Evening Update

Stocks Mixed as Bernanke Reiterates “Extended Period”

Stocks were mixed as traders continue to contemplate whether Friday’s much better-than-expected jobs report implies the need for the Fed to begin raising rates sooner than earlier believed in order to stave off the threat of inflation. Traders closely listened to a speech from Federal Reserve Chairman Ben Bernanke, who reiterated that extremely low fed funds rates will likely be in place for an “extended period,” and even indicated the possibility that inflation could move lower from here. The day started with the US dollar extending the move higher from Friday, with commodities moving to the downside, but the dollar ended the day lower. In equity news, the Financial Times reported that Citigroup is trying to gain approval to pay back $20 billion in TARP funds before a capital raising deadline. Meanwhile CF Industries raised its takeover offer for fellow fertilizer firm Terra Industries, MetLife forecasted a 50% jump in 2010 EPS, Dow member Intel announced it is scrapping a graphic chip project, boosting shares of Nvidia and Advanced Micro Devices, while McDermott International is splitting into two publicly traded companies. In economic news, consumer credit contracted less than expected, while Treasuries ended higher on the day.

The Dow Jones Industrial Average rose 1 point (0.0%) to close at 10,390, the S&P 500 Index fell 3 points (0.2%) to 1,103, and the Nasdaq Composite lost 5 points (0.2%) to 2,190. In light volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $1.54 lower at $73.93 per barrel, wholesale gasoline fell $0.03 to $1.94 per gallon, and the Bloomberg gold spot price fell $6.80 to $1,154.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 75.82.

The Financial Times reported yesterday that Citigroup Inc. (C $4) is trying to get the approval from the US government to allow it to repay $20 billion in taxpayer funds loaned to the firm as part of the Treasury’s Troubled Asset Relief Program (TARP), by next week, through a sale of shares of the firm. Citigroup argued that if it does not get the capital raising started by next week, the company may have to wait until late January, after Citigroup reports earnings. The newspaper cited unnamed sources and both the US Government and Citigroup have not commented on the report.

Separately, Kuwait Investment Authority (KIA)—the State’s sovereign wealth fund—sold its stake in Citigroup, after converting the preferred shares it owned of the US financial firm to common shares and selling them for $4.1 billion, making a profit of over $1 billion. KIA said it has no intention to carry out similar exits from other corporate investments before year-end. C was higher.

Fertilizer firm, CF Industries (CF $90) announced that it has increased its offer for Terra Industries (TRA $41) by $4.75 per share in cash, bringing the value of the deal to about $4.6 billion. The offer to acquire TRA now stands at $36.75 in cash—including a $7.50 per share special dividend—and 0.1034 of a share of CF common stock for each share of TRA. Terra Industries confirmed that it has received the revised proposal from CF and it is reviewing it and expects to consider it at a board meeting scheduled for later in the week. Today’s announcement continues a three-way battle in the fertilizer industry, which has CF trying to fend off a hostile takeover from Canada’s Agrium Inc. (AGU $60). Shares of all three firms were higher.

MetLife (MET $36) shares rose after the company said that in 2010, a 6-8% increase in premiums fees and other revenues, its disciplined pricing and underwriting, improving investment margins, and lower expenses will enable it to “deliver significant earnings growth.” MET expects 2010 operating EPS to rise about 50% year-over-year, or between $4.00-4.40, compared to the $4.11 that analysts are expecting. Additionally, MET said it expects 4Q 2009 EPS to be in a range of $0.90-0.95 and full-year 2009 earnings to be between $2.81-2.86. The Street is expecting the company to report 4Q and 2009 EPS of $0.91 and $2.85, respectively.

Shares of graphic chip makers Nvidia (NVDA $16) and Advanced Micro Devices (AMD $9) were solidly higher after Dow member Intel Corp. (INTC $20) announced that it will cancel plans to launch an advanced graphic chip to the market, after concluding that delays in its project, called Larrabee, would make it uncompetitive. The move derails plans for INTC to compete with NVDA and AMD in the graphic chip market, and a company spokesman said it will reveal more on its graphic chip plans next year. INTC shares were lower.

McDermott International (MDR $23) was sharply higher after the engineering and service firm announced that it plans to separate its operating subsidiaries, the Babcock & Wilcox Company (B&W) and J. Ray McDermott, into two independently, publicly traded companies. The separation is expected to be effected through a spin-off B&W and after competed, McDermott intends to be renamed J. Ray McDermott.

Bernanke reiterated rates to remain low for an “extended period”

Treasuries were lower with the yield on the 2-year note rising 7 bps to 0.76%, while the yield on the 10-year note gained 5 bps to 3.43%, and the yield on the 30-year bond was flat at 4.39%.

Federal Reserve Chairman Ben Bernanke gave a speech to the Economic Club of Washington. After Friday’s jobs report, where only 11,000 jobs were lost and leading indicators such as temporary jobs improved further, traders began to contemplate the possibility the Fed may need to raise rates further, however the Fed Chief said put those thoughts on the back burner, saying that “we’re still looking at the extended period” for keeping rates at an exceptionally low rate. In formal comments, he said “The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate.” While Bernanke believes modest economic growth will likely continue in 2010 and will bring down the unemployment rate, he believes the pace will be slower than the Fed would like.

With regard to inflation, Bernanke said that despite the rise in commodity prices, “on net it appears likely to remain subdued for some time.” In response to the expansion of the Fed’s balance sheet and any potential impact on inflation, he added that “near-term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here,” and that the Fed is committed to unwind stimulus efforts when needed to avoid higher inflation once the economy is strong enough and is confident that they possess “all the tools necessary to withdraw in a timely and effective way.” Bernanke added that the fed funds rate can rise even with a large balance sheet and the Fed is giving careful thought to an exit strategy. During the Q&A session, Bernanke joked that rates “can’t go down much further.”

Late in the day, a report from the Federal Reserve showed that US lenders reduced consumer credit for the ninth-consecutive month in October, albeit at a smaller pace than was expected. Total consumer debt outstanding was reduced by $3.51 billion – a -1.7% annual rate, versus the $9.4 billion expected, and data for August was revised from the previously announced drop of $14.8 billion to $8.8 billion. Within the report, revolving debt, such as credit cards, accounted for all of the drop, falling $6.95 billion, while debt such as auto and mobile-home loans increased by $3.44 billion. The Fed’s report doesn’t cover lending secured by residential real estate.

In a light week, there are no major US releases scheduled on tomorrow’s economic calendar.

Canadian economic data strong, while Europe contends with weakness

Canada received another report its economy is recovering, with building permits up 18%, on top of a report last week that 79,100 jobs were added, five times more than the forecast by a survey of economists conducted by Bloomberg. Canada’s economy is recovering as demand for natural-resources increases, as well as the improvement seen in the US economy, as the US accounts for 75% of exports.

In Europe, there were media reports that the UK government is considering a windfall tax on banks as a revenue-raising option to narrow the fiscal deficit. The UK is contending with high levels of fiscal and trade deficits and corresponding rising government debt, which resulted in a credit outlook downgrade in June. Elsewhere, Europe’s largest economy, Germany, reported that factory orders unexpectedly declined, falling 2.1% month-over-month in October—the first decline in eight months—versus the forecast of economists surveyed by Bloomberg, which called for a 0.8% increase.