Evening Update

Stocks Seesaw in Bid to Extend Rally

Stocks had an up and down day before finishing essentially where they started as the S&P 500 came up just short in its bid for a seventh-straight day of gains and the Dow managed only a small advance following two 200-point upsurges in the last three sessions. In equity news, Electronic Arts narrowly missed the Street’s 2Q expectations and announced an acquisition of a computer game maker, while Priceline.com comfortably exceeded earnings forecasts, Oracle announced that the European Commission has objected to its acquisition of Sun Microsystems, Beazer Homes posted an unexpected profit, and bond insurer MBIA saw its loss widen in 3Q. Meanwhile, Treasuries ended mixed after several Fed officials delivered speeches today, confirming the Fed’s view that the economic recovery is expected to be somewhat slow, the unemployment rate will likely continue to rise in the near-term, and some financial reforms are needed to avoid a repeat of the credit crisis and problems with “too-big-to-fail” financial institutions. The economic calendar was otherwise empty and will be so again tomorrow. Bond markets will be closed tomorrow in observance of the Veteran’s Day holiday.

The Dow Jones Industrial Average rose 20 points (0.2%) to close at 10,247, the S&P 500 Index was flat at 1,093, and the Nasdaq Composite dropped 3 points (0.1%) to 2,151. In light volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $0.38 lower at $79.05 per barrel, while wholesale gasoline was unchanged at $1.98 per gallon, and the Bloomberg gold spot price added $1.30 to $1,105.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up less than 0.1% at 75.05.

Electronic Arts (ERTS $18) reported 2Q EPS ex-items of $0.06, narrowly missing the $0.07 expectation of Wall Street analysts. Revenues at the video game publisher rose 2% versus last year to $1.1 billion, which matched the Street’s expectations as sales were driven by launches of sports game franchises “FIFA 10” and “Madden NFL 10,” along with the release of “The Beatles: Rock Band.” Additionally, the company announced a significant cut in its operating expenses, which will include a headcount reduction of approximately 1,500 positions – amounting to about 17% of the company's current workforce. The cost-cutting plan is expected to result in annual cost savings of at least $100 million and restructuring charges of $130 to $150 million. The company also said that it will acquire computer game maker Playfish Limited for about $275 million in cash and $25 million in equity retention arrangements. ERTS issued full-year guidance for diluted EPS of between $0.70-$1.00, compared to the $0.89 that analysts expect. Shares were under pressure.

Oracle(ORCL $22) announced that it has received a Statement of Objections from the European Commission pertaining to its $7 billion proposed acquisition of Sun Microsystems (JAVA $8). The Commission noted that Sun’s MySQL database product combined with Oracle’s product line-up could hamper competition in the database market. ORCL said it plans to vigorously oppose the Commission’s Statement of Objections as the evidence against the Commission’s objection "reveals a profound misunderstanding of both database competition and open source dynamics." The company explained "It is well understood by those knowledgeable about open source software that because MySQL is open source, it cannot be controlled by anyone. That is the whole point of open source." ORCL was little changed, and JAVA was lower.

Priceline.com (PCLN $204) was sharply higher after the online travel booking firm reported adjusted 3Q EPS of $3.45, above the $2.88 that analysts had anticipated, with revenues jumping 30% compared to last year to $731 million, topping the $686 million that the Street had forecasted. PCLN said its gross travel bookings—total dollar value of all travel services purchased by consumers, including taxes and fees—increased 33% over a year ago to $2.7 billion, as the summer travel season turned out to be an “exceptionally strong” one for PCLN. The company said its international operations contributed $317 million in revenue, which was a 42% increase compared to last year. The company said, “The online travel industry achieved improved year-over-year growth in 3Q as we comped against weakening demand in the prior-year period and received a boost from industry-wide fee reductions and supplier discounting and promotions.” The company offered 4Q EPS guidance that exceeded analysts’ forecasts.

Beazer Homes(BZH $5) was up almost 10% after the homebuilder reported a 4Q EPS gain of $0.87, compared to the Street’s expectation of a $1.24 per share loss, but BZH’s results include impairment charges and a gain on the early extinguishment of debt, which may not be factored into the Street’s forecast. Revenues fell from $650 million last year to $376 million, which was above the $338 million that analysts had anticipated. BZH said new orders rose 2.4% year-over-year, and the cancelation rate improved to 34.7% from 46.3% in the same period last year, while home closings decreased 24.3% year-over-year. "We've got a six-month runway here of a tax credit, great affordability and great mortgage rates," Beazer's CEO proclaimed, stating that he expects market conditions to “modestly improve in 2010.”

MBIA Inc. (MBI $4) was down more than 25% after its 3Q earnings showed a larger loss. The bond insurer lost $728 million, or $3.50 per share – almost 10% more than the $807 million loss it suffered in the same period a year ago. “The third quarter’s loss is a reminder that the impact of this recession continues to be felt throughout the economy,” said President and CFO Chuck Chaplin. “Incurred losses in our insurance business were above expectations and the same housing-related performance trends drove our asset losses and impairments, but those losses were partially offset by gains on debt repurchases in the quarter,” Chaplin explained.

Empty economic calendar, but plenty of Fed commentary to consider

Treasuries finished mixed as there were no major economic reports scheduled for release today. The yield on the 2-year note inched down 2 bps to 0.83%, the yield on the 10-year note dipped 1 bp to 3.47%, while the yield on the 30-year bond was up 1 bp to 4.41%.

Although the economic calendar was empty, traders have had several speeches from Fed members to consider. San Francisco Fed President Janet Yellen, Atlanta Fed President Dennis Lockhart, and Fed Governor Daniel Tarullo all spoke at conferences today. Yellen said she envisions the economic recovery could resemble the shape of an “L” with a gradual upward tilt of the base. "With such a slow rebound, unemployment could well stay high for several years to come," Yellen said. "It may take quite a while for financial institutions to heal to the point that normal credit flows are restored. The credit crunch hasn't entirely gone away," she added.

For Lockhart’s part, he foresees "very slow net job gains" beginning "sometime next year." Small businesses in particular could be a weak spot in the economy, according to Lockhart. Those smaller companies held up reasonably well in the 2001 recession but have not fared so well this time – accounting for about 45% of net job losses. Going forward, it is unlikely that small businesses can provide the typical one-third of net job growth that they did in the past two recessions. That is because small businesses generally rely on smaller banks for financing and those banks are troubled because of soured commercial real estate loans. "As the recovery develops, the (commercial real estate) problem will be a headwind, but not a show stopper, in my view," he said.

Meanwhile, Tarullo gave a speech on proposed financial regulation. According to Tarullo, “in many respects, this crisis was the culmination of changes in both the organization and regulation of financial markets that began in the 1970s.” To prevent a repeat of these problems, Tarullo endorsed the idea of requiring large banks to hold more capital in reserve, and also put forth the idea that the size of some banks should be limited to avoid potential problems with “too-big-to-fail” institutions. “Another approach is to attack the bigness problem head-on by limiting the size of financial institutions,” he said. In related news, Senate Banking Committee Chairman Christopher Dodd unveiled an official proposal for financial reforms. A draft of the bill obtained by Reuters contains plans for a government financial stability agency to identify risks in the US financial system, as well as a consumer financial protection agency.

Looking ahead to Wednesday, the economic calendar is expected to be quiet again, with no scheduled economic reports, and bond markets will be closed in observance of the Veteran’s Day Holiday.

German economic sentiment disappoints, European debt levels in focus

Stocks in Europe were slightly lower after relinquishing an early advance due to a larger-than-expected deterioration in a key gauge of economic sentiment in Germany—Europe’s largest economy. The German ZEW Survey of economic sentiment – an index of investor and analyst expectations – fell from 56.0 in October to 51.1 in November, versus the consensus of economists which called for the measure to dip to 55.0. "The upward trend of the economic expectations is interrupted for the time being. The surveyed financial market experts signal that they do not count on a strong boost for economic growth in the next year. It rather seems that economic recovery will proceed in small steps," ZEW said. The German government, which is spending 85 billion euros ($127 billion) to revive the economy, last month upped its expectations for the economy. It is now forecasting growth of about 1.2% in 2010, following the 5% contraction expected this year.

Elsewhere, Fitch Ratings warned that out of all four countries with its top AAA rating, the UK is most at risk of a downgrade. "It's clear that the UK's ability to sustain large public fiscal deficits and a level of public debt without driving up interest rates and without putting sterling under significant pressure is much less than in the case of the U.S," David Riley, Fitch's co-head of global sovereign ratings, said in an interview. The other AAA-rated countries besides the UK are the US, Germany and France. Fitch also said that Japan’s AA- rating could be at risk as the country plans to issue 44 trillion yen ($490 billion) in debt this year. "To be frank, at this point it is quite hard to see how they are going to maintain the 44 trillion yen," Riley said. On the other hand, Germany appears to be in a relatively more sound position in Fitch’s view. "The country that is so far looking the most secure in terms of triple-A status is Germany. Germany has the least fiscal adjustment needed to stabilize the debt."

In related news, European Union officials emerged from a two-day meeting with a renewed commitment to limit budget deficits to the EU limit of 3% of GDP, although it will take time to reach that goal as the members said economic stimulus remains necessary for the time being. “We will accept the targets laid down in the deficit procedure and bring our general deficit back below 3 percent” in 2013, Germany’s Finance Minister announced. The process is expected to take longer in France, as French Finance Minister Christine Lagarde said “it will be very difficult” for France to cut its deficit to 3% of GDP by 2013, and achieving the target by 2014 “will already be a nice effort.” Germany’s budget deficit is forecasted to peak at 5% of GDP next year, while that of France could hit 8.3% percent this year, according to the European Commission. That compares to the eurozone average forecasted deficit of a record high 6.9% of GDP in 2010. All 16 eurozone countries are expected to breach the EU limit, the European Commission forecasts.