Evening Market Update

Merger Monday Kickstarts US Equity Markets 

US stocks traded solidly higher today, extending the gains from the end of last week, as investors were greeted by multiple merger announcements, along with some decent corporate earnings. The major averages have now regained all the losses that occurred since last Monday’s sharp drop on the S&P downgrade announcement. Treasuries were mostly lower amid an unexpected decline in New York manufacturing, while a separate report showed no change in homebuilder sentiment over the past month. In equity news, Google agreed to acquire Motorola Mobility Holdings for approximately $12.5 billion, Ralcorp Holdings rejected a revised merger offer from ConAgra Foods, and Dow member Bank of America announced the sale of its Canadian credit card portfolio to Toronto-Dominion Bank Group. As the 2Q earnings season begins to wind down, Lowe’s Companies Inc and Estee Lauder both beat the Street’s profit expectations, but offered weak full-year guidance.

The Dow Jones Industrial Average gained 214 points (1.9%) to 11,483, the S&P 500 Index picked up 26 points (2.2%) to 1204.49, and the Nasdaq Composite gained 47 points (1.9%) to 2,555. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $2.53 to $87.91 per barrel, wholesale gasoline increased $0.05 to $2.87 per gallon, and the Bloomberg gold spot price gained $16.77 to $1,763.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% lower at 73.88.

In M&A news, Google Inc. (GOOG $557) announced that it has reached a definitive agreement to acquire  Motorola Mobility Holdings Inc. (MMI $38) for $40.00 per share in cash, or a total value of about $12.5 billion. MMI is Motorola’s mobile and wireline digital communications unit, and GOOG said it will run MMI as a separate business, and the deal will enable it to “supercharge” its Android ecosystem. GOOG traded lower, while MMI was sharply higher.

Ralcorp Holdings Inc . (RAH $83) announced that it has rejected a revised unsolicited merger proposal of $94.00 per share in cash from ConAgra Foods Inc. (CAG $24), determining that the offer “is not in the best interests” of the private-brand food maker and parent of Post cereal products. CAG’s offer is valued at about $5.2 billion, nearly a 10% increase from its previous offer of $86.00 per share. CAG said it is “extremely disappointed” by RAH’s rejection and it will continue to consider its options with respect to this potential transaction. Shares of both companies finished higher.

Finally, Dow member Bank of America Corp. (BAC $8) announced that it will exit its international credit card business by agreeing to sell its Canadian credit card portfolio to Toronto-Dominion Bank Group (TD $78), along with certain other assets and liabilities. Financial terms of the deal were not disclosed though TD said it will pay a “modest premium” for the expected $8.5 billion Canadian credit card receivables. BAC said the transaction is expected to have a positive impact on its Tier-1 common and tangible common equity and the respective ratios. BAC also said it will exit the UK and Irish card markets, with combined portfolios assets of $19 billion, and shares traded solidly higher.

In earnings news, Lowe's Companies Inc. (LOW $20) reported 2Q earnings ex-items of $0.68 per share, two cents above the consensus estimate of analysts surveyed by Reuters, but revenues, which grew 1.3% year-over-year (y/y) to $14.5 billion, missed the $14.7 billion that the Street had expected. 2Q same-store sales—sales at stores open at least a year—decreased 0.3% y/y. The world’s second largest home improvement retailer said, “despite some recovery in our seasonal business, our performance for the quarter fell short of our expectations.” LOW reduced its full-year guidance and shares finished higher.

Estee Lauder Cos Inc. (EL $94) posted 4Q EPS of $0.25, one penny above the Street’s expectations, with revenue increasing 12% y/y to $2.06 billion, also above the $2.03 billion projection of analysts. International sales have been driving growth in recent quarters, but the beauty-products maker saw a pickup in U.S. sales in the fourth quarter, while also benefiting from several new product launches. However, shares of the company fell sharply after it issued disappointing full-year guidance.

New York manufacturing activity falls, homebuilder confidence remains at a low level

The Empire Manufacturing Index, a measure of manufacturing in the New York region, unexpectedly fell in August, as it moved further into negative territory after dropping to -7.72 from July’s level of -3.76, compared to the estimates of economists surveyed by Bloomberg, which called for an improvement to 0.00. A reading of zero is the demarcation point between contraction and expansion in activity and the surprising decline came as new orders and inventories deteriorated further into negative territory. The report is the first major piece of data looking at manufacturing conditions in August.

Elsewhere, the NAHB Housing Market Index, a gauge of homebuilder sentiment, expectedly remained at 15 in August. The National Association of Home Builders (NAHB) said, “Builders continue to confront the same major challenges they have seen over the past year, including competition from the large inventory of distressed homes on the market, inaccurate appraisal values, and issues with their buyers not being able to sell an existing home or qualify for favorable mortgage rates because of overly tight underwriting requirements,”

Treasuries were mostly lower, as the yield on the 2-year note was flat at 0.19%, the yield on the 10-year note gained 5 bps to 2.31%, and the 30-year bond rose 4 bps to 3.77%.

Europ ean markets show strength ahead of tomorrow’s eurozone crisis meeting

The European markets appeared cautiously optimistic ahead of tomorrow’s meeting between Germany and France, in which a discussion on the recently heightened concerns regarding debt contagion in the eurozone is expected. Economic data out of the region was relatively light today, with the lone report worth noting being a decline in a read on UK home prices in August. Finally, volume may have been lighter than usual, with holidays in France and Italy, but French markets traded today, while Italian markets were closed.

In Asia/Pacific economic news, Japan’s released its 2Q GDP report, which showed a smaller contraction in output than economists had expected. Japan’s GDP shrank by an annualized rate of 1.3%, after contracting 3.6% in 1Q, and compared to the 2.5% drop that was expected. Per Bloomberg, Japan’s Finance Minister Noda said today that its economy will likely resume its expansion in 3Q, as he pledged yesterday to take “bold action” to try to stem the strength in the yen. There are near-term risks, but valuation on a forward price-to-earnings basis is on par with global indexes for the first time in 30 years. Japanese stocks may be poised to outperform global averages. Elsewhere in the region, Australia’s new motor vehicle sales rose solidly in July, while markets in South Korea and India were closed for holidays.

Readings on housing and industrial production out tomorrow

Tomorrow’s US economic calendar begins with housing starts, expected to fall 4.6% m/m in July to an annual rate of 600,000 units after jumping 14.6% in June, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to decrease 1.9% m/m to 605,000 units after rising 2.5% in June. Last month’s gains were driven by multi-family construction, while single-family starts also rose.

Later, just before the market open, the industrial production report will be released, expected to show production gained 0.5% m/m in July after rising 0.2% in June, while capacity utilization is forecasted to increase to 77.0% from 76.7%.

International releases will include German and eurozone 2Q GDP, UK CPI and retail price index, the eurozone trade balance, Canada’s manufacturing sales, and the Conference Board’s June Leading Index for China. Elsewhere, the minutes from the last Reserve Bank of Australia meeting will be released.