Evening Market Update

Market Comeback Falls Short

After opening solidly lower amid anxiety over the debt ceiling standoff, and a downgrade of Greece by Moody’s, US equities were able to pare some of those losses, only to lose steam and move again lower late in the day. The turnaround came courtesy of an announcement of a debt plan by Senate Democrats that appeared not to impress the markets. Earnings reports took a bit of a breather until after the close when Netflix reported results that were mixed. Meanwhile equity news was light, as E*Trade Financial announced that it has retained Morgan Stanley to review strategic alternatives in response to a letter by the company’s largest shareholder, Research in Motion announced a reduction of its global workforce, and Bridgepoint Education disclosed that privately-held Warburg Pincus LLC filed to sell its nearly 65% stake in the for-profit company. Treasuries finished to the downside despite the global debt uneasiness, while a read on manufacturing activity in Dallas showed better-than-expected improvement.

The Dow Jones Industrial Average lost 88 points (0.7%) to 12,593, while the S&P 500 Index fell 8 points (0.6%) to 1,337, and the Nasdaq Composite declined 16 points (0.6%) to 2,843. In moderate volume, 737 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.67 to $99.20 per barrel, wholesale gasoline lost $0.01 to $3.08 per gallon, and the Bloomberg gold spot price advanced $13.45 to $1,614.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 74.11.

After the close, Netflix Inc. (NFLX $282) reported 2Q EPS of $1.26, handily beating analysts’ estimates on revenues of $788.6 million that fell short of forecasts.

E*Trade Financial Corp. (ETFC $17) announced that it has formed a special committee of its Board, comprised entirely of independent directors, which has directed the company to retain Morgan Stanley (MS $23) to “conduct another broad review of strategic alternatives.” The announcement comes in response to a letter sent last week by privately-held investment firm Citadel LLC, which is the online brokerage firm’s largest stakeholder, urging the company to hold a special investor meeting to discuss plans to boost performance, including a possible sale, and the removal of two ETFC Board members.

ETFC said it believes it has already addressed the substance of Citadel’s proposals and that “it is not in the best interests of shareholders to call a special meeting at this time.” Moreover, ETFC said it completed a strategic review in 4Q 2010, determining that the continued execution of the company’s business plan was the best alternative for increasing shareholder value. The company concluded that Citadel’s proposal to remove two highly qualified independent Directors is “inappropriate, and contrary to Delaware law.” After the release from ETFC, Citadel sent a second letter over the weekend, demanding the company hold a special meeting with its stockholders. Meanwhile, the Wall Street Journal reported that rival TD Ameritrade Holding Corp. (AMTD $20) is planning to discuss at a meeting tomorrow the possibility of acquiring the online-brokerage firm, according to people familiar with the matter. AMTD did not comment on the story. Shares of ETFC and AMTD were nicely higher.

Research in Motion Ltd. (RIMM $27) announced that as part of its cost optimization program, the maker of the BlackBerry smartphone is reducing its global workforce by approximately 2,000 employees. RIMM said the size of this workforce reduction is in line with the preliminary estimate that was factored into its full-year financial guidance it gave on June 16, 2011. RIMM traded solidly lower.

Bridgepoint Education Inc. (BPI $27) was sharply lower after the for-profit education firm disclosed that privately-held Warburg Pincus LLC filed to sell its entire stake of BPI. As of April 1, 2011, Warburg Pincus’ stake in BPI amounted to about 65% of the total shares outstanding, or roughly 34.6 million shares.

Housing kicks off a full slate of economic data this week

Treasuries finished lower despite the declines in the equity markets and as the US debt ceiling issue continues to hang over the markets, with the yield on the 2-year note up 2 bps to 0.42%, the yield on the 10-year note 4 bps higher to 3.01%, while the 30-year bond rate advanced 6 bps to 4.32%.

Meanwhile, although today’s economic calendar is void of any major releases, we did get a look at regional manufacturing activity in the form of the Dallas Fed Manufacturing Index, which improved more than expected, rising from -17.5 in June to -2.0 for July. But a reading below zero denotes contraction. New orders, production, and employment expanded solidly to lead the larger-than-estimated improvement, offsetting a contraction in capital expenditures. The report is the latest read on activity in July, with earlier reports out of New York and Philadelphia mixed as severe weather and the tragedy in Japan continue to be felt.

Looking ahead, the  economic calendar will heat up as the week matures, joining the earnings parade and scrutiny on US policymakers to reach agreement on the debt ceiling. Housing data will kick off the heavy dose of data this week, which include the first look at 2Q GDP, the Federal Reserve’s Beige Book, durable goods orders, and regional manufacturing reports from Richmond and Chicago. Tomorrow, the S&P/CaseShiller Home Price Index will be released, forecasted to show prices were flat month-over-month (m/m) and down 4.55% year-over-year (y/y) in May. Pricing data lags sales data by a month, while June’s new home sales report out the same day is expected to show a 0.8% m/m gain in June to an annual rate of 322,000 units after falling 2.1% in May to 319,000. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which unexpectedly fell 0.8% m/m, uses closings.

Home prices and new home sales are likely to remain under pressure as the extremely elevated levels of foreclosures in the existing home market compete with new home offerings and give the upper hand to buyers. Moreover, the frustratingly high level of unemployment and recent soft patch in the economy are doing little to foster upbeat sentiment toward the housing sector. 

Also set for release tomorrow is Consumer Confidence, forecasted to fall slightly from a level of 58.5 in June to 56.0 in July.

Global debt issues pressure international markets

No clear resolution to the US debt ceiling issue and a downgrade of Greece’s sovereign credit rating by Moody’s Investors Service sapped sentiment across the pond, with the peripheral euro-area stock indices broadly lower pressured by financials. Moody’s cut Greece’s debt rating by three notches to a level just above default, which is the lowest rating of any country in the world covered by Moody’s, per Reuters. The ratings agency said last week’s new bailout plan set a negative precedent for creditors of other debt-laden countries, and the likelihood of a distressed debt exchange, “and hence a default, on Greek government bonds is virtually 100%.” Moody’s said once the distressed exchange has been completed, it will reassess Greece’s rating. The action by Moody’s resuscitated some debt contagion fears toward the two key eurozone nations that are feared to be at the most risk of the region’s debt crisis spreading, Italy and Spain.

In economic news in the region, a UK housing survey declined in July, Italian consumer confidence deteriorated more than economists’ forecasted, and a French read on business demand declined in July.

The US debt ceiling standoff pressured sentiment in the Asia/Pacific region as well with most markets in the area solidly lower, with the largest drop occurring in China, in which the negative mood was exacerbated by a deadly train wreck over the weekend in the nation, which sent shares of railway stocks sharply lower. China ordered a two-month inspection of rail safety, per Bloomberg. Economic news in the region was light, as the only item of note was a report that showed Australia’s 2Q Producer Price Index rose inline with economists’ forecasts.

Tomorrow’s international economic docket will remain light with a few key items of note, including the GfK Consumer Confidence index from Germany, UK 2Q GDP, and Consumer Confidence in South Korea, while the Reserve Bank of India is expected to up its benchmark repo rate by 25 bps to 7.75% at the conclusion of its monetary policy meeting.