optimism regarding the health of the consumer—while a couple reports depicting further expansion in business activity in the mid-Atlantic and New York regions continued to paint the improvement picture for the manufacturing sector. Benign inflation reports on both the wholesale and consumer levels, coupled with the second-straight month of gains in industrial production and capacity utilization also helped preserve the argument that economy may continue to recover from the depths of the hefty recession that gripped the markets since the end of 2007. Fed Chairman Ben Bernanke added to the upbeat backdrop after he announced that the recession is “very likely over.”

Not even a smaller-than-expected rise in building permits—giving the housing sector a relatively recent rare blemish—and the Obama administration’s announcement that it will impose a 35% tariff on Chinese-made tires—sparking trade war fears were enough to stop 2% gains for the week in all the major equity indices. The support from the economic front helped soothe the sting from the equity arena that came in the form of a profit miss from electronics retailer Best Buy (BBY $38) and revenue shortfalls from FedEx (FDX $76) and Oracle (ORCL $22).

Appraisal of housing market health and Fed meeting upcoming

The two-day Federal Open Market Committee (FOMC) meeting next week 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. After next week’s meeting, the Fed is not scheduled to meet again until November 4th, making this the last formal opportunity for the Fed the option to adjust the program size or timing. However, the Fed has been making changes to its special programs on dates outside of the formal FOMC meeting in recent months.

Renewal of sales in the housing market is expected to have continued pace in August, with a 2.1% month-over-month (m/m) increase in existing-home sales forecasted, to an annual rate of 5.35 million units, extending the upward trend to five months. New home sales are expected to have risen 1.6% m/m in August, to an annual rate of 440,000 units. New home sales are a small percentage of the total market but are seen as timelier indicator of sales, as they are based on signings, while existing home sales are tallied from closings, and reflect contracts signed one to two months earlier. Existing-home sales are scheduled to be released on Thursday, while new home sales will be released on Friday.

Durable goods orders are forecasted to have risen 0.4% m/m in August, after jumping a revised 5.1% in July—the largest gain in two years. The monthly orders data of goods intended to last at least three years can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data. Ex-transportation, orders are expected to have gained 1.0%.

Other releases on next week’s economic calendar include the Conference Board’s Leading Economic Indicators, the Richmond Fed Manufacturing Index, MBA Mortgage Applications, initial jobless claims and University of Michigan consumer sentiment.