Evening Market Update

Market Gains Aided by Financials and Homebuilder Sentiment

A better-than-expected profit report from Citigroup provided some needed strength to financials amid lingering concerns about a potential foreclosure crisis in the sector, and coupled with a larger-than-forecasted increase in homebuilder sentiment, stocks ended the day to the plus side to start the week. The equity markets’ move upward came despite an unexpected drop in industrial production, but the report benefitted Treasuries as the data helped keep expectations of further asset purchases by the Federal Reserve simmering. In earnings news, Hasbro and Halliburton both posted profits that beat the Street, while after the closing bell, IBM also bested earnings estimates. Elsewhere on the equity front, Northeast Utilities and NSTAR announced a merger agreement for a transaction value of about $4.3 billion in stock.

The Dow Jones Industrial Average was 81 points higher (0.7%) at 11,144, the S&P 500 Index rose 9 points (0.7%) to 1,185, and the Nasdaq Composite gained 12 points (0.5%) to 2,485. In moderate volume, 996 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil gained $1.38 to $83.08 per barrel, wholesale gasoline increased $0.05 to $2.15 per gallon, and the Bloomberg gold spot price rose $6.45 to $1,374.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.5% to 76.95.

Citigroup Inc. (C $4) announced 3Q earnings ex-items of $0.08 per share, above the $0.06 consensus estimate of analysts surveyed by Reuters, with revenues declining 10.4% year-over-year (y/y) to $20.7 billion, below the $21.1 billion that the Street was expecting. The company said it saw lower consumer lending and a decline in revenues at its banking and securities unit. However, the company said net credit losses decreased 4% quarter-over-quarter (q/q), posting the fifth-straight quarterly decline and its provisions for credit losses fell to the lowest level since 2Q 2007, reflecting “continued improvement in credit quality.” C recorded a net release of $2 billion in reserves for loan losses during the quarter. The company’s CEO Vikram Pandit said the firm’s “strong presence” in the emerging markets have the company well aligned for the growth trends it sees globally. Shares finished higher.

Hasbro Inc. (HAS $47) reported 3Q EPS of $1.09, five cents above the estimate of analysts, with revenues increasing 3% y/y to $1.3 billion, roughly inline with the Street’s forecast. The toy maker said revenue grew in its preschool, boys and games & puzzles categories. HAS said it continues to believe it should be able to grow revenues and EPS for the full-year 2010, including dilution from its television investments and barring a further decline in consumer spending, global economic conditions or foreign exchange. HAS was solidly above the flatline.

Halliburton Co.  (HAL $34) posted 3Q profits ex-items of $0.58 per share, compared to the $0.56 that analysts were expecting, with revenues increasing 30% y/y to $4.7 billion, versus the $4.6 billion that the Street was expecting. The oil services company said it had a record quarter in North America, where higher activity in the unconventional natural gas and oil basins offset declines linked to the deepwater drilling suspension in the Gulf of Mexico. HAL was under pressure after reaching a two-year high last week, per Bloomberg.

In other earnings news, after the closing bell, International Business Machines (IBM $142) reported 3Q EPS of $2.82, above the $2.75 analyst forecast, on revenues of $24.3 billion.

In M&A news, Northeast Utilities (NU $30) and NSTAR (NST $39) announced that both companies’ Boards of Trustees have unanimously approved a definitive merger agreement that will create one of the nation’s largest utilities, with a total enterprise value of $17.5 billion. The combined company will continue to be called Northeast Utilities, and in a $4.3 billion stock transaction, NST shareholders will receive 1.312 NU shares for each share of NST they own. Shares of both companies were lower.

Industrial production unexpectedly falls, homebuilder sentiment exceeds expectations

Manufacturing activity was in focus, headlined by the September reading of industrial production, which unexpectedly declined, decreasing 0.2% month-over-month (m/m), compared to the 0.2% gain that economists surveyed by Bloomberg had expected, and the 0.2% advance in August was left unrevised. Production was weighed down by decreases in output of construction, utilities, and consumer goods. Capacity utilization came in at a slightly lower-than-forecasted 74.7% from an upwardly revised 74.8% in August and where economists had expected the rate to be for September. Utilization remains 5.9% below its average from 1972 to 2009.  The equity markets appeared to have taken the disappointing data in stride, aided possibly by another m/m gain in business equipment, which has increased nine out of the last ten months and is 10.1% higher y/y.

The NAHB Housing Market Index, a gauge of homebuilder sentiment, rose more than expected, increasing to 16 in October, from 13—the lowest level since March 2009—and compared to the slight increase to 14 that was expected by economists. Any reading below a level of 50 indicates more respondents feel conditions are poor but the report noted that homebuilders are “starting to see some flickers of interest among potential buyers, and are hopeful that this interest will translate to more sales in the coming months.” However, the NAHB said that because most builders still have “no access to credit for building homes, there is a real concern that we will not be able to meet the pent-up demand when consumers are ready to get back in the market.”

Treasuries were mostly higher following the industrial production data as expectations of further bond purchases by the Federal Reserve rose. The yield on the two-year note was flat at 0.37%, the yield on the 10-year note fell 6 bps to 2.50%, and the 30-year bond yield lost 4 bps to 3.94%.

Oversea economic data limited

Economic reports overseas were nearly absent save for a few minor reports. Home prices in the UK was the lone release being reported across the pond, which showed a 3.1% month-over-month (m/m) increase for October, following a decline the month prior, while on a year-over-year basis home values rose 2.9%. Further east, Japanese department store sales fell 5.2% m/m in September subsequent to a 3.2% decline in August, and September new vehicle sales rose in Australia.

In other international news, truckers in France blocked highways and refineries are on strike, intensifying a standoff between the workers and French president Nicolas Sarkozy’s plan to raise the minimum retirement age to 62. The clash curtailed supplies within the nation, Europe’s second largest fuel market per Bloomberg, fueling the rise in crude oil and gasoline futures.

Additional housing data due out tomorrow

Tuesday brings the release of the report on housing starts for September, expected to fall 3.0% m/m to an annual rate of 580,000 units, after posting a surprising 10.5% increase in August. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to rise 0.7% m/m to 575,000 units after increasing 1.8% in August. Last month’s results were boosted by the volatile multi-family sector, while single family starts rose only 4.3%, and single family permits fell 1.2%.

Tomorrow’s international calendar will be busier and offer a number of closely-watched reports including Germany’s ZEW Economic Sentiment survey and the nation’s PPI figures, the euro-zone will report its current account, and the UK releases mortgage lending numbers and industrial orders. In central bank action, the Bank of Canada meets to discuss monetary policy where no change is expected to its overnight target rate.