Morning Update

Bulls Off and Running After Long Weekend

Traders are in a buying mood coming back from the long holiday weekend as sentiment is being sweetened by a favorable move in Asia and as financials are helping lead European markets higher on the back of an upbeat earnings report from Barclays. M&A news is also helping support optimism in the equity markets as retail real estate firm Simon Property Group Inc offered to acquire General Growth Properties for $10 billion, fertilizer firm Yara International announced plans to acquire Terra Industries for about $4 billion, and Dow member JPMorgan Chase & Co reported that has agreed to obtain certain commodity assets of RBS Sempra Commodities for $1.7 billion. In other equity news, Dow member Kraft Foods exceeded analysts’ earnings estimates, while fellow Dow component Merck & Co. matched the Street’s expectations. Additionally, Capital One Financial reported that loan charge-offs rose in January. The economic front is also contributing to the optimism, after a report on manufacturing activity 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. Treasuries are lower as equities are advancing, ahead of a full slate of major economic reports this week and today’s afternoon report on homebuilder sentiment.

At 10:55 a.m. ET, the Dow Jones Industrial Average is 0.9% higher, the S&P 500 Index is up 1.0%, and the Nasdaq Composite is advancing 0.8%. Crude oil is $2.68 higher at $76.81 per barrel, wholesale gasoline is up $0.07 at $2.00 per gallon, and the Bloomberg gold spot price is higher by $17.20 at $1,118.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 80.00.

Dow member Kraft Foods (KFT $29) reported 4Q EPS of $0.48, three cents above the expectation of Wall Street analysts, with revenue 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. Shares are under pressure.

Fellow Dow component Merck & Co. (MRK $37) 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 is trading higher.

In M&A news, Simon Property Group Inc. (SPG $72) issued an offer to acquire General Growth Properties (GGWPQ $9) 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.

In other M&A news, agriculture firm Terra Industries (TRA $40) agreed to be acquired by Norwegian fertilizer company Yara International (YRAIF $39) for $41.10 per share in cash, with a total equity value of about $4.1 billion. Moreover, Dow member JPMorgan Chase & Co. (JPM $39) announced that it will acquire certain commodity assets of RBS Sempra Commodities—a privately held company jointly owned by Royal Bank of Scotland (RBS $10) and Sempra Energy (SRE $50)—for about $1.7 billion.

Capital One Financial (COF $36) 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%.

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 (economic calendar ). Treasuries remain lower, following the manufacturing report, as the equity markets are moving higher.

Later this afternoon, the economic calendar will yield the release of the NAHB’s Housing Market Index, and the gauge of homebuilder confidence is forecast to improve from 15 in January to 16 February.

Despite the short week, there is full slate of economic reports

Economic releases heat up tomorrow, when housing starts for January will be reported, 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 to an annual rate of 620,000 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 tomorrow, anticipated to rise 0.8% 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%.

Several readings on inflation will be released this week with the Producer Price Index (PPI) on Thursday expected to show prices at the wholesale level were up 0.8% m/m in January, after rising 0.2% in December. While food and energy are the smallest components of the inflation indexes, the volatility of their prices tends to explain a large portion of m/m changes. The core rate, which excludes food and energy, is expected to rise 0.1% after being unchanged in the prior month. The Consumer Price Index (CPI) follows on Friday, anticipated to have risen 0.3% m/m in January, after increasing 0.1% in December. Ex-food and energy, the core CPI rate is forecasted to have risen 0.1%, after increasing by that amount in the prior month.

Traders will be closely monitoring the Federal Reserve’s release of the minutes from the January Federal Open Market Committee (FOMC) meeting mid-day tomorrow. There were no changes to interest rates in the last meeting and the Fed maintained the March expiration of the mortgage-backed security (MBS) purchase program. In an interesting development, 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. Dudley of the New York Fed has defined “extended period” as equal to six months, and investors monitor the Fed’s language closely for clues as to the timing that the Fed may be contemplating for exit of monetary stimulus.

In addition to outlining non-conventional tools for exit, Fed Chief Bernanke’s written statement 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.” As these details have been disseminated via Bernanke’s statement and digested by the market, with the exception of any changes to the MBS program, there may be little additional market moving news within the FOMC meeting minutes.

Other releases on the US economic calendar week include MBA Mortgage Applications, the import price index, initial jobless claims, the Index of Leading Economic Indicators, and the Philadelphia Fed’s Business Activity Index.

Europe gaining ground on upbeat earnings and economic reports

Stocks in Europe are higher in late-day action, led by basic materials and financials on the heels of a better-than-expected earnings report out of the banking sector and after a smaller-than-expected decline in a gauge of economic sentiment in Germany—Europe’s largest economy. Barclays (BCS $17) is up solidly after the UK bank posted full-year earnings that exceeded analysts’ forecasts, due to strength in its investment banking unit. On the economic front, the German ZEW survey—a gauge of investor and analyst expectations—declined from 47.2 in January to 45.1 in February, but came in higher than the 41.0 level that economists surveyed by Bloomberg had anticipated. Elsewhere, a separate report showed that UK consumer prices fell more than expected on a month-over-month (m/m) basis in January. In other equity news, shares of L’Oreal (LRLCF $100) are down over 5% after the world’s largest cosmetics maker posted a full-year profit that came up short of analysts’ forecasts. The UK’s FTSE 100 Index is up 1.3%, France’s CAC-40 Index is 1.0% higher, and Germany’s DAX Index is rising 1.2%.

Focus on Greece’s deficit problems remains, 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. Greece’s Athex Composite Index is down 1.7%, but has come off of the lows of the day.

Asia advances in light session

Stocks in Asia were mostly higher in lighter-than-usual trading with markets in China, Hong Kong, and Taiwan remaining closed for holidays and as the US markets were closed on Monday. Japan’s Nikkei 225 Index was 0.2% higher, South Korea’s Kospi Index increased 0.5%, and India’s BSE Sensex 30 Index advanced 1.2%. Most of the day’s attention was focused on the Australian/New Zealand region with a couple of earnings reports and a reading on inflation being released. New Zealand’s NZX 50 Index rose 0.9% following a report that showed producer prices in 4Q increased by a smaller amount than economists expected on a quarter-over-quarter basis. Meanwhile, Australia’s S&P/ASX 200 Index gained 0.5%, led by financials, after the nation’s third-largest lender, Westpac Banking Corp. (WBK $103), rose solidly after announcing better-than-expected 1Q profits, but was cautious in its outlook. However, the advance in the nation was limited by a decline in shares of Foster’s Group (FBRWY $5) after Australia’s largest beer and winemaker posted first half profits that missed analysts’ forecasts.