Evening Market Update

Stocks Fall Short in Another Late-Day Slide

The equity markets gave up gains late in the day to finish modestly lower, as reassuring comments from Federal Reserve Chairman Ben Bernanke on the economic recovery wasn’t enough to keep stocks in the green. On the economic front, the MBA Mortgage Application Index declined and wholesale inventories increased less-than-expected, while the Fed released its Beige Book late in the trading day, showing that economic conditions continued to improve, but that growth was modest. In equity news, Texas Instruments upwardly revised its 2Q earnings and revenue guidance, Pall Corp reported better-than-expected quarterly results and Navistar International surprised analysts with strong 2Q earnings. In M&A news, IT firms Allscripts-Misys Healthcare Solutions and Eclipsys Corp agreed to merge for $1.3 billion, and a battle in the retail pharmacy business heated up as CVS Caremark announced plans to cut Walgreen from its drug network, in response to a similar action by Walgreen earlier this week. Treasuries were mixed after fluctuating with the equity movements.

The Dow Jones Industrial Average declined 41 points (0.4%) to close at 9,899, the S&P 500 Index fell 6 points (0.6%) to finish at 1,056, and the Nasdaq Composite dropped 12 points (0.5%) to 2,156. In modest volume, 1.7 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil gained $1.91 to $73.90 per barrel, wholesale gasoline rose $0.04 to $2.03 per gallon, and the Bloomberg gold spot price fell $3.90 to $1,232.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.2% to 87.91.

Texas Instruments Inc. (TXN $24) provided its scheduled 2Q business update, in which it said revenues are expected to come in between $3.45-3.59 billion, revised from a prior range of $3.31-3.59 billion, and EPS is forecasted to be between $0.60-0.64, from its previous outlook of between $0.56-0.64. The Reuters survey of analysts had called for the company to report 2Q revenues of $3.47 billion and EPS of $0.61. On a conference call following the update, a company spokesperson said it is seeing “broad-based strength,” and that the company does not have a direct exposure to the euro’s depreciation against the dollar, and has not experienced a slowdown in the region, per Dow Jones Newswires. Shares were lower.

In M&A news, healthcare IT firms Allscripts-Misys Healthcare Solutions Inc. (MDRX $17) and Eclipsys Corp. (ECLP $19) announced that they have agreed to merge in an all-stock transaction valued at about $1.3 billion. Under the terms of the deal ECLP stockholders will receive 1.2 shares of MDRX for each share they own, a 19% premium based on the June 8th closing price. MDRX was solidly lower, while ECLP traded higher.

Pall Corp. (PLL $35) finished sharply higher after the filtration, separation, and purification fluid management firm posted fiscal 3Q EPS of $0.58, eight cents above the consensus estimate of Wall Street analysts. Revenues at the company increased 10.8% year-over-year (y/y) to $616 million, topping the $596 million forecast of the Street. The company said the “expected industrial recovery appears to now be firmly underway,” and orders grew 27%.

Navistar International Corp. (NAV $50) reported 2Q EPS of $0.42, which far exceeded analysts’ estimates of a $0.05 loss. According to the company, the surprising results were a result of lower manufacturing and material expenses and accelerating sales of trucks featuring the company’s new 13-liter engine. NAV reiterated its April forecast for 2010 profit of between $2.75 and $3.25 per share and said that it received an order to supply more than 5,000 heavy-duty commercial trucks through 2014. Shares of NAV traded lower.

The battle between rivals CVS Caremark Corp. (CVS $31) and Walgreen Co. (WAG $30) escalated today as CVS announced plans to eliminate Walgreen’s pharmacy from its drug network in a month. The decision comes just days after Walgreen, the largest U.S. drug store chain, said it would remove its drug stores from the pharmacy-benefit network of CVS Caremark, citing “unpredictable” reimbursement rates and promotion of plans that require patients with chronic conditions to fill maintenance prescriptions through CVS. Walgreen generates 7% of total company sales from CVS members’ prescriptions and both companies stand to lose business as a result of the conflict. Shares of both companies were lower.

Wholesale inventories come up short, mortgage apps fall, Fed events carry the ball

Wholesale inventories for April rose 0.4% month-over-month (m/m), just shy of the 0.5% increase that economists surveyed by Bloomberg had forecasted, but March’s 0.4% increase was revised to a 0.7% gain. Inventories of computer and equipment and software were up 3.8%, and stockpiles of petroleum were 6.9% higher. Sales rose 0.7% from March, led by lumber and other construction materials, electronic goods, and durable goods, but the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at 1.13 months.

In other economic news, the US MBA Mortgage Application Index declined 12.2% last week, after the index that can be quite volatile on a week-to-week basis, inched 0.9% higher in the previous week. The decrease came amid a 5.7% drop in the Purchase Index, along with a 14.3% decline in the Refinance Index. The decrease in the overall index came despite a 2 basis-point decrease in the average 30-year mortgage rate, which declined to 4.81%, near the record low of 4.61% that was reached at the end of March 2009.

The Fed was in focus today, beginning with Fed Chairman Ben Bernanke providing testimony in front of the House Budget Committee on Capitol Hill, regarding economic and financial conditions. Bernanke noted that the recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year and inflation is likely to remain subdued. The Fed Chief added that although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity. He also said that “significant restraints” on the pace of recovery remain, as he noted the housing market and the boost it has received from the homebuyer tax credit, which has expired, and the latest growth in payroll employment, which “importantly reflected an increase” in hiring in the Census. In the Q&A session, Bernanke said that a double dip recession can never be completely ruled out, but he said that the Fed anticipates GDP will grow in the neighborhood of 3.5% this year and at a somewhat faster pace next year.

On the fiscal situation in the US, Bernanke noted that our fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession, and the ongoing developments in Europe point to the importance of maintaining sound government finances. The Fed Chairman concluded that achieving long-term fiscal sustainability will be difficult, but “unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.”

The Federal Reserve Beige Book was released in early afternoon trading, and showed that economic conditions “continued to improve” since the last report, but many districts described the pace of growth as “modest.” Also, consumer spending and tourism activity generally increased and net business spending also rose, with employment and capital spending edging up, but inventory investment slowing. The report also revealed gradual improvement in nonfinancial services, manufacturing, and transportation sectors, while the April deadline for the homebuyer tax credit buoyed residential real estate. However, commercial real estate remained weak, but there were some reports of increased leasing, and financial activity was little changed on balance, with some Districts noting a modest increase in lending. Inflation conditions were reported as subdued with prices of final goods and services “largely stable,” as higher input costs were not being passed along to customers and wage pressures continued to be minimal.

Treasuries were mixed, as the yield on the 2-year note was down 2 bps to 0.73%, the yield on the 10-year note was flat at 3.18%, and the 30-year bond yield rose 1 bp to 4.12%.

Optimistic reports suggest increase in Chinese exports

Reuters reported that sources at an investor conference cited a Chinese government official as saying that Chinese exports grew about 50% year-over-year (y/y) in May. The Chinese government did not confirm the report and it is expected to report its export figures tomorrow, and economists surveyed by Bloomberg are forecasting a 32% y/y gain for May. Also, sources told Reuters that China’s inflation rate was 3.1% and new yuan loans were 630 billion, both of which topped economists’ forecasts. A separate report out of Japan showed that machine orders rose 4.0% m/m in April, following a jump of 5.4% in March, and compared to the 1.7% increase that economists had expected. Elsewhere in the Asia/Pacific region, Australia reported that consumer confidence deteriorated in the month of June, while a separate report showed home loans fell by a smaller amount that forecasted, and South Korea’s unemployment rate moved lower from 3.7% in April to 3.2% in May.

In European economic news, Sweden’s industrial orders rose 0.9% m/m in April, compared to the 1.0% increase that economists were anticipating, and the UK trade deficit narrowed by a smaller amount than expected. Meanwhile, some of the euro-area fears were soothed on the heels of successful three-and-ten year bond auctions in Portugal as strong demand, albeit enticed by high yields, helped boost optimism of the debt-laden nation’s ability to raise capital in the open markets.

The US economic calendar will be light tomorrow, as the only release will be weekly initial jobless claims, which are expected to decrease to 450,000 from a previous reading of 453,000.

The international calendar will be more active, highlighted by the monetary policy announcements from both the Bank of England and the European Central Bank, which are both expected to keep their benchmark interest rates unchanged at 0.5% and 1.0%, respectively. Other releases include German CPI, French manufacturing and industrial production, Italy’s industrial production and final reading of 1Q GDP, Australian unemployment rate, Japan’s consumer confidence and final reading of 1Q GDP. Additionally, China releases housing prices, retail sales, industrial production, and the aforementioned export, CPI and loan data. The Central Bank of Brazil will also meet to set its target interest rate, with economists expecting a hike of 75 bps to 10.25%.