Evening Update

Stocks Manage to Hold Gains

Investors found some cause for optimism in a surprisingly-strong pending home sales report, although profit taking held down markets and led to choppy trading as stocks opened weakly before rallying late to finish higher. News flow was both good and bad today as earnings surprises from CVS Caremark and Cognizant Technology Solutions, and reaffirmed guidance from Caterpillar, were offset by an earnings miss from Archer Daniels Midland. Additionally, three of the nation’s largest homebuilders reported disappointing earnings, although bulls pointed to the rise in the pending home sales report as a sign that better days are ahead for the sector. Meanwhile, Treasuries started the day strong but ended weaker as traders considered economic data showing that personal income fell in the absence of stimulus checks, while personal spending was higher, boosted by rising gas prices.

The Dow Jones Industrial Average rose 34 points (0.4%) to close at 9,320, the S&P 500 Index gained 3 points (0.3%) to finish at 1,006, while the Nasdaq Composite added 3 points (0.1%) to 2,011. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil dropped $0.16 to $71.42 per barrel, wholesale gasoline decreased $0.01 to $2.06 per gallon, and gold climbed $8.80 to $965.60 per ounce.

CVS Caremark (CVS $34) reported adjusted EPS of $0.65, one penny ahead of the Reuters estimate, as revenues jumped 17.6% to $24.9 billion, also topping the Street's estimate, which called for the prescription and healthcare services firm to post sales of $24.4 billion. CVS said its pharmacy benefit management network revenues surged 27.4%, its mail service sales climbed 12.5%, and its retail same-store sales increased 6.1%. The company also raised its full-year EPS guidance. Shares were little changed.

Caterpillar (CAT $48 ¹) reaffirmed its 2009 outlook, calling for revenues to be in a range of $32-36 billion and profit ex-items to range between $1.15-2.25 per share. "We feel like we've found bottom. We are beginning to see some stabilization in sales volumes. It just feels a little better inside and out," Chairman Jim Owens told analysts. "We start this cycle from a very low level and we expect pretty significant recovery in the immediate years ahead," Owens noted, adding "We know there are risks. We need a period of stability to restore investor confidence." CAT shares notched a solid gain following the bullish outlook.

Archer Daniels Midland (ADM $29) finished solidly lower after reporting fiscal 4Q net earnings fell 83% to $0.10 per share, much lower than the Street's forecast of $0.44, as revenues slid 24% to $16.5 billion, but topped analysts' expectations. The world’s largest agribusiness firm said decreased average selling prices reduced net sales and other operating income by about $5.8 billion, partially offset by higher sales volumes. Management noted that it did see "signs of improving demand in the various food, feed and fuel markets we serve."

Homebuilder D.R. Horton (DHI $12) was higher despite posting a wider-than-expected 3Q loss of $0.45 per share. Analysts had expected a loss of just $0.23 per share. Revenues dropped 36% to $914 million. Results continue to be hampered by charges related to writing down the value of land held on its balance sheet, as DHI took another $110 million of such charges during the quarter, although management noted that it still managed to generate over $100 million in cash flow from operations. "Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for home buyers and weak consumer confidence," Chairman Donald Horton noted.

Meanwhile, rival builders Pulte Homes (PHM $12) and Centex (CTX $11), who are merging, ended mixed after reporting their quarterly results. Pulte suffered a loss of $0.74 per share in 1Q, worse than the loss of $0.57 that had been expected, as sales fell 58% to $679 million, above the $647 million that had been projected. "Business has been consistent for the past few months," Pulte’s COO told investors. Meanwhile, Centex lost $1.21 per share on an adjusted basis – slightly worse than the analyst estimate of a loss of $1.17, as revenues declined by nearly a half to $574 million. Once PHM and CTX complete their merger, they will overtake DHI as the nation’s largest homebuilder.

Cognizant Technology Solutions (CTSH $34) was over 10% higher after its adjusted 2Q EPS of $0.47 beat the Street estimate of $0.37, while sales grew 13% to $777 million, compared to the forecast of $762 million. The IT outsourcing firm also raised its full-year outlook. CTSH now expects sales of at least $3.14 billion, yielding earnings of at least $1.66 per share. Analysts were looking for revenue of $3.10 billion, and EPS of $1.54. Cognizant noted that demand is stabilizing, and corporate IT budgets “look firm for the remainder of the year.”

PepsiCo (PEP $59) was nicely higher after announcing that it has entered into definitive merger agreements to acquire its two largest bottlers, the Pepsi Bottling Group (PBG $36) and PepsiAmericas (PAS $28)—for $36.50 per share and $28.50 per share, respectively, for a total value of $7.8 billion. PEP had previously offered $29.50 per share for PBG and $23.27 per share for PAS for a total of $6 billion in April, but the offers were rejected. PEP said the agreement will create a fully integrated beverage business, enabling it to bring products and packages to market faster, and streamline its manufacturing and distribution systems so that it can react more quickly to changes in the marketplace. The company added that the transaction is expected to create annual pre-tax synergies of $300 million and be accretive to its earnings by about $0.15 per share in 2012.

Personal outlays data mixed

Personal income (chart) fell 1.3% in June, versus the Bloomberg estimate of a 1.0% decline, and May was revised from a gain of 1.4% to 1.3%. Meanwhile, personal spending rose 0.4% in June, above the Bloomberg expectation of a 0.3% advance, while May's 0.3% rise was revised to just 0.1%. Lastly, the savings rate fell from a downwardly revised 6.2% in May to 4.6%. The Commerce Department cautioned that stimulus checks distorted the personal income data. Adjusting for these one-time payments, income was down just 0.1%, as opposed to the 1.3% fall that was reported. Similarly, the spending figures were influenced by rising fuel prices and on an inflation-adjusted basis, personal spending actually fell 0.1% last month.

Also, The PCE Price Index, which is released with the income and spending data, fell 0.4% year-over-year in June, compared to the consensus forecast of a 0.2% increase, and May's gain was downwardly revised from 0.1% to a 0.3% decline. The core PCE Price Index, which excludes food and energy, gained 0.2%, inline with expectations. Year-over-year, core prices moved 1.5% higher, versus the consensus of economists surveyed by Bloomberg, which called for the index to show a 1.7% gain.

Elsewhere, pending home sales jumped 3.6% in June, much better than the 0.7% forecasted rise, and May was revised solidly higher to a gain of 0.8% from 0.1%. Pending home sales typically lead existing home sales by a month or two and have gained ground for a fifth-straight month. The National Association of Realtors (NAR) said historically low mortgage rates, affordable home prices and large selection are encouraging buyers who have been on the sidelines. Although recently, the momentum in pending home sales had not translated fully to a similar increase existing home sales, existing home sales have risen for three-straight months, adding to the recent uptick in sentiment that the economy may be in recovery mode.

Treasuries, which were higher after the consumer outlays data, finished lower following the better-than-expected housing report. In the end the yield on the 2-year note rose 1 bp to 1.19%, the yield on the 10-year note added 4 bps to 3.68%, and the yield on the 30-year bond increased 6 bps to 4.46%.

ISM Services data for tomorrow

The ISM Non-Manufacturing Index comes out tomorrow and is expected to rise to 48.0 in July from 47.0 in June. Recent economic reports have shown that exports are leading the recovery, with last month’s sub-component, new export orders, rising to 54.5, the first time the index indicated growth since September 2008. The report is the complement to the ISM Manufacturing Index released yesterday, which improved to 48.9 from 44.8, much better than the 46.5 forecast.

The ADP Employment Change Report will also be released tomorrow, and while the report has not been a particularly accurate predictor of the government’s labor report, it has gained increased attention as another read on the employment situation. The forecast is that large private sector employers shed 350,000 jobs in July, an improvement from the 473,000 loss in June. The report showed job losses so far in this cycle peaked in March, despite a peak in January for the broader labor report.

In other economic news tomorrow, weekly MBA Mortgage Applications will be released, and factory orders are expected to decline 0.8%.