Evening Update

Large Rally Sends Dow to New 2009 High

Renewed economic optimism sent the Dow soaring more than 200 points higher to a new yearly high. The source of the optimism appeared to stem from a weekend meeting of G20 world finance leaders, which reassured investors that economic stimulus measures and low interest rates will be kept in place. Commodity prices also benefitted, and basic materials stocks were the strongest portion of the market, with gold making a new all time high above $1,100 per ounce and the dollar under heavy pressure. In equity news, McDonald’s reported a rise in monthly same-store sales, RadioShack said it will begin selling the iPhone, Dish Network announced a special dividend that offset its weak earnings report, and Freddie Mac said its quarterly loss narrowed. Elsewhere, Kraft Foods formalized its takeover offer for Cadbury, while Comcast and General Electric reportedly agreed to a method of valuing NBC Universal, clearing the way for another potential M&A transaction. Meanwhile, Treasuries ended the day mixed following the rally in stock markets and a report from the Federal Reserve that showed bank lending remains tight, although significantly better than during the worst periods of last year’s financial crisis.

The Dow Jones Industrial Average jumped 204 points (2.0%) to close at 10,227, the S&P 500 Index gained 24 points (2.2%) to 1,093, and the Nasdaq Composite advanced 42 points (2.0%) to 2,154. In light volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $2.00 higher at $79.43 per barrel, while wholesale gasoline was up $0.06 to $1.98 per gallon, and the Bloomberg gold spot price added $8.55 to $1,103.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 1.0% to 75.08.

Dow member McDonald’s (MCD $63) was higher after it reported that global comparable store sales—sales at all restaurants in operation at least thirteen months—for October rose 3.3%. The world’s largest fast food chain said its US comparable sales slipped 0.1%, Europe’s sales jumped 6.4%, and sales from its Asia/Pacific, Middle East and Africa segment gained 4.7%. McDonald’s noted that its US market performance matched its forecast last month predicting that year-over-year results in October would be flat to slightly down, as a result of a difficult comparison basis with the year ago period, and the company still gained market share in the US quick-service restaurant sector.

Meanwhile, fellow Dow component Kraft Foods (KFT $27) formalized its 9.8 billion British pound ($16 billion) hostile takeover offer for UK confectionary firm Cadbury (CBY $51). Today’s proposal remained unchanged from its September bid, which offered shareholders 300 pence in cash and 0.2589 new KFT shares for each share of CBY. Due to stock value fluctuations since the original offer, today’s deal is below the bid of 10.2 billion pounds that Cadbury rejected two months ago. CBY again rejected KFT’s bid, labeling it a “derisory offer.” Besides the lower offer price, CBY noted the “unattractive prospect of the absorption of Cadbury into a low-growth conglomerate business model" as reason for rejecting the proposal. After Cadbury shareholders receive the official offer documents, they will have 60 days to decide whether or not to accept the offer. KFT was lower, while CBY was modestly higher.

In other deal related news, Comcast (CMCSA $15) and General Electric (GE $16 ¹) were both higher after the two companies reportedly agreed on a method of valuing NBC Universal – putting the price of the entertainment group “in the neighborhood of $30 billion,” clearing an obstacle in a potential M&A transaction, according to the Wall Street Journal, citing people familiar with the matter. The report stated that the two companies are now ironing out the final details of an agreement, and an announcement could come as early as next week. Neither company commented.

RadioShack (RSH $20) was almost 15% higher after the electronics retailer announced that as part of its ongoing mobility strategy, it will sell Apple’s (AAPL $201) iPhone 3G and 3GS in a limited number of company-owned stores in Dallas-Fort Worth and the New York City metropolitan area beginning later this month. RSH said that it expects to introduce the iPhone in stores nationwide in 2010.

Dish Network (DISH $20) was nicely higher after the satellite TV firm reported that it will pay out a one-time dividend of $2.00 per share on outstanding Class A and Class B common stock. Also, DISH reported 3Q EPS excluding the impact of the TiVo litigation of $0.42, two cents below the $0.44 that Wall Street analysts had forecasted, with revenues decreasing 1.5% versus last year to $2.9 billion, inline with expectations. The company did report that it added approximately 241,000 net subscribers during the quarter, which was better than some on the Street had expected.

Freddie Mac (FRE $1 ¹) was moderately lower after announcing that its 3Q loss narrowed to $6.3 billion, or $1.94 per share. In 3Q last year the struggling mortgage lender lost $25.3 billion, or $19.44 per share. Approximately 3.3% of Freddie Mac's borrowers are at least three months behind on their mortgage payments, more than double the rate last year. “We continued to see some positive housing market developments, including higher volumes of home sales and modest increases in house prices in certain areas of the country," the company's new CEO Charles Haldeman said. On the other hand, ongoing problems with rising delinquencies and unemployment levels, as well as excess inventory are expected to encumber the recovery “for some time" and push house prices lower, the company warned.

Fed says bank lending still tight

The Federal Reserve issued its quarterly senior loan officer opinion survey midday, which is based on responses from 53 domestic banks and 23 U.S. branches of foreign banks. The October survey showed that banks continued to tighten lending standards over the past three months on all major types of loans to both businesses and households. However, the net percentages of banks that tightened standards continued to decline from the peaks reached late last year.

About 15% of banks reported tightening credit terms for commercial and industrial loans – about half as much as reported during the July survey and substantially below the peak near 80% from October 2008. Reasons cited for the stricter standards were the same as those reported in the previous three surveys, namely a reduced tolerance for risk, followed by an economic outlook that was less favorable, and a worsening of industry-specific problems. With regards to residential real estate lending, about 25% of banks reported that they had tightened standards on prime loans – slightly higher than seen in the July survey, but significantly below the peak of near 75% that was reported in July 2008. Meanwhile, between 30-40% of banks said they continued to tighten conditions for credit card loans. Furthermore, in response to a special question in the survey with regards to the pending credit card legislation passed in May, most banks indicated they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation

Treasuries finished mixed and little-changed following the data. The yield on the 2-year note inched up 1 bp to 0.85%, while the yield on the 10-year note dipped 3 bps to 3.47%, and the yield on the 30-year bond slipped 1 bp to 4.39%.

In other economic news, the G20 group of finance ministers and central banks from the world’s 20 leading economies met and over the weekend decided that although there have been signs of recovery, they will keep stimulus measures in tact to ensure a global recovery takes hold. "The classic mistake in past crises was to put on the brakes too quickly," US Treasury Secretary Timothy Geithner said. "But we all recognize that confidence in our ability to reduce future deficits and to exit from the extraordinary monetary policy and financial emergency measures is very important to confidence in the sustainability of recovery." In one potentially surprising development, the UK's Prime Minister Gordon Brown lent his support to a proposal that would tax financial transactions between banks, with the idea of using those funds to pay for future bank bailouts. Geithner said the US would not support such a tax on banks, although he agreed that taxpayers should not be responsible for footing the bill for a financial crisis. Also discussed during the meetings was the issue of climate change finance, but no agreement was reached on that matter.

China rating upgraded, German industrial production gains

Moody's announced today that it has upgraded its outlook for both China and Hong Kong's credit ratings to “positive” from “stable.” "The Chinese authorities are successfully steering the economy through the turbulence of the global financial crisis and recession, and furthermore, they seem likely to remain vigilant to protect systemic stability from future threats and challenges," Moody’s said. Furthermore, in spite of the 4 trillion yuan ($586 billion) stimulus package that the government is implementing to prop up economic growth, China’s public finances are still in relatively good shape. The government expects to keep its budget deficit below 3% of GDP this year, with a goal of maintaining total government debt to below 20% of GDP. Among the risks that Moody’s mentioned was the potential that the stimulus program could lead to destabilizing asset bubbles. Today’s announcement from Moody’s is in contrast to rival ratings agency Fitch though, which said last week that surging property values and deteriorating asset quality in the Chinese banking system could be potential areas of concern for the country’s debt rating. "The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness," Fitch said.

On the European economic front, a report showed industrial production in Germany—Europe’s largest economy—rose 2.7% in September, above the revised 1.8% gain seen in August and easily exceeding the 1.0% advance that economists had anticipated. On a year-over-year basis, manufacturing output is still down 12.9%. Meanwhile, German exports rose 3.8% in September from August, the government said today, also exceeding economists’ estimates. “With increasing manufacturing orders, particularly for basic and investment goods, the recovery in industrial production should continue in the fourth quarter,” Germany’s Economy Ministry said in a statement.