Evening Update

Second Day of Deal News, Stocks Post Minor Gain

Equity markets ended slightly higher, extending bullish sentiment after the second-straight day of M&A announcements. Today’s round of deals included CF Industries Holding announcing an increased bid to acquire fertilizer firm Terra Industries, to compete with Norway’s Yara International’s agreement, while Dow Chemical announced an agreement to sell its Styron plastics unit to private equity firm Bain Capital Partners for about $1.6 billion. Automakers announced February sales, headlined by Ford outselling GM in the US for the first time since 1998. In other equity news, Qualcomm Inc. increased its dividend and announced a new $3 billion share buyback, while Staples Inc. missed earnings estimates. Treasuries were mixed and there were no major economic reports in the US today.

The Dow Jones Industrial Average rose 2 points (0.0%) to close at 10,406, the S&P 500 Index was 3 points (0.2%) higher at 1,118, and the Nasdaq Composite gained 7 points (0.3%) to 2,281. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil was $0.98 higher at $79.68 per barrel, wholesale gasoline rose $0.04 to $2.00 per gallon, and the Bloomberg gold spot price increased $15.57 to $1,134.56 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.2% to 80.48.

Terra Industries (TRA $46) moved sharply higher today after CF Industries Holdings Inc. (CF $106) announced that it has offered to acquire the fertilizer firm for $37.15 per share in cash and 0.0953 of a share of CF, with a total value of $47.40 per share, or about $4.7 billion. This is an upward revision to CF’s previous bid for TRA and the deal is contingent on TRA terminating its $41.10 per share, $4.1 billion merger agreement with Norway’s Yara International (YARIY $40). TRA confirmed that it received CF’s sweetened bid and said it will evaluate the terms of the proposal. YARIY declined to comment on the bid from CF, and will be entitled to a $123 million break-up fee if the deal is terminated. CF and YARIY were lower.

In other M&A news, Dow Chemical (DOW $29 ¹) announced that it has reached a definitive agreement with private equity firm Bain Capital Partners, in which DOW will sell its Styron plastics division for $1.63 billion. DOW traded higher.

Ford Motor Co. (F $12) was lower, despite outselling GM in US vehicle sales for the first time since 1998, with sales at Ford rising 43% year-over-year (y/y) in February, compared to the Street’s forecast of a 33% increase. General Motors' February sales were 12.0% higher y/y, compared to analysts’ forecasts of a 20% increase. Separately, GM announced that it is recalling 1.3 million compact cars, due to problems with power steering. Also, GM announced that it will offer zero-percent financing for five years on most of its 2010 models and six years for 2009 models.

The financing announcement from GM comes on the heels of a report from the Wall Street Journal that Toyota Motor Corp (TM $74) is set to unveil an aggressive incentive program in which it will offer zero-percent financing on some models. TM announced sales fell 8.7% in February, slightly better than the 10% decline expected during the first full month of results after the company’s recall issues began in January. TM did not confirm the incentive program report and its shares were slightly higher. Among other carmakers, Honda Motor Co. (HMC $35) was higher after announcing a 12.7% increase in US car sales, despite an estimate of a 24% rise by industry researcher Edmunds.com, and Chrysler announced sales increased by 0.5%, better than the -18% consensus estimate. Total industry sales were 10.3 million in the month, slightly worse than the 10.4 million estimate.

Qualcomm Inc. (QCOM $38) was solidly higher after the wireless technology firm announced that it has increased its quarterly dividend by 12%, from $0.17 per share to $0.19. Additionally, QCOM announced a new $3.0 billion stock repurchase program.

Staples Inc. (SPLS $23) reported 4Q EPS ex-items of $0.38, one penny shy of the consensus estimate of Wall Street analysts, with revenues increasing 4% y/y to $6.4 billion, versus the $6.3 billion that the Street was expecting. The office supply firm issued 2010 EPS guidance that missed analysts’ estimates. Shares were lower by 10%.

Economic docket quiet today, services reading and Beige Book on tap

Treasuries were mixed and there were no major economic reports in the US today. The yield on the 2-year note was down 1 bp to 0.79%, the yield on the 10-year note was flat at 3.61%, and the yield on the 30-year bond rose 1 bp to 4.57%.

The ISM Non-Manufacturing Index will be released tomorrow, forecast to improve from 50.5 in January to 51.0 in February. Although the index, depicting conditions in the service sector, is expected to remain above the 50 mark—the demarcation point between expansion and contraction—it has lagged behind the improvements seen in the manufacturing sector. Despite Monday’s larger-than-expected decline in the ISM Manufacturing Index, it remained in expansionary territory for the seventh-straight month. The manufacturing sector has been supported by international trade, with exports growing for the eighth-straight month, while the service sector report is more domestically-driven and moved back into expansion territory in January for first time since October. The tepid and diverging readings of the service sector, relative to the manufacturing sector will likely continue given the headwinds that facing the consumer.

The Federal Reserve Beige Book will also be released tomorrow, and is expected to provide a broad-based view of conditions across the Fed’s twelve districts in the US. The Beige Book is not a formal survey or index like most other economic reports, but rather it is a compilation of anecdotal pieces of information gathered from the Fed’s various contacts in local businesses and Fed policy makers use the data to prepare for its next monetary policy meeting on March 16th, to gauge whether any changes in policy are necessary.

Other releases on the US calendar tomorrow include the MBA Mortgage Application Index, and the ADP Employment Change Report, where private payrolls are forecasted to have fallen 20,000 in February.

Economic news plentiful in international markets

According to several media reports, Greece is anticipated to unveil its plans to cut an additional 4.8 billion euros ($6.5 billion) from its budget deficit, the equivalent of as much as 2% of GDP, bowing to pressure ahead of a meeting later this week with German officials to further combat its deficit problems and expectations have grown that the Greek nation will receive some form of eurozone aid. However, nothing has been confirmed and the reports suggest that Greece will need to prove that it has the measures in place to get its deficit under control before any aid will be granted.

On the economic front in Europe, Switzerland’s 4Q GDP rose more than expected on a month-over-month (m/m) basis and UK PMI Construction unexpectedly declined in February. However, the headlining release was a report that showed the pace of eurozone consumer price increases slowed from 1.0% y/y in January to 0.9% in February, matching economists’ expectations.

In Asia/Pacific, India’s exports rose 11.5% y/y—the third-straight monthly gain—and imports gained 35.5% y/y. Moreover, the emerging nation said yesterday that its PMI manufacturing posted the eleventh-consecutive month of expansion in February and increased the most in 1 ½ years, per Bloomberg. Australian data also came into focus in Asia, as retail sales rose more than expected on a m/m basis. Japan’s jobless rate in January fell from an upwardly revised 5.2% in December to 4.9%, versus the expectation that the rate would come in at 5.1%. In other economic news in the region, South Korea’s consumer prices rose by a smaller-than-expected amount in February.

Globally, several central banks met to discuss monetary policy, with the Reserve Bank of Australia increasing its benchmark lending rate by 25 basis points to 4.00%, as expected. Australia’s economy has been resilient, escaping the recession, and unemployment remains low at 5.3%. Elsewhere, the Bank of Canada kept its benchmark interest rate at 0.25%, as expected, but said that “core inflation has been slightly firmer than projected” and GDP was “slightly higher than the Bank had projected.” GDP in Canada grew at a 5% pace in the fourth quarter and core inflation in January accelerated to 1.9% y/y, close to the central bank’s 2% target. The bank dropped a reference to inflation risks being “tilted slightly to the downside” in the statement.

Tomorrow, economic releases internationally will include eurozone and German retail sales, PMI services readings from Germany, France, Italy and the UK, and Japan is set to announce capital spending in 4Q.