Evening Update

Hot Home Sales Give Markets A Spark

Despite a downward revision to 3Q GDP, the third major credit rating downgrade of Greece in a month, and a surprising drop into negative territory for the Richmond Fed Manufacturing Index, stocks were higher, aided by a larger-than-expected jump in existing home sales. Equity news added to the relatively favorable backdrop, as Boeing became the sole owner of a fuselage facility, State Street Corp. acquired an Italian securities services unit, and a UK regulator reversed a merger objection to the proposed tie-up between Live Nation and Ticketmaster. Elsewhere, Jabil Circuit exceeded Wall Street analysts’ profit projections, Bristol-Myers Squibb increased its dividend, but Take-Two Interactive Software lowered 1Q and full-year guidance after announcing it will sell a distribution unit. Volume remained lower in the holiday-shortened week, and Treasuries finished lower.

The Dow Jones Industrial Average rose 51 points (0.5%) to close at 10,465, the S&P 500 Index added 4 points (0.4%) to 1,118, while the Nasdaq Composite gained 15 points (0.7%) to 2,253. In light volume, 956 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil was $0.68 higher at $74.40 per barrel, wholesale gasoline was unchanged at $1.88 per gallon, and the Bloomberg gold spot price fell $9.48 to $1,083.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 78.24.

Dow member Boeing (BA $55 ¹) was higher after it announced that it has become the sole owner of Global Aeronautica, LLC, a South Carolina fuselage subassembly facility for its Dreamliner. BA announced that it has acquired the half of the facility that was owned by Alenia North America—a subsidiary of Italy’s Alenia Aeronautica, a Finmeccanica (FINMY $8) company. Financial terms were not disclosed. Separately, BA announced that All Nippon Airways (ALNPY $6), also known as ANA, ordered five each of its 777 and 767 jetliners, valued at approximately $2 billion at list prices.

In other M&A news, State Street Corp. (STT $44) announced that it has signed an agreement to acquire the securities services unit of Italy’s Intesa Sanpaolo (ISNPY $26) for approximately 1.28 billion euros ($1.87 billion) in cash. STT said the acquisition represents a significant milestone in its strategy to become a truly global provider, enhancing its ability to provide high-value services to institutional investors. Shares of both firms were higher.

Moreover, shares of Live Nation (LYV $8) and Ticketmaster (TKTM $13) were both higher after the UK’s Competition Commission dropped an earlier objection that a merger between the live music promoter and ticket retailer would result in “substantial lessening of competition in the market for live music ticket retailing.” The decision helps pave the way for the approval of US regulators and the creation of the world’s largest live entertainment company.

In earnings news, Jabil Circuit (JBL $17) reported fiscal 1Q core EPS of $0.32, above the $0.29 that analysts had expected, with revenues falling 8.8% versus last year to $3.1 billion, inline with the Street’s forecast. The electronics manufacturing and services company said it delivered significant margin expansion and revenue growth on a sequential basis, while it issued 2Q guidance that topped analysts’ forecasts after saying it thinks it has established positive momentum. Shares were sharply higher.

Take-Two Interactive Software (TTWO $10) announced that it will sell its Jack of All Games distribution business for about $43 million, while it cut its 1Q and full year guidance. TTWO now expects revenue to come in as high as $140 million and $910 million for 1Q and full year, respectively, and it now expects losses that could be as high as $0.55 per share for 1Q and $0.68 per share for the year. Analysts are expecting a 1Q loss of $0.47 per share on revenues of $227 million, and a full year loss of $0.48 per share, with revenues forecasted to come in at $1.1 billion. Despite being lower for most of the day, TTWO ended the day unchanged.

Bristol-Myers Squibb (BMY $26) increased its quarterly dividend by 3.2% to $0.32 per share. The biopharmaceutical company said it is confident in the strength of its biopharma business, which has helped put it in a strong cash position, and it expects solid cash flows to continue in the years ahead. Shares relinquished an early gain, however, and were modestly lower.

Last look at 3Q GDP comes in lower than expected, but home sales jump

The final revision of 3Q Gross Domestic Product (chart), the broadest measure of economic output, was released this morning and showed a 2.2% annualized rate of growth, compared to the first revision, which was lowered to 2.8%—where the Bloomberg forecast called for it to remain—and the 0.7% contraction in output that was reported for 2Q. Personal consumption rose 2.8%, lower than the 2.9% previously reported and what was forecasted. Real final sales, which exclude changes in inventory, were up 1.5%, versus the 1.9% that was reported in the first revision of the report and the positive 0.7% reported for 2Q. The GDP Price Index increased 0.4% versus the 0.5% previously reported and where it was expected by Bloomberg economists to remain. The core PCE Index, which excludes food and energy, increased 1.2%, versus expectations of 1.3% and the rate remains between of the Fed’s implied target of 1-2%. Treasuries are lower, paring some early losses following the report.

The primary revisions to the final reading on 3Q GDP were downward assessments of consumer spending on services, commercial construction, and a larger-than-initially reported contraction in inventories. Inventories fell at a slower pace than in 2Q, which added 0.7% to 3Q GDP, but inventories continue to be drawn down, plunging at a record amount from the peak. While the economy recorded a 0.15% growth excluding the stimulus-driven factors of “cash-for-clunkers” and residential housing construction, as well as federal government non-defense spending, the softness in growth and excess slack in factory utilization and jobseekers are among the reasons the Fed remains on hold. However, economists are projecting an expansion in growth in 4Q to 3.0%, and while they expect a slowdown in growth in 1Q to the lowest rate in 2010, the forecast is still a respectable 2.65%, and growth is expected to continue for the remainder of 2010. As such, at some point the Fed will need to rein in the unprecedented level of stimulus provided.

Existing-home sales rose 7.4% month-over-month (m/m) in November to an annual rate of 6.54 million units, better than the 2.5% increase to 6.25 million units forecasted by a Bloomberg survey of economists, and after surging 10% in October and 9% in September. The median existing-home price fell 4.3% year-over-year (y/y) in November to $172,600, and the supply of homes fell to 3.5 million units, representing 6.5 months of sales. A rush of first-time buyers seeking to close before the initial expiration of the tax incentive drove results, as first-timers accounted for 50% of sales in November and October.

The National Association of Realtors (NAR) has reported that based on growth in population, existing-home sales should be in the range of 5.5-6.0 million annually, versus an annual rate of below 5 million before the tax credit, and while the NAR cautioned that sales could dip temporarily, they believe the tax credit simply unleashed pent-up demand rather than borrowed from the future. The housing market has strengthened, although sustainability is questioned with rising delinquencies and foreclosures adding to inventory, as RealtyTrac reports that nearly 2 million units are in foreclosure or are bank-owned, and this figure is expected to grow. Additionally, housing affordability could be hampered if mortgage rates rise when the Fed’s purchases of mortgage-backed securities conclude at the end of March.

In other economic news, the Richmond Fed Manufacturing Index unexpectedly deteriorated into negative territory, falling from 1 in November to -4 in December, snapping a streak of seven months in positive territory for the index. All the broad indicators of activity—shipments, new orders and employment—landed in negative territory.

Treasuries finished lower despite the downward revision to the GDP figure as the equity markets moved higher following the better-than-expected existing home sales report. The yield on the 2-year note rose 4 bps to 0.90%, the yield on the 10-year note advanced by 7 bps to 3.75%, while the yield on the 30-year bond increased 4 bps to 4.60%. Please note, US markets will close early on Thursday and remain closed Friday in observance of the Christmas holiday.

Tomorrow we will get another key report on the health of the housing sector, complimenting today’s existing home sales, with the release of new home sales, forecasted to increase 1.7% month-over-month (m/m) in November to an annual rate of 438,000 units (economic calendar). The estimated advance may carry more weight and indicate more organically generated sales compared to the surprising 6.2% jump in October, which may have been boosted by homebuyers trying to take advantage of the government’s first-time homebuyer tax credit before the initial intended expiration in November. New home sales are reported when an initial contract is signed as opposed to existing home sales, where sales are recorded at the closing of home purchase. Despite the fact that new home sales make up a small proportion of home sales—averaging only about 7% of the total market in 2009—traders pay attention to the report as a harbinger of economic growth. New home sales have a favorable impact on the economy from multiple fronts as materials are used during construction of homes, labor is needed to build, and funds are demanded to finance home production. Also, new home sales can foreshadow consumer spending as homebuyers spend to decorate and furnish the new homes.

Other economic reports set for release tomorrow include personal income and spending, forecasted to increase 0.5% and 07%, respectively, the core PCE Price Index, expected to rise 0.1%, the final reading of the University of Michigan’s Consumer Sentiment Index for December with economists looking for a slight rise to 73.8, and the MBA Mortgage Application Index.

Greece credit rating cut for a third time

Moody’s Investors Service became the third major credit scoring agency to cut the sovereign debt rating on the nation of Greece, lowering it by one notch to A2, and placing its outlook at “negative”. However, the downgrade soothed concerns of some expecting a steeper reduction, as such a move could endanger the country’s eligibility for its debt to be used as collateral to access funds from the European Central Bank, a risk Moody’s said was “remote.” Greece’s new government has said it hopes to cut its debt of 12.7% of gross domestic product to below the European Union’s 3% limit by 2013.

In other economic news in the euro region, the UK’s economy contracted less than expected in 3Q, falling 0.2% quarter-over-quarter as compared to the previously-reported 0.3% decline, as a bounce in construction and fixed investment helped to offset declines in services and industrial production. However, economists expected a revision to a 0.1% decline. Construction rose 1.9%, compared to the previous 1.1% decline reported, and fixed investment increased 2.2%, as opposed to the 0.3% drop measured earlier. Elsewhere, the January consumer confidence survey in Germany, Europe’s largest economy, fell to 3.3 from a revised 3.6 in December, showing sentiment is expected to decline for a third straight month. Also, producer prices in France rose slightly above expectations on a month-over-month basis in November, but at a slower pace than the previous month.