Evening Update

Bullish Sentiment Still Permeating Markets

Stocks finished solidly higher, with the S&P 500 Index ending above the 1,000 level for the first time in 2009. A mix of economic and earnings news supported the gains, as manufacturing reports from around the globe came in better than expected, capped by this morning’s strong ISM Manufacturing Index report. Treasuries were under pressure following the economic data, and the US dollar sank to its lowest level since just after the Lehman Brothers collapse, signaling that the fear pervading markets since last fall is rapidly dissipating. The corporate arena also lent some support to the advance, as the surprisingly strong interest in the government’s cash-for-clunkers program resulted in marked improvement in monthly sales for the US’s Big Three automakers, and corporate earnings reports were also largely positive, with upside surprises from Humana, Clorox, and Tyson Foods offsetting earnings misses from Loews and MGM Mirage. Elsewhere, Bank of America agreed to pay a $33 million fine after the SEC alleged it withheld information from its shareholders regarding its controversial acquisition of Merrill Lynch. Separately, the bank also announced a shake-up in its top management, sparking speculation as to the future of CEO Ken Lewis.

The Dow Jones Industrial Average rose 115 points (1.3%) to close at 9,287, the S&P 500 Index gained 15 point (1.5%) to finish at 1,003, while the Nasdaq Composite added 30 points (1.5%) to 2,009. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $2.13 to $71.58 per barrel, wholesale gasoline increased $0.06 to $2.07 per gallon, and gold climbed $2.15 to $956.15 per ounce.

Ford (F $8) was up solidly after posting an increase in monthly sales on a year-over-year basis for the first time since 2007, rising 2.3% in July. George Pipas, Ford's top sales analyst, noted that the government’s “cash for clunkers” incentive program boosted sales across the industry in July. Early indications show that total nationwide sales for the month of July could reach 11.5 million on a seasonally-adjusted annual rate, whereas without the clunkers program July sales probably would have been about the same as June at around 9.7 million, according to Pipas.

Meanwhile, rivals Chrysler and General Motors both also benefited as the struggling automakers saw a marked improvement in the pace of decline in their sales. Chrysler’s July sales fell just 9.4% year-over-year, compared to a 42% drop in June, whereas GM witnessed a 19% fall in July, after a 36% adjusted decline in the previous month. The "cash for clunkers" program has only been in place since July 24, but it has shown such strong demand that the plan’s approved funding is already almost exhausted. Transportation Secretary Ray LaHood told the Wall Street Journal that unless the Senate approves $2 billion in additional funding, the Obama administration could be forced to halt the program as early as tomorrow.

Bank of America (BAC $15 ¹) received a lawsuit from the SEC today for allegedly making “materially false and misleading” claims related to its acquisition of Merrill Lynch. The allegations center around year-end performance bonuses paid by Merrill to executives, which Bank of America told its shareholders would not be paid without its consent. The SEC’s complaint states that Bank of America had already agreed to let Merrill pay up to $5.8 billion in bonuses at the time of making that statement to investors. "Companies must give shareholders all material information about corporate transactions they are asked to approve," an SEC director said, adding "failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty." Bank of America announced that it will agree to pay a $33 million penalty to settle the charges, without admitting or denying the allegations.

Separately, Bank of America today announced several changes to its top management structure, highlighted by the hiring of former Citigroup (C $3) CFO Sallie Krawcheck, along with some additional internal reshuffling of staff. The changes added to speculation that Ken Lewis’s position at CEO may be in jeopardy. Lewis has already been asked to step down from his role as Chairman of the Board, and he has gone before Congress recently to testify about his actions during the firm’s controversial acquisition of Merrill Lynch. Lewis told investors in late July that some new hires would open up the competition to succeed him, although he intends to stay with the firm until it has repaid all of its bailout money. Shares pared gains but finished higher following the reports.

Humana (HUM $34) announced 2Q earnings of $1.67 per share, three cents above the Reuters estimate, as revenues rose 7% to $7.9 billion, which also topped the Street's expectations. The company said it is making progress reducing costs and investing in improved health outcomes for its members, while it closely monitors events in Washington. HUM issued 3Q guidance that was inline with analysts' forecasts and reaffirmed its full-year EPS guidance. Shares were higher.

Clorox (CLX $59) posted fiscal 4Q EPS of $1.20, one penny ahead of the Street's forecast, with revenues flat versus last year at $1.5 billion, roughly inline with analysts' estimates. The consumer products producer said earnings benefitted from price increases, significant cost savings and lower commodity costs. Shares were lower, although CLX reaffirmed its full-year guidance.

Tyson Foods (TSN $11) was down despite posting 3Q EPS from continuing operations of $0.33, which was ahead of the $0.22 analyst forecast. Revenues fell 3% to $6.66 billion, which was roughly inline with analyst expectations. However, management cautioned that next quarter is not shaping up as positively. "Soft demand for protein is likely to make the fourth quarter more challenging than the third quarter,” Tyson’s CEO said, with the head of poultry and prepared foods adding, "This quarter will be a little tougher. I'm concerned about the softness in the economy. We're simply not seeing demand recovery we've previously expected."

Loews Corp (L $32) reported 2Q EPS of $0.78, below the Reuters forecast of $0.98, and the company's chief said excluding realized capital losses, it would have reported profits of $1.19 per share. Revenues at the diversified corporation declined about 10% to $3.5 billion, slightly above the Street's expectation. Earnings were impacted by investment losses at CNA Financial (CNA $17), a commercial insurer in which Loews owns a 90% stake. Shares were higher.

MGM Mirage (MGM $7) reported that it lost $0.60 per share during 2Q, worse than the loss of $0.09 that had been expected, although management pointed out that the results included $0.45 per share in write-downs related to impairment charges and debt retirement. Meanwhile, sales fell 22% to $1.49 billion, which met expectations, as revenue per available room – a key performance measure for the industry – dipped 31% to $109 on the Las Vegas Strip. Occupancy at MGM resorts slipped from 97% to 94% during the quarter. MGM’s loss compares with the unexpected 2Q profit of $0.01 per share reported by competitor Las Vegas Sands (LVS $10) on Friday. MGM shares were higher though after reassuring comments from CEO Jim Murren that the casino operator saw “a more stabilized - though still difficult - operating environment in the second quarter.” Murren was also upbeat about the potential for the company’s new CityCenter project, which is currently under construction. “We believe CityCenter will invigorate the Las Vegas market and be a key component of the future growth of MGM MIRAGE," he told investors.

Apple (AAPL $166) announced that Google (GOOG $452) CEO Eric Schmidt will be resigning from its board, a position he had held since 2006, as increasing competition between the two firms made it increasingly difficult for him to continue in the role. Apple CEO Steve Jobs said in a statement that the resignation was a mutual decision, spurred because Schmidt’s effectiveness as a director would be “significantly diminished” as he needs to recuse himself from more and more meetings due to potential conflicts of interest. Google has recently entered new markets such as computer and mobile-phone software which put it into competition with Apple, leading to growing speculation in recent months that today’s move was imminent. Both stocks were higher today.

Huron Consulting Group (HURN $14) was down almost 70% after the business consulting firm announced a restatement of its financial statements and its CEO resigned. HURN said it will restate financial statements for the fiscal years 2006-2008, and 1Q 2009 to correct its accounting for certain acquisition-related payments received by the sellers in connection with the sale of certain acquired businesses that were subsequently redistributed among themselves and to other select Huron employees.

Manufacturing data beats expectations

With the bulk of 2Q earnings season in the rear-view mirror, sentiment on Wall Street will likely be steered by this week's economic calendar, which is bursting at the seams with key reports that could go a long way in determining the sustainability of the economic recovery. The flurry of reports kicked off this morning with the ISM Manufacturing Index (chart) improving to 48.9 in July from 44.8 in June, which was higher than the 46.5 forecast by economists. The index is closing in on the level of 50 which marks the separation point between contraction and expansion and has now posted three-straight months above the 41.2 level, which generally indicates an expansion of the overall economy. Meanwhile, the more forward-looking components of the report, the New Orders and Production Indexes, both rose significantly above 50, which is a positive indicator for future growth in the sector. New orders improved to 55.3 in July after slipping to 49.2 last month, while the production component of the index rose to 57.9, the highest level since June 2007.

Separately, construction spending (chart) data was also released this morning, and unexpectedly rose 0.3%, whereas economists had expected a fall of 0.5%. June’s data was revised slightly to show a 0.8% contraction.

Treasuries were lower today, extending early losses after the report, as the yield on the 2-year note rose 6 bps to 1.18%, the yield on the 10-year note added 14 bps to 3.62%, and the yield on the 30-year bond increased 10 bps to 4.40%.

In related news, former Fed Chairman Alan Greenspan said in an interview over the weekend on ABC’s “This Week” program that the US economy may grow faster than economists are expecting because of the possible inventory rebuild. “We may very well have 2.5% in the current quarter,” Greenspan said, adding “the reason is there has been such an extraordinarily high rate of inventory liquidation that the production levels are well under consumption.”

The compliment to today's report will come on Wednesday, with the ISM Non-Manufacturing Index, which is expected to improve from 47.0 in June to 48.0 in July. Meanwhile, tomorrow’s economic calendar will center on the personal income and spending report, which is expected to show income dropped 1.0% in June, following a rise of 1.4% in May, while spending rose 0.3%, inline with the May level.