Evening Update

Stocks Make it Ten for Eleven

Markets bumped along for most of the day in light volume but were able to finish at the highs of the day with the Dow notching gains for the tenth time in 11 sessions amid mixed readings from both the corporate and economic fronts. Existing home sales fell at a slower pace than anticipated but inventory rose unexpectedly, while homebuilder KB Home noted the first increase in backlog in four years, but new order growth of 5% fell short of analyst’s forecasts. In other economic news, a report on manufacturing activity in the central Atlantic region unexpectedly improved. In earnings news, Walgreen Co missed estimates citing a weak flu season, Carnival Corp reported earnings that beat the Street and it raised guidance, and H&R Block cheered better results over the past few weeks. Treasuries were mostly lower.

The Dow Jones Industrial Average jumped 103 points (1.0%) to close at 10,889, the S&P 500 Index gained 8 points (0.7%) to 1,174, and the Nasdaq Composite was 20 points (0.8%) higher at 2,415. In moderate volume, 985 million shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $0.31 higher at $81.91 per barrel, wholesale gasoline was flat at $2.26 per gallon, and the Bloomberg gold spot price rose $3.05 to $1,105.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 80.77.

Walgreen Co (WAG $36) reported 2Q EPS ex-items of $0.70, lower than the $0.71 analyst estimate, and revenue of $17 billion also missed forecasts of $17.17 billion. The company said that same-store sales – sales from stores open more than a year – fell 0.2%, driven by a 1.6% decline in front of the store sales as the company saw lower demand for discretionary goods and cold and flu products, while same-store sales for prescriptions rose 0.6%. In commenting on the results, the CEO said that, “As much as the early flu season helped our first quarter results, it hurt our second quarter results.” However, better-than-expected margin performance helped shares move higher, as WAG has been revamping stores, removing discretionary goods and adding private-label and staple products, and the company noted “good economics” as the program has reduced inventory by $500 million.

KB Home (KBH $17) reported a net loss of $54.7 million, or $0.71 per share, including pretax, noncash charges for inventory impairments and land option contract abandonments of $13.4 million. The Street estimate was for a $0.42 loss per share. Analysts are noting that the write-down was generally lower than most had expected, and was 59% lower than the $32.3 million reported in the year-ago period, but that the 5% increase in net orders was smaller than anticipated. Meanwhile, the company noted that backlog grew for the first time in four years and that it is positioned to return to profitability in the latter part of the year. In commenting on the housing market, KBH said that it doesn’t yet see a sustained nationwide recovery, but that a number of markets may be stabilizing or starting to rebound. Shares were lower.
Carnival Corp (CCL $39) reported 1Q EPS ex-items of $0.17 on revenue of $3.1 billion, with earnings ahead of the $0.14 consensus estimate, but revenue coming in below the analyst estimate of $3.14 billion. The CEO said that, “We were very encouraged by our results as pricing continued to rebound off last year’s low and we returned” to revenue growth, and while the company benefitted from “significant cost sayings,” it was “masked by rising fuel prices.” Bookings volume was higher relative to a year ago and prices significantly higher versus last year’s discounted levels, prompting CCL to increase its fiscal-year earnings outlook to $2.25-2.35 per share and estimated revenue per-bed per day to rise 2-3%, higher than the previous forecast of $2.10-2.30 per share and revenue yields to be flat to up slightly. Shares were higher.

H&R Block (HRB $18) was higher after saying it has seen improved results in March, although the company remains “disappointed” in tax season-to-date results, as the company earlier this month indicated it was underperforming its competitors. In the first half of March, same-office returns in retail operations grew 7.0% year-over-year, while total tax returns increased 4.3% as total retail returns were 4.4% higher and the net average retail fee per tax return increased 2.1%.

Existing home sales fall at slower-than-expected pace

Existing-home sales fell 0.6% month-over-month (m/m) in February to an annual rate of 5.02 million units, better than the 1.1% decline to 5.0 million units forecasted by a Bloomberg survey of economists, and January’s data was unrevised. The median existing-home price fell 1.8% from a year ago to $165,100, while rising 0.1% m/m, and the supply of homes increased by 312,000 to 3.59 million units, equating to 8.6 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier, while new home sales, are considered a more timely indicator of conditions in the housing market, as they reflect contract signings. New home sales are expected to show a 1.9% increase in February to an annual rate of 315,000 units when released on Wednesday. Housing market data has been volatile and has yet to show a resurgence in sales after the initial tax credit was expanded and extended.

The National Association of Realtors (NAR), who releases the data on sales of previously occupied homes, said that the increase in supply was “unusual” and may have been caused by more distressed properties coming on the market and by trade-up buyers who are now putting up their houses for sale in advance of other purchases. Distressed sales were 35% of transactions, down from 45-50% a year ago. The crash in housing prices has attracted the interest of investors, who were 19% of transactions and accounted for the majority of the 27% of transactions purchased using cash, up from a historical average of cash transactions around 10%. While the national data showed an increase in supply, real estate is local, and the NAR noted that “A lack of affordable housing inventory is holding back sales and pressuring prices to be bid upwards in many California markets.”

The decline in home prices and resulting small equity positions by many homeowners upon entering the economic crisis has resulted in nearly 25% of homeowners owing more than the value of the home. When combined with high unemployment, foreclosures are expected to continue to add to the supply of homes for sale. To-date, the rate of foreclosures has slowed, partly due to moratoriums and bank restraint, while some buyers and investors have begun to bargain hunt, stabilizing the balance between supply and demand, as well as prices. The question for economic growth is whether this balance will continue while pressures on the demand side could wane and supply continues to increase. In her article Fed Stands Pat … But for How Much Longer?, Schwab’s Chief Investment Strategist Liz Ann Sonders says that she believes the economic recovery is legitimate and more self-sustaining than many believe and she provides a list of economic releases supporting her view. When the housing market begins to add to economic activity is unknown, but the economy can still grow on the back of net export growth and increases in business investment.

In other economic news, the Richmond Fed Manufacturing Index improved in March to 6 from 2 in February, higher than the forecast of 5, wherein a reading above zero denotes expansion. Within the report, shipments grew at a modest pace, while new orders were virtually unchanged and employment steadied. Other indicators were mixed, with backlogs of orders moving into negative territory, while vendor delivery times grew at a quicker pace.

The yield curve steepened slightly following the Treasury’s auction of $44 billion in 2-year notes yielding 1.00%, fetching a bid-to-cover ratio of 3.0. The yield on the 2-year note was flat at 0.98%, the yield on the 10-year note gained 3 bps to 3.69%, and the 30-year bond yield rose 3 bps to 4.60%.

Divisions within Bank of Japan apparent

The Bank of Japan released the minutes from its February monetary policy meeting, where some members were surprisingly of the view that “upside and downside risks were becoming balanced” even as deflation deepened, while others noted “considerable downside risks to the economy.” The difference of opinions continued into March, as the 5-2 vote last week by the Bank of Japan to expand a credit program to 20 trillion yen ($222 billion) demonstrates, and there is speculation that last week’s move was prompted by political pressure. A separate report showed that commercial land prices in Japan fell 6.1% in 2009 to the lowest level since comparable data was first collected in 1974, according to Bloomberg.

In Europe, the UK consumer price index for February came in lower than expected, rising 3.0% year-over-year (y/y) versus the 3.1% estimate, a deceleration from the 3.5% pace in January. The core CPI, which excludes food and energy, rose 2.9% m/m, also below economists’ forecasts, which called for the measure to gain 3.1%. The measure of inflation is at the upper end of the 3.0% limit set by policymakers, but is a positive move as some central bankers have expressed concern that inflation risks have risen. Also, the retail price index in the UK rose 0.6% m/m in February from an unchanged reading in January, below the 0.7% expected by economists.

Commentary about the situation in Greece continued in earnest ahead of a European Union (EU) summit scheduled for March 25-26, with EU President Van Rompuy seeking to strike an agreement on an aid mechanism for Greece before the start of the meeting, according to a European diplomat. Conflicting signals continued today as the Greek Finance Minister pushed back against suggestions that the International Monetary Fund (IMF) provide loans and the German Economy Minster repeated his reluctance to put his taxpayer funds at risk.

In the US’s neighbor to the north, Canada’s leading economic indicator index rose 0.8% in February following a revised 0.7% rise in January, below the 0.9% increase anticipated by economists polled by Bloomberg, but marking the ninth-straight rise in the measure. Nine of the 10 components within the index showed gains with the housing component of the index, which includes housing starts and existing home sales, rising 1.7% from the prior month, new orders up 6.2%, and sales at furniture and appliance stores saw a 1.2% increase. The lone component that declined was the average workweek, which fell 0.8%.

More housing data, as well as durable goods orders, to be released tomorrow

New home sales will be released tomorrow, and are expected to show a 1.9% m/m increase in February to an annual rate of 315,000 units and are considered a more timely indicator of conditions in the housing market than existing home sales, as they reflect contract signings. The m/m increase in new home sales would be the first since October, as sales dropped off in November with the initial expiration of the tax credit, which was later extended and expanded in scope.

Durable goods orders will also be reported on Wednesday, expected to rise 0.6% m/m in February after increasing 3.0% in January, while ex-transportation, orders are also forecasted to have grown 0.6% m/m, after falling 0.6% in January. The durable goods data is volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data.

The economic recovery has been led by manufacturing, as businesses allowed inventories to plunge by a record amount, using existing stockpiles to fulfill orders. With demand returning, albeit at low levels, this type of behavior was unsustainable, and manufacturers returned to production. While factory utilization has rebounded, at 72.7% in January, it remains 7.9% below the longer-term average, and combined with little upward pressure on wages due to high unemployment, restrained housing costs, and low velocity of money (the rate that money multiplies through the economy as it is lent out), there is little threat of inflation in the near-term, and as such, there isn’t much pressure on the Fed to raise rates.

The other report on tomorrow’s US economic calendar is the MBA Mortgage Applications Index.

Tomorrow’s international economic calendar will include manufacturing and services PMI numbers from the euro-zone, Germany’s IFO Business Climate Index, employment and consumer confidence figures in Italy, and the UK will publish its budget report.