Morning Market Update

Stocks Decline as Recovery Doubts Rise

After posting a loss yesterday, stocks are extending losses today as uncertainty about the economic recovery is rising, with durable goods orders missing estimates, with a measure of capital spending falling, and while Japanese exports decelerated. Meanwhile, housing data continues in the headlines, with weekly mortgage applications rising despite a report yesterday that showed existing home sales plunged in July, and ahead of the new home sales report later today, and Treasuries are higher. In equity news, homebuilder Toll Brothers annoucned its first profit in nearly three years, and BHP Billiton reported a profit miss, while 3Par said it was proceeding with merger negotiations with Dow component Hewlett-Packard Co, giving Dell Inc three days to respond. Overseas, European shares extended losses on the durable goods report, while Asian shares fell.

As of 8:49 a.m. ET, the September S&P 500 Index Globex futures is 7 points below fair value, the Nasdaq 100 Index is 15 points below fair value, and the DJIA is 63 points below fair value. Crude oil is down $0.26 at $71.37 per barrel, and the Bloomberg gold spot price is up $6.05 at $1,236.70 per ounce.

Toll Brothers (TOL $17) reported a surprise 3Q profit of $0.16 per share, above the $0.14 per share loss expected, as revenues fell less than anticipated to $454.2 million versus the $393 million estimate. CEO Robert Toll said that the combination of buyers postponing purchases, a lack of new home production, and a significant reduction in competition in the luxury home space could result in “pent-up demand coupled with limited supply once a recovery takes hold.” The company was the first builder to report a full quarter of results since the expiration of the homebuyer tax credit.

BHP Billiton (BHP $65) reported a doubling of its second-half profit, while the $6.59 billion in net income missed the $7.2 billion analyst estimate. In commenting on its results, BHP said that “Despite our short-term caution, we remain positive on the longer-term prospects for the global economy, driven by continued urbanization and industrialization of emerging economies.” The company added that this path, “will not be without volatility.” Meanwhile, the company’s $38.6 billion, $130 per share hostile bid for Potash Corp. of Saskatchewan Inc. (POT $148) continues to make headlines as the China Business News reported that China’s Sinochem Group is evaluating a bid, citing a company spokesperson, while the UK’s Telegraph reported that Rio Tinto Plc (RTP $48) won’t make a bid, citing sources close to the company. Neither Potash nor Rio Tinto have commented on the day’s reports.

Elsewhere in M&A news, data storage company 3Par Inc (PAR $27) released a statement saying it has informed Dell Inc (DELL $12) that it is entering merger negotiations with Dow component Hewlett-Packard Co (HPQ $38), giving Dell three days to respond, after HP’s $24 per share bid bested Dell’s $18 per share bid. Dell has not commented.

Durable goods miss estimates, mortgage apps rise, while new home sales due out later

Durable goods orders rose 0.3% month-over-month (m/m) in July, much lower than the forecast of a 3.0% increase by economists surveyed by Bloomberg, while June’s figure was upwardly revised by 0.9% to a decline of 0.1%. Ex-transportation, orders declined 3.8%, compared to the expectation of a 0.5% increase, while June was adjusted upward by 0.8% to an increase of 0.2%. Non-defense capital goods excluding aircraft, considered a good proxy for business spending, fell by 1.5% in July after increasing by 1.0% in June.

In other economic news, the US MBA Mortgage Application Index rose 4.9% last week, after the index that can be quite volatile on a week-to-week basis, rose 13% in the previous week. The increase came as the Refinance Index gained 5.7%, and the Purchase Index advanced 0.6%. The results came amid a 5 basis-point decrease in the average 30-year mortgage rate to 4.55%.

Treasuries are higher after the early reports and ahead of the 10 a.m. EST report on new home sales, expected to be flat in July after surprising the market last month with a 23.6% jump to an annual rate of 330,000 units. Sales of new homes are considered a timely indicator of the housing market as sales are recorded as contracts are signed.

Europe lower, weighing slower global growth, despite an increase in German confidence

Stocks in Europe extended early losses in afternoon trading after the disappointing release of US durable goods orders, as traders weigh slowing US growth and decelerating export growth in Japan against a study that showed confidence among German businesses rose. The German Ifo report on the business climate rose to a level that was higher than forecast as the assessment of the current situation rose, while the expectations about the future fell to a level that was also above expectations.

However, the sovereign debt situation in Europe made headlines after S&P cut Ireland’s long-term sovereign debt rating one step to AA- on concern about the rising costs of supporting its banks, with S&P raising its estimate of recapitalizing the banking system to as much as 50 billion euros ($63 billion) from a previous estimate of 35 billion euros. Ireland’s debt agency said that the analysis was “not robust” as it doesn’t take into account the assets the government controls as a result of bailing out the banks, that the estimate of recapitalization was “extreme,” and that Ireland is fully funded until 2Q of 2011. Meanwhile, the yield on Irish 2-year bonds rose 31 bps to 3.127%, the highest since May 7, and the spread of 10-year debt over German bunds climbed to a record 332 bps, 26 points above the May 7 level.

In equity news, Ageas and Admiral Group Plc, the insurer formerly known as Fortis, rose after reporting strong first half profits. The UK FTSE 100 Index is down 1.2%, Germany’s DAX Index is declining 0.9%, France’s CAC-40 Index is lower by 1.5%, and the Irish Overall Index is down 0.1%.

Asian fall as anxiety over global growth builds

Stocks in Asia were lower as the US posted a record plunge in existing home sales yesterday and Japan reported the fifth-straight month of slowing exports in July, with July exports decelerating to 23.5% from 27.7% in June. The yen touched 83.90 versus the dollar during trading, and the 15-year high in the yen is threatening the prospects of Japanese exporters, pulling the Nikkei 225 Index down 22% from its April high, while the index fell 1.7% on the day. Meanwhile, Japan’s Prime Minister Kan said he hasn’t and won’t comment on currency intervention, but the yen came off the highs of the day after the Nikkei newspaper reported that the Bank of Japan was considering expanding a program that provides low-cost rates to lenders to 30 trillion yen ($356 billion) and the duration of loans extended to six months from three.

Elsewhere, a Chinese Leading Index released by the China Economic Monitoring & Analysis Center and Goldman Sachs Research fell for the fifth-straight month, and Chinese property developers came under pressure after the state-owned Xinhua News Agency reported that the government is still studying a property tax and plans to introduce real estate tax reform, citing an official from the National Development and Reform Commission. China's Shanghai Composite Index fell 2.0%, while Hong Kong’s Hang Seng Index lost 0.1%. India’s BSE Sensex 30 Index declined 0.7% after the nation’s central bank issued its annual report for the year ending June 30 and said controlling inflation was its top priority, and that “Inflation has emerged as a major concern.” The South Korean Kospi Index lost 1.5%, as a measure of consumer confidence fell for the first time in five months and as global growth concerns rise, with the country highly reliant on exports, while Australia’s S&P/ASX 200 Index fell 1.4%.