Evening Market Update

Mixed Data and Greek Developments Leave Traders Confused

Stocks struggled and ended the session mixed as developments in Greece continued to weigh and US economic data yielded positive housing data, a decline in jobless claims, and a smaller current account deficit but also another disappointing plunge in a survey of regional economic activity, this time in the Mid-Atlantic, and Treasuries were mostly higher. In equity news, Kroger Corp and Smithfield Foods Inc both beat the Street, but technology company Finisar Corp gave a disappointing forecast. In M&A news, Energy Transfer Equity LP announced an agreement to buy Southern Union Co for roughly $4.2 billion in stock, while the Wall Street Journal reported that Capital One Financial Corp was close to acquiring the US online banking business of ING Groep NV for a mix of cash and stock worth $9 billion.

The Dow Jones Industrial Average gained 64 points (0.5%) to 11,961 and the S&P 500 Index rose 2 points (0.2%) to 1,288, while the Nasdaq Composite fell 7 points (0.3%) to 2,624. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.14 to $94.95 per barrel, wholesale gasoline gained $0.03 to $2.95 per gallon, and the Bloomberg gold spot price fell $2.20 to $1,528.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 75.54.

Finisar Corp. (FNSR $15) fell over 15% after the fiber-optic equipment maker issued fiscal 1Q guidance that missed analysts’ forecasts, with 1Q EPS ex-items expected to be in a range of $0.17-0.21, compared to the $0.35 consensus estimate of analysts surveyed by Reuters, and revenues to come in between $215-230 million, below the $249 million that the Street had expected. The outlook was issued along with the company’s fiscal 4Q results, which showed EPS of $0.33, inline with analysts’ projections, and revenues of $237 million, below the $243 million that the Street was looking for.

Kroger Co. (KR $24) reported fiscal 1Q EPS of $0.70, above the $0.64 that the Street had anticipated, with revenues rising 11% year-over-year (y/y) to $27.5 billion, exceeding the $26.6 billion estimate of analysts. The grocery store operator said same-store supermarket sales—sales at stores open at least a year—rose 4.6% y/y excluding fuel sales. Shares were solidly higher following the report, which also included the company raising its full-year same-store sales and EPS guidance.

Smithfield Foods Inc. (SFD $22) reported fiscal 4Q earnings of $0.85 per share, three cents above analysts’ forecasts, but revenues, although rising 7.3% y/y to $3.1 billion, came in below the $3.2 billion Street forecast. The meat company said its pork segment produced record profit for the quarter, while its hog production saw continued “strong export demand,” particularly from Asian markets. Looking ahead, the company said pork segment profitability “should continue to be robust” in fiscal-year 2012, while its cost savings initiative “is well underway” and should improve its long-term cost structure. Shares were nicely higher.

In M&A news, Energy Transfer Equity L.P. (ETE $46) announced that it has reached a definitive agreement to acquire Southern Union Co. (SUG $33) for $33.00 per share in stock, or about $4.2 billion excluding $3.7 billion in debt. The companies said the deal will create the largest consolidated natural gas pipeline company in the US. ETE was solidly higher, while SUG traded over 15% to the upside.

Also, the Wall Street Journal reported that Capital One Financial Corp (COF $49) was closed to a deal to purchase the US online banking business of ING Groep NV (ING $11) for a deal valued at $9 billion, consisting of $6.2 billion in cash and $2.8 billion in stock, while raising $2 billion in new capital later this year, before the deal closes. ING was ordered by the European Commission to sell the business by 2013 as a condition for government aid received during the financial crisis. The WSJ cited a person with direct knowledge of the matter, while neither firm commented and stocks of both companies rose.

Housing starts and permits rise and jobless claims decline, but Philly Fed Index falls 

Housing starts for May rose 3.5% month-over-month (m/m) to 560,000 units from a favorably revised 541,000 annual rate of units in April, above the 545,000 expectation of economists.  Building permits also positively surprised, by increasing 8.7% m/m in May to an annual rate of 612,000, after April’s upward revision to a 563,000 rate. The expectation was for permits to come in at 557,000 units. The volatile multi-family sector boosted results, as starts gained 8.9% and permits jumped 23.2%. However, the single-family sector also rose, with starts increasing 3.7% and permits growing 2.5%.

Lack of confidence by homebuyers amid falling prices, as well as people displaced by foreclosures, has resulted in an uptick in demand for rental properties. As a result rents are rising and while still high, vacancies in the multi-family sector have declined. Meanwhile, single-family new home sales have been hurt by falling prices of foreclosures of existing homes. However, the housing market overall remains depressed, and the National Association of Realtors believes home sales have been held back by 15-20% due to “very restrictive loan underwriting standards,” noting that proposed regulations that effectively raise downpayment requirements to 20% would “slam the brakes on the housing market” due to the low number of people that could afford this downpayment, putting pressure on new home buyers and thus the trade-up market as well.

Additionally, weekly initial jobless claims fell more than forecasted, dropping by 16,000 to 414,000, versus last week's figure which was upwardly revised by 3,000 to 430,000, and compared to the decline to 420,000 that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, remained unchanged at 424,750, while continuing claims dropped by 21,000 to 3,675,000, above the forecast of economists, which called for continuing claims to come in at 3,670,000.

However, the Philly Fed Manufacturing Index fell to a level depicting contraction, surprising economists, dropping from 3.9 in May to -7.7 in June. Economists had expected the index to increase to 7.0, with a reading of zero the separating point between expansion and contraction. The index dropped as new orders fell 13.0 points to -7.6, shipments dipped 2.5 points to 4.0 and inventories fell further into negative territory, dropping to -8.5. Also, employment posted a sharp 18 point drop to 4.1—the weakest reading since October—and the prices paid component was cut by 21.5 points to 26.8.

Finally, the 1Q  current account came in smaller than expected at $119.3 billion, from a favorably revised $112.2 billion in 4Q, and compared to the increase to $130.0 billion that was anticipated by economists.

Treasuries ended mixed, with the yield on the 2-year note flat at 0.38%, while the yield on the 10-year note declined 5 bps to 2.92%, and the 30-year bond rate fell 3 bps to 4.17%.

Greece remains the focus of markets globally

Eurozone debt fears have amplified as lack of agreement has markets considering the possibility and implications of a Greek default and the ripple effects throughout the European banking system and the threat of contagion to other sovereign debt in Europe. Events yesterday heated up as large anti-austerity protests ensued in the streets of Greece and the nation’s Prime Minister Papandreou vowed to reshuffle his cabinet and seek a vote of confidence, in order to unify the government in its efforts to carry out the tough austerity measures. Elsewhere in peripheral Europe, Irish Finance Minister Noonan said yesterday that senior bondholders should share in the losses of Anglo Irish Bank Corp and Irish Nationwide Building Society, reversing a previous pledge to protect holders of senior securities. Ireland is trying to negotiate better bailout terms, and today Noonan qualified that senior bondholders of Allied Irish Banks Plc (AIB $2) and Bank of Ireland Plc (IRE $1) would not be affected and the burden sharing plan would be subject to approval by the European Central Bank. Lastly, the debt fears toward the peripheral eurozone nation showed up in a debt auction in Spain today, as the nation sold 2.8 billion euros ($4 billion) in 8 and 15-year bonds, which missed the country’s maximum target of 3.5 billion euros in capital raised, with rates higher than previous auctions, per Bloomberg.

Sentiment did receive a boost in late European trading, after European Union Economic and Monetary Commissioner Olli Rehn said eurozone governments will agree at a meeting starting Sunday to pay the next installment of funds due under the original bailout, while delaying a final decision on a longer-term Greek package until July, and implied that the IMF could also agree to pay the current payment due, contrary to an early June IMF statement that noted further funds would not be disbursed until Greece addressed its funding needs for 2012. Dow Jones Newswires quoted an unnamed senior IMF official as saying a commitment for the next 12 months’ of funding is expected “to be given by Sunday, or even later on June 24 by the European Council,” and noted that Greece also needs to adopt the new fiscal consolidation medium-term program to qualify for the disbursement. The unnamed IMF official was also quoted as saying that the current disbursement is "not so urgent as some people think. We have enough time to meet the next borrowing needs of Greece by the middle of July, so we have some time.".

The European economic calendar was overshadowed by the focus on Greece, but there were some reports worth mentioning, with eurozone consumer prices coming in a bit cooler than expected in May, while UK retail sales fell much more than projected in May.

In Asia Pacific news, India’s central bank increased its benchmark interest rate for the tenth time since the beginning of 2010. India’s interest rate was boosted by 25 basis points to 7.50%, matching expectations of economists. In other economic news in the region, Australia’s new motor vehicle sales fell in May, and a separate report showed the nation’s consumer inflation expectation remained at 3.3% in June, while China’s Leading Index improved slightly from March to April.

Tomorrow’s economic schedule is light but Greek spotlight will remain

The US economic calendar tomorrow will yield the Conference Board’s Index of Leading Indicators, which is expected to rise 0.3% in May after falling 0.3% in April, and the preliminary University of Michigan Consumer Sentiment Index reading for June, which is expected to fall to 74.0 from 74.3 in May.

International releases will include Japan department store sales for May, French wages, eurozone construction output and trade balance, as well as Canadian wholesale sales.