Evening Update

Stocks Remain in the Green Despite Surprising Home Sales

Shares finished higher for the fourth-straight session, overcoming an unexpected drop in new home sales, a downward revision of consumer sentiment, a decline in mortgage applications and personal income and savings numbers that came in shy of economists’ forecasts. Volume was light in the final full day of trading this week, as markets will close early tomorrow for the Christmas holiday. In equity news, Micron Technology and Red Hat both reported earnings that topped the Street’s estimates, while Cintas missed analysts’ predictions and Research in Motion apologized to customers for a third outage in a month. Wells Fargo announced that they have paid back TARP funds and Ford expects to complete their sale of Volvo by 2Q of 2010. Treasuries finished mixed after losing early morning gains following the housing report.

The Dow Jones Industrial Average rose 1 point (0.01%) to close at 10,466, the S&P 500 Index added 3 points (0.2%) to 1,121, while the Nasdaq Composite gained 17 points (0.8%) to 2,270. In light volume, 787 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil was $2.27 higher at $76.67 per barrel, wholesale gasoline rose $0.08 to $1.97 per gallon, and the Bloomberg gold spot price increased $4.10 to $1,088.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 77.91.

Micron Technology (MU $10) reported fiscal 1Q EPS of $0.23, compared to the consensus of Wall Street analysts, which called for the semiconductor firm to report EPS of $0.07. Revenues came in at $1.7 billion, topping the $1.6 billion that the Street had forecasted as sales of DRAM chips increased 50% quarter-over-quarter (q/q) due to a 25% increase in sales volume and a 21% gain in average selling prices. Meanwhile sales of its NAND flash memory chips rose 21% q/q on a 16% increase in sales volume and a 5% rise in average selling price. Shares were higher.

Cintas Corp. (CTAS $26) closed solidly lower after the corporate uniform maker’s CEO said current analyst expectations for the company’s revenue and earnings are “too optimistic,” due to its businesses’ correlation to employment levels and the fact that 3Q is traditionally its most challenging period of its fiscal year. CTAS’ chief executive added that the company anticipates that when job recovery does occur, it will be a “slow and lengthy process.” The comments came as the company reported fiscal 2Q EPS ex-items of $0.39, which missed the $0.43 that analysts had predicted, with revenues declining 1% versus 1Q to $884.5 million, also short of the Street’s forecast.

Red Hat (RHT $31) was higher after the business software firm reported 3Q EPS ex-items of $0.17, one penny ahead of the Street’s forecast, as revenues jumped 18% from a year ago to $194 million, compared to analysts’ expectations of $188 million. RHT said its subscription revenue for the quarter was up 21% to $164 million.

Research in Motion (RIMM $68) overcame early pressure from concerns about network stability after users of the company’s BlackBerry smartphone suffered from the third outage in a month, after email services were delayed for users in the Americas yesterday, due to a flaw in two recently released versions of its BlackBerry Messenger. RIMM said its technical teams have taken corrective action to restore service.

Ford Motor Co. (F $10) was higher after the US automaker reported that it has settled all substantive commercial terms relating to the proposed acquisition of Volvo Car Corporation by China’s privately-owned Zhejiang Geely Holding Group. Ford said the deal is expected to close by the 2Q of 2010. The deal has been estimated at about $1.8 billion, far short of the $6.45 billion that Ford paid for Volvo in 1999, per Reuters.

Wells Fargo & Co. (WFC $27) announced that it repaid $25 billion in funds it received from the Treasury Department under the Troubled Asset Relief Program. The repayment comes after the company completed a public stock offering of 489.9 million shares of common stock at $25 per share, raising $12.25 billion. Wells Fargo said it paid accrued dividends of $131.9 million, bringing the total dividends paid to the Treasury to $1.44 billion and also noted that the Treasury still holds warrants to buy approximately 110 million shares of its common stock. Shares ended the day lower.

New home sales unexpectedly drop, personal outlays come in slightly below expectations

Treasuries finished little changed after pairing an earlier advance. The yield on the 2-year note rose 2 bps to 0.92%, the yield on the 10-year note was flat at 3.75%, and the yield on the 30-year bond was unchanged at 4.61%. Please note, US markets will close early on Thursday and remain closed Friday in observance of the Christmas holiday.

The housing sector remained in focus today as new home sales unexpectedly fell to the lowest level in seven months, with sales tumbling 11.3% month-over-month (m/m) to an annual rate of 355,000 units, compared to the expectations of economists surveyed by Bloomberg, which called for a 1.7% increase m/m in November to an annual rate of 438,000 units. The surprising slump comes on the heels of a downwardly revised 1.8% gain—versus the 6.2% rise that was previously reported—to annual rate of 400,000 units in October. The median price of a new home fell 1.9% year-over-year (y/y) to $217,400, while rising 3.8% m/m. Inventory of new homes for sale gained ground in November, to 235,000 units, representing 7.9 months of supply at the current sales rate. New home sales have averaged well below 10% of the total market in 2009, but are viewed as a timely indicator of sales, as they are based on signings, while existing home sales are tallied from closings, and reflect contracts signed one to two months earlier.

Treasuries extended early gains amid the disappointing report as November new home sales—due to the aforementioned recording difference versus existing home sales—lacked the support from the government’s first-time home purchase credit like existing home sales, which yesterday’s report showed a 7.4% jump for November, suggesting the absence of organic, non-artificially sweetened sales of new homes.

Personal income was 0.4% higher in November, just shy of the Bloomberg estimate of 0.5%, but October was revised from a 0.2% gain to a 0.3% rise. Personal spending rose 0.5% in November, below the 0.7% Bloomberg expectation, while October’s 0.7% decline was downwardly revised to a 0.6% gain. The savings rate remained unchanged at an upwardly revised 4.7% in November.

Also, the PCE Price Index, which is released with the income and spending data, increased 1.5% year-over-year in November, below the consensus forecast of 1.6%, and October’s modest rise was downwardly revised from 0.2% to 0.1%. The core PCE Price Index, which excludes food and energy, was flat, compared to expectations of a 0.1% increase. Year-over-year, core prices moved 1.4% higher, below the 1.5% consensus of economists surveyed by Bloomberg. Treasuries are higher following the income and spending data.

Meanwhile, the final revision to the University of Michigan’s Consumer Sentiment Index showed an unexpected downward adjustment from 73.4 in the preliminary report to 72.5 for December, but up from the 67.4 reading in November. Economists expected the index to be revised higher to 73.8. The unfavorable revision was attributed to decreases in the expectations and current components that were reported from the preliminary report.

On the energy data front, crude oil prices moved solidly higher after a late-morning oil inventory report from the Energy Information Administration showed oil stockpiles fell by 4.9 million barrels, a much larger draw than the 900,000 barrel decline that was forecasted by Reuters. Elsewhere in the report, distillate inventories fell more than expected and gasoline stockpiles unexpectedly declined.

In other economic news, the US MBA Mortgage Application Index fell 10.7% last week, after the index, which can be quite volatile on a week-to-week basis, gained a modest 0.3% in the previous week. The drop came as the average 30-year mortgage rate was unchanged at 4.92%, while the Refinance Index fell 10.1%, and the Purchase Index decreased 11.6%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

The week will end with tomorrow’s Christmas Eve-shortened session but traders will have some important data to digest, as durable goods orders for November will be released, forecasted to have increased 0.5% after October’s 0.6% decline in orders of goods intended to last at least three years (economic calendar). Excluding transportation, orders are expected to have advanced 1.1%, after falling 1.3% in the previous month. Although the large orders in the aerospace and the defense can make the report volatile on a month-to-month basis, traders pay close attention to the report as it can be an indicator of business spending and activity in the nation’s factories. Additionally, this report can be a gauge used to predict possible changes in the labor market and with growth in employment at the top of most economists’ lists as the main cog in the economic recovery machine that is still misfiring—coupled with the severely deprived inventory levels—signs of strength in this report can have a meaningful impact on sentiment and the direction of the markets.

Additionally, weekly initial jobless claims will be released and are expected to decline by 10,000 to 470,000.

UK central bank unanimously voted to keep rates unchanged

The Bank of England released the minutes from its last policy meeting, which showed policy members voted unanimously to keep its benchmark lending rate at a record low of 0.5% and to keep its bond-purchase plan at 200 billion pounds ($320 billion). The UK central bank’s minutes said, “Most members felt that there had been some positive developments for the near term, albeit relatively minor ones by comparison to the uncertainties.” The U.K. has been giving mixed signals about its recovery, with the U.K. Office of National Statistics reporting today that services industries contracted in the three months through October, while the British Bankers Association said that mortgage lending rose to the highest level in two years last month.

Elsewhere, a French economic report showed an unexpected drop in consumer spending on a month-over-month basis in November. Spending on manufactured goods declined 0.1% from October, compared to expectations of a 0.5% gain. Germany reported a larger month-over-month increase in import prices for November. Italy’s retail sales unexpectedly came in flat but a separate report showed consumer confidence rose more than expected, to its highest level in more than seven years. Japan’s central bank reiterated its pledge to keep a “moderately loose” monetary policy, which offset its commitment to curb excess capacity and combat the formation of asset bubbles, such as property market speculation. New Zealand’s 3Q GDP, which came in at a quarter-over-quarter gain of 0.2%, was half of the forecast of economists surveyed by Bloomberg.