Evening Market Update

Equity Markets Post Solid Gains Ahead of Fed Meeting

Stocks surged higher today to start the week off on the right foot, as traders anxiously await tomorrow’s Federal Reserve monetary policy meeting and mid-day statement release. The only major report on the economic front was an unexpected flat reading on homebuyer sentiment, although the National Bureau of Economic Research (NBER) made news by pronouncing that the recession officially ended in June of 2009. President Obama participated in a town-hall event on the economy, although his comments did not prompt any market moving reaction. M&A announcements dominated the equity front, as International Business Machines Corp. agreed to acquire business analytics firm Netezza Corp. for $1.7 billion, while L-1 Identity Solutions Inc. reached an agreement to be acquired by French aerospace firm Safran SA. In earnings news, Lennar Corp. and Discover Financial Services both beat the Street’s top- and bottom-line estimates. BP Plc rounded out the equity news by announcing that the well responsible for the Gulf of Mexico oil spill is “officially dead.” Treasuries finished the day higher.

The Dow Jones Industrial Average gained 146 points (1.4%) to close at 10,754, the S&P 500 Index was 17 points higher at 1,143, while the Nasdaq Composite advanced 40 points (1.7%) to 2,356. In relatively light volume, 951 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $0.98 to $74.64 per barrel, wholesale gasoline was $0.03 higher at $1.95 per gallon, and the Bloomberg gold spot price advanced $3.65 to $1,277.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.1% to 81.32.

Dow member International Business Machines Corp. (IBM $131) announced that is has reached an agreement to acquire business analytics firm Netezza Corp. (NZ $28) for $27 per share in cash, or about $1.7 billion. The deal is said to expand IBM’s business analytics initiatives to help clients gain faster insights into their business information, with increased performance at a lower cost. IBM traded modestly higher, while NZ was up sharply.

In other M&A news, L-1 Identity Solutions Inc. (ID $12) agreed to be acquired by French aerospace firm Safran SA (SAFRY $27) for $12.00 per share in cash, or $1.6 billion. Additionally, ID announced that it will sell its counter-terrorism business to UK BAE Systems Plc. (BAESY $21) for $296 million in cash. The aforementioned acquisition of ID by SAFRY is contingent on the BAESY deal closing. All three firms finished higher, with ID moving almost 20% to the upside.

Homebuilder Lennar Corp. (LEN $15) reported fiscal 3Q EPS of $0.16, after posting a loss of $0.97 per share in the same period a year ago, compared to the $0.04 Reuters estimate. Revenues increased 14% year-over-year (y/y) to $825 million, compared to the $769 million that was anticipated by analysts. However, the company said new orders were down 15%, as a result of the expiration of the Federal homebuyer tax credit. LEN was nicely higher.

Discover Financial Services (DFS $16) reported fiscal 3Q EPS of $0.47, ten cents above the Street’s forecast, and although revenues declined 8% y/y to $1.7 billion, they exceeded the $1.6 billion expectation. The credit card firm said its credit performance continued to improve, with net charge-offs—the amount of outstanding loans that it does not expected to be repaid—down 79 basis points from the prior quarter to 7.18% and its amount of loans delinquent over 30 days—a gauge of future net charge-offs—falling 36 basis points to 4.16% compared to last quarter. DFS traded solidly higher.

BP Plc. (BP $39) moved higher after it was announced that the well responsible for the massive Gulf of Mexico oil spill was “officially dead,” according to the head of the oil spill response team. Per Dow Jones Newswires, retired US Coast Guard Admiral Thad Allen said, “Additional regulatory steps will be undertaken, but we can now state, definitively, that the Macondo well poses no continuing threat to the Gulf of Mexico.”

Homebuilder sentiment unchanged, Obama town-hall fails to spark big reaction

Today’s economic calendar was relatively light, with the lone report being the NAHB Housing Market Index, a gauge of homebuilder sentiment, which remained unchanged at 13 in September, compared to the slight increase to 14 that was expected by economists surveyed by Bloomberg. Any reading below a level of 50 indicates more respondents feel conditions are poor and the index remained at the lowest level since March 2009. The report noted that homebuilders in general, “haven’t seen any reason for improved optimism in market conditions over the past month.” Also, builders reported that the two leading obstacles to new-home sales right now are consumer reluctance in the face of the poor job market and the large number of foreclosed properties for sale.

Today’s housing report is the first of a long list of major reads on the sector this week, as existing and new home sales will be released in the second-half of the week—forecasted to rise 7.1% and 6.9%, respectively month-over-month (m/m) for August—while tomorrow will bring the release of housing starts and building permits. Starts are used as a timely indicator of future new home sales and are forecasted to increase by 0.7% m/m in August to an annual rate of 550,000, after missing expectations on the downside in July. Meanwhile, permits—an indicator of future construction—are expected to show a 0.2% m/m increase in August to an annual pace of 560,000.

However, for the week, the headlining economic event will likely be tomorrow’s one-day Federal Open Market Committee (FOMC) meeting and mid-day statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. At the last FOMC meeting held August 10, the Fed downgraded its economic outlook and made a slight policy change to prevent its balance sheet from shrinking. The Fed noted that with the pace of economic recovery more modest than previously anticipated, and to support further recovery, they would keep the balance sheet constant by reinvesting proceeds of principal payments from mortgage-backed securities into Treasuries, as prepayment of mortgage-backed securities threatened to shrink the balance sheet, a defacto form of tightening.

There has been ample discussion about the Fed possibly taking the next step and entering a new asset purchase program, dubbed “QE2,” or quantitative easing part two, by the Street. Some view this step as necessary to jump-start growth from low expected levels, while others fret about the Fed’s ability to control rates with a bloated balance sheet when it eventually comes time to tighten. Also, it will be interesting to see how many of the Fed Members on are the same page, given the increased chatter about more easing and the fact that Thomas Hoenig has voted against the monetary policy decision to keep “exceptionally low levels of the federal funds rate for an extended period,” for five-straight meetings.

Meanwhile, the focus of the economic day was on President Obama’s economic town-hall meeting, which gave traders nothing new in terms of how the Administration will try to jumpstart employment and boost the economy. No market moving announcements were made and the equity markets and Treasuries maintained early gains. The yield on the two-year note was flat at 0.46%, while the yield on the 10-year note decreased 3 bps to 2.70%, and the 30-year bond yield lost 3 bps to 3.88%.

Moody’s affirms UK debt rating, but UK housing data disappoints

In international economic news, Moody’s affirmed its top debt rating for the UK, and an analyst for the ratings firm said, “The commitment to fiscal consolidation and putting debt on a declining path are important” to supporting the rating, and, “everything they’re doing and saying so far is consistent with the Aaa,” per Bloomberg. Elsewhere across the pond, UK home prices fell 1.1% m/m in September and the y/y rate of growth slowed from 4.3% in August to 2.6% in September, while a separate report showed mortgage approvals in the nation rose by a smaller amount than anticipated. Additionally, Italy’s trade balance swung to a larger-than-forecasted surplus, and Greece’s current account deficit narrowed.

The Asian economic calendar was light today to add to the lackluster action with slight improvements seen in New Zealand’s consumer confidence and services activity, along with a much better-than-forecasted jump in Taiwan’s export orders, being the few reports worth mentioning. Back in the Americas, Canadian wholesale sales unexpectedly fell in July by 0.1% to $42.6 billion, while economists were looking for a 0.1% increase.

Tomorrow’s international economic calendar will include Canadian and Brazilian CPI, Mexican retail sales, Japanese leading index, and the Reserve Bank of Australia will release the minutes from its September meeting.