Evening Market Update

Markets Lose Steam in Final Hour

A boost from a better-than-expected existing home sales report and a slightly higher-than-forecasted rise in the Index of Leading Economic Indicators disappeared in late-day trading and stocks fell back near the lows of the day, as disappointing manufacturing and services reports out of Europe and an increase in US weekly initial jobless claims further stymied sentiment toward the global economic recovery. Treasuries moved higher after the US jobs and European PMI reports and finished in the green, however the upbeat US housing and leading indicators releases pared some of the early advances. In equity news, Dow member McDonald’s upped its dividend, and Bed Bath & Beyond and Red Hat both beat the Street’s earnings projections. Elsewhere, Edwards Lifesciences got the go ahead from the FDA to begin trials of its replacement heart valve, Avis Budget Group sweetened the cash portion of its offer to acquire Dollar Thrifty Automotive Group, while GM’s impending IPO may be half of what it was hoping for, and a regulatory decision on GlaxoSmithKline’s diabetes drug will likely negatively impact sales.

The Dow Jones Industrial Average lost 77 points (0.7%) to close at 10,662, the S&P 500 Index declined 9 points (0.8%) to 1,125, while the Nasdaq Composite dropped 7 points (0.3%) to 2,327. In moderate volume, 950 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil increased $0.47 to $75.18 per barrel, wholesale gasoline gained $0.01 to $1.91 per gallon, and the Bloomberg gold spot price advanced $1.20 to $1,292.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.3% to 80.08.

Dow member McDonald’s Corp. (MCD $75) announced that its Board of Directors authorized an 11% increase in its quarterly dividend to $0.61 per share. The world’s largest fast-food chain said today’s dividend increase demonstrates its confidence in the long-term strength of its brand. Shares were lower.

Bed Bath & Beyond Inc. (BBBY $43) reported 2Q EPS of $0.70, above the $0.63 Reuters estimate, with revenues increasing about 12% year-over-year (y/y) to $2.1 billion, roughly inline with the Street’s expectation. Same-store sales—sales at stores open at least a year—jumped 7.4% y/y. The housing products retailer issued 3Q EPS guidance that was inline with the Street’s forecasts, while it increased its full-year earnings outlook, which exceeded expectations. BBBY traded higher.

Red Hat Inc. (RHT $40) posted 2Q earnings ex-items of $0.19 per share, one cent above the consensus forecast of analysts, with revenues growing 20% y/y to $219.8 million, exceeding the Street’s estimate of $212.3 million. The producer of the Linux open-source operating system said it continued to benefit from new project spending, expansion and cross selling of its product solutions and strong renewals in its top accounts. RHT was up over 10%.

Edwards Lifesciences Corp. (EW $68) finished over 13% higher after the cardiovascular technologies firm reported that the US Food & Drug Administration (FDA) conditionally approved the first of two trials of its transcatheter replacement heart valve. According to Dow Jones Newswires, the company’s heart valve replacement is available for sale in Europe after receiving approval there in March.

Avis Budget Group Inc. (CAR $11) announced that it is increasing the cash portion of its offer to acquire Dollar Thrifty Automotive Group Inc. (DTG $52) from $40.75 per share to $45.79. CAR said it is increasing the offer because it continues to believe in the merits of the transaction, and the offer represents a meaningful premium over the revised offer to acquire DTG by Hertz Global Holdings Inc. (HTZ $10). DTG was higher, while CAR and HTZ came under pressure.

Bloomberg reported that General Motors will likely look to raise between $8-10 billion in an intial public offering in November, nearly half of what the US automaker and its investment banks were considering, citing people familiar with the matter. Those cited in the report say that the US Treasury Department, which owns 61% of GM, is seeking a higher share price to recover its $49.5 billion assistance to GM, as opposed to having to cash out a larger portion of its investment at a lower price. Neither GM nor the Treasury commented on the report.

In an emailed statement, London-based GlaxoSmithKline Plc (GSK $39) said it will discontinue all promotions of its diabetes treatment, Avandia, following European and US regulator decisions regarding the sale of the drug. The embattled treatment, once the best-selling diabetes medicine, will be pulled from Europe’s market, while additional warnings will be required and sales will be limited in the US. The decisions come after a three-year battle following research that showed that Avandia increased the risk of heart attacks. Shares of GSK finished lower.

Home sales and LEI surprise to the upside, while jobless claims rise

Existing home sales rose 7.6% month-over-month (m/m) in August to an annual rate of 4.13 million units, slightly better than the 7.1% increase to 4.10 million units forecasted, and July’s data was revised modestly higher to 3.84 million. The median existing-home price rose 0.8% from a year ago to $178,600, while declining 1.9% m/m, and the supply of homes increased by 0.6% m/m to 3.98 million units, equating to 11.6 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier.

The tax credit boosted sales for most of 2009 and the first half of 2010. However, sales still remain below the 4.5 million annual pace that marked the low before the tax credit, and sales in August were the second-lowest in a decade of record-keeping. The National Association of Realtors (NAR), who releases the data, believes that sales will continue to be soft in September and October, as prior months pulled forward sales. Despite a nearly 40-year high in affordability, homebuyer sentiment remains low due to “lingering economic uncertainty” according to the NAR, and high levels of joblessness. With the high rate of unemployment, and nearly 25% of homeowners underwater in their mortgages, the housing market will continue to be influenced by future inventory coming from foreclosures as there are nearly 8 million homes in some stage of delinquency, default or foreclosure. To-date, the amount of homes that have made it through the foreclosure process has been small, due to foreclosure moratoriums, loan modification programs, and banks’ reluctance to put homes on the market, forcing recognition of losses on the asset.

Weekly initial jobless claims rose by 12,000 to 465,000, versus last week's figure which was upwardly revised by 3,000 to 453,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 450,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 3,250 to 463,250, while continuing claims dropped by 48,000 to 4,489,000, compared to the 4,473,000 that was anticipated by economists.

In other economic news, the Conference Board released the Index of Leading Indicators (LEI) for August, which increased by 0.3%, above expectations of a 0.1% advance, and July’s 0.1% rise was unrevised. The increase was paced by positive contributions from the money supply and a favorable yield curve, while negative contributors were jobless claims and the pace of deliveries.

Treasuries moved higher following the disappointing employment data and unfavorable economic reports out of Europe, but did pare some of those gains on the housing release. The yield on the two-year note lost 2 bps to 0.42%, the yield on the 10-year note fell 3 bps to 2.55%, and the 30-year bond yield shed 6 bps to 3.73%. Yields have come down recently on concerns about the economic recovery, which prompted the US Federal Reserve, in Tuesday’s monetary policy announcement, to seemingly open the door for more stimulus efforts in the form of another round of quantitative easing (QE), or purchases of assets such as Treasury bonds, in order to pump more cash into the system.

Disappointing economic data across the pond

The euro-zone PMI Composite Index, depicting activity in the manufacturing and services sectors, fell from 56.2 in August to 53.8 in September, with a reading above 50 denoting expansion, compared to the modest decline to 55.7 that was anticipated by economists. Euro-zone services posted the biggest decline for the index. Manufacturing and services activity in Germany—Europe’s largest economy—both fell more than expected to pace the worse than forecasted read in the euro-zone, while although the pace of France’s manufacturing activity in the nation unexpectedly increased in September , the services gauge fell more than expected. In other economic news in the region, UK mortgage approvals fell to a 16-month low in August, per Bloomberg, Italy’s unemployment rates increased by a smaller-than-expected amount, and Ireland’s 2Q GDP posted an unexpected quarter-over-quarter (q/q) contraction, which fanned the flames of sovereign debt anxiety.

In the Americas, Mexico’s unemployment rate fell by a larger-than-expected amount in August to 5.44% m/m, while Brazil’s jobless rate dropped to a record 6.7% m/m, below the 7.0% expected by economists.

With markets in Japan, South Korea, Hong Kong, and China all closed for holidays, economic news in Asia/Pacific was light, but there were a couple of releases worth a mention. A report in New Zealand showed that the nation’s 2Q GDP expanded by a much smaller amount than forecasted by economists, while Taiwan’s unemployment rate declined more than expected and its industrial production expanded at a rate that topped economists’ estimates.

More housing data, as well as durable goods orders, on tap

New home sales will be released tomorrow, expected to show a 6.9% m/m increase in August to an annual rate of 295,000 units. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales, released earlier today.

Durable goods orders will also be reported on Thursday, expected to fall 1.0% m/m in August after rising 0.3% in July, while ex-transportation, orders are forecasted to have grown 1.0% m/m, after declining 3.8% in July. Non-defense capital goods excluding aircraft, considered a good proxy for business spending, is anticipated to grow 3.0% after falling by 8.0% the month prior. The durable goods data is volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data. Within the 2Q gross domestic product (GDP) report, corporate spending on equipment and software rose at a 24.9% annual rate, and has been a source of strength in the recovery.

Elsewhere, international economic reports are light as much of Asia is on holiday, while France will release final 2Q GDP, Germany announces import prices and the IFO survey of business confidence, and Italy reports retail sales.