Evening Update

Stocks Rebound on Strong GDP Figures

Stocks rallied today and the Dow jumped 200 points as positive economic data soothed investor fears about the pace of economic recovery. The nation’s first reading on 3Q GDP was released, showing the economy expanded 3.5% last quarter, which was better than economists had expected. A separate report showed a significant drop in continuing claims for unemployment, which also allayed some of the economic concerns that led to the recent sell-off on Wall Street. Meanwhile, 3Q earnings season kept chugging along today and shares of Exxon Mobil were under pressure after the Dow member posted a larger-than-expected quarterly loss on the back of lower oil and gas prices and weak refining margins. That earnings miss was counterbalanced though by better-than-expected figures from Procter & Gamble, Kellogg, Motorola, Symantec, and Aetna. In the bond markets, Treasuries sold off as risk-taking was back in vogue among traders today.

The Dow Jones Industrial Average jumped 200 points (2.1%) to close at 9,963, the S&P 500 Index climbed 23 points (2.3%) to 1,066, and the Nasdaq Composite advanced 38 points (1.8%) to 2,098. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $2.41 higher at $79.87 per barrel, while wholesale gasoline gained $0.04 to $2.02 per gallon, and the Bloomberg gold spot price was up $18.30 to $1,046.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was off 0.6% to 75.97.

Exxon Mobil (XOM $74) reported 3Q EPS ex-items down almost 70% year-over year to $0.98, missing the $1.03 that Wall Street analysts had anticipated, with revenues of $82.3 billion, which was also below the $85.2 billion consensus estimate. The company’s largest division, consisting of oil and gas production, saw quarterly output increase 3%, aided by the start-up of several new projects in Qatar, but the company received an average of $50 less per barrel of oil when compared with the same period a year ago. Looking at XOM’s results by sector, the upstream, or exploration division, saw earnings plunge 63% to $4 billion, while XOM’s downstream, or refining division, had its profits slashed 89% to $325 million as weak margins weighed on the group’s results. Shares were under pressure most of the day, but managed to get back close to the unchanged mark by the close of trading.

Fellow Dow component Procter & Gamble (PG $60) reported fiscal 1Q EPS of $1.06, 3% higher year-over-year and above the $0.99 that analysts had expected. Revenues were $19.8 billion, matching the Street’s forecast, as organic sales growth of 2% topped the company’s previous guidance of flat-to-minus three percent. The company said the outperformance came as a result of better-than-expected results across most business segments. Meanwhile, the consumer product conglomerate raised its full-year organic sales growth estimate and also increased the low end of its full-year EPS guidance range to reflect the strong results. Shares were nicely higher.

Motorola (MOT $9) was up almost 10% after reporting 3Q EPS ex-items of $0.02, which beat the Street’s forecast calling for the mobile device maker to post flat EPS for the quarter, while revenues of $5.5 billion for the quarter matched analysts’ estimates. By division, MOT’s mobile devices segment sales fell 46% versus last year but the operating loss in the segment slowed compared to 2Q. Additionally, the company said its broadband mobility solutions performed well and that it continued to manage its cost structure.

Kellogg (K $51) reported 3Q EPS of $0.94, ten cents above the Street’s expectations, with revenues of $3.3 billion, which matched analysts’ estimates. The cereal and convenience food maker said its North American unit posted organic net sales growth of 2% as its cereal and snacks growth offset a decline in frozen and specialty products. The company’s international unit sales were 6% higher after excluding currency and acquisitions, led by Europe’s strong return to net sales growth in the back half of the year. Kellogg also raised its full-year 2009 guidance and said the company is well positioned to deliver another year of strong growth in 2010 as well. Shares advanced.

Symantec Corp. (SYMC $18) was more than 10% higher after the security software firm reported fiscal 2Q EPS ex-items of $0.36, three cents above the Street’s forecast, as revenues declined 3% versus last year to $1.5 billion, which was slightly above the $1.4 billion expectation. The company said it is encouraged by signs of stabilization in the markets it serves and is confident it will continue to see gradual improvement over the next few quarters, and it issued 3Q guidance that matched expectations. Shares are receiving an additional boost from the company’s separate announcement that it has authorized a $1 billion share repurchase program.

Health insurer Aetna (AET $27) reported 3Q EPS ex-items of $0.69, better than the $0.66 consensus prediction from Wall Street. Sales were up 14% to $8.7 billion. However, the company forecasted a weak 4Q as a result of high flu-related medical costs, and said it expected its full-year results to come in at the low end of its previous guidance. The company said 2010 would likely be a “repositioning year,” but deferred giving a specific forecast until early next year. Today’s report from Aetna mirrored yesterday’s earnings release from peer WellPoint (WLP $47), which beat analyst forecasts with its 3Q EPS but forewarned of higher medical cost trends in 4Q due to the weak economy, more unemployed workers, and a more severe flu season. Shares in Aetna were up strongly today, and WellPoint was also higher, recovering some of yesterday’s weakness.

First look at 3Q GDP is upbeat, jobless claims dip slightly

Treasuries retreated today as risk-taking was back in vogue with investors. In today’s bond trading session, the yield on the 2-year note rose 3 bps to 0.97%, while the yield on the 10-year note was up 7 bps to 3.49%, and the yield on the 30-year bond advanced 7 bps to 4.33%.

Advance 3Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 3.5% annualized rate of growth, compared to the 0.7% decline in 2Q, and versus the Bloomberg forecast, which called for a 3.2% advance. Personal consumption rose 3.4%, also higher than the 3.1% forecast and following the 0.9% decline in 2Q. Real final sales, which exclude changes in inventory, was 2.5% higher.

Pricing pressures remained subdued, with the GDP Price Index increasing 0.8%, below the Bloomberg forecast of 1.4%. The core PCE Index, which excludes food and energy, rose 1.4%, matching expectations and the rate sits between of the Fed’s implied target of 1-2%.

Durable goods purchases, which include autos, jumped 22%, the biggest increase since 2001. The impact of auto sales, production and inventories contributed 1.6% to GDP growth. Catalyzed by low inventories and increased home sales stimulated by a first-time buyer tax credit, residential construction rebounded at a 23% annual rate, the first gain in almost four years and the biggest since 1986, and added 0.5% to growth.

The economy grew even excluding government stimulus, as non-durable goods purchases by consumers grew 2.0% and services rose 1.2%. Imports rebounded in the quarter, increasing 16.4%, while exports were up 14.7%. Businesses remain more hesitant, allowing inventory to fall another $130.8 billion in the quarter, while equipment and software purchases grew a mere 1.1% annualized in the quarter. Government spending increased 7.9% annualized, down from 11.4% in 2Q, hampered by a retrenchment in state and local spending.

Weekly initial jobless claims dipped modestly by 1,000 to 530,000, versus last week's figure that was unrevised at 531,000. The Bloomberg consensus called for claims to fall to 525,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 6,000 to 526,250. Continuing claims also fell, tumbling by 148,000 to 5,797,000, versus the forecast of 5,905,000. Treasuries remain lower following the GDP and jobs reports.

In other news, Treasury Secretary Timothy Geithner testified before a House Financial Services Committee today on proposed financial reforms. According to Geithner, the Federal Reserve should lose its authority to rescue “too big to fail” banks, but should remain the lender of last resort. "The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm." Geithner emphasized though that allowing large financial institutions to simply go bankrupt is not a good option either. “As the collapse of Lehman Brothers showed, the Bankruptcy Code is not an effective tool for resolving the failure of a global financial services firm” because it moves too slowly and does not take into account the “spill-over effects on the financial system or the economy.” Instead, systemically-important banks should be placed into a receivership managed by the FDIC, where they could be unwound and liquidated in an “orderly way,” with losses borne not by taxpayers but by shareholders and creditors of the firm, Geithner explained.

Looking ahead to tomorrow, Friday’s economic calendar includes a report on personal income, which is forecasted to remain flat in September, while personal spending is expected to show a 0.5% contraction. Other reports scheduled for tomorrow include a revised reading for the University of Michigan Consumer Sentiment Index and the Chicago PMI.

German unemployment rate dips, Japanese industrial output gains

In international economic news, unemployment in Germany—Europe’s largest economy—unexpectedly fell in October and the unemployment rate declined to 8.1%, versus the expectation that the rate would increase from 8.2% to 8.3%. The Federal Labor Agency, which prepared the report, credited government incentives for companies to retain staff as part of the explanation behind the improvement. Chancellor Angela Merkel, who was sworn in for a second term yesterday, has pledged tax cuts worth 24 billion euros ($35 billion) in an attempt to jumpstart the economy. Merkel gave a speech last week, acknowledging that there was no guarantee the plan would work, but it would assuredly have better odds of succeeding than “if all we do is save, save, save.”

Elsewhere, Japanese industrial output increased for the seventh-straight month in September. Output expanded 1.4%, which was above the median forecast of 1.0%, although it was slightly slower than the 1.6% pace of August. In addition, the report showed that inventories fell again, bringing them to the lowest level in more than 20 years. More than half of Japan’s exports are to other Asian countries, so the recent economic rebound in neighboring countries such as China and South Korea has given a boost to Japan, although it has still lagged behind most other Asian nations in exiting the recession – weighed down by weak domestic consumption which constitutes about three-fifths of its economy.