Evening Update

Bulls Seem Content to Coast Into the New Year Toast

The major equity markets failed to post a new high for 2009 as stocks finished slightly below the flatline for the first time in seven sessions as conviction on the Street remained absent, with traders preferring to sit on the steep gains the equity markets posted as the global economy exited the recession. Equity news was light, with reports suggesting General Motors is mulling the fate of its Saab unit, Morgan Stanley is implementing changes to compensation packages for executives, and Egypt reached a deal to purchase 20 new F-16 fighter jets made by Lockheed Martin for $1.6 billion. However, the economic front provided some optimism as consumer confidence rose to a three-month high as expectations of the future and easing employment pessimism led the way, while housing prices posted the smallest decline since 2007. Treasuries moved higher amid the economic data and following a $42 billion government debt auction of five-year notes. Overseas, equity markets finished mostly higher.

The Dow Jones Industrial Average dipped 2 points (0.02%) to close at 10,545, the S&P 500 Index lost 2 points (0.1%) to 1,126, while the Nasdaq Composite declined 3 points (0.1%) to 2,288. In light volume, 638 million shares were traded on the NYSE and 1.2 billion shares were traded on the Nasdaq. Crude oil was $0.06 lower at $78.71 per barrel, wholesale gasoline dipped $0.01 to $2.03 per gallon, and the Bloomberg gold spot price decreased $9.80 to $1,097.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 77.84.

General Motors is said to be waiting until next week before deciding on the fate of its Saab unit as it reviews bids, according to Paul Aakerland, a Saab board member who also heads the IF Metall union at Saab, saying that “It’s our understanding that if there’s a bid that GM finds sufficiently interesting, then the 31st of December is not a date that’s holy,” adding that “Spyker and others are very willing to buy Saab, so we’re still hoping for that solution.”

Elsewhere, the Wall Street Journal is reporting that GM is offering dealers hefty incentives to move leftover vehicles from discontinued Saturn and Pontiac brands, saying in a letter to dealers that it would pay them $7,000 for each car moved to rental-vehicle or service-vehicle fleets operated by the dealers, who can then sell them as used cars. If the dealers pass along all the new incentives to customers, car buyers could receive as much as 46% off the sticker price.

Morgan Stanley (MS $29) is set to overhaul the way it pays its most senior executives, deferring more compensation and benchmarking pay against competitor firms, according to a report in the Wall Street Journal, citing people familiar with the matter. The program would pay executives about one quarter of their 2009 pay in cash, with the rest in deferred stock. The report cites one idea under consideration is that most of the top 30 executives would submit 65% or more of their pay to deferrals or “clawbacks” – which would entail the possibility of returning money in the event of future losses. Morgan Stanley has not commented on pay plans. Elsewhere, the company changed its bylaws to establish a standing risk committee and provide for separate positions of chairman and CEO, effective January 1, when the CEO position is assumed by James Gorman. Shares traded higher.

Lockheed Martin Corp. (LMT $77) moved higher after the US Defense Department said that Egypt reached a deal to purchase 20 F-16 fighter aircrafts manufactured by LMT, valued at $1.6 billion. A spokesman for the Defense Security Cooperation Agency said the first delivery of the order is expected to come in early 2012, per Reuters. According to the report, a spokesman for LMT said the agreement marks the 53rd time an F-16 customer has returned for a new batch of jets.

Housing prices fall at smallest rate since 2007, consumer confidence improves

The Conference Board released its consumer confidence report, which increased to 52.9 in December, the highest since September and roughly inline with the expectation of 53.0, while November’s reading was upwardly revised to 50.6. The headline number rose as respondents’ gauge of expectations for the next six months climbed to 75.6, the highest since the recession began two years ago, while the measure of present conditions decreased to 18.8, the lowest level since February 1983, according to Bloomberg. Additionally, the report revealed that the “jobs hard to get” portion of the present situation component of the survey improved and respondents expect more jobs to be available six months from now. Treasuries finished higher following an afternoon advance on the heels of the government’s auction of $42 billion in 5-year notes. The yield on the 2-year note fell 2 bps to 1.01%, while the yields on the 10-year note and the 30-year bond were down 4 bps at 3.80% and 4.65%, respectively.

Meanwhile, the S&P/Case-Shiller Home Price Index release showed a decline in home prices of 7.3% year-over-year (y/y) in October, versus the -7.2% that had been expected, the smallest y/y decline since October 2007. Seasonally adjusted, prices were up 0.4% in October over September, and 11 of the 20 metro areas showed an increase. The rate of decline in home prices has been improving for approximately nine months according to S&P/Case-Shiller. However, David Blizter, Chairman of the Index Committee at S&P sounded a note of caution, noting that non-seasonally adjusted, “The turnaround in home prices seen in the Spring and Summer has faded” and that “All in all, this report should be described as flat.” While inventory has declined during the seasonally strong period, the threat of rising foreclosures, expiration of tax incentives in the first half of 2010, and end of the Fed’s mortgage-backed security purchase program in March could impact the sustainability of the housing recovery.

Elsewhere, the Federal Reserve late yesterday proposed a program to sell term deposits to banks to drain some of the $1 trillion in excess reserves in the banking system. The plan is subject to a 30-day comment period, and “has no implications for monetary policy decisions in the near term,” according to a statement released by the Fed. The term deposit facility would allow financial institutions to earn interest “no higher than the general level of short-term interest rates” on deposits for maturities not to exceed one year, likely between one and six months, to the central bank. Currently, the Fed pays interest on banks' overnight deposits. The Fed has also been analyzing reverse repurchase agreements, where the Fed lends securities for a set period, commits to repurchasing the securities at maturity.

Tomorrow, the lone release on the economic calendar will be the Chicago Purchasing Managers Index, forecast to decline from 56.1 in November to 55.1 in December.

International shares rise, sentiment biased to recovery

Stocks overseas finished higher, led by basic materials and industrials shares as economic recovery continued to dominate the sentiment of traders. International economic news was also light, with the final tally of French 3Q GDP, at 0.3% quarter-over-quarter, and an increase in business confidence in Italy headlining a few economic reports reported out of Europe. However, Russian markets were lower after Prime Minister Vladimir Putin said that new regulations would be put in place to limit the inflow of hot money into the country, while encouraging long-term investments. Putin said that “We now have conditions that attract inflows of speculative capital. We need to change the rules in order to make the country less attractive to speculators.” Putin did not specify the measures, but said that “We don’t plan on doing anything that will shake up the markets.”