Evening Market Update

Stocks Ride Tech Strength to Finish Higher

The equity markets traded nicely higher today, led by strength in the technology and industrials sectors, and by positive news out of Europe as Spain announced austerity measures and the UK welcomed new leadership. The domestic economic front saw a rise in mortgage applications, which were offset by a report showing the US trade deficit increased 2.5% in March. In equity news, Dow member Walt Disney Co. reported better-than-expected top- and bottom-line results, while fellow Dow component Cisco Systems announced earnings after the market close that beat analysts’ estimates. Favorable earnings were also reported by Macy’s Inc and Electronic Arts Inc, while IBM offered optimistic EPS guidance at their annual meeting with investors. In other equity news, shares of Morgan Stanley traded lower on a Wall Street Journal report that the financial firm is under Federal investigation regarding mortgage derivates, while the M&A front received a boost on speculation that Fidelity National Information Services Inc may be acquired by a group of private equity firms. Treasuries finished the day lower.

The Dow Jones Industrial Average rose 149 points (1.4%) to close at 10,897, while the S&P 500 Index rose 16 points (1.4%) to 1,172, and the Nasdaq Composite was 50 points (2.1%) higher at 2,425. In moderately heavy volume, 1.3 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil fell $0.95 to $75.42 per barrel, wholesale gasoline was $0.02 higher at $2.21 per gallon, while the Bloomberg gold spot price rose $6.30 to $1,239.18 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 84.84.

Dow member Walt Disney Co. (DIS $36) reported fiscal 2Q EPS ex-items of $0.48, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 6% year-over-year (y/y) to $8.6 billion, besting the $8.4 billion Street forecast. The company said the “incredible” box office performance of Disney’s Alice in Wonderland aided results, but some analysts are expressing some disappointment in the company’s margin performance at its media networks unit. Media margins were impacted by higher expenses at its ESPN network, which were accelerated by higher contractual costs for college basketball and NBA programming. Also, the launch of EPSN UK added to higher expenses as the network had to secure soccer programming rights. Shares finished the day lower.

Fellow Dow member Cisco Systems Inc. (CSCO $27) released fiscal 3Q results after the closing bell, as EPS came in at $0.42, compared to the Street’s estimate of $0.39. The company’s CEO John Chambers said the 3Q results were “proof points that our strategy is working and was probably the strongest quarter in our history.”

Macy’s Inc. (M $24) reported 1Q EPS of $0.05, one penny above the Street’s forecast, with revenues increasing 7.2% y/y to $5.6 billion, slightly above the $5.5 billion that analysts were forecasting. Same-store sales—sales at store open at least a year—rose 5.5% y/y. The company said Macy’s and Bloomingdale’s both had an excellent quarter and outperformed most of their key competitors and while the overall economy remains “unclear,” it believes it is well positioned to continue to gain market share. Shares were higher.

Morgan Stanley (MS $28) traded lower after the Wall Street Journal reported that Federal prosecutors are investigating whether the financial firm misled investors about mortgage derivatives, according to people familiar with the matter. The report suggests regulators are examining, “among other issues,” whether MS disclosed that it at times placed bets against investments in Collateralized Debt Obligations (CDOs)—a financial instrument made up of pools of bond-related investments—that were marketed to investors. The company’s CEO said that he was not aware of any Federal investigation and the company “has not been contacted by the Justice Department about any transactions that were raised in the Wall Street Journal article, and we have no knowledge whatsoever of a Justice Department investigation.”

Electronic Arts Inc. (ERTS $18) announced fiscal 4Q EPS ex-items of $0.07, two cents above the Street’s estimate, with revenues rising 40% y/y to $850 million, above the $839 million that analysts were anticipating. The video game maker said its Battlefield: Bad Company 2 title outperformed to help drive results, and it affirmed its 1Q and full-year 2011 guidance. ERTS traded solidly lower, suggesting analysts may have expected the company to favorably revise its outlook.

Dow member International Business Machines (IBM $131) was solidly higher to help technology issues gain ground after the company’s CEO said IBM will almost double its earnings by 2015 as it pursues opportunities in “higher value segments” such as software and emerging markets. The comments came at an annual meeting with investors.

Fidelity National Information Services Inc. (FIS $30) is reportedly in talks to be acquired by a group of private-equity firms led by Blackstone Group LP., according to people familiar with the situation. The speculation was first reported by The Wall Street Journal, and FIS has not commented on the rumor. If completed, the deal would be somewhere in the range of $15 billion, which would make it the largest leveraged buyout since the market downturn began three years ago. FIS is one of the largest U.S. companies providing technology services to the banking industry, and also helps banks process credit-card transactions, services auto loans and handles back-office functions for money managers. Shares traded higher today, and are up over 14% since the news first broke last Thursday.

Trade deficit widens, mortgage applications rise

The trade deficit widened from a slightly smaller-than-initially reported $39.4 billion in February to $40.4 billion in March, versus the Bloomberg estimate calling for the deficit to increase to $40.5 billion. The trade deficit is at the largest level since December 2008, led by steep increases in crude oil prices. The price of crude oil rose $1.40 per barrel to $74.32, the highest level since October 2008, and the quantity of barrels rose from 243.3 million barrels to 299.5 million barrels.

In other economic news, the MBA Mortgage Application Index rose 3.9% last week, after the index that can be quite volatile on a week-to-week basis, advanced 4.0% in the previous week. The increase came amid a 14.8% jump in the Refinance Index, which offset a 9.5% drop in the Purchase Index. Moreover, the increase in the overall index came on a 6 basis-point decrease in the average 30-year mortgage rate, which declined to 4.96%, remaining above the record low of 4.61% that was reached at the end of March 2009.

Treasuries finished lower, in a reversal of the recent flight to quality, and after the auction of $24 billion of 10-year notes. The auction drew a yield of 3.548%, versus a Bloomberg forecast of 3.582%, and the bid-to-cover ratio was 2.96, compared to an average of 2.98 for the past 10 sales, reflecting a slight decrease in demand. The yield on the 2-year note was up 3 bps to 0.86%, the yield on the 10-year note gained 6 bps to 3.58%, and the 30-year bond yield was 7 bps higher at 4.49%.

Flood of upbeat economic news out of Europe

The European economic front contributed to improved sentiment today, with German, Italian, and euro-zone 1Q GDP reports all expanding more than economists’ expectations, while France’s 1Q GDP increased by a smaller amount than forecasted and Spain’s 1Q GDP contracted by a slightly smaller pace than anticipated. In other economic news, euro-zone industrial production rose more than expected in March and the UK’s jobless claims fell by a larger amount than forecasted. Also, the Bank of England released its quarterly inflation report, in which it said inflation is expected to probably fall below its target rate of 2%, after temporary inflation pressures wane, such as the impact of the restoration of the standard rate of Value Added Tax (VAT), the increase in oil prices, and continuing pass-through from the exchange rate depreciation. Also, BoE Governor Mervyn King said the recovery is likely to gather pace over the next year, but the pace will be dampened by the fiscal consolidation and the need for UK banks to continue to repair their balance sheets.

In political news in the UK, following yesterday’s resignation by Prime Minister Gordon Brown, which ended a thirteen year run for the Labour Party, Conservative Party leader David Cameron took over as Prime Minister and said he planned on forming a coalition government with the Liberal Democratic Party, per Reuters. The coalition could help unlock the “hung Parliament” that resulted from last week’s election, helping the nation’s fiscal policy making process. In other euro-zone fiscal policy news, Spain’s Prime Minister said the country will implement austerity measures, including public spending and civil service wage cuts, aimed at reducing the country’s budget deficit to 6% of its GDP in 2011, from 11.2% in 2009.

In Asia/Pacific news, Japan’s preliminary Leading Index rose from 98.4 in February to 102.8 in March, matching economists’ forecasts. In other economic news in the region, South Korea’s unemployment rate dipped from 3.8% in March to 3.7% in April, and separately, the nation’s central bank left its benchmark interest rate unchanged at 2.0%. Meanwhile, Australia issued a report that showed home loans fell more than expected and India’s industrial production rose at a slower pace than expected.

Brazil rounded out the international news by announcing that its retail sales rose by 15.7% in March y/y, the largest amount since 2001, reflecting a surge in demand and an increasing level of inflation. Economists were expecting a rise of 14%, after last month’s report was revised upward to 12.2%. The Brazilian Finance Minister said he “doesn’t see a bubble in the economy, as food prices are the main drivers of inflation at the moment and will get back to normal.” He added that GDP growth estimates of 6.5-7.0% in 2010 are “exaggerated”, as the Brazilian Central Bank predicts levels closer to 5.8%.

The US economic calendar will be light again tomorrow, with the only report being weekly initial jobless claims, which are expected to decrease to 440,000 from a previous reading of 444,000. Traders will be looking ahead to a busy Friday, which will include advance retail sales, industrial production & utilization, and the University of Michigan consumer confidence report.

The international economic front will also be quiet tomorrow, with the only release being a report on the unemployment rate in Australia.