Evening Update

Bulls Successful at Keeping Momentum Going

After posting a solid advance yesterday, and kicking off February in grand fashion, stocks were able to extend the momentum and close near the best levels of the day. Hope of a recovery in the housing sector amid a modest rebound in pending home sales and an unexpected profit from D.R. Horton added to the favorable mood. Sentiment was also helped by a better-than-expected profit from United Parcel Service and M&A activity in the financial sector with Bank of New York Mellon agreeing to acquire the global investment servicing business of PNC. In other equity news, Dow Chemical beat the Street’s earnings expectations, a major shareholder is seeking to increase his stake in Barnes & Noble, Whirlpool exceeded the Street’s profit projections and issued a favorable outlook, but energy firm BP Plc missed forecasts. Meanwhile, auto manufacturers reported January US vehicle sales, headlined by Ford Motor Co., which posted an adjusted 35% increase, while Toyota Motor Co. faltered amid its gas pedal issues. Treasuries were nearly unchanged.

The Dow Jones Industrial Average rose 111 points (1.1%) to close at 10,297, the S&P 500 Index gained 14 points (1.3%) to 1,103, and the Nasdaq Composite advanced 19 points (0.9%) to 2,190. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil was $2.80 higher at $77.23 per barrel, wholesale gasoline jumped $0.09 to $2.02 per gallon, and the Bloomberg gold spot price rose $9.00 to $1,114.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.3% to 78.99.

United Parcel Service (UPS $59 ¹) reported 4Q EPS of $0.75, one penny above the estimate of Wall Street analysts, with revenues falling 2.5% year-over-year (y/y) to $12.4 billion, topping the $12.2 billion that the Street was expecting. The package delivery firm said its results were due in large part to strong performance by its international segment, which saw volume growth and improvement in operating margin. UPS said economic forecasts indicate gradual improvement as 2010 unfolds, and 1Q will be the most challenging of the year for the company, with profitability only slightly better than last year. However, the company said for 2010, it will substantially improve performance and it anticipates EPS should be within a range of $2.70-3.05, an increase of 17-32% over 2009. Analysts are forecasting the company to report 2010 EPS of $2.81. Shares were higher.

Dow Chemical (DOW $28 ¹) announced that excluding certain items, its 4Q earnings were $0.18 per share, compared to the $0.11 per share that the Street had anticipated, with revenues increasing 15% y/y to $12.5 billion, compared to the $11.8 billion that was expected by analysts. The company said its revenue growth was driven by a 10% increase in volume and a 6% decrease in price. The company said volume increased versus last quarter in all geographic regions except for North America, which dipped 1%, and its volume jumped 33% in emerging geographies y/y. DOW said it sees demand in emerging geographies continuing to show sustained growth, which bodes well for global expansion, but “growth will continue to lag in the US and Europe, however, as high unemployment persists and questions about the sustainability of government stimulus spending remain.” Shares were lower.

In M&A news, Bank of New York Mellon (BK $29) announced that it has agreed to acquire PNC Financial Services Group’s (PNC $55) global investment servicing business, a provider of custody, fund accounting, transfer agency and outsourcing solutions for asset managers and financial advisors. The deal is an all-cash acquisition at a purchase price of $2.3 billion, including the purchase of $1.6 billion of stock and repayment of intercompany debt from PNC. Shares of both firms were lower.

D.R. Horton (DHI $13) was sharply higher after the homebuilder reported an unexpected profit of $0.56 per share, compared to the loss of $0.13 per share that analysts were expecting as revenues jumped 23% y/y to $1.1 billion, exceeding the $960 million that the Street forecasted. DHI said its net sales orders surged 45% y/y and its home closings increased 36%. DHI said market conditions are still challenging, characterized by rising foreclosures, high inventories of available homes, increasing unemployment, tightening FHA lending standards and weak consumer confidence. But the homebuilder said new home inventory remains low, interest rates are favorable and housing affordability is near record highs. DHI added that the extension of the federal tax will benefit its spring selling season.

Barnes & Noble (PNC $55) global investment servicing business, a provider of custody, fund accounting, transfer agency and outsourcing solutions for asset managers and financial advisors. The deal is an all-cash acquisition at a purchase price of $2.3 billion, including the purchase of $1.6 billion of stock and repayment of intercompany debt from PNC. Shares of both firms were lower.

Ford Motor Co. (F $11) kicked off a plethora of January US vehicle sales reports out of the auto sector, announcing that sales jumped 35% y/y on an adjusted basis, and the company said it gained about two percentage points in market share compared to the same period last year. Toyota Motor Co. (TM $77), on the other hand, saw an 8.7% y/y decline in sales for January, on an adjusted basis, stung buy its troubles from a massive recall of vehicles due to a faulty accelerator pedal and a freeze in production of many of its popular models in the last week of the month as a result. TM’s rivals both showed gains, with Nissan Motor Co. (NSANY $17) reporting a 25.8% jump in sales, while Honda Motor Co. (HMC $34) issued a more modest increase of 2.9%. General Motors posted a 22% increase in sales, citing a stronger economy and TM’s decision to cease sales of eight models in the US, while Chysler continued to struggle, posting a 0.4% decline. Shares of F, HMC and NSANY were all higher, while TM lost nearly 4% in US trading.

Europe’s largest oil company, BP Plc (BP $56), reported a 68% jump in earnings excluding items to $4.4 billion, or $0.23 per share y/y, but that came in shy of analysts’ estimates, which called for the energy firm to post $4.7 billion. The company said output will be slightly lower in 2010 and refining margins will remain depressed for the time being.

Whirlpool Corp. (WHR $82) is solidly higher after reporting 4Q EPS ex-items of $1.64, topping the $1.32 forecast of analysts, with revenues increasing 5% to $4.9 billion, beating the $4.4 billion that the Street expected. The appliance maker said its results were favorably impacted by cost reduction and productivity initiatives and increased sales volumes. WHR said it expects to report full-year EPS between $6.50-7.00, compared to the $6.45 that analysts are forecasting.

Pending home sales rebound slightly from November’s tumble

Pending home sales rebounded in December, rising 1.0% month-over-month (m/m), inline with the forecast of economists surveyed by Bloomberg, and following the downwardly revised 16.4% m/m drop recorded in November. Compared to last year, sales are up 10.5%. The National Association of Realtors (NAR) pointed out that it is important to recognize how the tax credit is skewing market data. “There are easily understood swings in contract activity as buyers respond to a tax credit that was expiring and was then extended and expanded,” the NAR chief economists said. He added that, “These swings are masking the underlying trend, which is a broad improvement over year-ago levels. December activity was the fifth highest monthly tally in two years.”

Treasuries were mostly flat with the yield on the 2-year down 1 bp at 0.85%, the yield on the 10-year note 2 bp lower at 3.63%, and yield on the 30-year bond dropping 1 bp to 4.55%.

Australia central bank surprises

The Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged at 3.75%, surprising economists surveyed by Bloomberg that all forecasted that the RBA would hike its rate to 4.00%, which would have made it the fourth-straight increase in as many meetings. In a statement following the announcement, the RBA said information about the impact of the central bank’s previous rate hikes “is still limited” and policymakers deemed it appropriate to hold “a steady setting of monetary policy for the time being.” The RBA added that borrowing costs will be “adjusted further” to keep inflation within the RBA’s 2-3% target if economic conditions evolve broadly as expected.

Retail sales in Germany increased 0.8% m/m in December, following a downwardly revised 1.7% m/m decline in November, lower than the 0.9% increase that economists were expecting. In other economic news in the region, Eurozone producer prices increased 0.1% m/m in December, compared to the flat reading that was forecasted by economists, while on an annual basis, prices at the wholesale level fell for the twelfth-consecutive month, per Bloomberg. Elsewhere, a separate report showed UK Construction PMI unexpectedly improved, but remained at a level depicting contraction.

Read on services sector and job report preview on tap

The ISM Non-Manufacturing Index will be released tomorrow, and is forecasted to increase to 51.0 in December from 50.1 in November. The index has been fluctuating around the 50.0 level that separates expansion from contraction, having increased by a smaller-than-expected amount in November back into expansion territory. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Monday and posted the highest level since August 2004, with the new orders and production indexes moving above 60, employment posting the highest level since April 2006, and 13 of 18 industries reporting growth, up from nine industries last month.

Strength in the manufacturing sector does not necessarily translate into immediate improvement in the services sector, but due to the cyclical nature of manufacturing, it tends to lead changes in the overall economy, with increased production resulting in job or wage gains, which filter through the economy in a positive feedback cycle.

Traders will be eyeing the Wednesday’s ADP Employment Change Report as a potential read on Friday’s Labor Department report, although the ADP report overstated job losses relative to the government’s nonfarm payrolls report for five-straight months before nearly equaling December’s figure. The forecast for the ADP report is that private sector employers shed 30,000 jobs in January, while the Bloomberg survey of economists is expecting an increase of 8,000 jobs in Friday’s report, which includes changes in government payrolls.

The other release on tomorrow’s economic calendar is the weekly MBA Mortgage Applications Index.

International economic releases will include service Purchasing Manager Indexes (PMIs) out of the Eurozone and the UK, Eurozone retail sales, UK consumer confidence, as well as Australian retail sales and building approvals.