Evening Market Update

Equities Finish Mixed Ahead of FOMC Start

Traders returned from the long holiday weekend in a cautious mood, as several global markets remained closed and ahead of the Fed’s two-day policy meeting which will conclude on Wednesday with an unprecedented press conference. The Dow and S&P 500 lost ground, but strength in technology issues helped to keep the Nasdaq marginally in the green. On the earnings front, chipmakers SanDisk and Advanced Micro Devices both reported profits that exceeded analysts’ forecasts after the closing bell on Thursday, Johnson Controls also bested the Street’s earnings and revenues expectations, while both RadioShack’s and Kimberly-Clark’s EPS fell short of what analysts were looking for. In M&A news, Community Health Systems’ revised $3.3 billion proposal to acquire all the outstanding shares of Tenet Healthcare was unanimously rejected by the company. Treasuries finished higher, despite a rebound in March new home sales, while the US dollar lost ground, providing strength to commodities.

The Dow Jones Industrial Average lost 26 points (0.2%) to 12,480, the S&P 500 Index was 2 points (0.2%) lower at 1,335, while the Nasdaq Composite was 6 points (0.2%) higher at 2,826. In light volume, 698 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.01 to $112.28 per barrel, wholesale gasoline gained $0.01 to $3.28 per gallon, while the Bloomberg gold spot price increased $6.30 to $1,510.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 74.00.

SanDisk Corp. (SNDK $50) reported 1Q EPS ex-items of $1.03, three cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 19% year-over-year (y/y) to $1.3 billion, roughly inline with the Street’s forecast. The flash memory chipmaker—chips used in mobile phones, digital cameras, and navigation devices—said its mobile business drove growth in 1Q and it has been actively managing its supply chain following the recent events in Japan and it remains on track to “deliver a strong 2011.” SNDK reaffirmed its full-year revenue outlook. SNDK was solidly higher.

Fellow chipmaker Advanced Micro Devices Inc. (AMD $9) announced 1Q earnings of $0.08 per share, above the $0.05 that analysts had expected, with revenues increasing 2% y/y to $1.6 billion, matching the projection on the Street. The company said its results were highlighted by “strong demand” for its first generation Fusion Accelerated Processing Units, as shipments “greatly exceeded” expectations. AMD issued 2Q revenue guidance that was inline with estimates. However, shares were lower as analysts may have been disappointed by the results following last week’s blow-out earnings results from competitor and Dow member Intel Corp. (INTC $22).
Johnson Controls Inc. (JCI $40) achieved fiscal 2Q EPS ex-items of $0.56, one penny above the Street’s forecast, with revenues increasing 22% y/y to $10.1 billion, compared to the $9.4 billion that analysts had projected. The automotive component and building energy efficiency solutions company said it had double-digit improvements in all three business segments. JCI also increased its full-year revenue outlook, but shares awere under pressure as the company said on a conference call with analysts that the tragedy in Japan is having a “pretty heavy impact” on its Japanese customer base, and it expects production in the nation to be down 50% in 3Q.

RadioShack Corp. (RSH $16) reported a 1Q profit of $0.33 per share, including a $0.02 per share charge for the extinguishment of debt, two pennies shy of what analysts were expecting, as sales rose 2.1% y/y to $1.06 billion, also short of the $1.07 billion forecasted on the Street. The consumer electronics retailer said its gross margins declined to 44.8% from 47.2%, same-store sales fell 0.6% m/m, and it lowered the high-end of its full-year earnings guidance by $0.10 to a range of $1.60-1.80. RSH ended marginally lower.

Elsewhere on the earnings front, Kimberly-Clark Corp. (KMB $64) posted 1Q EPS ex-items of $1.09, well below the $1.17 consensus estimate of analysts surveyed by Reuters, on revenues of $5.0 billion, slightly ahead of the $4.98 billion expectation. The consumer products company said rising prices for key raw materials more than offset higher volumes, and hence lowered the low-end of its EPS guidance for the year by $0.10 to a range of $4.80-5.05 and increased its projections for the cost of pulp, oil and other materials. Shares finished lower.

In M&A news, Tenet Healthcare Corp. (THC $7) announced that it has unanimously rejected Community Health Systems Inc’s (CYH $31) revised $6.00 per share in cash, or about $3.3 billion, proposal to acquire all outstanding shares of THC. The company said CYH’s offer “grossly undervalues” the company and is not in the best interests of THC or its shareholders. CYH said it is “disappointed” by the rejection and it remains ready to engage in constructive discussions to move this transaction forward. THC was higher, while CYH was nearly unchanged.

New home sales rise to kick off the week, but Fed meeting looms on the horizon

New home sales rose to a level that topped expectations, increasing 11.1% month-over-month (m/m) to an annual rate of 300,000 units in March, from an upwardly revised annual rate of 270,000 units in February—up from the initially reported level of 250,000 units. Economists surveyed by Bloomberg expected a rate of 280,000. The median home price fell 4.9% y/y but is 2.9% higher m/m to $213,800. Inventory of new homes for sale declined to 183,000 units, representing 7.3 months of supply at the current sales rate, down from 8.2 months in February. March’s increase was paced by a 66.7% m/m jump in sales in the Northeast and a 25.9% m/m rise in the West. New home sales are considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which rose more than expected in March, uses closings.

Although new home sales rebounded from the record low seen in February, sales remain depressed, exacerbated by intense competition from the flood of supply of existing homes on the market, due mainly to increasing foreclosures. Meanwhile, homebuilders are responding by lowering production as the level of inventory of new homes on the market sits at the lowest level since 1967. Moreover, amid the backdrop of elevated supply, coupled with continued tight lending standards that have fostered an increase in all-cash buyers—which have the upper hand in price negotiations—the outlook for home prices likely remains less than favorable. Tomorrow, we will get a look at national home prices for February in the form of the S&P/Case-Shiller Home Price Index, expected to post a 0.4% m/m decrease—the eighth-straight monthly drop—and a y/y price decline of 3.3%.
  

In 2011 lenders are likely to foreclose on more homes than any other year since the housing crisis began in 2006. The only saving grace is that RealtyTrac believes 2011 will be the peak in foreclosures, predicting 1.2 million homes will be repossessed this year, up from one million in 2010. Liz Ann adds that necessary ingredients for a healthy recovery in housing would be a down slope in the unemployment rate, a further loosening of the credit environment, no significant (further) spike in mortgage rates, and general improvement to consumer confidence.

Treasuries were modestly higher following the housing data, with the yield on the two-year note down 2 bps to 0.65%, the yield on the 10-year note 4 bps lower to 3.37%, and the 30-year bond down 2 bp to 4.46%.

Meanwhile, US monetary policy garnered the heaviest attention on the economic front, ahead of tomorrow’s start of the two-day Federal Open Market Committee (FOMC) meeting. No major changes are expected to the Fed’s stance and the statement will be released earlier than usual on Wednesday, at 12:30 p.m. EST, followed by the first post-statement news conference and Q&A session led by Fed Chair Bernanke beginning at 2:15 p.m. EST.

In addition to the S&P/Case Shiller report, the only other items that will grace the US economic calendar will be consumer confidence and the Richmond Fed Manufacturing Index.

Quiet on the international front

With most markets in Europe and in Asia remaining closed for holidays, economic news overseas was non-existent. Schwab’s Liz Ann, Brad and Michelle note in their Schwab Market Perspective, despite Portugal’s need for funds, the ECB followed through on its “strong vigilance” on inflation by hiking rates in early April. We remain concerned about a rate hike cycle when economic growth in the eurozone remains fragile and the full impact of fiscal austerity is yet to be felt. European stocks appear to be attractively valued. However, outside of companies with high exposure to growth coming from the United States and emerging world, we remain suspect of the ability for European stocks in general to outperform in the face of growth headwinds.

Sentiment in Japan was soft as the nation’s Nikkei 225 Index was open for business and declined 0.1%, pressured by the nation’s automakers following reports of steep declines in output for March, when Japan was hit by the massive earthquake and tsunami causing widespread production halts. Later in the day, Standard & Poor’s cut its outlook on Toyota Motor Corp. (TM $79), Nissan Motor Co. (NSANY $18) and Honda Motor Co. (HMC $38), days ahead of earnings reports from Japanese automakers hitting the Street, indicating a possible downgrade of the automakers in the offing Finally, China’s Shanghai Composite Index also saw light trading and fell 1.5% on uneasiness regarding further policy tightening in the wake of rising commodity costs.

Tomorrow’s international economic calendar will be dormant with no major reports scheduled for release.