Evening Market Update

Stocks Tick Higher on Tech Strength, Close Week in the Green

The US equity markets got off to a quick start on Friday, but only managed to finish slightly above the flatline after an unexpected decline in a report on consumer sentiment stymied any hope of a late-week rally. Volume picked up as today was a quadruple witching day - the simultaneous expiration of multiple forms of options and futures contracts. Treasuries finished the day higher, as the only other report on the domestic economic docket was a tame reading on core consumer prices. Technology stocks highlighted the trading session as Oracle and Research in Motion both posted better-than-expected earnings and Texas Instruments increased its share repurchase program by $7.5 billion and raised its dividend by 8%. Elsewhere on the equity front, Dow member Caterpillar reported strong machine sales, Arena Pharmaceuticals' obesity treatment was rejected, while Alkermes' drug dependency treatment received approval to expand. Rounding out the equity news was an announcement that Student Loan Corp will sell its assets to a trio of buyers and be acquired by Discover Financial Services.

On Friday, the Dow Jones Industrial Average gained 13 points (0.1%) to close at 10,608, the S&P 500 Index was 1 point higher at 1,126, while the Nasdaq Composite advanced 12 points (0.5%) to 2,316. In relatively heavy volume, 1.9 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil fell $1.01 to $73.56 per barrel, wholesale gasoline was flat at $1.92 per gallon, and the Bloomberg gold spot price lost $1.32 to $1,273.94 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-rose 0.2% to 81.41. For the week, including dividends, the DJIA increased 1.4%, the S&P 500 Index gained 1.5%, and the Nasdaq Composite rose 3.3%.

Oracle Corp. (ORCL $27) posted fiscal 1Q EPS ex-items of $0.42, five pennies above the Reuters estimate, with revenues jumping 50% year-over-year (y/y) to $7.6 billion, above the $7.3 billion that analysts were expecting. The business software company said its software business grew strongly in all regions with new license sales up 25%, while its hardware business also grew faster than it anticipated. ORCL’s recently hired President Mark Hurd said on a conference call with analysts that, "There's really no one else in the market with the software and hardware assets that can match Oracle." Shares were solidly higher.

Research in Motion (RIMM $47) announced 2Q EPS of $1.46, ten cents above the Street's expectations, with revenues rising 31% y/y to $4.6 billion, above the $4.5 billion that analysts forecasted. The company said it added about 4.5 million new BlackBerry subscriber accounts, while it set a new record with over 12 million BlackBerry smartphone shipments. RIMM said its expects a continuation of this momentum in 3Q as it extends and rolls out new products as it heads into the holiday buying season. The company issued 3Q guidance above analysts’ forecasts. RIMM traded in the green.

Texas Instruments Inc. (TXN $26) reported that its Board of Directors authorized the company to repurchase an additional $7.5 billion of its common stock and it will repurchase shares at times and prices considered appropriate by the company. Additionally, TXN said it plans to raise its quarterly cash dividend by $0.01 per share to $0.13. TXN finished higher.

Dow member Caterpillar Inc. (CAT $73) reported that worldwide sales of machines were up 37% in the three months ended in August, led by a 43% increase in industrial equipment. However, sales of marine equipment were down 40%. CAT’s sales were strongest in Latin America, which rose 57%, and the worst performing area was from its Europe, Africa and Middle East region, but it still posted a 26% increase. Shares were higher.

Illinois Tool Works Inc. (ITW $47) reported that its operating revenue increased 13% y/y for the three months ended August 31, and its organic or base revenues contributed 12% to the total growth. The industrial conglomerate said its worldwide end markets continued to show solid demand, especially those associated with its welding, automotive, and industrial packaging businesses. Shares are modestly lower after giving up an early advance.

Arena Pharmaceuticals Inc. (ARNA $2) is down over 45% after a US Food & Drug Administration (FDA) advisory committee voted 9-5, rejecting the biotechnology firm's diet treatment Lorcaserin. The FDA committee said data does not adequately demonstrate that the potential benefits of the treatment outweigh potential risks to allow marketing approval. In other industry news, Alkermes Inc. (ALKS $15) was up solidly after an FDA advisory voted 12-1 that its drug Vivitrol should be approved for the treatment of opiod dependence.

On the M&A front, shares of Student Loan Corp. (STU $30) skyrocketed over 40% after the student-loan company agreed to sell its assets to a trio of buyers. Citigroup Inc. (C $4), which currently owns 80% of STU, will buy $8.7 billion worth of assets, which will result in a $500 million loss in the third quarter, while SLM Corp. (SLM $12) - commonly known as Sallie Mae - will buy a $28 billion portfolio of securitized federal student loans. Once the asset sales are completed, Discover Financial Services (DFS $16) will acquire STU's private student-loan business for $600 million. Shares of Citigroup and DFS traded lower and SLM moved higher.

Consumer prices remain in check, consumer sentiment read on deck

The Consumer Price Index showed prices at the consumer level were up 0.3% in August month-over-month (m/m), matching the forecasted gain by economists surveyed by Bloomberg, as well as the increase seen in July. Meanwhile, the core rate, which strips out food and energy, was flat in August, after rising 0.1% in July, and compared to estimates calling for a 0.1% gain. On a year-over-year basis, consumer prices were up 1.1% in August, down from the 1.2% rate in July, and the core CPI was 0.9% higher y/y, after rising by the same amount in July. The Producer Price Index released yesterday indicated that prices at the wholesale level rose 0.4% m/m in August and the core PPI increased 0.1%. Treasuries finished higher, as the yield on the two-year note fell 1 bp to 0.46%, while the yield on the 10-year note decreased 2 bps to 2.74%, and the 30-year bond yield lost 2 bps to 3.90%.

The University of Michigan Consumer Sentiment Index unexpectedly fell more than forecasted, declining from 68.9 in August to 66.6 for September, compared to the increase to 70.0 that was expected. This is the lowest level since August 2009 and the worse-than-expected reading came as the economic outlook component of the survey fell from 62.9 in August to 59.1 in September, offsetting a slight increase from 78.3 to 78.4 in the current economic conditions component. The report also revealed that inflation expectations for the one-year time horizon fell from 2.7% to 2.2%, while the five-year time horizon remained at 2.8%.

German producer prices highlight sparse international economic data

International economic news was relatively light today, as focus turned to the health of the Irish banking sector amid speculation that the nation's banks may need more government support, while Irish debt concerns ramped up even after the Irish Finance Ministry said there was no truth to the rumors that the government may ask for international aid. Meanwhile, German producer prices came in unexpectedly flat m/m in August, compared to the 0.3% increase that was forecasted by economists, euro-zone construction output fell in July, while the euro-area's current account surplus more than doubled in July, and Italy's m/m industrial orders fell much more than expected in July. Elsewhere, Japan announced that its department store sales fell 3.2% y/y in August, while South Korea’s department store sales rose 8.5% y/y in August.

Stocks end on the upside as data tilts to the bulls’ side

The equity markets posted a tally on the positive side of the ledger as the week's worth of data favored the bulls' case that we should be able to skirt a double-dip recession. A bulk of the optimism came from overseas, highlighted by a plethora of favorable reports out of China depicting healthy prosperity in the economy that has led the global recovery, as well as the Japanese government intervening to try to derail the steep advance in the yen that has threatened Japan's economy. Also, optimism toward the financial sector came from Switzerland, in the form of clarity of global banking sector capital rules from Basel III that showed institutions have eight years to comply, soothing concerns about the requirements being too strict. Also, the bulls found some support from favorable data out of the tech sector, with Friday's better-than-expected tech reports for Oracle Inc. and Research in Motion, while the retail sector also contributed to the bulls' cause. August retail sales posted stronger-than-expected growth, even after excluding items such as auto and gas, which gave a clearer picture of consumer spending, and Best Buy Co. Inc. (BBY $37) posted earnings well above the Street's expectations as it "significantly" increased its operating margin. Other reports this week for the bulls to hang their hats on included: an unexpected drop in weekly initial jobless claims-the third decline in the last four weeks-industrial production showed continued growth, and optimism in small businesses, which are vital to the economy and employment picture, rose for the first time in three months.

However, the week did not go by without the bears having a say in the matter, as the advance in the equity markets was limited by regional manufacturing reports out of New York and Philadelphia. The Empire Manufacturing Index unexpectedly showed activity slowed, and the Philadelphia Fed Business Activity Index failed to move back into a level depicting expansion-posting the second-straight contraction reading after recording a string of eleven-consecutive months of expansion ending in July. Moreover, the bears sharpened their claws on a profit miss by FedEx Corp. (FDX $82), which also offered a mixed outlook, raising its full-year EPS outlook but saying that it is expecting a phase of somewhat slower growth going forward. With the bulls and bears being able to point to certain aspects of weekly economic data to support their respective cases, it is no wonder why uncertainty on the outlook for the global recovery is running high and the markets continue to be range bound.

Slew of housing data and Fed meeting to highlight next week

The economic calendar starts off Tuesday with the release of the report on housing starts for August, expected to show an increase of 0.7% month-over-month (m/m) to an annual rate of 550,000 units, after posting a modest 1.7% increase in July. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to rise 0.2% m/m in August to 560,000 units after falling 3.1% in July.

Thursday brings the existing home sales, which reflect closings from contracts entered one to two months earlier and are forecasted to rebound 7.1% m/m in August to an annual rate of 4.1 million units after plunging 27.2% m/m in July. Friday follows up with the release of new home sales, expected to increase 6.9% m/m in August to an annual rate of 295,000 after dropping 12.4% in July. Sales of new homes are considered a timely indicator of the housing market as sales are recorded as contracts are signed. Home sales figures have been volatile since the expiration of the tax credit in April.

Durable goods orders will also be reported on Friday, expected to have decreased 1.0% m/m in August after inching 0.3% higher in July, while ex-transportation, orders are forecasted to have grown 1.0% m/m in August, after declining 3.8% in July. The figures tend to be volatile on a month-to-month basis, distorted by the large size of some goods such as aircraft.

However, the focus of the week will be on Tuesday's one-day Federal Open Market Committee (FOMC) meeting and mid-day statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. At the last FOMC meeting held August 10, the Fed downgraded its economic outlook and made a slight policy change to prevent its balance sheet from shrinking. The Fed noted that with the pace of economic recovery more modest than previously anticipated, and to support further recovery, they would keep the balance sheet constant by reinvesting proceeds of principal payments from mortgage-backed securities into Treasuries, as prepayment of mortgage-backed securities threatened to shrink the balance sheet, a defacto form of tightening.

There has been ample discussion about the Fed possibly taking the next step and entering a new asset purchase program, dubbed "QE2," or quantative easing part two, by the Street. Some view this step as necessary to jump-start growth from low expected levels, while others fret about the Fed's ability to control rates with a bloated balance sheet when it eventually comes time to tighten. However, at this point the signs appear to be for no action, as some economic data has been better than expected, and the Fed may wish to wait for more information before acting further. In his speech at the annual economic symposium held in Jackson Hole at the end of August, Fed Chair Ben Bernanke gave a lengthy overview of his outlook for the US economy, keeping in mind the Fed's dual mandate of "maximum employment and stable prices." On the inflation front, Bernanke said that "At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low." Bernanke also sounded optimistic about the ability of the economy to "handoff" from a recovery driven by fiscal stimulus and inventory building to growth in private final demand, notably consumer spending and business investment.

Other US economic releases include the NAHB Housing Market Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the Conference Board’s Index of Leading Indicators.

Elsewhere in the Americas, Canada releases wholesale sales, retail sales and its leading index, Brazil announces employment data, Mexico releases retail sales and its unemployment rate, and the central bank of Mexico meets to discuss monetary policy, where the expectation is for no change in rates.

In Europe, releases include euro-zone PMI reports on manufacturing and services, industrial new orders and consumer confidence, the German IFO survey of business confidence, and UK housing prices.

In Asia/Pacific, releases include Japanese leading index, and New Zealand 2Q GDP data. Additionally, the Reserve Bank of Australia releases its minutes from its September meeting.