Evening Update

Stocks Still Struggling to Find Direction

Markets fluctuated today before ending mixed and little-changed. Traders were buzzing this morning after Warren Buffett announced a $34 billion acquisition of railroad Burlington Northern Santa Fe. That announcement was met with news that toolmakers Stanley Works and Black & Decker have agreed to team up in a $4.5 billion deal to fan the flames of a recently revitalized M&A market. Stocks spent most of the day struggling to get back to the flatline though, with traders perhaps putting off their stock purchases ahead of key economic releases later in the week, with tomorrow bringing the monetary policy announcement from the Fed, and Friday the labor report, potentially giving investors a better view of the pace of the economic recovery. In other equity news, MasterCard, Viacom, Emerson Electric, Archer Daniels Midland, and Royal Caribbean Cruises all reported surprisingly-strong profits, Dow member Johnson & Johnson said it will reduce its global workforce by 6-7%, and automakers reported their monthly sales for October, with mixed results. Meanwhile, Treasuries ended lower after a stronger-than-expected increase in factory orders.

The Dow Jones Industrial Average lost 18 points (0.2%) to close at 9,772, the S&P 500 Index rose 3 points (0.2%) to 1,045, and the Nasdaq Composite advanced 8 points (0.4%) to 2,057. In relatively subdued volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $1.47 higher at $79.60 per barrel, while wholesale gasoline was up $0.01 to $2.00 per gallon, and the Bloomberg gold spot price rose $25.70 to $1,085.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 76.36.

Berkshire Hathaway (BRKA $100,155) was higher after it announced that its has reached an agreement to acquire for $100 per share in cash and stock the remaining 77.4% it does not already own of Burlington Northern Santa Fe (BNI $98), valued at approximately $44 billion, including $10 billion of outstanding debt, making it the largest acquisition in Berkshire Hathaway’s history. Berkshire Hathaway said its $34 billion investment in BNI is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry. Berkshire’s Chairman and CEO Warren Buffett said that, “Most important of all, however, it’s an all-in wager on the economic future of the United States,” adding that “I love these bets.” Separately, Berkshire Hathaway announced that its Board of Directors approved a 50-for-1 split of its Berkshire Hathaway Class B Common Stock (BRKB $3,318), subject to shareholder approval.

In other M&A news, Stanley Works (SWK $47) and Black & Decker Corp. (BDK $58) announced that they have entered into a definitive merger agreement, to create an $8.4 billion firm named Stanley Black & Decker, in an all-stock transaction valued at about $4.5 billion. The deal price is a 22% premium for Black & Decker shareholders, who will own 49.5% of the combined company. Although Stanley is the smaller company based on sales and employees, it is the acquirer in the deal, and Stanley’s CEO John Lundgren will be the chief executive of the combined group. Despite the fact that both companies are well-known toolmakers, Black & Decker’s Nolan Archibald said there are relatively few overlaps in the product lineups. "While we might be iconic brands and iconic names, very few of our products compete," he said. Nevertheless, job cuts are likely as a result of the combination, although Lundgren estimated they could be kept to fewer than 4,000. The deal still needs regulatory and shareholder approval. Both stocks were higher today.

Meanwhile, Dow member Johnson & Johnson (JNJ $59) announced global restructuring initiatives, including a workforce reduction of 6-7%, designed to strengthen the company’s position. JNJ said it is taking steps to prioritize its innovation efforts around health care and execute aggressively on bringing key new products to market. The initiative is expected to increase the company’s operational efficiency and generate annualized, pre-tax cost savings of $1.4-1.7 billion when fully implemented in 2011. JNJ said it expects to take a $1.1-1.3 billion restructuring charge in 4Q 2009. Shares were slightly lower.

Earnings continue to hit the street, with MasterCard (MA $216) reporting 3Q EPS ex-items of $3.48, easily beating the estimate of Wall Street analysts, which called for the credit card processor to report earnings of $2.94 per share. Revenues grew 2% versus the same period last year to $1.4 billion, slightly higher than the $1.3 billion that the Street had forecasted. MA had an increase of 7.6% in the number of transactions processed to 5.8 billion and pricing changes contributed to approximately six percentage points of net revenue growth, but partially offset by the impact of slightly lower cross-border volumes compared to last year. Shares were lower despite the better-than-expected earnings report.

Moreover, Viacom (VIAB $28) reported adjusted 3Q earnings of $0.69 per share, up 25% versus last year, and above the $0.57 that analysts had expected, with growth in filmed entertainment and media networks. Revenues at the media conglomerate and parent of MTV and Comedy Central networks dipped 3% to $3.3 billion, matching expectations, primarily reflecting lower home entertainment and advertising sales, which more than offset increases in affiliate sales and theatrical revenues. Shares were little changed.

Elsewhere on the earnings front, shares of Emerson Electric (EMR $39) were higher after the industrial conglomerate reported 4Q EPS of $0.67, seven cents above the Street’s forecast, with revenues rising 4.6% versus last quarter to $5.3 billion, inline with analysts’ expectations. The company said its results signify improving revenue trends and positive benefits from its aggressive structural repositioning for greater efficiency. EMR added that it is well positioned for economic recovery, but the shape and speed of the recovery remain unknown and it expects weakness to continue in the near term. As a result, the company issued full-year 2010 revenue guidance that came in below analysts’ expectations. Additionally, EMR’s Board of Directors voted to increase the company’s quarterly dividend from $0.33 per share to $0.335 per share.

Archer Daniels Midland (ADM $32) was higher after reporting fiscal 1Q EPS of $0.77, down 53% versus last year, but well above the $0.57 that the Street had expected, with revenues falling 29% to $14.9 billion, missing analysts’ expectations of $17.9 billion. The agricultural firm said its oilseeds processing profit decreased on lower margins and production, while its corn processing profit improved on lower net corn and manufacturing costs. ADM added that its agriculture services profit decreased due to reduced demand and less volatile commodity market conditions.

In other earnings news, Royal Caribbean Cruises (RCL $19) said its 3Q profit fell 44% to $1.07 per share, although that was better than the $1.00 figure that analysts had expected. Sales tumbled 17% to $1.8 billion, which was inline with forecasts. "While the pricing environment is still not what we'd like it to be, we're pleased to see solid growth in our order book," CFO Brian Rice told investors. Nevertheless, the company issued guidance of full-year earnings of just $0.70 per share, missing the $0.74 level that analysts had thought possible. "Like many other travel companies, we saw more strength than we expected during our peak season but have been experiencing more pricing pressure on some of our traditionally softer fall season sailings," the company said, although it expects the pricing environment to improve in 4Q, and said it remains optimistic that 2010 will bring year-over-year improvement on that front. Shares were solidly lower.

Meanwhile, Ford (F $8) was the first automaker to release its October sales today, with its peers expected to follow suit later in the day. Ford reported monthly sales slipped 0.6% on an adjusted basis, which was significantly better than the 4.5% decline that analysts had predicted. "We expect, and it certainly looks like it's materializing so far, that fourth-quarter sales will higher than those pre-'Clunker' levels," Ford said. Furthermore, the lone Detroit automaker not to seek a government bailout reported that it gained market share for the 12th time in 13 months. Shares were lower. Meanwhile, General Motors reported a 4.0% increase in its monthly sales, slightly below the 4.4% forecast. GM said that it has now gained market share for three consecutive months. Rounding out the announcements from Detroit, Chrysler suffered a 32.3% fall against last year’s levels, above the 29.3% decline that had been estimated.

Switzerland’s largest bank UBS (UBS $16) was down after it reported its fourth-consecutive quarterly loss, which was wider than analysts had expected, led by charges and outflows of funds from its key wealth and asset management units. UBS said it lost 564 million Swiss francs ($552 million) in 3Q, which was better than the 1.4 billion Swiss franc loss suffered last quarter, but significantly larger than the 207 million Swiss franc loss that had been projected. Additionally, the company’s newly appointed management team said in a letter to shareholders that, “We do not expect an immediate recovery in client net new money flows.”

In other European banking news, the UK provided 31 billion pounds ($51.2 billion) in new taxpayer aid to Royal Bank of Scotland (RBS $12) and Lloyds Banking Group (LYG $6), both of which already have the UK government as their largest shareholder. As part of the deal, both banks have agreed to sell some key businesses and branches, in an attempt to appease European Union competition concerns related to state aid. As a result of these asset sales, new banks accounting for 10% of the UK retail market will need to be created, according to the UK Treasury. "We're creating more competition in banking. We're making sure that our banks are built on a more solid basis," UK Prime Minister Gordon Brown said. Additionally, Lloyds announced that it will raise 13.5 billion pounds ($22.1 billion) by selling rights – the largest rights issuance in world history – as it attempts to improve its capital position and avoid more government involvement in the bank. RBS ended lower, but LYG rose today.

Treasuries fall as factory orders are stronger than expected

Headlining a relatively sparse economic calendar, factory orders (chart) rose more than expected for the month of September, advancing 0.9%, compared to the consensus of economists calling for a 0.8% gain. This was the fifth advance in orders in six months, and August’s 0.8% decline was left unrevised. Excluding transportation, orders rose 0.8%. Meanwhile, September’s durable goods orders—initially reported last week—were favorably revised from a 1.0% advance to a 1.4% gain.

Treasuries were lower after giving up some early gains following the report. The yield on the 2-year was unchanged at 0.91%, while the yield on the 10-year note added 6 bps to 3.47%, and the yield on the 30-year bond gained 8 bps to 4.34%.

Busy economic day, capped by the Fed statement on monetary policy

The two-day Federal Open Market Committee (FOMC) meeting concludes with the release of the statement mid-day Wednesday. No changes are expected to interest rate policy at the meeting. The only change made at the September meeting was that the Fed extended the timing of the mortgage-backed security purchase program, but minutes from the meeting showed that some believed an increase in the size of the program may be needed to reduce slack in the economy. The Fed’s Treasury purchase program expired last week.

The ADP Employment Change Report will also be released Wednesday, giving traders a reading on the state of private sector employment. While sometimes referred to as a preview of Friday’s Bureau of Labor Statistics report on employment change, the report has not correlated well with the monthly trends, at times completely missing the direction and magnitude of change in the government’s labor report. However, in the current jittery environment, traders seek any evidence that can be gathered to support or undermine the case for sustainability of the recovery. The forecast is that private sector employers shed 200,000 jobs in October after declining by 254,000 in September.

Elsewhere, the ISM Non-Manufacturing Index is expected to have increased to 51.5 in October from 50.9 in September. The report is the companion to the ISM Manufacturing Index released on Monday, which showed a much better-than-expected rise to 55.7 in October from 52.6 in September, versus the forecast of a reading of 53.0. A reading above 50 indicates economic expansion.

The other report on tomorrow’s US economic calendar is the weekly MBA Mortgage Applications Index.

Australia raises rates again, European growth outlook revised up

In international economic news, the Reserve Bank of Australia hiked interest rates for the second time in a month, raising its key lending rate by 25 basis points to 3.5%. Opinions on whether the RBA may raise rates for a third time in December were divided though, after RBA Governor Glenn Stevens said the sharp rise in the nation’s currency is likely to constrain output and dampen price pressures. Central banks are also meeting this week in the US, Eurozone, and UK, but none is expected to increase interest rates at this time. Australia was one of the few countries in the world to not suffer a single quarter of negative growth during the global recession.

Elsewhere, the European Commission raised its 2010 GDP outlook from a previous forecast of a 0.1% contraction, to a 0.7% expansion. The commission, the executive arm of the European Union, now expects the economy to contract 4.1% this year, before expanding 0.7% in 2010, and 1.6% in 2011. The commission also said growth rates will likely slow in the first half of 2010, in what it described as a “soft patch” caused by the pending withdrawal of global stimulus measures, before recovering in the second half of the year. The battered condition of the banking sector also presents a risk to the growth forecast. "Without further repairing of balance sheets of many banks, credit flows will not be at normal levels and without normal credit flows we will not have a sustained recovery in our economy," the commission said.