Evening Update

Stocks Reach New High For 2009

Stocks surged ahead, forming a new high for the year as another reassuring report on the housing sector combined with the continuing stream of positive 2Q earnings reports to push the Dow back above the 9,000 level. The strong rally was relatively broad-based with every sector posting solid gains, and optimism spilled over to the commodity sector as well, while bonds sold off as the generally optimistic mood dampened investor demand for Treasuries. A whole host of companies – ranging from Ford, to 3M, AT&T, McDonald’s, UPS, Fifth Third Bancorp, and eBay all reported quarterly earnings today, with results by-and-large beating analyst forecasts. Meanwhile, in economic news, existing home sales posted a third-straight monthly increase, and weekly jobless claims grew less than expected.

The Dow Jones Industrial Average jumped 188 points (2.1%) to close at 9,069, the S&P 500 Index climbed 22 points (2.3%) to finish at 976, and the Nasdaq Composite added 47 points (2.5%) to 1,974. In relatively heavy volume, 1.4 billion shares were traded on the NYSE and 3.1 billion shares were traded on the Nasdaq. Crude oil added $1.76 to $67.16 per barrel, wholesale gasoline increased $0.07 to $1.91 per gallon, and gold fell $1.10 to $950.30 per ounce.

Ford (F $7) was up almost 10% after posting a smaller-than-expected 2Q loss ex-items of $0.21 per share, versus the Reuters estimate of a $0.50 per share loss, on revenues of $27.2 billion. Ford ended the quarter with $21 billion in gross cash and a cash burn rate of $1 billion, down from a rate of almost $4 billion in 1Q. The company stuck to its guidance that it will return to annual profitability in 2011. “We’re 18 months away, I guess,” CFO Lewis Booth told analysts, with CEO Alan Mulally cautioning that “clearly this is still a very fragile economy.” Ford’s US sales fell more than 30% in the first half, the best result among the top-six automakers.

3M Company (MMM $69) reported 2Q EPS ex-items of $1.20, much higher than the Street's forecast, which called for the company to report profits of $0.94 per share. Revenues of $5.7 billion exceeded analysts' expectations by $300 million. The Dow member said its health care and consumer and office businesses each delivered double-digit year-over-year profit improvements. CFO Patrick Campbell noted that the “tremendous sequential surge” in demand for masks as a result of the swine flu outbreak was one of the key factors boosting results this quarter. Masks to protect against the H1N1 virus are on back-order through 2009, the company said. The company raised its full-year EPS guidance to a level that topped expectations and shares were nicely higher.

Fellow Dow component AT&T (T $25) announced 2Q EPS of $0.54, three cents above the Street's forecast, as revenues totaled $30.7 billion, just above the expectations. Total wireless subscribers grew by 1.4 million, and net new postpaid subscribers—the more highly valued contracts—rose by 29% versus last year to 1.2 million, which the company proclaimed as the best ever for 2Q. Moreover, the company said it had record low postpaid subscriber churn at 1.09%. Meanwhile, revenue from data services surged 37% during the quarter, aided by the launch of the latest iPhone. AT&T is the sole service provider for the iPhone in the US, and iPhone users spend approximately 60% more each month than other customers, AT&T has said. The company said it activated more than 2.4 million new iPhones this quarter, with more than a third of them being customers who were new to the carrier. Shares were higher.

Another Dow member, McDonald's (MCD $56) reported 2Q EPS ex-items of $0.97, in line with the Street's forecast, as revenues of $5.6 billion came in just shy of estimates. Global same-store sales increased 4.8% for 2Q, but shares were lower after the fast-food chain said June same-store sales rose just 2.6%, which came in below what the Street had anticipated as analysts had predicted MCD would more strongly take market share during the recession. MCD did not give any future guidance, although CEO Jim Skinner noted that so far in July, same store sales growth has been similar or better than June’s results.

United Parcel Service (UPS $54 ¹) said adjusted 2Q EPS declined from $0.85 to $0.49, which matched analysts' expectations, as consolidated revenues fell about 17% to $10.8 billion, below the $11.1 billion that was expected. UPS said its results were adversely affected by continuing weakness in global economic activity, and package volume fell 4.7%. The company issued 3Q EPS guidance below the Street's estimates. "We do see tremendous requests from our customers to bring their costs down," CFO Kurt Kuehn told analysts, while CEO Scott Davis reassured investors, "I wouldn't call this a new normal, it will come back. Industrial production will grow again." Shares were higher.

Ebay (EBAY $22) was up approximately 10% after the company reported 2Q EPS ex-items of $0.37, one cent above the Reuters estimate, as revenues fell about 4% to $2.1 billion. The ecommerce firm said revenue growth of its PayPal online payment unit and its Skype internet communications software was offset by the effects of the stronger dollar and a modest decline in the marketplace business—which includes eBay, Shopping.com, StubHub and other ecommerce sites. The company's gross merchandise volume—total value of goods sold—fell 10% year-over-year, but the decline was smaller than had been anticipated, per Reuters, and the pace of decline slowed from last quarter's 16% drop. The company issued 3Q revenue guidance that came in above analysts' estimates.

Fifth Third Bancorp (FITB $8), one of the nation’s largest regional lenders, gained almost 15% after it reported a 2Q profit of $1.15 per share, compared with the loss of $0.34 per share that analysts had expected. CEO Kevin Kabat noted that even after excluding for some unusual items in this quarter’s results – such as a $1.1 billion gain from selling its processing business – the bank would have still posted a gain of approximately $200 million, or $0.27 per share. Credit conditions “remain difficult and signals regarding future trends are somewhat mixed at this point,” Kabat said, adding that he expects loan losses “to increase moderately in the third quarter, with higher commercial real estate charge-offs partially offset by lower consumer charge-offs.”

Two of the US’s largest military contractors announced mixed 2Q earnings, with military electronics maker Raytheon (RTN $46) reporting EPS of $1.23, above the Street forecast of $1.13, while competitor Northrop Grumman (NOC $46) earned $1.29 per share, which matched analyst predictions. Northrop reiterated its 2009 earnings outlook of $4.65-4.90 per share, which is below the analyst forecast of $4.96, while Raytheon upped its guidance by a nickel to $4.60-4.75, relative to the Wall Street forecast of $4.73. Both companies noted that the industry must adapt to new military spending patterns in Washington, exemplified by a recent F-22 fighter jet project that was denied funding. Northrop CEO Ronald Sugar pointed out that such spending decisions on Capitol Hill are “a balancing act between addressing dangerous national security threats and fiscal spending constraints.” Shares of RTN were higher, while NOC was lower.

Bristol-Meyers Squibb (BMY $21) moved higher after reporting 2Q EPS of $0.49, which was above analyst expectations, as sales rose 4% to $5.4 billion. However, BMY also announced a $2.4 billion acquisition of rival Medarex (MEDX $16) today, which largely overshadowed the results. MEDX shares jumped almost 90% on the news, as Bristol will gain access to the biotech firm’s seven experimental antibodies as well as Medarex’s drug-development technology used to find new cancer and immunology treatments. Following March’s announcement that Merck (MRK $30) will acquire Schering-Plough (SGP $27), the deal kept alive investor expectations that more M&A deals in the pharma industry may be in the pipeline, as firms attempt to supplement their lack of organic sales growth by purchasing new drugs.

Existing home sales post third-straight monthly rise

Treasuries were lower today in response to the general economic optimism. The yield on the 2-year note added 10 bps to 1.04%, the yield on the 10-year note increased 13 bps to 3.68%, and the yield on the 30-year bond gained 11 bps to 4.56%.

Existing home sales rose for the third-straight month in June, rising 3.6% month-over-month (m/m) to an annual rate of 4.89 million units, higher than the forecast of 4.84 million and an increase of 1.5%, while May was revised slightly lower to 4.72 million units from the 4.77 million initially reported. Single-family home sales increased 2.4%. Sales continue to be driven by steep discounts offered by foreclosures, with the median existing-home price dropping 15.4% year-over-year (y/y) in June to $181,800. Distressed sales accounted for 31% of sales, down from the 45% level reported at the start of the year.

The National Association of Realtors (NAR) said that the increase in sales was less than what was indicated by pending home sales activity, and a June survey of NAR members showed 37% experienced one lost sale as a result of new appraisal standards. These contracts are falling through after appraisals are coming in at lower prices, as appraisers who aren’t familiar with the locale are using recent sales, which have been dominated by distressed sales, to model prices. The NAR believes that distressed sales typically sell for 20% less than the normal market price and are often in subpar condition.

First-time homebuyers, armed with the $8,000 tax credit, also continued to drive sales, as well as a seasonal rise of repeat buyers. Inventories fell 0.7% during the month to 3.82 million existing homes available for sale, and the supply homes for sale fell to 9.4 months from 9.8 months, with raw inventory down 14.9% from a year ago.

Sales of both new and existing homes have stabilized due to increased confidence from a slower pace of price declines, tax credits and housing affordability near a 40-year high. While inventory levels have declined, not all foreclosure homes are included in the numbers, and there are reports that banks are holding back potential inventory in order to not flood the market, trying to keep price declines from getting out of control. Also, according to the Mortgage Bankers Association, outside of first-time homebuyers, another large portion of sales are coming from investors, measured by a higher than normal share of homes being purchased with cash, indicating that “organic” sales still remain muted. Additionally, sales have been dominated by entry-level homes, evidenced by a 6 month supply of homes below $250,000, versus a 20 month supply of homes greater than $1 million. While the housing market isn’t back to functioning normally, stabilization is a positive contributor to economic recovery.

Weekly initial jobless claims (chart) increased 30,000 to 554,000, versus last week's figure that was upwardly revised by 2,000 to 524,000. The Bloomberg consensus called for claims to reach 557,000. However, the Labor Department said the data was distorted by an unusual pattern of layoffs in the automotive industry. The four-week moving average declined by 19,000 to 566,000—the fourth-straight weekly decline—while continuing claims also fell, declining by 88,000 to 6,225,000, versus the forecast of 6,390,000.

Looking ahead to tomorrow, a revised reading of the University of Michigan Consumer Sentiment Index for July will be released, with economists forecasting a level of 65.0, which is essentially unchanged from the prior figure. The preliminary reading in this index was released earlier this month, and saw a fall from June’s 70.8 level down to 64.6 in July as rising gas prices in recent months and continued increases in the unemployment rate appeared to weigh on consumer sentiment.