Evening Update

Home Sales Jump and Dollar Falls to Let Bulls Out of Stalls

The major equity markets shifted back into rally mode, courtesy of weakness in the US dollar, which boosted oil and gas and materials issues, and following a more than 10% jump in existing home sales, spurring optimism about the economic recovery. However, relatively lighter-than-usual trading volume ahead of the Thanksgiving holiday may have exaggerated the advance. Treasuries relinquished early losses and finished slightly higher. In other economic news, the NABE said its economists on average expect net US job losses to bottom in 1Q 2010, while a Fed official said the central bank’s asset purchase programs should be kept alive beyond their scheduled expiration dates to provide additional tools for dealing with the economy. In equity news, Tyson Foods, Campbell Soup, Tech Data Corporation, and Valspar all beat analyst earnings expectations. Elsewhere on the equity front, Microsoft and News Corp. were reported to be discussing a deal that would remove certain news websites from Google’s search engine, while UPS announced shipping rate increases.

The Dow Jones Industrial Average rose 133 points (1.3%) to close at 10,451, the S&P 500 Index gained 15 points (1.4%) to 1,106, and the Nasdaq Composite advanced 30 points (1.4%) to 2,176. In light volume, 980 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil was $0.20 lower at $77.67 per barrel, while wholesale gasoline was unchanged at $1.98 per gallon, and the Bloomberg gold spot price jumped $14.50 to $1,165.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.7% at 75.13.

Tyson Foods (TSN $13) reported 4Q EPS ex-items of $0.28, better than the $0.26 figure that Wall Street expected. Revenues were approximately inline with the level seen in 4Q 2008 at $7.2 billion, which was above the $6.9 billion consensus estimate. The company said that three of its operating segments, including Beef, Pork, and Prepared Foods all performed well, with adjusted profitability levels inline with historical averages. The fourth segment – Chicken – saw tougher conditions but the company said it is confident that it has measures in place to return that division to higher profitability. "Fiscal 2010 should be a much better year," Chief Operating Officer Jim Lochner said. Shares traded below the unchanged mark.

Campbell Soup (CPB $35) said its 1Q adjusted EPS increased 14% to $0.87, better than the $0.81 that analysts had forecasted. Meanwhile, revenue fell 2% to $2.2 billion as sales volumes were down 4% but prices were 2% higher. That was slightly behind the $2.3 billion revenue figure that Wall Street had anticipated. The company said improved gross margin performance and lower marketing expense helped it offset the lower revenues. “We’re especially pleased with the significant improvement in our gross margin, driven by increased productivity in our supply chain,” CEO Douglas Conant said. The soup maker also raised its full-year guidance and shares finished higher.

Microsoft (MSFT $30) and News Corp. (NWS $14) are reportedly discussing a deal that would see News Corp. get paid to remove its news websites from Google’s (GOOG $582) search engine, according to a source familiar with the matter. Microsoft owns the competing Bing search engine, while News Corp owns newspapers such as the Wall Street Journal and the Sun. The report said that News Corp initiated the discussions and that other publishers including the New York Times (NYT $9) are also looking for ways to charge for their news online. The Financial Times said Microsoft has held talks with other online publishers about removing their sites from Google as well. Google released a statement saying “We believe search engines are of real benefit to newspapers.” None of the other companies involved commented. All four stocks were higher.

Package delivery company UPS (UPS $58 ¹) said late Friday that it will increase its shipping rates by an average of 4.9% for its ground packages and all air express and US origin international shipments. UPS said the new rates will take effect on January 4, 2010. Additionally, the company said it planned to change its fuel surcharges aimed at better aligning its air and ground fuel surcharges and reducing fuel surcharge volatility when fuel prices fluctuate. Shares finished in the green.

Tech Data Corporation (TECD $44) reported 3Q EPS jumped 157% versus last year to $0.84, well above the $0.71 that analysts had expected. Revenues also exceeded the Street’s forecasts, even after falling 8.1% to $5.6 billion, as $5.3 billion was anticipated. The IT products firm said the decline in revenues reflected some moderation in the overall decline in IT spending, but continued expansion of its IT solutions portfolio combined with disciplined pricing and cost control helped improve its operating margin. TECD added that although the magnitude and timing of an economic recovery remain uncertain, there are clearly signs of an improving outlook, which combined with the strength of certain foreign currencies against the dollar, the company sees 4Q revenue that is above the consensus forecast of analysts. Shares were higher.

Valspar (VAL $27) notched 4Q adjusted EPS of $0.53, beating expectations of $0.49. Revenues fell 16% to $777 million, although the company noted that the prior year period contained an extra week. The revenue figure was still lower than the $783 million estimate of analysts. Commenting on the results, the paint and coatings company said it was pleased with the results, which were achieved under “extremely challenging global economic conditions.” The firm also commented on its prospects for 2010, saying “Our outlook for fiscal 2010 assumes modest revenue growth and ongoing pressure on raw material costs.” VAL expects to earn between $1.85-$2.05 per share in 2010, while analysts are predicting $1.93. Shares came under pressure.

Home sales surge as buyers rush to beat subsidy deadline

Existing-home sales surged 10.1% month-over-month (m/m) to an annual rate of 6.10 million units in October. That was significantly better than expected as economists had only forecast a 2.3% gain to 5.70 million. At the same time, last month’s data was revised lower, with September data now showing an 8.8% increase to 5.54 million units. Even the National Association of Realtors was surprised at the size of the gain with NAR’s chief economist reporting “Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November.” Similarly, the NAR warned “With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer.”

The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 – 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. “In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive,” the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.

Elsewhere, St. Louis Federal Reserve Bank President James Bullard said asset purchase programs should be kept alive after their scheduled expiration to give the Fed more flexibility to deal with the economy. “I would just like to keep them active at a very low level instead of saying we’re shutting down, shutting down permanently,” he said. Explaining the rationale for such a move, Bullard noted “Initially it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in.” The Fed’s commitment to buy $1.25 trillion of mortgage backed securities is presently scheduled to end in March 2010.

Meanwhile, the National Association for Business Economics (NABE) said its economists on average expect net US job losses to bottom in 1Q 2010. "While the recovery has been jobless so far, that should soon change," said Lynn Reaser, NABE's president and chief economist. "Within the next few months, companies should be adding instead of cutting jobs." The national unemployment rate recently reached 10.2% in October, the highest in 26 years. On the other hand, of the 48 panelists NABE surveyed, 61% do not foresee a complete recovery of jobs lost in the recession until 2012.

Treasuries finished modestly higher amid the rally in the equity markets and following the aforementioned reports. The yield on the 2-year was unchanged at 0.72%, while the yields on the 10-year note and the 30-year bond both dipped 1 bp to 3.36% and 4.28%, respectively.

Another look at 3Q GDP and housing headline a busy day on the economic front

Another set of housing data is expected on Tuesday, as the S&P/Case-Shiller Home Price Index will be reported and is expected to show a continued improvement in the pace of price declines to -9.1% year-over-year (y/y) in September, after dropping 11.3% in August (economic calendar). The index has been falling at a slower pace since February, and the August report marked the fourth-straight increase on a month-over-month (m/m) basis. This series lags the existing home and new home sales data by a month and is a three-month average of prices in 20 cities.

Also on tap for tomorrow, a revised reading on the nation’s economic output will be released, with economists expecting 3Q Gross Domestic Product growth to be revised down to 2.8% annualized from the 3.5% that was originally reported. That would still be an improvement over the 0.8% contraction witnessed in 2Q, however, and would still represent the first growth in the economy since the beginning of the recession last year. At the same time, personal consumption is expected to be revised slightly lower from 3.4% to 3.2%, while the GDP Price Index and Core PCE Index are expected to remain inline with previously reported figures.

Other reports due out tomorrow that deserve a mention include the Consumer Confidence Index for November, expected to dip from 47.7 in October to 47.5, and the minutes from the Federal Reserve’s November 4th monetary policy meeting.

A gauge of eurozone manufacturing and service sectors reaches a two-year high

In international economic news, European stocks received some support from a report showing eurozone services and manufacturing sectors expanded for the fourth-consecutive month, to reassure investors that the regional economy is recovering from the worst downturn in more than 60 years. The eurozone’s PMI Composite Index rose from 53.0 in October to 53.7 in November, topping the 53.4 reading that economists surveyed by Bloomberg had expected. A reading above 50 indicates expansion and the index rose to a level not seen since November 2007.

In Asia, Taiwan’s export orders climbed in October for the first time in more than a year. Orders – an indication of shipments in the next three months – were up 4.4% year-over-year, which beat the average analyst expectation of 4.0%. The Taiwanese government also said today that industrial production rose 6.7% in October, an acceleration from the revised 1.7% pace from September. Meanwhile, Thailand’s economy shrunk at a 2.8% annual rate in 3Q, the smallest pace in a year. That followed the 4.9% contraction in 2Q and beat the consensus estimate calling for a 3.2% fall.

Elsewhere in Asia, sentiment in the region was tempered somewhat by a report that China may be about to rein in some of its extraordinary economic stimulus measures. A media report quoted Chinese officials as saying that banks in the country will be asked to slow their pace of lending. The largely state-controlled sector has extended more loans in the first seven months of this year than in the two previous years combined, although the pace of new lending appears to have moderated in recent months. Surging asset prices in Chinese stock and property markets have caused some analysts to warn that bubbles may form if easy money policies are not toned down. Additionally, Reuters reported that, according to a source with direct knowledge of the matter, the China Banking Regulatory Commission (CBRC) is pushing for major Chinese banks to increase their capital adequacy ratio—a key gauge of financial strength—from an average of 11% to 13%. The CBRC denied the report and posted a statement on its website that said the CBRC has no such requirements.