Evening Update

Another Wild Day on Wall Street

Stocks continued their bumpy ride today, first soaring on strong economic data but later giving back those gains amid some midday weakness in the financial sector, which was partially attributed to sober comments on the present state of the banking sector from a Fed official in testimony before Congress. Stocks then showed some late-day resiliency to finish the trading session with modest gains. The initial rally this morning was fueled by the ISM Manufacturing Index, which showed the fastest pace of growth in the manufacturing sector in more than three years. Adding to that was a rise in pending home sales and an unexpected increase in construction spending. Treasuries moved lower following those economic reports. In equity news, Ford posted a surprising profit, Denbury Resources inked a $4.5 billion acquisition in the oil & gas sector, and Cooper Tire & Rubber, Humana, and Clorox all beat analyst earnings forecasts. All news was not rosy, however, as CIT Group revealed that it will file for bankruptcy proceedings, which could have ramifications for the large number of small businesses that depend on the lender for financing, although CIT said it expects to continue normal operations while restructuring its debt load.

The Dow Jones Industrial Average was up 77 points (0.8%) to close at 9,789, the S&P 500 Index rose 7 points (0.7%) to 1,043, and the Nasdaq Composite advanced 4 points (0.2%) to 2,049. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $1.13 higher at $78.13 per barrel, while wholesale gasoline was up $0.03 to $1.99 per gallon, and the Bloomberg gold spot price rose $13.30 to $1,058.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 76.22.

Ford (F $8) reported a surprising 3Q profit ex-items of $0.26 per share, versus the expectation of Wall Street analysts that called for the automaker to post a $0.12 per share loss. Revenue declined by $800 million to $30.9 billion, but that was well above the $28.3 billion that was expected by analysts. Ford said its 3Q results clearly show that it is making tremendous progress despite the prolonged slump in the global economy. The company, which had burned through $4.7 billion in cash during the first half of the year, reported its gross cash was up $2.8 billion from 2Q. Ford said it expects to be profitable in 4Q and raised its 2011 earnings outlook from at least break even, to “solidly profitable,” and shares were up strongly.

CIT Group (CIT $0.25 ¹) announced over the weekend that the Board of Directors of the struggling bank voted to proceed with a prepackaged plan of reorganization by filing with the US Bankruptcy Court to restructure its debt and streamline its capital structure. CIT said it has the overwhelming support of its debtholders for this plan. CIT also noted that none of its operating subsidiaries will be included in the filings, and as a result, all operating entities are expected to continue normal operations. Shares fell approximately 65%.

In M&A news, Denbury Resources (DNR $13) and Encore Acquisition (EAC $45) today jointly announced that they have entered into a definitive merger agreement, in a transaction that is valued at approximately $4.5 billion. Encore stockholders will receive $50 per share for each share of EAC, comprised of $15 in cash and $35 in DNR common stock. That represents a premium of approximately 35% above Friday’s closing price. The companies said the transaction positions the new company as one of the largest crude oil-focused, independent North American exploration and production companies. "All of our operations are in the Gulf Coast. It is good to expand to another area, to get a footprint in another location like the Rockies," Denbury’s CEO said. The Boards of Directors of both companies have unanimously approved the merger agreement, and each will recommend approval of the transaction to its respective shareholders. Shares of DNR were down 10%, while EAC shares rallied more than 20%.

Shares of Human Genome Sciences (HGSI $25) were over 30% higher after the biopharmaceutical firm and its partner GlaxoSmithKline (GSK $41) reported that their experimental lupus drug Benlysta met the primary efficacy endpoint in its second Phase 3 trial. The companies said the drug achieved a statistically significant improvement in patient response versus a placebo. HGSI added that it plans to submit marketing applications in the first half of 2010, and the results confirm its view that Benlysta has the potential to become the first new approved drug in decades for people living with systemic lupus, an inflammatory disease causing the body to attack its own tissue and organs.

Cooper Tire & Rubber (CTB $16) was solidly higher after it reported net income improved by $102 million as it swung from a loss of $55 million in the same period a year ago, to a profit of $71 million, or $0.77 per share. That was well ahead of the Street’s forecast of a profit of $0.66 per share. Revenues also improved versus last year, growing by $9 million to $803 million, versus analysts’ expectations for the tire company to post sales of $715 million. CTB said its improved results were driven by lower raw material costs and the company’s continued manufacturing improvements and improved utilization of capacity, offset by unfavorable price and product mix and restructuring charges.

Health insurer Humana (HUM $37) announced that its 3Q profit jumped 65% to $1.78 per share, just ahead of the consensus forecast of $1.77. Revenues improved 8% to $7.7 billion, narrowly missing the $7.8 billion that had been expected. The company said that its results reflected strong performance in its government business, due to growing membership and premiums from Medicare Advantage plans, which are government-sponsored, privately run programs offering comprehensive health coverage to elderly patients. That strength was offset somewhat by weakness in the company’s commercial segment, which was hampered by fewer workers with coverage as a result of the recession. Following the results, the company provided guidance for 2010 earnings between $5.05-5.25 per share, which was below the $5.36 that analysts were looking for, although the company noted that its forecast included the impact of asset write-downs and other charges. Shares were lower.

Meanwhile, the swine flu outbreak boosted Clorox (CLX $59), as its 1Q earnings rose 23% to $1.11 per share, well above the average analyst estimate of $0.90. Revenues declined less than 1% to $1.4 billion, which was also ahead of the $1.3 billion forecast from analysts. Management noted that most of its businesses performed well during the period, but that strong sales of disinfecting products related to the H1N1 flu pandemic led it to exceed its earnings expectations in the quarter. For full-year 2010, the company increased its EPS outlook by a nickel to $4.05-$4.20, and shares were slightly higher.

Jam-packed economic docket kicks off with positive manufacturing report

Treasuries finished lower as equity markets were higher. The yield on the 2-year rose 3 bps to 0.92%, the yield on the 10-year note added 5 bps to 3.43%, and the yield on the 30-year bond gained 5 bps to 4.27%.

The ISM Manufacturing Index came in at 55.7 in October, up significantly from the 52.6 reported in September. It was also significantly above the forecasts of economists, who had predicted only a slight improvement to 53.0. The manufacturing sector has now registered growth for three consecutive months, with October signifying the fastest pace of growth since April 2006. If the PMI for October were annualized, it now corresponds to a 4.5% annual increase in real GDP, based on the historical relationship between the index and the real economy.

Looking at the various sub-components of the index, nearly every one indicated growth, and even the ISM’s index of employment in the sector jumped from 46.2 to 53.1. That marked the first growth in hiring in more than a year, and the ISM attributed the improvement to “some callbacks and opportunities for temporary workers.” Also of significance, the survey of manufacturers’ inventories came in at 46.9 – still indicating inventories are contracting, although at a slower pace than last month when the index read 42.5. Commenting on the data, ISM reported that “Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode.”

Elsewhere, pending home sales jumped again, rising 6.1% in September to the highest level since December 2006, and well above the flat reading forecasted by economists, and following August’s unrevised 6.4% increase. Pending home sales typically lead existing home sales by a month or two and have gained ground for an eighth-straight month.

Separately, construction spending data was also released this morning, and unexpectedly rose by 0.8%—the largest increase in over a year—versus the consensus of economists that called for a decline of 0.2% in September. However, August’s data was revised from a 0.8% advance to show a 0.1% drop.

Meanwhile, Fed official Jon Greenlee testified before Congress today and his comments on the current state of the banking sector attracted attention. Greenlee pointed out that, although stability in the sector has improved since last year, “the condition of the banking system is far from robust,” Greenlee noted that poor loan quality, subpar earnings, and uncertainty about future conditions “raise questions about capital adequacy for some institutions.” Moreover, he added that lower loan demand, more-conservative underwriting standards, and a focus on working out problem loans have “limited the degree to which banks have added high-quality loans to their portfolios, an essential step to expanding profitable assets and thus restoring earnings performance.”

The economic calendar for Tuesday includes a report on factory orders, which are forecasted to show a rise of 0.8% in September.

Manufacturing sector also shows growth in UK, Europe, and China

On the eurozone economic front, a report showed the UK’s Purchasing Manager’s Index grew at the fastest pace in two years in October, as the gauge of manufacturing activity rose from an upwardly revised 49.9 in September, to 53.7, and well above the 50 reading that is the separation point between expansion and contraction, and what economists surveyed by Bloomberg had expected.

Meanwhile, a separate report showed the eurozone PMI rose from 49.3 to 50.7 in October, inline with economist expectations. It was the sector’s first growth in 17 months. "With capacity now coming into line relative to order books, and further growth of production looking likely in coming months as factories restock, conditions are set to improve further," said market research group Markit, which prepared the report. Regional differences were noted as a potential area of concern, though. "In particular, surging nine-year high growth in France sits uncomfortably with ongoing weakness in Italy and Spain," according to Markit. Stocks in Europe ended broadly higher following the positive manufacturing data.

China’s Shanghai Composite Index jumped 2.7% to buck the trend as nearly every other market in the Asia/Pacific region was under pressure. The rally in Shanghai came following a report released by HSBC which showed China’s Purchasing Manager’s Index posted the fastest pace of expansion in the manufacturing industry in 18 months. It was the seventh consecutive month that the index has been above the watershed level of 50 separating growth from contraction. The report mirrored yesterday’s PMI report from the National Bureau of Statistics, which also showed expansion in manufacturing activity at an 18-month high pace, to boost economic optimism on China.

Elsewhere, the Mexican stock market came under heavy pressure, falling more than 2% following an announcement that the nation’s opposition-controlled congress approved over the weekend a permanent 1 percentage-point increase in sales tax to 16%, after rejecting Mexican President Felipe Calderon’s proposal for a 2% consumption tax. Bloomberg pointed out that this move may help the country avoid a credit-rating downgrade, citing some analysts.