Evening Market Update

Equity Markets Move Higher on Soothing Euro-Debt Concerns

The bulls got the best of the market today, as stocks finished nicely in the green on improved sentiment toward the euro-area debt crisis and some optimistic US equity news. Financials led the advance following some upbeat comments from the group, including the suggestion of a dividend increase from JP Morgan Chase CEO Jamie Dimon. On the economic front, import prices rose on a jump in fuel prices, while mortgage applications saw a modest increase. Additionally, the Fed released its Beige Book, where it noted a moderate expansion in economic activity amid mixed financial conditions. In other equity news, Lululemon Athletica raised its 4Q guidance, AIG reached an agreement to sell its Taiwanese life insurance unit for $2.16 billion, and ITT Corp announced plans to split into three separate companies. Elsewhere, Arch Coal cut its 2010 outlook, while fellow coal producer Cliffs Natural Resources reached an agreement to acquire Canadian Consolidated Thompson Iron Mines for $4.95 billion. Treasuries finished the day lower.

The Dow Jones Industrial Average rose 84 points (0.7%) to 11,755, the S&P 500 Index was 11 points (0.9%) higher at 1,286, and the Nasdaq Composite gained 21 points (0.8%) to 2,737. In moderate volume, 964 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil gained $0.65 to $91.76 per barrel, wholesale gasoline fell $0.02 to $2.46 per gallon, while the Bloomberg gold spot price rose $5.05 to $1,386.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.0% to 80.03.

Dow member JP Morgan Chase and Co. (JPM $45) led a strong advance in the financial sector after CEO Jamie Dimon said in a CNBC interview after yesterday’s close that the bank could pay an annual dividend of up to $1 per share in the second quarter. The Federal Reserve said in November that the biggest U.S. banks would be allowed to boost dividends, assuming they pass new stress tests.

Lululemon Athletica Inc.  (LULU $73) was nicely higher after the athletic apparel retailer raised its 4Q guidance due to “stronger-than-anticipated” net revenues. LULU said it now expects 4Q EPS to be in a range of $0.55-0.57, versus its previous outlook of between $0.46-0.48, and revenues are anticipated to come in a range of $237-239 million, compared to the $210-215 million it had originally forecasted. Also, the company said same-store sales—sales at stores open at least a year—are expected to reflect a mid-to-upper twenties percentage increase year-over-year (y/y), up from previous guidance of high teens percentage growth. Analysts surveyed by Reuters had expected the company to post 4Q EPS of $0.51 and revenues of $222 million.

American International Group Inc.  (AIG $58) announced that it has reached an agreement to sell its near 98% interest in Taiwanese Nan Shan Life Insurance Company Ltd. to a Taiwan-based consortium led by Ruen Chen Investment Holding Co. Ltd. for $2.16 billion in cash. This is the second time AIG has tried to sell its stake in Nan Shan and the deal needs to be approved by Taiwan’s Financial Supervisory Commission, which in August blocked a previous $3.0 billion offer by Hong-Kong based buyers on concerns they lacked the financial health and commitment to Nan Shan. The deal comes as AIG tries to get itself free of US government control that resulted from the company’s $180 billion bailout during the financial crisis. AIG traded modestly lower.

ITT Corp. (ITT $62) moved sharply higher after the industrial conglomerate announced that it will split into three separately, publicly-traded companies. ITT Corp will continue as a standalone, industrial company, while its water-related business and its defense segment will be spun off to make up the other two companies. ITT said in today’s business environment it believes this strategy is the best approach to unlock their value-generating potential for shareholders.

Arch Coal Inc. (ACI $34) cut its adjusted earnings outlook for 2010, citing lower shipments caused by weather-related delays in rail service on the east coast. The second-largest U.S. coal producer does expect to make up a portion of the delayed production throughout the year, and reports suggest that U.S. coal companies will be looked upon to increase production in order to fill the void in coal supply left by the flooding in Australia, which produces two-thirds of the world’s premium coking coal. Shares of ACI finished lower.

In related industry news, coal and iron-ore producer Cliffs Natural Resources Inc. (CLF $88) announced an agreement to acquire all of the outstanding shares of the Canadian Consolidated Thompson Iron Mines Ltd. for approximately $4.95 billion. CLF executives said the acquisition would help the company expand its share of the global iron-ore market, which is a key steelmaking ingredient, and has seen a strong boost in prices as the global recovery continues. Shares of CLF traded higher.

Import prices and mortgage apps rise, Beige Book notes solid end to 2010

The Import Price Index rose 1.1% month-over-month (m/m) for December, compared to the expectation of economists, which called for the index to increase by 1.2%, and following the upwardly revised growth of 1.5%—from a previous report of 1.3%—that was seen in November. Year-over-year (y/y), import prices are higher by 4.8%, versus the 4.7% forecast of economists. Fuel prices led the increase, rising 4.1% to post the third-straight month of gains exceeding 4%. Beginning tomorrow, we will get a more complete picture of inflation as the Producer Price Index will be released, expected to increase 0.8% m/m in December, while excluding food and energy, the core rate is forecasted to rise 0.2%. Moreover, on Friday, the Consumer Price Index will be released, anticipated to show the headline rate rose 0.4%, while the core rate is expected to remain subdued, growing 0.1%.

From the Federal Reserve’s standpoint, the core rates of inflation—more closely monitored by the Fed—remain contained, clearing the way for the Fed to continue its second round of $600 billion in asset purchases, known as quantitative easing or QE2, which it reiterated its intention to do so in its monetary policy meeting in December. However, the Fed noted at their December meeting that several members viewed the risk of deflation—a general decline in prices—as having “receded somewhat.” Meanwhile, from the consumer and corporate profit standpoint, the recent inflation data suggests a potential headwind may be brewing. Rising food and energy prices, or “bad inflation,” threaten the discretionary income of the consumer, which accounts for the lion’s share of economic activity, while higher input prices have the potential to squeeze corporate profits as the current economic environment hampers the ability for businesses to pass along the higher costs of production.

In other economic news, the  MBA Mortgage Application Index increased by 2.2% last week, after the index that can be quite volatile on a week-to-week basis, rose 2.3% in the previous week. The increase came as a 4.9% gain in the Refinance Index offset a 3.7% decline in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate fell 4 basis points to 4.78%, above the record low of 4.21% on October 8.

The Federal Reserve released its Beige Book in afternoon action, which is a report summarizing anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for January 25-26. The report had some positive pieces of data, as it noted that economic activity continued to “expand moderately,” and all Districts reported manufacturing activity continued to recover and retailers indicated that sales appeared to be higher in this holiday season than in 2009 and, in some cases “better than expectations.” Moreover, the report revealed that financial conditions were mixed, while residential real estate markets remained weak across all Districts and commercial construction was described as subdued or slow. On inflation, both retailers and manufacturers noted that “costs were rising,” and that competitive pressures had led to only modest pass-through into final prices. Finally, the report showed that the labor markets appeared to be “firming somewhat,” as some modest hiring beyond replacement was said to have occurred and/or was planned in a variety of sectors.

Treasuries finished lower amid the solid gains in equities and following the inflation and housing data. The yield on the two-year note rose 2 bps to 0.60%, the yield on the 10-year note increased 3 bps to 3.37%, and the 30-year bond yield gained 4 bps to 4.53%.

Possible changes to euro-zone bailout soothes some debt concerns

European debt concerns dissipated somewhat, after the European Union and Monetary Affairs Commissioner Rehn said the European Commission and euro-zone countries are mulling changes to the size and scope of the euro-zone’s bailout fund.

Meanwhile, the economic calendar across the pond offered support to sentiment as there were some favorable releases to help boost optimism about the economic health of the European economy, which could help combat the debt crisis in the region. Euro-zone industrial production rose much more than economists expected, rising 1.2% m/m in November, compared to the 0.5% growth that was anticipated, while Italy’s industrial production also exceeded economists’ growth forecasts. Moreover, Germany’s annual GDP growth rate rebounded from a -4.7% rate in 2009 to a 3.6% pace of expansion—the fastest economic expansion in two decades, per Bloomberg—for 2010. However, the UK reported that its trade deficit widened more than anticipated.

In Asia/Pacific, a report showed that Japan’s trade surplus narrowed by an amount that exceeded economists’ forecasts, while India’s industrial production rose at a smaller-than-expected rate, and Thailand’s central bank increased its benchmark interest rate by 25 basis points to 2.25%.

Back in the Americas, Brazil announced that retail sales increased 1.1% in November, compared to the 0.5% increase expected by economists.

PPI, jobless claims, and trade balance on tap for tomorrow

In addition to the aforementioned Producer Price Index, other releases on tomorrow’s US economic calendar will include weekly initial jobless claims, which are expected to tick slightly higher to 410,000, and the November trade balance, which economists expect to expand to a deficit of $40.5 billion.

Releases on tomorrow’s international calendar will include the French CPI, the German wholesale price index, UK industrial and manufacturing production, Japanese machine orders, the Chinese leading indicator, and Australia’s unemployment rate. Additionally, the Bank of England will conclude its monetary policy meeting, where it is expected to keep interest rates unchanged.