Evening Market Update

Earnings and M&A Activity Add Skip to Bulls' Step

Better-than-forecasted profits from Dow members Wal-Mart Stores and Home Depot along with some large M&A deals helped to boost sentiment and lift stocks, assisting the Dow in notching its first triple-digit gain in more than two weeks. BHP Billiton made an unsolicited bid to acquire Potash Corp of Saskatchewan for roughly $39 billion and Pactiv Corp agreed to be acquired by Reynolds Group Holdings for about $6 billion. Moreover, better-than-expected industrial production and capacity utilization reports added to the bulls’ elation, despite a slightly higher than-forecasted read on core producer prices and lower-than-anticipated housing starts and building permits figures. Earnings news centered around the retail sector as both Saks and Urban Outfitters beat analysts’ forecasts, but announced store closures and a decline in margins at Abercrombie & Fitch took the wind out of the sails of its positive results. In other news on the equity front, Eli Lilly & Co halted the development of an Alzhiemer’s treatment. Treasuries finished lower amid the strength in equities.

The Dow Jones Industrial Average jumped 104 points (1.0%) to 10,302, the S&P 500 Index rose 13 points (1.2%) to 1,093, and the Nasdaq Composite gained 28 points (1.3%) to 2,209. In light volume, 981 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil rose $0.53 to $75.77 per barrel, wholesale gasoline was $0.02 higher at $1.95 per gallon, while the Bloomberg gold spot price shed $0.10 to $1,225.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—declined 0.3% to 82.22.

Dow component Wal-Mart Stores Inc. (WMT $51) announced 2Q earnings of $0.97 per share, one penny above the Reuters estimate, but revenues increased 2.8% year-over-year (y/y) to $103 billion, shy of the Street’s $105 billion estimate. US same-store sales—sales at stores open at least a year—declined 1.8% y/y, but it said its international unit continued to drive growth for the company, with net sales increasing 11% to $26 billion, with strong contributions from Mexico, Brazil and China. The company said the slow economic recovery will continue to affect its customers, and it expects they will remain cautious about spending. WMT raised its full-year EPS outlook and issued 3Q earnings guidance that matched expectations. Shares were higher.

Fellow Dow member Home Depot Inc. (HD $28) reported 2Q EPS of $0.72, two cents above the consensus estimate of analysts, but revenues, which increased 1.8% y/y to $19.4 billion, came in below the $19.6 billion that the Street was looking for. Same-store sales rose 1.7% y/y, with US same-store sales rising 1.0%. The world’s largest home improvement retailer increased its full-year EPS outlook but lowered its revenue forecast, and both figures came in below analysts’ forecasts. HD finished nicely higher.

A slew of other earnings reports out of the retail sector poured in headlined by Urban Outfitters Inc. (URBN $33), which posted 2Q EPS of $0.42, above the $0.39 that analysts forecasted, with revenues increasing 20% y/y to $552 million, exceeding the $542 million that was expected. The clothing retailer’s net same-store sales grew 7% y/y, as the company said it continues to focus on disciplined inventory and expense management, given the context of an uncertain economic environment.

Other reports from the group included: a smaller-than-forecasted loss and better-than-expected revenues from luxury retailer Saks Inc.(SKS $8), while Abercrombie & Fitch Co. (ANF $35) posted top and bottom line performances that topped forecasts but margins declined on further discounting and it said it will close 60 domestic stores and will reduce its international growth for its Hollister stores. URBN and SKS were nicely higher, but ANF was solidly lower.

In North American M&A news, Potash Corp. of Saskatchewan Inc. (POT $143) announced that its Board of Directors has received and unanimously rejected an unsolicited proposal to be acquired by BHP Billiton Ltd. (BHP $70) for $130 per share in cash. The Canadian agriculture firm said the $38.5 billion proposal is grossly inadequate and it is not in the best interests of its shareholders. POT was over 27% higher, while BHP finished lower.

In other M&A news, Pactiv Corp. (PTV $33) was nicely higher after the maker of Hefty waste bags and disposable tableware and cookware agreed to be acquired by Reynolds Group Holdings—a subsidiary of New Zealand-based Rank Group Limited—in a transaction valued at about $6 billion, including debt. Under the terms of the deal, shareholders of the consumer and foodservice packaging firm will receive $33.25 per share in cash.

Eli Lilly & Co. (LLY $35) was lower after the drugmaker said it will halt development of semagacestat, a treatment for Alzheimer’s disease, because preliminary results from two ongoing long-term Phase-III studies showed it did not slow disease progression and was associated with worsening of clinical measures of cognition and the ability to perform activities of daily living. Separately the US Food and Drug Administration said it will ask an outside panel of medical experts, due to safety concerns, whether its antidepressant drug Cymbalta should be expanded as treatment for chronic pain.

Housing starts and permits come up short, PPI rises, while industrial production up next

Housing starts for July came in below expectations, rising 1.7% from a downwardly revised 537,000 annual rate of units in June to a rate of 546,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 560,000. Additionally, building permits fell more than expected, dropping 3.1% month-over-month (m/m) in July, to an annual rate of 565,000, while June’s figure was downwardly revised to 583,000. The expectation was for permits to dip to 580,000 units.

While new homes are a small portion of the housing market, the starts data is considered a timely indicator of the housing market as sales are recorded as contracts are signed, and building permits are a gauge of future construction, and one of the leading indicators tracked by the Conference Board. Within the report, single-family starts fell 4.2% and single-family permits declined 1.2%.

Elsewhere, the Producer Price Index showed prices at the wholesale level rose 0.2% m/m in July, after decreasing 0.5% in June, matching economists’ forecasts, while the core rate, which excludes food and energy, increased 0.3% m/m, above the forecast of economists calling for core prices to increase 0.1%. On a year-over-year basis, headline producer prices were 4.2% higher, and the core rate was up 1.5%. Almost half of the advance in the core rate was attributed to a 1.5% rise in prices for light motor trucks, while prices for pharmaceuticals and passenger cars also contributed to the increase.

The July reading of industrial production rose 1.0% m/m, well above the 0.5% increase expected after June’s reading was downwardly revised by 0.2% to a negative 0.1%. Manufacturing was boosted by a nearly 10% increase in auto production, excluding this benefit, production ex-motor vehicles and parts grew 0.6%. Capacity utilization rose more than expected to 74.8% from 74.1% in June, while the expectation was an increase to 74.6%. Utilization remains 5.8% below its average from 1972 to 2009.

Incoming economic data has been mixed but indicates that the economic expansion continues. Primary concerns have centered around housing and jobs, and the Fed last week pledged to maintain the size of their balance sheet to support the recovery, characterizing the pace of the recovery as more modest than previously expected. Consumer confidence has been hampered by the weak jobs outlook, and Liz Ann, Brad and Michelle believe high levels of uncertainty by businesses have hampered their willingness to hire. Cisco Systems’ (CSCO $22) CEO John Chambers said last week that they were seeing “unusual uncertainty” and getting “mixed signals” about the recovery. Small businesses, an important generator of jobs, have not participated in the recovery to the same degree as large businesses, and remain highly uncertain about the future.

Treasuries finished mostly lower amid the gains seen in the equity markets. The yield on the two-year note was flat at 0.50%, the yield on the 10-year note gained 6 bps to 2.63% and the yield on the 30-year bond was 4 bps higher at 3.76%.

German investor sentiment falls short of expectations

The German ZEW Survey of Economic Sentiment, which is a gauge of expectations among investors and analysts over the next six months, fell from 21.2 in July to 14.0 in August, the lowest level since April 2009, and below the 20.0 reading that economists had expected. However, separate reports showed the German ZEW Survey of the Current Situation surged well above forecasts, and the euro-zone ZEW Survey of Economic Sentiment unexpectedly rose for the month. In other economic news in the region, the UK Consumer Price Index declined 0.2% m/m in July, after rising 0.1% in June, matching expectations, while on a y/y basis, consumer prices were up 3.1%, down from 3.2% in June, also matching expectations. The y/y rate is more than one percentage point above the 2% government target rate.

Further east, Hong Kong’s unemployment rate declined more than anticipated, falling from 4.6% in June to 4.3% in July, and compared to the 4.5% rate that was expected. Also, the Conference Board reported that its Chinese Leading Index improved m/m in June. Elsewhere, the Reserve Bank of Australia released the minutes from its monetary policy meeting earlier this month. The RBA said the global economy had continued its expansion, though conditions differed across regions and growth in Australia’s trading partners had been very strong. Moreover, the RBA said its forecast for GDP growth was a gradual increase to the 3.75-4.00% range in 2011 and 2012, and inflation was expected to be around 2.75% over the next year or so. The central bank added that developments over the latest month had not materially changed its assessment and there was still more uncertainty over the global outlook than there had been earlier in the year, so it judged that the existing level of its benchmark interest rate as still appropriate.

Back in the Americas, Canada reported a better-than-expected 0.1% increase in manufacturing sales, above the -0.5% expected by economists.

Global economic news will be light tomorrow, with the MBA Mortgage Applications Index being the only item on the US’ docket, while Japan will report its Tertiary Industry Index as well as the Leading Index. In central bank action, the Bank of England will release the minutes from its August 4-5 monetary policy meeting.