Evening Update

Bulls Start Off New Year in High Gear

Boosted by favorable manufacturing data reports overseas, stocks held on to an early advance to close nicely higher as a US manufacturing report posted the fifth-straight month of growth, adding to the global economic recovery optimism, which resulted in commodity issues leading the way. The energy sector also received additional support from the announcement that Chesapeake Energy received a cash infusion from French oil company Total, and reports of colder-than-average temperatures around the country. In other equity news, Dow member Kraft Foods was reported to be increasing its offer for Cadbury, Novartis offered to purchase the rest of eye-care company Alcon from Nestle, and General Motors announced record Chinese vehicle sales. Additionally, Time Warner Cable and News Corp reached a contract extension, but Scripps Network dropped programming from Cablevision. There was some Fedspeak over the weekend that garnered some attention as Fed Chair Ben Bernanke said that the Fed is not to blame for the housing bubble and while regulation is the preferred measure to attack asset bubbles, monetary policy can be used if regulations fail. Moreover, Fed Vice Chairman Donald Kohn said the growing deficit will not keep it from exiting current policies. Treasuries remained mixed after the manufacturing report and news that construction spending continued to contract.

The Dow Jones Industrial Average rose 156 points (1.5%) to close at 10,584, the S&P 500 Index added 18 points (1.6%) to 1,133, while the Nasdaq Composite gained 39 points (1.7%) to 2,308. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $2.18 higher at $81.54 per barrel, wholesale gasoline was up $0.06 at $2.11 per gallon, and the Bloomberg gold spot price increased $23.08 to $1,120.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.5% to 77.51.

Chesapeake Energy Corp (CHK $28) was higher after French oil company Total SA (TOT $66) signed a joint venture agreement in which it will acquire 25% of Chesapeake’s Barnett shale gas portfolio for $800 million and committed to pay another $1.45 billion by funding 60% of CHK’s future capital expenditures on drilling and completion of wells within the joint venture, which Chesapeake expects to be reached by year-end 2012. Total and CHK have also agreed to jointly study certain North American shale gas opportunities together. The deal marks the fourth joint venture transaction for CHK, which said this transaction would allow the company to reduce its financial leverage and future capex. Total shares were also higher.

Dow member Kraft Foods Inc (KFT $27) was reported to be increasing its offer for UK confectioner Cadbury PLC (CBY $52) according to a report in the Sunday Times, which cited unnamed sources reporting that the hostile bid for the company will be raised in the next two weeks. Reuters reported that KFT is set to win approval this week from the European Union in its hostile bid for CBY, according to a source familiar with the matter. Shares of both companies traded higher. Neither company commented on the reports.

In other global M&A announcements Nestle (NSRGY $49), the world’s largest food company according to Bloomberg, was higher after Novartis (NVS $53) offered to buy the rest of eye-care company Alcon (ACL $155) from Nestle and minority shareholders for approximately $39.3 billion, and Nestle announced a stock buyback worth 10 billion Swiss francs ($9.65 billion). Alcon and Novartis shares were lower. Novartis is paying Nestle $180 a share in cash for its stake, while offering 2.8 Novartis shares for each Alcon share, implying a price of $153 per share at the prior day closing price. Under the prevailing Swiss takeover law, once Novartis buys the Nestle stake, it will be able to use its 77% Alcon stake to vote the merger through, even if minority holders oppose the deal. Alcon said in a statement that its independent directors are evaluating the offer, while Novartis said it considers the offered price fair.

General Motors reported that it sold a record 1.83 million vehicles in China in 2009, an increase of 67%, as the Chinese government boosted demand by halving the purchase tax for small engine vehicles in 2009. GM said it increased its market share in China by 1.3% to 13.4%.

News Corp. (NWS $16) and Time Warner Cable (TWC $42) reached a deal to keep NWS’s Fox Networks programming available to TWC clients, ending a battle that included months of negotiations that focused on how much TWC should pay for the capability to provide the Fox Network content. Terms of the deal were not disclosed and NWS’s deputy chairman said the new agreement was “fair” and it “recognizes the value of our programming,” while TWC’s CEO said the new contract was a “reasonable deal.” NWS and TWC finished higher.

Meanwhile, in other industry news, Scripps Networks Interactive (SNI $42), which is also involved in negotiations regarding the extension of its existing contract with TWC, removed its programming—including the Food Network and HGTV—from Cablevision (CVC $26) amid a dispute over a contact extension between the two media companies. CVC said it had offered to continue broadcasting HGTV and the Food Network while both parties worked on an agreement but SNI removed its channels “without warning.” SNI said that it has been trying to have productive talks with CVC for more than six months, but such requests have been rejected. Shares of both SNI and CVC are higher.

US manufacturing surprises to the upside, joins global upbeat PMI reports

The ISM Manufacturing Index (chart) increased from 53.6 in November to 55.9 in December, above the 54.3 that economists surveyed by Bloomberg had forecast. A reading of 50.0 separates expansion from contraction. New orders increased from 60.3 in November to 65.5 in December, production rose from 59.9 to 61.8, while the employment component improved from 50.8 to 52.0. Although any one month’s purchasing manager index 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, the report should preserve the argument that the economic recovery continues as the overall index has increased for five consecutive months and the Employment Index posted the third-straight month of growth, following 14 consecutive months of decline. Commenting on the report, the ISM noted “This month's report is quite strong as both the New Orders and Production Indexes are above 60 percent.” The ISM added that the manufacturing sector may be benefitting from an excessive destocking cycle as indicated by the recent performance of the Customers’ Inventories Index, which have been “too low” for nine consecutive months, sitting at the lowest reading since inception in January 1997.

Separately, construction spending data was also released this morning, falling 0.6% in November, lower than the 0.5% drop expected, and October’s initially reported flat reading was downwardly revised to a drop of 0.5%, making November the seventh-consecutive month spending on both residential and commercial projects declined. Residential spending fell by 1.6% in November, after surging 4.8% in October, as builders rushed to finish projects to have supply of homes available for sale in time for new home buyers to qualify for the initial expiration of the tax credit. Treasuries finished mixed, but did gain some ground after the reports. The yield on the 2-year note fell 6 bps to 1.07%, the yield on the 10-year note declined by 1 bps to 3.82%, while the yield on the 30-year bond increased 2 bps to 4.65%.

Fed Chairman Ben Bernanke gave a speech at the American Economic Association annual meeting over the weekend, in which he defended the Fed’s policy of low rates during the past decade, rejecting claims they caused the housing bubble, saying rates were close to what they should have been when looking at the modified Taylor rule, noting housing bubbles in other countries, and blaming lax regulation. Bernanke said the Fed must be open to raising rates to fight against asset bubbles, but said stronger regulation is the best solution to prevent a repeat of the crisis. Meanwhile, Fed Vice-Chairman Donald Kohn also spoke over the weekend, reiterating that the Fed has no shortage of tools for firming the stance of policy and that it will be able to unwind its actions when and as appropriate. Kohn added that the “large and growing federal deficit will not stop the Federal Reserve from exiting from current policies,” when needed to keep inflation under control and the economy on a path to sustained high employment.

Tomorrow, the US economic calendar will yield key releases on housing and manufacturing with factory orders, forecasted to rise 0.5% for November, and pending home sales, expected to show the gauge of the pipeline of existing home sales fell 2.0% for November.

Manufacturing data drives global recovery optimism

Overseas markets got the recovery optimism ball rolling for the day, highlighted by a report that Chinese manufacturing grew at the fastest pace in over five years, boosting shares of basic resources and industrial companies. In Europe, the UK reported the best increase in manufacturing in more than two years—besting estimates—while the euro area announced the final release of PMI data that was in line with prior forecasts.

Tomorrow, the international economic data will likely be headlined by the unemployment change out of Germany—Europe’s largest economy—vehicle sales in Japan, consumer confidence in France, and the Eurozone CPI estimate.