Evening Update

Strength in Financials Highlights Another Low-Key Trading Day

Stocks managed to finish slightly higher on the day as the financial sector showed strength and a lack of economic news produced another day of muted trading. An unexpected drop in wholesale inventories was reported early in the day, led by another increase in sales, which improved the outlook on the manufacturing sector and consumer demand. A slight increase in mortgage applications was also seen, following a large increase last week. Biotech firms dominated the equity news today, as Allergan Inc received FDA approval for alternate uses of its Botox treatment, while InterMune Inc also received FDA panel recommendation for the approval of its lung treatment. In M&A news, Abbot Laboratories agreed to acquire Facet Biotech Corp and Terra Industries announced that its board judged CF Industries Holdings Inc’s proposal to acquire the company to be superior to offer of Norway’s Yara International. In retail earnings news, American Eagle Outfitters matched the Street’s expectations, while J. Crew Group Inc. solidly beat analysts’ forecasts. Treasuries finished the day lower.

The Dow Jones Industrial Average rose 3 points (0.03%) to close at 10,567, the S&P 500 Index edged 5 points (0.5%) higher at 1,146, while the Nasdaq Composite gained 18 points (0.8%) to 2,359. In modest volume, 1.1 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil was $0.38 higher at $81.87 per barrel, wholesale gasoline rose $0.02 to $2.28 per gallon, and the Bloomberg gold spot price fell $14.10 to $1,107.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 80.45.

Shares of Allergan Inc. (AGN $62) finished higher after the US Food and Drug Administration (FDA) approved the use of the company’s Botox treatment for spasticity in the flexor muscles of the elbow, wrist and fingers in adults. Spasticity can occur following a stroke or following a spinal cord or traumatic brain injury or in patients affected by multiple sclerosis or adults with a history of cerebral palsy.

In related biotech industry news, shares of InterMune Inc. (ITMN $38) were up over 60% after an FDA panel recommended the approval of the company’s lung treatment for idiopathic pulmonary fibrosis—a condition caused when tissue in the lungs become thick and scarred. Meanwhile, Facet Biotech Corp. (FACT $27) was also up over 60% after the company and Abbott Laboratories (ABT $55) reached a definitive agreement for ABT to acquire FACT for $27 per share or about $722 million. ABT shares were modestly higher as the company separately reported the FDA approved an intraocular lens treatment for cataract patients.

In other M&A news, Terra Industries(TRA $47) announced that its Board has unanimously determined that CF Industries Holdings Inc’s (CF $101) approximate $4.72 billion proposal to acquire the company constitutes a superior proposal to Norway’s Yara International’s(YARIY $41) $4.1 billion offer. TRA said it has provided YARIY a chance to change its offer within five business days to make it at least as favorable to TRA stockholders as the CF proposal. CF’s offer would give TRA shareholders $37.15 in cash and .0953 shares of CF per TRA share held, while YARIY’s offer was for $41.10 per share in cash. YARIY confirmed that it has received the notification from TRA and will evaluate the situation. YARIY would receive a $123 million breakup fee if its deal is terminated. Shares of all three firms were higher.

American Eagle Outfitters (AEO $18) reported 4Q EPS ex-items of $0.33, inline with the consensus estimate of Wall Street analysts, with revenues increasing 7% year-over-year (y/y) to $972 million, compared to the $969 million that the Street had anticipated. The retailer said its same-store sales—sales at stores open at least a year—rose 5% y/y, after posting a 15% y/y decline in the same period a year ago. The company said its gross margin rose by 600 basis points, primarily due to fewer markdowns. AEO expects 1Q EPS ex-items to be in a range of $0.15-0.17, compared to the $0.15 that analysts are forecasting. Shares were solidly higher.

Fellow retailer J. Crew Group Inc. (JCG $45) also reported positive 4Q results, with EPS coming in at $0.61 per share, compared to analyst estimates of $0.48 per share. Same-store sales increased 17% y/y, while revenues rose 19% y/y to $460.6 million. The company said it plans to open 15 new stores this year, as the company’s CEO noted that opportunities in real estate are improving. JCG projected Q1 earnings of $0.48 to $0.53 per share, which is in-line with the Street’s forecast. Shares of the company ended the day lower.

Wholesale inventories surprise to the downside, mortgage applications inch higher

Wholesale inventories unexpectedly declined, decreasing by 0.2% in January month-over-month (m/m), versus the Bloomberg consensus, which called for a 0.2% advance, and December’s 0.8% decrease was revised to a 1.0% decline. A 4.7% jump in petroleum inventories was offset by a 2.4% decline in computer equipment, as well as a 4.5% drop in farm products. Sales rose 1.3%, bringing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to a record low of 1.10 months from 1.12. Treasuries remain higher after extending losses following the report.

Sales have increased for ten-straight months and given the lean levels of inventories, the report suggests that manufacturers could be forced to increase production to meet demand, which could bode well for the continued improvement in manufacturing and the employment outlook.

The US MBA Mortgage Application Index inched 0.5% higher last week, after the index, which can be quite volatile on a week-to-week basis, advanced 14.6% in the previous week. The increase came as the 1.5% decline in the Refinance Index was offset by a 5.7% increase in the Purchase Index. The slight advance in the overall index came despite a 6 basis-point increase in the average 30-year mortgage rate, which rose to 5.01% and remains above the record low of 4.61% that was reached at the end of March 2009.

Treasuries moved lower on the day after the completion of a $21 billion 10-year note auction and no major reports on today’s US economic calendar. The yield on the 2-year note was 3 bps higher at 0.90%, the yield on the 10-year note rose 1 bp to 3.71%, and the 30-year bond yield was 1 bp higher at 4.69%.

A flood of data released in Europe

In European news, UK manufacturing production fell 0.9% m/m in January, versus the 0.2% gain that economists expected, and its industrial production fell 0.4% m/m in January, compared to the 0.3% increase that was forecasted. Meanwhile, French industrial production rose 1.6%, after a fall of 0.2% last month, and manufacturing production, which excludes energy output, rose 0.8%, which both topped analyst forecasts. Meanwhile, Italian industrial production climbed 2.6%, after falling 0.2% last month. Moreover, trade data out of Germany—Europe’s largest economy—are also in focus, with the German trade surplus and current account balance both coming in below expectations, as exports fell 6.3% m/m in January, which was the largest drop in a year, versus the expectation that exports would rise 0.5%, offsetting a larger-than-expected increase in its imports. In other European economic news, the German Consumer Price Index was unexpectedly revised higher and Italy’s 4Q GDP was revised to a larger contraction than expected.

In Asia/Pacific news, China’s property prices rose at the fastest pace in nearly two years in February. According to the statistics bureau, residential and commercial real-estate prices in 70 cities gained 10.7% y/y, up from a 9.5% increase last month, and m/m home prices rose 0.9% in February, a deceleration from the 2.07% m/m in January and 5.28% m/m in December. New home prices rose 13% nationwide, while second-hand housing prices climbed 8.5%. The increases add urgency to the government’s efforts to cut down on speculation and provide affordable housing to its citizens. In related news, China also reported that property sales by value rose 70.2% in the first two months of the year, while property sales by floor area rose 38.2% during the same period.

Economic reports on tomorrow’s US economic calendar will include the trade balance, which is expected to yield a deficit of $41.0 billion, after an unexpected fall to $40.2 billion last month and weekly initial jobless claims, which are predicted to fall to 460,000 from last week’s reading of 469,000.

The international economic calendar will be active again tomorrow, as Japan will report GDP and industrial production, China will announce PPI, CPI, retail sales and industrial production, Brazil will report retail sales and GDP, and Australia will report its monthly unemployment rate which is expected to remain flat at 5.3%.