Morning Update

Starting the New Month in the Green

Stocks are higher in morning action as the bulls are trying to rebound from Friday’s sharp sell-off that ended October on a sour note, which boosted fears that the economic recovery may have hit a snag. Earnings are trickling in, with Ford posting an unexpected profit, while M&A news is prevalent this morning with Denbury Resources announcing that it will acquire Encore Acquisition for about $4.5 billion, suggesting confidence in the corporate sector may be improving. In other equity news, CIT announced over the weekend that it has filed for a prepackaged bankruptcy. Treasuries are lower as equities are on the rise, ahead of today’s key reading on manufacturing activity, which will kick off a full slate of major economic reports this week, headlined by the Federal Reserve’s monetary policy meeting and the labor report. Overseas, Asia was solidly lower, while Europe is flat.

As of 8:51 a.m. ET, the December S&P 500 Index Globex future is 5 points above fair value, the DJIA is 43 points above fair value, and the Nasdaq 100 Index is 3 points above fair value. Crude oil is higher by $0.71 at $77.71 per barrel, and the Bloomberg gold spot price is up $10.13 at $1,055.53 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% to 76.20.

Ford (F $7) reported 3Q EPS ex-items of $0.26, versus the expectation of Wall Street analysts, which called for the automaker to post a $0.12 per share loss. Revenue declined by $800 million to $30.9 billion, but 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 are sharply higher.

CIT Group (CIT $0.72 1) announced over the weekend that the Board of Directors of the struggling financing firm 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 said none of its operating subsidiaries will be included in the filings, and as a result, all operating entities are expected to continue normal operations.

In M&A news, Denbury Resources (DNR $15) announced that it has acquired Encore Acquisition (EAC $37) in a transaction that is valued at approximately $4.5 billion, including the assumption of debt. Encore stockholders will receive $50 per share for each share of EAC, comprised of $15 in cash and $35 in DNR common stock. The companies said the transaction positions the new company as one of the largest crude oil-focused, independent North American exploration and production companies.

Jam-packed economic docket kicks off later today

This week’s economic calendar is full and will likely go a long away in shaping the direction the equity markets take as traders are looking for any clues pointing to whether the global economic recovery can be sustained. Later today, the data will begin to pour in with the releases of the ISM Manufacturing Index, forecast to improve from 52.6 in September to 53.0 in October, pending home sales, expected to show sales were flat in September, and construction spending, which is anticipated to decline 0.2%. Treasuries are lower in morning action ahead of these reports.

Despite the full-slate of key economic reports due out today, the Federal Reserve and the labor market are likely to take top billing on the economic marquee, beginning with the commencement of the two-day Federal Open Market Committee (FOMC) meeting tomorrow, concluding 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.

Friday’s nonfarm payrolls is poised to be the other headlining report on the week, with the Bloomberg survey of economists forecasting payrolls to fall 175,000 in October after an unexpected accelerated decline of 263,000 in September, and the unemployment rate is estimated to have increased to 9.9% in October from 9.8% in September.

Other releases on this week’s busy economic calendar include factory orders on Tuesday, the ISM Non-Manufacturing Index, the ADP employment change, and MBA mortgage applications on Wednesday, nonfarm productivity, initial jobless claims and unit labor costs on Thursday, with wholesale inventories and consumer credit joining the labor report to round out the week on Friday.

Europe nearly unchanged as materials offset financials

Stocks in Europe are hovering around the flatline in afternoon action, with gains in basic materials offsetting pressure on financials. The banking sector in being bogged down by this weekend’s announcement that CIT Group filed for bankruptcy, and after Royal Bank of Scotland (RBS $14)—the UK’s largest bank controlled by the government—announced that talks with officials about the company’s future included “some divestments not initially contemplated.” The pressure on the group is being exacerbated by a report from the Daily Telegraph newspaper that the UK government plans to release plans this week to spend 30 billion pounds ($49.3 billion) to purchase more shares of RBS and fellow partly government-owned firm, Lloyds Banking Group (LYG $6). Neither company commented on the matter. On the 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.

Asia finds pressure after Friday’s slide on Wall Street

Most stocks in Asia were solidly lower on the heels of the steep selloff on Wall Street on Friday, as traders continue to question whether the fundamental data underlying the economy and corporate earnings are pointing to a continuation of the global economic recovery. Japan’s Nikkei 225 Index fell 2.3%, as export issues were pressured by the weakness in the US and as the yen strengthened versus the dollar to threaten the outlook for profits of firms that rely on sales in the US. Consumer lenders, however, managed to escape the fray and finish higher after the Nikkei newspaper said the government may postpone tighter lending regulations. In equity news, Sony Corp (SNE $29) fell about 6% amid the aforementioned economic uneasiness, which overshadowed the company’s forecast after Friday’s closing bell of a smaller-than-expected full-year loss. Additionally, shares of Daiwa Securities Group (DSECY $53) were down over 4% after Japan’s number two brokerage firm reported a lower-than-expected 2Q profit.

Elsewhere, Australia’s S&P/ASX 200 Index fell 2.2%, South Korea’s Kospi Index dropped 1.4%, and Hong Kong’s Hang Seng Index declined 0.6% to round out the disappointing day in Asia. However, China’s Shanghai Composite Index jumped 2.7% in the face of the broad-based selloff in the Asia/Pacific region, 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. The report followed yesterday’s PMI report from the National Bureau of Statistics, which also showed expansion in manufacturing activity, to boost economic optimism on China.