Evening Market Update

Telecom Deal Fuels Stocks

Despite a larger-than-forecasted drop in existing home sales and a rise in the price of crude oil, stocks were able to finish the day strong, with the Dow moving back above the 12,000 mark for the first time in two weeks. The announcement that Dow member AT&T has reached an agreement to acquire T-Mobile USA from Germany’s Deutsche Telekom fueled the upward momentum, while easing concerns over a possible nuclear meltdown in Japan and renewed air strikes on Libya by the US and European allies that has stymied Qaddafi’s military also boosted sentiment. Elsewhere on the equity front, Citigroup announced a 1-for-10 reverse stock split and the reinstatement of its quarterly dividend, Tiffany & Co bested the Street’s earnings expectations, while Sprint Nextel suffered following the announcement of the AT&T/Deutsche Telekom deal. Treasuries finished lower amid the strength in the equity markets, showing little reaction to the disappointing housing report.

The Dow Jones Industrial Average rose 178 points (1.5%) to 12,037, the S&P 500 Index gained 19 points (1.5%) to 1,298, and the Nasdaq Composite advanced 48 points (1.8%) to 2,692. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.24 to $103.09 per barrel, wholesale gasoline jumped $0.05 to $3.00 per gallon, while the Bloomberg gold spot price rose $7.90 to $1,426.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 75.44.

Dow member  AT&T Inc. (T $28) announced that it has reached a definitive agreement to acquire T-Mobile USA from Deutsche Telekom AG (DTEGY $15) in a cash-and-stock transaction currently valued at approximately $39 billion. AT&T will pay $25 billion in cash and the rest in stock. The companies said the deal provides an optimal combination of network assets to add capacity sooner than any alternative, and it provides an opportunity to improve network quality in the near term for both companies’ customers. As part of the transaction, Deutsche Telekom will receive an equity stake in AT&T that would give it an ownership interest in AT&T of approximately 8% and a Deutsche Telekom representative will join the AT&T Board of Directors. The acquisition is subject to regulatory approvals. Shares of AT&T were higher, while shares of Deutsche Telekom were up over 11%.

Meanwhile, Sprint Nextel Corp. (S $4) was sharply lower following the announcement, with a company spokesperson telling Dow Jones Newswires, “The Department of Justice and Federal Communications Commission must decide if this transaction is in the best interest of consumers and the US economy overall, and determine if innovation and robust competition would be impacted adversely by this dramatic change in the structure of the industry.”

Citigroup Inc. (C $4) announced a 1-for-10 reverse split of its common stock and that it intends to reinstate a quarterly dividend of $0.01 per share in the 2Q 2011, following the effective date of the reverse stock split, which it expects to be after the close of trading on May 6, 2011. The company’s CEO Vikram Pandit said, “Citi is a fundamentally different company that it was three year ago.” Shares finished lower.

Tiffany & Co. (TIF $60) reported 4Q EPS ex-items of $1.44, above the $1.40 consensus estimate of analysts surveyed by Reuters, with revenues rising 12% year-over-year (y/y) to $1.1 billion, roughly inline with the Street’s expectations. Same-store sales—sales at stores open at least a year—increased 9% y/y, due to better holiday sales than it had previously reported and growth in all geographic regions. The company issued full-year 2011 guidance that topped expectations. Shares were solidly higher.

Existing home sales fall more than forecasted

Existing-home sales fell 9.6% month-over-month (m/m) in February to an annual rate of 4.88 million units, compared to the 4.5% decrease to 5.12 million units forecasted by economists surveyed by Bloomberg, and from January’s slightly upwardly revised 5.40 million units. The median existing-home price fell 5.2% from a year ago to $156,100, and was 1.1% lower m/m. The supply of homes rose by 3.5% m/m to 3.49 million units, equating to 8.6 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier. The National Association of Realtors (NAR), who releases the report, said that home sales were being constrained by the “twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated.” As a reflection of the tight credit availability, cash transactions accounted for 33% of all transactions, the highest since the NAR began tracking the figure in August 2008, primarily from investors, which accounted for 19% of buyers.

Treasuries finished lower amid the strong advance in the equity markets, while showing little reaction to the disappointing housing data. The yield on the 2-year note rose 4 bps to 0.64%, the yield on the 10-year note was 6 bps higher at 3.33%, and the 30-year bond yield gained 3 bps to 4.45%.

Telecom M&A deal, easing Japanese concerns aid sentiment overseas

The M&A deal between Deutsche Telekom and AT&T Inc. was the major theme providing a boost to sentiment overseas. However, uncertainty regarding stability in the Middle East and North Africa continued to garner attention in the wake of a second wave of US and European led coalition airstrikes on Libya, which crippled Qaddafi’s military and hampered an advance into rebel territory. Meanwhile, the European economic calendar was light, with the only piece of data worth a mention being a reading on UK home prices that gained 0.8% m/m in March, after jumping 3.1% in February.

In the Asia/Pacific region, no major economic reports were released on a day of relatively lighter-than-usual trading with the Japanese markets closed for a holiday. However, the tragedy in Japan following the massive earthquake and tsunami that hit the Northeast region of the nation continued to be in focus, with amplified attention remaining on the damaged nuclear facility north of Tokyo. Japan continues to try to cool nuclear reactors at the facility to avoid a meltdown, with some relative signs of progress made, and Japanese Prime Minister Kan said he can see “light at the end of the tunnel,” per Bloomberg. Also, US-European led airstrikes on Libya over the weekend had traders eying the prices of oil and trying to gauge what lies ahead for the Libyan leadership and stability in the Middle East and North African region.

Tomorrow, the only item on the US economic calendar will be the Richmond Fed Manufacturing Index, where activity in that region of the US is forecast to tick slightly lower to 24 in March from 25 in February. However, the international docket will offer a few more reports, including Japan’s All Industry index, China’s trade balance, and Taiwan’s unemployment rate, while across the pond, the UK will offer CPI, retail prices and public sector borrowing. Back in North America, Canada will report retail sales and its leading index.