Evening Update

Healthcare and M&A Activity Spurs Bulls

Equity markets were able to shake off early pessimism stemming from negative news overseas to finish well into positive territory as healthcare issues were higher ahead of the result of a special election in Massachusetts which could have an impact on the Obama Administration’s healthcare reform in Congress, and following encouraging M&A happenings. Cadbury accepted Dow member Kraft Foods’ sweetened takeover offer and Tyco International agreed to acquire Brink’s Home Security Holdings, boosting optimism that confidence may be returning to the corporate sector. In other equity news, Citigroup reported a 4Q loss, which matched estimates, the Wall Street Journal reported that MetLife is nearing an agreement to acquire AIG’s international insurance unit Alico, TD Ameritrade missed on both the top and bottom lines, while Parker Hannifin trounced the Street’s profit projections. Elsewhere, Google postponed the introduction of its phone in China, and Japan Airlines filed for bankruptcy. Treasuries were modestly lower as equities gained ground and after a read on homebuilder confidence deteriorated.

The Dow Jones Industrial Average rose 115 points (1.1%) to close at 10,725, the S&P 500 Index increased by 14 points (1.3%) to 1,150, while the Nasdaq Composite added 32 points (1.4%) to 2,320. In fairly light volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $0.95 higher at $79.32 per barrel, wholesale gasoline was up $0.01 to $2.06 per gallon, and the Bloomberg gold spot price rose $4.95 to $1,138.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.5% to 77.47.

Citigroup (C $4) reported a 4Q loss of $0.33 per share, matching the estimate of Wall Street analysts, and excluding a pre-tax loss associated with the repayment of the government’s Troubled Asset Relief Program (TARP), the company said it would have lost $0.06 per share. Citigroup added that its provision for loan losses in 4Q was $8.2 billion, down 36% versus the same period a year ago, and off 10% from 3Q. The company said it made “enormous progress” in 2009 as it “greatly improved” its capital strength and reduced the size and scope of the company. Citigroup had 4Q net credit losses of $7.1 billion, which was down $800 million from 3Q, and the second-straight quarter of improvement. On a conference call with analysts, Citigroup’s CFO said the company is seeing “continuing stabilization” in most of its loans to corporations and the performance of consumer loans will depend almost entirely on the condition of the US economy going forward, per the Dow Jones Newswires. Shares overcame an early loss and were slightly higher.

UK confectioner Cadbury (CBY $55) has accepted Dow member Kraft Foods’ (KFT $29) sweetened takeover offer, which values CBY at nearly $19 billion, per CNBC. The deal entails KFT paying 840 pence ($13.78) for each share of CBY, including 500 pence per share in cash and the remaining being paid in KFT stock. Additionally, CBY shareholders will receive 10 pence per share as a special dividend once the deal is declared an unconditional offer. KFT revised its previous bid by about 9% and CBY shareholders have until February 2nd to accept the offer. CBY was higher, while KFT was lower.

In other M&A news, Tyco International (TYC $38) has agreed to acquire Brink’s Home Security Holdings (CFL $42), now operating as Broadview Security, for a cash and stock transaction valued at $42.50 per share or about $2 billion. Separately, TYC said it now expects to report 1Q EPS ex-items in a range of $0.63-0.65, versus the company’s previous guidance of between $0.48-0.50 per share. Also, TYC said its guidance includes revenue of $4.25 billion, exceeding its previous outlook of $4.1 billion, and it maintained its full-year EPS ex-items outlook of between $2.30-2.50. Analysts are expecting TYC to report 1Q EPS of $0.50, and $4.1 billion, with full-year EPS anticipated at $2.49. Both TYC and CFL were higher.

Moreover, the Wall Street Journal reported that MetLife Inc. (MET $39) is in final discussions with American International Group (AIG $28) to purchase the bailed out insurer’s American Life Insurance Co, known as Alico, in which MET is expected to pay about $14-15 billion. The report suggests that the sale would be the biggest step to date by AIG to pay back the government, which has committed a total of $182.3 billion, and it could result in $9 billion of proceeds going back to the government. The WSJ cited people familiar with the matter and none of the entities involved have commented. Shares of both firms were higher.

TD Ameritrade (AMTD $19) reported fiscal 1Q EPS of $0.23, missing the Street’s expectation by three cents, as revenues of $625 million, were also below the $634 million forecast. AMTD said client trading volumes have decreased some from record highs, but they remain “healthy,” and it said it continues to deliver strong client asset and account growth. Despite the miss, shares were higher. .

Diversified industrial firm Parker Hannifin (PH $61) was higher after reporting fiscal 2Q EPS of $0.64, easily beating the $0.36 that analysts had forecasted, with revenues increasing 5.3% versus last quarter to $2.4 billion, just above the $2.3 billion that the Street had predicted. PH said that although 2Q is typically their weakest period, its margin performance in 2Q was “most impressive,” and it is encouraged to see its order trends improve sequentially for the second consecutive quarter. The company’s CEO added that, “With our actions to drive strong margin and cash flow performance taking full effect, and what we believe to be the early signs of a recovery emerging, we are anticipating a strong second half to our fiscal year and have raised our guidance appropriately.” PH boosted its full-year EPS by 44% to a range of $2.40-2.80, compared to the $2.02 that analysts are forecasting.

Following comments last week that it may end operations in China, Google (GOOG $587) postponed the introduction of its mobile phones in the eastern nation, the world’s largest handset market, per Bloomberg. The move comes after the No.1 internet search engine disclosed a censorship dispute with the Chinese government, and after it reported a “highly sophisticated” cyber attack on its corporate infrastructure, originating from China, that resulted in the theft of intellectual property and attempted access to the Gmail accounts of Chinese human rights activists in mid-December. Shares of GOOG were higher.

Showing 2.32 trillion yen in debt, Japan Airlines (JALSY $0.30) will file for bankruptcy under a 900 billion yen ($10 billion) restructuring plan lead by the state-affiliated fund, Enterprise Turnaround Initiative Corp. of Japan. Under the restructuring, JALSY will cut 31 routes, 14 international and 17 domestic, as well as remove 53 planes from its fleet. As well, the beleaguered airline will chop nearly one-third of its workforce. According to the plan, the moves may aid in JALSY reaching an operating profit by the fiscal year-end of March 2012, as reported by Bloomberg. Shares of JALSY were down over 40% in US trading.

Homebuilder sentiment unexpectedly slips

Treasuries were lower as the equity markets showed resiliency throughout the day. The yield on the 2-year note rose 2 bps to 0.89%, the yield on the 10-year note increased by 2 bps to 3.70%, while the yield on the 30-year bond gained 1 bp to 4.59%.

The only item on today’s economic docket was the afternoon release of the NAHB’s Housing Market Index, and the gauge of homebuilder confidence deteriorated from 16 in December to 15 in January. Economists surveyed by Bloomberg expected the index to increase to 17. A reading below 50 means most respondents still view conditions as poor.

German sentiment falters, China raises rates again

Investor confidence in Germany—Europe’s largest economy—fell for the fourth consecutive month, as the ZEW survey of economic sentiment—a gauge of expectations for the next six months—fell from 50.4 in December to 47.2 in January, compared to the minimal decline to 50.0 that economists surveyed by Bloomberg had forecasted. However, the current situation gauge improved to -56.6 in January from the -60.6 reading in December. In other economic news across the pond, prices at the consumer level in the UK rose 2.9% year-over-year, courtesy of a jump in oil prices, above analysts’ expectations, and to the highest level since records began in 1997, per Bloomberg.

For a second-straight week, the People’s Bank of China (PBOC) carried out another government debt auction with a higher yield. The nation’s central bank sold one-year bills with the yield of 1.9264%, an increase of eight basis points, and the highest rate in 14 months, per Bloomberg. The move comes as the eastern country continues its efforts to curtail excess liquidity and prevent the forming of asset bubbles following a 379.8 billion yuan ($55.6 billion) in new loans last month, crowning an unprecedented surge to 9.59 trillion yuan in credit extended for the year. Elsewhere, the unemployment rate in Hong Kong fell to 4.9%, more than the 5.0% expected by economists surveyed by Bloomberg.

Readings on housing market and inflation due out tomorrow

Housing starts for December will be reported tomorrow, expected to be up 0.2% month-over-month (m/m) in December to an annual rate of 575,000, as this figure has experienced volatility due to the initial expiration of the tax credit, which influenced a 10.1% drop in October and 8.9% jump in November. Building permits, one of the leading indicators tracked by the Conference Board, are forecasted to decrease 1.5% m/m to an annual rate of 580,000, after declining 4.2% m/m in October and increasing 6.9% in November. Despite new home sales falling in three of the past four months, and still low homebuilder sentiment, cancellation rates have improved and builders have had to add to inventory of smaller and more affordable homes to meet changing consumer buying behavior.

Additionally, the Producer Price Index (PPI), a gauge of prices at the wholesale level, will be released, and is forecast to be flat m/m in December, after jumping 1.8% in November as energy prices jumped. Excluding the more volatile food and energy components, the core rate is expected to rise 0.1% in December, after November’s hotter-than-expected reading of 0.5%, which was driven by a 4.2% increase in prices for light motor trucks and a rise in cigarette prices. On a year-over-year (y/y) basis, the headline price is expected to jump 4.5%, while the core rate is forecasted to increase a more subdued 1.0%.

The other release on the US economic calendar tomorrow is the weekly MBA Mortgage Applications Index.

Internationally, economic releases include Japanese machine tool orders and tertiary index, German PPI, UK employment, Canadian CPI and Australian consumer confidence.