Evening Update

Moving Higher, Supported by M&A and Economic Data

The equity markets are moving nicely higher in afternoon action as traders are in a buying mood upon their return from an extended holiday weekend. The bulls received support in early action as European markets gained ground on the back of an upbeat earnings report from Barclays, which was extended by a plethora of major M&A reports, headlined by retail real estate firm Simon Property Group Inc offering to acquire General Growth Properties for $10 billion. Meanwhile, the economic front is helping sentiment as a report on manufacturing activity in New York rose more than expected, and a gauge of investor sentiment in Germany—Europe’s largest economy—declined by a smaller amount than was forecasted by economists. On the earnings front, Dow member Kraft Foods exceeded analysts’ earnings estimates, but its sales were a bit light, while fellow Dow component Merck & Co. matched the Street’s expectations, Waste Management exceeded profit projections, and Darden Restaurants issued a better-than-expected 3Q EPS outlook. In other equity news, Capital One Financial reported that loan charge-offs rose in January, fertilizer firm Yara International announced plans to acquire Terra Industries for about $4 billion, and Dow member JPMorgan Chase & Co reported that it has agreed to obtain certain commodity assets of RBS Sempra Commodities for $1.7 billion. Treasuries are mixed amid the advance in the equity markets and after homebuilder sentiment improved.

At 10:57 a.m. ET, the Dow Jones Industrial Average is 1.2% higher, the S&P 500 Index is up 1.3%, and the Nasdaq Composite is advancing 1.0%. Crude oil is $2.75 higher at $76.88 per barrel, wholesale gasoline is up $0.07 at $2.00 per gallon, and the Bloomberg gold spot price is higher by $16.00 at $1,117.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.9% at 79.65.

Dow member Kraft Foods (KFT $29) reported 4Q EPS of $0.48, three cents above the expectation of Wall Street analysts, with revenues increasing 3.2% year-over-year (y/y) to $11.0 billion, compared to the $11.1 billion that the Street had forecasted. The company said the global economic environment continued to be difficult but improving volume and product mix were significant contributors to income growth and margin expansion. However, KFT said its volume gains were largely offset by lower prices for cheese products, due to lower dairy costs. Shares were under pressure.

Fellow Dow component Merck & Co. (MRK $38) announced 4Q EPS ex-items of $0.79, inline with the Street’s expectations, as revenues came in at $10.1 billion, compared to the $9.7 billion that analysts were expecting. The drugmaker said its performance in 4Q was characterized by strong growth in key brands and continued investment in its newest products and promising late-stage pipeline. MRK traded higher.

In M&A news, Simon Property Group Inc. (SPG $75) issued an offer to acquire General Growth Properties (GGWPQ $12) for $10 billion, in which GGWPQ shareholders would receive more than $9.00 per share, consisting of $6.00 per share in cash and more than $3.00 per share in a distribution of GGWPQ’s ownership interest in Master Planned Community assets. SPG said it is also prepared to offer SPG common equity instead of the cash consideration in whole or in part. Shares of both companies were higher.

In other M&A news, agriculture firm Terra Industries (TRA $41) agreed to be acquired by Norwegian fertilizer company Yara International (YRAIF $41) for $41.10 per share in cash, with a total equity value of about $4.1 billion, a 24% premium over TRA’s closing price on Friday. The move comes a month after US-based CF Industries Holdings (CF $104) dropped its bid to acquire TRA. Shares of TRA were sharply higher, while YRAIF was lower.

Moreover, Dow member JPMorgan Chase & Co. (JPM $40) announced that it will acquire the global oil, metal and European power and gas assets of RBS Sempra Commodities—a privately held company jointly owned by Royal Bank of Scotland (RBS $11) and Sempra Energy (SRE $49)—for about $1.7 billion. On a separate note, JPM reported that a bomb exploded outside of the building that houses its central Athens, Greece offices. No injuries were reported, as police received a warning call one half hour before the incident and authorities were able to cordon off the area, according to a police spokesperson. CNBC reported that JPM was unsure if it was the target of the blast, and no one has claimed responsibility. Shares of JPM and RBS were higher, while SRE was lower..

Capital One Financial (COF $37) reported that its US January annualized charge-off rate— the portion of loans that the company does not expect to collect—increased from 10.14% in December to 10.41% and its credit card delinquencies of 30 days or more—an indicator of future charge-offs—came in at 5.8% from 5.78%. Despite the increase in its charge-off rate, shares were nicely higher.

Darden Restaurants (DRI $40) was higher after the company issued 3Q EPS guidance that exceeded the consensus estimate of analysts. The parent company of Red Lobster and Olive Garden said it is expecting to post 3Q EPS between $0.91-0.93, compared to the $0.80 that the Street was anticipating. DRI said the signs of sales and traffic improvement it began to see late in 2Q continued into January and February, and as a result it also is increasing its EPS outlook for the full-year.

Waste Management (WM $33) announced 4Q earnings ex-items of $0.52 per share, four cents above the forecasts of analysts, with revenues declining 3.2% y/y to $3.01 billion, versus the $2.9 billion that the Street had expected. The company said it saw encouraging signs of improvement in 4Q, with its commercial and residential business lines continuing to demonstrate their strength, while the 6.4% y/y decline in its internal revenue growth from volume was a 250 basis point improvement from last quarter. WM issued a full-year EPS outlook that came in above the anticipation of analysts. WM was higher

Manufacturing and housing reports kick off busy economic week

The Empire Manufacturing Index, a measure of manufacturing in the New York region, jumped in February to a level of 24.91, well above the level of zero that suggests conditions are neither contracting nor expanding. Economists surveyed by Bloomberg expected an improvement to 18.00, following the previous month’s level of 15.92. The employment component of the report increased from 4.00 in January to 5.56 in February and the average workweek improved from 5.33 to 8.33. However, new orders fell from 20.48 to 8.78. The report is the first major piece of data looking at manufacturing conditions in February, and later this week, the Philly Fed Manufacturing Index will be released on Thursday, expected to increase from 15.2 in January to 17.0 in the current month, providing further insight into the health of the sector.

In other economic news, the NAHB’s Housing Market Index—a gauge of homebuilder confidence— improved from 15 in January to 17 February. Economists surveyed by Bloomberg expected the index to increase to 16. A reading below 50 means most respondents still view conditions as poor. Treasuries are mixed in afternoon action, with the short-to-mid end of the curve moving into positive territory.

Treasuries reversed course in afternoon trading in a flight to safety after the reported bomb explosion in Greece. The yield on the 2-year note fell 2 bps to 0.80%, the yield on the 10-year note lost 3 bps to 3.66%, and yield on the 30-year bond declined 1 bp to 4.64%.

Europe economic reports mixed

The German ZEW survey—a gauge of investor and analyst expectations—declined for a fifth month in February to 45.1 from 47.2 in January, but higher than the 41.0 level that economists surveyed by Bloomberg had anticipated. Elsewhere, a separate report showed that UK consumer prices fell 0.2% m/m for January, the smallest January decline since records began in 1997, but on a year-over-year basis (y/y) prices at the consumer level rose 3.5%, the fastest pace in 14 months. Bank of England Governor Mervyn King said in a letter to Chancellor Alistair Darling that “the committee expects this to be a temporary deviation” from the government’s 2% target, and that, “Inflation is more likely than not to fall back to target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.”

Greece’s deficit problems remained in focus, and Eurozone finance ministers said the debt-ridden nation has until March 16th to prove that its efforts to get its deficit under control are working, or it may have to take further steps to combat its debt problems.

Housing, industrial production and FOMC minutes on tap

A full day of economic data includes housing starts for January, expected to show an increase of 4.1% m/m to an annual rate of 580,000 units, after falling 4.0% in December, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to decline 5.1% m/m in January after jumping 10.9% m/m in December. This report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather.

Industrial production will also be reported, anticipated to rise 0.7% m/m in January, after a 0.6% increase in December, while capacity utilization is expected to have risen to 72.6% from 72.0%.

Traders will be closely monitoring the Federal Reserve’s release of the minutes from the January Federal Open Market Committee (FOMC) meeting mid-day Wednesday. There were no changes to interest rates in the last meeting and the Fed reiterated the March expiration of the mortgage-backed security (MBS) purchase program. One member dissented at the meeting, believing that continuing to “pre-commit” to the “exceptionally low” levels of fed funds for an “extended period” was no longer warranted. By communicating their intentions regarding policy, the Fed influences expectations about future rates, and thus traders carefully parse the minutes.

Fed Chief Bernanke last week noted that as a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the fed funds market has declined considerably, raising the possibility that the fed funds rate could for a time become a less reliable indicator than usual. As such, the Fed is considering using another operating target to communicate the stance of policy for a time, such as the interest rate paid on reserves, in combination with targets for reserve quantities. Lastly, Bernanke indicated the Fed expects to increase the spread between the discount rate and the target fed funds rate, “before long,” but indicated that this should not be interpreted as signaling any change in the outlook for monetary policy. These details have been disseminated via Bernanke’s statement and digested by the market, but traders will be looking for any additional insight on any changes to the MBS program the Fed may be contemplating.

Other releases on the US sector economic calendar include the import price index, expected to have risen 1.0% m/m in January, and weekly MBA Mortgage Applications.

International economic releases include Japanese machine tool orders, UK jobless claims, European construction output, Canadian wholesale sales, and Australian leading indicators. Much of the Asian region continues to be on holiday for the week-long Lunar New Year celebration.