Evening Market Update

Modest Gains Before Corporate Earnings Rain

The equity markets finished modestly higher as traders played their cards close to the vest ahead of 1Q earnings season, which unofficially kicked off after today’s closing bell, with Dow member Alcoa posting earnings that matched analysts’ estimates. M&A activity was the highlight for the day, helping the Dow Jones Industrials nudge above the 11,000 mark, headlined by ConocoPhillips selling its stake in a Canadian oil sands project to China’s Sinopec for over $4 billion. Other activity included Mirant and RRI Energy announcing a merger of equals, DynCorp receiving a buyout offer, Halliburton reporting the purchase of Boots and Coots, and Devon Energy selling Gulf assets to Apache Corp for about $1 billion. Moreover, Palm was reported to be shopping itself, while California Pizza Kitchen announced it has hired an advisor to look at strategic alternatives, while separately releasing an increase in guidance for 1Q results. Treasuries moved higher and there were no major US economic releases due today.

The Dow Jones Industrial Average gained 9 points (0.1%) to close at 11,006, the S&P 500 Index rose 2 points (0.2%) to 1,196, and the Nasdaq Composite was 4 points (0.2%) higher at 2,458. In light volume, 976 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $0.58 lower at $84.34 per barrel, wholesale gasoline was $0.01 higher at $2.30 per gallon, and the Bloomberg gold spot price lost $6.40 to $1,155.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.6% to 80.58.

Just after the closing bell, Dow member Alcoa (AA $15) unofficially kicked off 1Q earnings season, with the aluminum producer reporting 1Q EPS ex-items of $0.10, matching the consensus estimate of Wall Street Analysts, on revenues of $4.9 billion, compared to the Street’s forecast, which called for revenues of $5.2 billion.

ConocoPhillips (COP $56) announced that it has entered into definitive agreements with subsidiaries of China Petrochemical Corp, also known as Sinopec, to sell its 9% interest in the Syncrude Canadian oil sands project for $4.65 billion. COP said that this deal is an important step in the $10 billion divestiture program which it announced last October and is expected to close in 3Q 2010, once Canadian and Chinese government approvals are obtained. COP traded higher.

Shares of Mirant (MIR $13) and RRI Energy(RRI $5) traded higher after reporting a merger of equals that would create the second-largest independent US power producer, to be named GenOn Energy. The combined company is estimated to deliver $150 million in cost savings starting in 2012, providing larger geographic diversity and “ample liquidity” of $2.9 billion in cash to handle market swings. Mirant shareholders will get a fixed ratio of 2.835 shares of RRI Energy for each of their shares, and a 54% stake, and RRI Energy will hold the remaining 46%.

Palm Inc. (PALM $6) traded over 15% higher after Bloomberg news reported that the company hired Goldman Sachs(GS $178) and Frank Quattrone’s Qatalyst Partners to seek bids for the company, citing people familiar with the situation, who noted that Taiwan’s HTC Corp and China’s Lenovo Group Ltd (LNVGY $16) have looked at the company. None of the companies in the report commented.

DynCorp International Inc (DCP $17) surged nearly 50% after agreeing to be purchased by private-equity firm Cerberus Capital Management for nearly $17.55 per share, or $1.5 billion including the assumption of debt. Affiliates of Veritas Capital Fund Management, which own 35% of the shares outstanding, have agreed to vote in favor of the deal. The company, which provides support for US national security and foreign policy objectives, has 28 days to solicit alternative proposals.

In other M&A news, Halliburton (HAL $31) announced a cash and stock deal to buy Boots & Coots (WEL $3) for $232 million, and Apache Corp (APA $108) agreed to buy the Gulf of Mexico assets of Devon Energy(DVN $68) for about $1.05 billion. Shares of Boots & Coots and Apache were higher, while Halliburton and Devon Energy finished lower.

California Pizza Kitchen (CPKI $21) advanced after it said it had hired an advisor to review strategic alternatives, including a possible sale, merger or other combination and separately announced preliminary 1Q earnings results. The pizza chain said it expects earnings of $0.10 per share, including a $0.03 benefit for gift card breakage, versus a $0.05-0.07 per share forecast given during its February conference call and the $0.08 consensus estimate of Wall Street analysts.

Economic calendar likely to yield to 1Q earnings traffic

Treasuries finished higher while the economic calendar lacked any major releases today and will remain light until Wednesday. The yield on the 2-year note was down 2 bps to 1.03%, while the 10-year note and 30-year bond yields decreased by 4 bps to 3.84% and 4.70%, respectively. Sentiment is likely to shift from being driven by economic reports to taking their cue from the looming 1Q earnings season.

Rescue plan details buoy Greece

News of a bailout plan for Greece supported Greek sentiment with details showing Euro-region finance ministers will provide as much as 30 billion euros in three-year loans in 2010 at a rate around 5%, below the rate currently being priced by markets, while the International Monetary Fund (IMF) would provide another 15 billion euros. The 45 billion euro bailout offer comes ahead of a pivotal bill auction in Greece tomorrow, and the Greek Finance Minister said that the government plans to go ahead with debt sales without taking up the aid offer. The EU showed no sign of demanding further budget measures, saying the Greek government was implementing a “very bold and ambitious plan.”

Elsewhere, Chinese data dominated the headlines in Asia, highlighted by disappointing loan growth data out of China and concerns about tighter lending standards. The China Banking Regulatory Commission said that some banks in Beijing had “voluntary and prudently” raised down-payment requirements for second mortgages to 60% and that lenders must report risk exposures by the end of June. China also announced new loans in March of 510.7 billion yuan ($74.8 billion), below the 709 billion yuan forecast and the 700 billion yuan announced for February, while money supply as measured by M2 rose 22.5%, down from 25.5% in February. Meanwhile, China reported its first trade deficit since 2004, of $7.2 billion, as imports surged 66% while exports rose 24%, while the surplus was larger than the $390 million deficit expected by a survey of economists conducted by Bloomberg. Deficits were reported with Japan and S. Korea, while a $9.9 billion surplus with the US was reported.

Tomorrow the US economic calendar will remain light, with the trade deficit, forecast to widen to $38.5 billion for February, and the Import Price Index, expected to rise 1.0% m/m in March, as the lone releases scheduled.

On the international front, releases will include German consumer and wholesale price reports, French CPI, the UK trade balance, and Canadian new home prices.