Evening Update

Mixed Messages from the Economic Front

The bulls showed some afternoon resiliency as the S&P 500 Index managed to post a gain despite an unexpected plunge in pending home sales, as Ford posted strong sales to highlight the industry’s December US sales reports, and an upside surprise in factory orders helped soothe the sting of the housing data. Treasuries finished higher following the economic reports. Other equity news worth mentioning includes Google introducing its Nexus One smartphone and the Wall Street Journal adding to speculation of a tablet PC to be unveiled later this month by Apple. Moreover, retailers gained support from an increase in sales forecasts from an industry association, while casino operators found a tailwind on a media report of strong sales in Macau, and Continental Airlines’ improving revenue forecast helped boost US carriers. Equity news across the pond also garnered attention, as the destiny of Cadbury continued to be in view, with Nestle bowing out of bidding after buying a division from Kraft, while Berkshire Hathaway voted against Kraft’s proposal to issue new shares to fund the potential acquisition.

The Dow Jones Industrial Average dipped 12 points (0.1%) to close at 10,572, while the S&P 500 Index added 4 points (0.3%) to 1,137, and the Nasdaq Composite was flat at 2,309. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $0.35 higher at $81.86 per barrel, wholesale gasoline was up $0.03 at $2.13 per gallon, and the Bloomberg gold spot price decreased $1.70 to $1,119.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 77.61.

Auto makers were higher, highlighted by Ford (F $11), which reported December US auto sales posted an adjusted 23.3% year-over-year (y/y) increase, compared to the estimate of an 8.3% gain, per CNBC. The company added that it is estimating the first full-year gain in market share for the first time since 1995. Shares of Ford were solidly higher. Moreover, Chrysler reported a y/y decline in sales of 10.5%, which was a smaller drop than the 12% decline that had been expected. Adjusted sales at General Motors fell 12.8%, more than the 9% decline that was anticipated. Elsewhere, Toyota Motor (TM $84) posted a 23% increase in US sales for the month, but shares finished under pressure.

Cadbury PLC (CBY $50) was lower after Nestle SA (NSRGY $48), which agreed to buy the North American pizza business from Kraft Foods Inc (KFT $29) for $3.7 billion, ruled itself out of bidding for the UK confectioner, while Kraft rose the cash component of its offer using proceeds from the sale of the pizza business. Cadbury said the “tinkering” of terms, which does not change the value of the offer, remains “derisory with less than half the consideration in cash.” Adding to the story, Berkshire Hathaway (BRK/A $99,710), the top shareholder of Kraft at 9%, has decided to vote against Kraft’s proposal to issue new shares to fund the potential acquisition, saying offering Kraft’s stock, which they believe is undervalued, for a full price of Cadbury results in an “expensive currency” to be used in an acquisition. BRK/A added that after January 19th—when KFT must announce its final offer for CBY—if it concludes that the offer does not destroy value for KFT shareholders, “we will change our vote to yes.” Nestle also finished higher, while KFT and BRK/A were in the green in US trading.

Rumors of a tablet PC from Apple (AAPL $214) received a boost from a report in the Wall Street Journal, which quoted a person familiar with the matter saying that the device will be unveiled later this month and will go on sale in March. A spokesman for the company said “We are not going to comment on rumors and speculation.” The Journal also reported the company is buying Quattro Wireless for $275 million, a company that focuses on advertising on mobile phones. Shares were higher.

Elsewhere in technology, Google (GOOG $624) introduced its smartphone today, based on the Android operating system. Code-named the Nexus One, the phone costs $529 without a service plan and $179 with purchase of a two-year contract with Deutsche Telekom’s (DT $15) T-Mobile. Google is aiming to boost usage of mobile phones to expand its market of selling ads for mobile search. Shares traded modestly lower.

Retailers were higher after the International Council of Shopping Centers (ICSC) said that same-store sales – stores open at least a year – rose 2.5% for the week ended January 2 from a year earlier, and boosted their December sales growth estimate to 2.5% from a previous projection of 2.0%.

Meanwhile, US airline stocks gained ground as Continental Airlines (CAL $20) traded up sharply after it reported that its consolidated passenger revenue per available seat mile (RPSM) was forecasted to decline between 3.5-4.5% y/y in December, compared to the 8.5% y/y decline it saw in November. Additionally, CAL said consolidated traffic for December increased 6% y/y. Shares of UAL Corp. (UAUA $14) were also solidly higher after the parent of United Airlines posted RPSM were flat in December.

Shares of casino operators moved higher after a media report from Macau—a key gambling market—said gaming revenue jumped 48% y/y in December. Shares of Las Vegas Sands (LVS $18) and Wynn Resorts (WYNN $68) led the advance among casino operators, finding some additional support from analysts upgrades of the two firms based on their exposure in Macau.

Pending home sales plunge while factory orders are better-than-expected

Factory orders (chart) rose 1.1% month-over-month (m/m) in November, besting the 0.5% forecasted rise, while October’s increase was revised upward from 0.6% to 0.8%, the third-straight monthly increase, led by gains in business equipment. November’s durable goods orders were revised higher as part of the report to a gain of 0.8% versus the initial report of a 0.6% increase, while ex-transportation, the figure was revised to 1.9% from the advance release of 2.0%. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, rose an upwardly revised 3.6%, from the initial report of a 2.9% gain.

However, pending home sales surprised to the downside, with contracts to buy previously-owned homes falling 16.0% m/m in November, worse than the expectation of a fall of 2.0%, and October was revised higher to an increase of 3.9%, versus the initially reported gain of 3.7%. The report was the first decrease in 10 months, and was likely influenced by the initial expiration of the homebuyer tax credit. The National Association of Realtors (NAR) said that the drop was expected, noting “It will be at least early spring before we see notable gains in sales activity.” The NAR is projecting an additional 900,000 first-time buyers and 1.5 million repeat buyers are expected to benefit from the extended and expanded tax credit, and while they believe mortgage rates will “inch higher” in 2010, the tax credit and job growth will “support home buying activity and absorb enough inventory to bring a rough balance between buyers and sellers,” adding that “Home prices are expected to stabilize or even modestly rise as a result in 2010.” Treasuries remained higher after extending gains following the reports. The yields on the 2-year note and the 10-year note declined by 6 bps to 1.01% and 3.76%, respectively, while the yield on the 30-year bond fell 4 bps to 4.60%.

Full slate of economic data includes services, Fed meeting minutes and jobs

The ISM Non-Manufacturing Index will be released tomorrow, and is expected to have increased back into expansion territory, to 50.5 in December, after dipping below the 50 level that marks the separation between expansion versus contraction in November, falling to 48.7. Monday’s better-than-expected release of the companion ISM Manufacturing Index improved to 55.9 in December after dropping to 53.6 in November, the fifth-straight month of expansion in the manufacturing sector and the highest reading since April 2006, with new orders jumping to 65.5, the best level since December 2004, and employment posted the third-consecutive month of expansion. The recovery in the manufacturing sector has been aided by “cash-for-clunkers” production and export strength, and due to its more cyclical nature, tends to lead changes in the service sector, but services comprise nearly 90% of the economy and are largely domestic-driven.

Markets have been indecisive when receiving bullish economic reports, at times cheering the prospect of a self-sustaining recovery, while at other times, demonstrating nervousness regarding the implication that the Fed would need to raise rates to keep growth from overheating. As such, the mid-day release of the minutes from the December Federal Open Market Committee (FOMC) meeting will receive extra focus from investors. While there were no surprises from the statement read immediately following the meeting, investors will be looking for signs of the timing that the Fed may be contemplating for exit of monetary stimulus.

Traders will also be watching the ADP Employment Change Report, where the forecast is that private sector employers shed 75,000 jobs in December after declining by 169,000 in November. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls were flat in December, and that the unemployment rate increased to 10.1%, after falling to 10.0% in November. The other release on the US economic calendar tomorrow is MBA Mortgage Applications.

In international economic releases, services PMIs will be released in the Euro zone, the UK, Russia and India, while the Euro zone and Brazil will announce industrial production data and Australia releases monthly building approvals.

Financial news supports Europe, while China remained in focus in Asia

Financials in Europe were boosted from comments by Irish Finance Minister Brian Lenihan, who yesterday said that the capitalization of the country’s banking system would be resolved by the end of the first quarter, with the government providing capital if the banks can’t raise funds by themselves. In other news of the region, Greece’s debt manager said that the country may borrow directly through banks by the end of January, the second time in as many months, and may use a private placement rather than the bank syndicate previously considered, with the decision dependent on the European Central Bank and market reaction to the stability and growth program the country will provide tomorrow. In Asia, the economic data had a Chinese tilt, with a senior government official saying China may report 8.5% GDP growth in 2009, and the Shanghai Securities News reporting that China plans to expand a trial on a program to calculate real-estate taxes.