Evening Update

Risky Bets Back in Vogue as Dubai Fears Retreat

Stocks finished with solid gains as investors gained comfort that Dubai’s debt situation will be contained and not result in a global contagion. Economic data also helped repair investor sentiment as a host of generally positive reports from around the world combined with the ninth-straight gain in pending home sales and a surprising increase in construction spending to offset a smaller-than-expected expansion in the US manufacturing sector. Treasuries moved lower and the dollar also retreated as the demand for safe haven assets receded. Meanwhile, equity news was again focused on deal announcements as GE and Vivendi reportedly reached an agreement that could pave the way for a transaction giving Comcast Corp control of NBC Universal. Elsewhere, Pfizer inked a deal giving it control of a new drug, while AIG closed two transactions allowing it to free itself of $25 billion in debt owed to the Federal Reserve Bank of New York. Rounding out the day’s announcements, Staples Inc. and Guess Inc. both beat profit forecasts, and the nation’s automakers released their November sales reports with generally better-than-expected results.

The Dow Jones Industrial Average gained 127 points (1.2%) to close at 10,472, the S&P 500 Index rose 13 points (1.2%) to 1,109, and the Nasdaq Composite increased 31 points (1.5%) to 2,176. In relatively light volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $1.09 higher at $78.37 per barrel, wholesale gasoline rose $0.03 to $2.04 per gallon, and the Bloomberg gold spot price increased $17.80 to $1,197.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.6% to 74.42.

Several media outlets reported that Dow member General Electric (GE $16 ¹) has come to a tentative agreement to purchase partner Vivendi’s (VIVDY $30) 20% stake in NBC Universal for $5.8 billion, according to people familiar with the discussions. The agreement would pave the way for GE, which owns 80% of NBC Universal, to complete an entertainment joint venture, which would include NBC Universal and be controlled by Comcast Corp. (CMCSA $15). None of the entities involved confirmed the reports, and GE CEO Jeffrey Immelt said today “I can’t talk too much about it, I just think you always have to be thinking about what’s next in every industry you’re in, stay strategically agile, and I’ll leave it at that.” Shares of all three firms were higher.

Staples Inc. (SPLS $24) reported 3Q EPS ex-items of $0.39, one penny ahead of the expectation of Wall Street analysts, with revenues declining 6% versus last year to $6.5 billion, which was slightly above the $6.4 billion that the Street had anticipated. The office supply firm’s CEO said, “With North American Retail growing again, improving trends in our Catalog business, solid profitability in our European office products portfolio, and record free cash flow, we’re increasingly optimistic about the future.” SPLS issued a 4Q revenue outlook that topped analysts’ forecasts and shares were solidly higher.

Guess Inc. (GES $42) was sharply higher after the apparel maker reported 3Q EPS of $0.69, easily above the expectation of analysts, which called for the company to report earnings of $0.50 per share. Revenues dipped 1% versus last year to $523 million, also well above what analysts were expecting, as revenues were forecasted to come in at $483 million. GES said each of its businesses performed better than expected as its customers continued to respond well to its product assortment in all markets around the world, while controlling its costs and inventories tightly to protect its profitability. The company issued 4Q and full-year guidance that topped the Street’s forecast.

Former Dow member and government bailed-out insurer American International Group (AIG $30) was solidly higher after the company reported that it has closed two previously announced transactions with the Federal Reserve Bank of New York (FRBNY), reducing the debt AIG owes FRBNY by $25 billion. As a result of the deals, the FRBNY will receive preferred equity interests in certain newly formed subsidiaries—American International Assurance Company and American Life Insurance Company—in exchange for the debt, which AIG believes will advance its goal of positioning the two subsidiaries for initial public offerings or third party sales. AIG said its outstanding principal balance under the FRBNY’s credit facility stands at $17 billion, and the total amount available under this facility has been reduced from $60 billion to $35 billion. The company’s CEO said the company continues to focus on stabilizing and strengthening its businesses, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities.

Pharmaceutical giant Pfizer (PFE $19) was higher after announcing that it will license the worldwide rights to a treatment for Gaucher disease – a rare genetic disorder – from Israeli biotech company Protalix BioTherapeutics (PLX $9). The deal will put Pfizer into competition with Cerezyme, the best-selling drug of rival Genzyme (GENZ $51). The deal is also significant because it marks Pfizer’s entry into the market for less common diseases, with costlier treatments. “This agreement supports our goal to meet the needs of many patient populations, including those affected by rare diseases,” the company said. According to the terms of the deal, Pfizer will pay Protalix $60 million initially and up to $55 million later, and the companies will split marketing expenses and revenue for the drug on a 60-40 basis, with Pfizer having the larger share.

Ford Motor Co. (F $9) gained ground after its monthly sales were essentially flat compared to last November at 122,846. On an adjusted basis to account for two fewer selling days this year, sales were 8.7% higher, beating the 4.1% increase that analysts had predicted. Within Ford’s report, sales of crossovers climbed 26% while sales of cars rose 14%, offsetting declines of 18% in sales of trucks and 21% in SUVs. “We seem to have stabilized at a level that is higher than the pre-clunkers level but still not setting the world on fire,” the company said. “With the cloud over our heads of unemployment and consumer confidence not completely clear, we’ll have guarded optimism for December,” Ford’s US sales chief added. The automaker also announced its North American production plan for 1Q 2010, saying it plans to build 550,000 vehicles, an increase of 58% compared with 1Q 2009.

Meanwhile, General Motors reported adjusted sales for November up 6.3% over the same time in 2008, beating the 5.8% forecast from analysts. GM also said it plans to build 650,000 vehicles in 1Q 2010 in North America, 75% higher than the same period in 2009 when the automaker was in a financial crisis. Elsewhere, Chrysler suffered a 19% decline in its November sales, although on a month-over-month basis the company saw only a modest fall compared to October. The new Chrysler – an alliance with Italy's Fiat (FIATY $16), which purchased a stake in the US automaker under a government-supported bankruptcy reorganization, said that despite the decrease in its sales, its marketshare increased slightly to 8.4% during the month. Chrysler’s monthly sales report – as well as those from foreign automakers Toyota (TM $81), Honda (HMC $32) and Nissan (NSANY $15) all exceeded analyst estimates.

National manufacturing activity decelerates by a faster pace than expected

The ISM Manufacturing Index (chart) came in at 53.6 in November. That was below last month's reading of 55.7, but still above the 50.0 mark that separates expansion from contraction. It was also below the forecasts of economists, who had predicted a smaller retracement to 55.0, on the heels of last month’s surprisingly strong jump from the 52.6 reading in September. Investors should hesitate to put too much emphasis into any one month’s purchasing manager index though, as they can be somewhat unpredictable given they are not constructed of hard data but merely a diffusion index that reflects the number of people saying conditions are better compared to the number saying conditions are worse. More importantly, the report has indicated growth in the manufacturing sector for four consecutive months, after bottoming in August following 18 months of decline. Commenting on the report, the ISM noted “Signs are still encouraging for continuing growth as both new orders and production are still at very positive levels.”

Looking at the various sub-components of the index, nearly every one indicated expansion and the ISM’s index of employment in the sector also managed to stay above 50 for the second consecutive month, indicating that hiring is picking up after more than a year of declines. Also of significance, the Prices Index fell 10 points from 65 to 55, much below the average economist forecast for a flat reading. That data point signals less inflationary pressure on manufacturers’ costs. Finally, the Customers’ Inventories Index registered 37 in November, down again from 38.5 last month and making it the eighth consecutive month below 50, which means respondents believe their customers' inventories are too low at this time.

Elsewhere, pending home sales unexpectedly increased, rising 3.7% in October to the highest level since March 2006, and compared to the -1.0% drop forecasted by economists, and following September’s modest downwardly revised 6.0% increase. Pending home sales typically lead existing home sales by a month or two and have gained ground for a ninth-straight month.

Separately, construction spending (chart) data was also released this morning, and came in flat versus the consensus of economists that called for a decline of 0.5% in October. However, September’s data was revised from a 0.8% advance to show a 1.6% drop.

Treasuries were lower following the manufacturing and housing data. The yield on the 2-year note rose 1 bp to 0.67%, the yield on the 10-year note gained 8 bps to 3.28% and the yield on the 30-year bond also added 8 bps to 4.27%.

Europe parses a plethora of data, while Bank of Japan holds an emergency meeting

A slew of upbeat economic data in the eurozone was announced today, including a favorable revision to eurozone PMI for November, which showed manufacturing activity expanded at a faster pace than economists had expected. Additionally, data out of Germany—Europe’s largest economy—came in better than expected, with unemployment unexpectedly falling, retail sales rising more than anticipated, and the nation’s PMI for November expanding at a faster pace than initially forecast.

Other economic data across the pond included home prices in the UK rising more than expected and 3Q GDP in Switzerland showing the economy returned to growth, rising 0.3% quarter-over-quarter to match expectations. On the negative end of the spectrum, a report showed PMI in the UK depicted manufacturing activity growing at a slower pace than economists predicted.

Meanwhile, the Bank of Japan held an unplanned meeting and decided to “further enhance easy monetary conditions” by introducing a new funds-supplying operation, in hopes of encouraging a further decline in longer-term rates. At the meeting, the BoJ announced more quantitative easing measures by offering three-month loans at 0.1% for up to approximately 10 trillion yen ($115 billion), while also maintaining its monthly government bond purchase target and keeping its overnight lending rate at 0.1%. The central bank said it believes that the decision made today will “firmly support Japan’s economic developments toward recovery,” and that the bank recognizes that it is a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability.

In other Asian central bank announcements, the Reserve Bank of Australia announced that it will raise its key lending rate by 25 basis points to 3.75%, as expected, making it the third rate increase in as many meetings. The RBA said the risk of serious economic contraction in Australia has passed and its material adjustments to the stance of monetary policy will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Rounding out the data in the region, a government report on China’s PMI held at an 18-month high, while a separate PMI report constructed by HSBC showed Chinese manufacturing accelerated in November.

Fed’s Beige Book slated for tomorrow

The Federal Reserve Beige Book will be released tomorrow afternoon, in preparation for the next Federal Open Market Committee (FOMC) meeting which is scheduled to take place in two weeks and conclude on December 16. The report is a summary of anecdotal economic data collected from all twelve Federal Reserve District Banks and it will be used by the Fed to gauge whether any changes in its monetary policy are necessary. The report is potentially market moving for this reason, and also because it gives investors a more timely reading of current economic conditions than they can get from most other sources. The last Beige Book, released October 21, showed more signs of improvement in the economy, although the gains appeared somewhat tentative. "Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered," the report showed. Traders will be closely watching tomorrow’s report for any signs that the trajectory of the economy could have changed since then.

The ADP Employment Change Report will also be released Wednesday, giving traders a reading on the state of private sector employment. The forecast is that private sector employers shed 150,000 jobs in November after cutting 203,000 in October. 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.

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