Evening Market Update

Glass Viewed as Half-Full

Stocks rose as traders had more time to mull foreclosure documentation issues that weighed on markets yesterday, coming down on the side that more stimulus continues to be in the offing by the Federal Reserve. While the mid-day release of the Beige Book indicated the economy continues to recover, and prompted the market to come off session highs, the mild nature of the improvement preserved the sentiment of coming stimulus, moving the dollar lower and commodities higher. In earnings news, Dow members Boeing Co and United Technologies beat the Street, while Yahoo Inc, Morgan Stanley, and Wells Fargo posted mixed results. Elsewhere, shares of Eli Lilly & Co, Amylin Pharmaceuticals Inc, and Alkermes Inc were under pressure after the US Food & Drug Administration declined to approve their shared diabetes treatment for a second time. Elsewhere, mortgage applications fell and Treasuries were mixed.

The Dow Jones Industrial Average rose 129 points (1.2%) to 11,108, the S&P 500 Index gained 12 points (1.1%) to 1,178, and the Nasdaq Composite advanced 20 points (0.8%) to 2,457. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil gained $2.38 to $82.54 per barrel, wholesale gasoline rose $0.03 to $2.08 per gallon, and the Bloomberg gold spot price gained $11.90 to $1,343.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.3% to 77.21.

Dow component Boeing Co. (BA $71 ¹) achieved 3Q EPS of $1.12, six pennies above the Street’s forecast, with revenues growing 2% year-over-year (y/y) to $17.0 billion, above the $16.8 billion analyst expectation. The aerospace company said backlog grew as it had $25 billion in new orders in 3Q. The company said its results and upwardly revised outlook reflect the continued strong performance of its commercial production and services programs and the ability of its defense businesses to produce solid results in a “challenging environment.” BA also reiterated that its first delivery of its long delayed 787 Dreamliner is expected in mid 1Q 2011. BA rose nicely.

Fellow Dow member United Technologies Corp. (UTX $74) announced 3Q EPS of $1.30, compared to the $1.28 analyst estimate, with revenues increasing 1% y/y to $13.5 billion, but below the $13.9 billion expectation. The industrial conglomerate said commercial aerospace aftermarket orders have rebounded “nicely,” but commercial construction markets “remain weak.” UTX raised its 2010 EPS outlook to $4.70, the high end of its prior range, but this was below the consensus forecast of $4.72 in EPS. Shares overcame early weakness and were higher.

Yahoo Inc. (YHOO $16) reported 3Q EPS ex-items of $0.16, one penny above the estimate of analysts surveyed by Reuters, with revenues excluding traffic acquisition costs (TAC) declining 0.6% y/y to $1.12 billion, compared to the $1.13 billion Street forecast. The world’s number-two internet search engine said display advertising revenue growth was “good,” and margins were double what they were last year. YHOO issued 4Q revenue guidance that missed analysts’ forecasts, however shares rose.

Morgan Stanley (MS $25) posted 3Q EPS ex-items of $0.05, including a $0.30 per share loss on debt-related credit spreads and a $0.12 per share gain from a tax item, compared to the $0.15 that the Street had expected, but it was unclear if analysts had factored in the aforementioned items included in the company’s earnings results. However, although revenues fell 20% y/y to $6.8 billion, the results beat the $6.4 billion that was anticipated by analysts. The company’s CEO James Gorman said he was not satisfied with the firm’s overall performance, which saw sales and trading business “clearly muted,” but it delivered broad-based strength in investment banking and improved performance—and positive flows—in both its wealth management and asset management segments. Shares closed just under the unchanged mark.

Wells Fargo & Co. (WFC $26) reported 3Q EPS of $0.60, five cents north of the expectation of analysts, with revenues of $20.9 billion coming up just shy of the $21 billion that was expected on the Street. The company said it had diverse sources of growth, with all business segments contributing to earnings and credit quality improving for the third-consecutive quarter. WFC saw its community banking business up 13% quarter-over-quarter (q/q), continued “strong” deposit growth, and the second highest quarter for mortgage applications ever. WFC rose nicely.

Meanwhile, outside of the earnings front, shares of Eli Lilly & Co. (LLY $36) were down solidly, and shares of Amylin Pharmaceuticals Inc. (AMLN $11) plunged nearly 50% and Alkermes Inc. (ALKS $11) fell more than 25% after the three partners announced that the US Food and Drug Administration (FDA) declined to approve a version of diabetes drug Byetta for the second time. The FDA said more data is needed regarding potential heart risks. The news boosted shares of Denmark-based Novo Nordisk (NVO $100), which sells a competing diabetes drug called Victoza.

Fed views economy as moderately improving

The Federal Reserve Beige Book was released mid-day, a summary of anecdotal data gathered by Fed staffers on or before October 8 from all twelve Federal Reserve districts, in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for November 2-3. In contrast to the last Beige Book, where the Fed described “widespread signs of a deceleration,” the assessment was that economic activity “continued to rise, albeit at a modest pace.” Seven of the districts reported moderate improvements, three indicated mixed or steady conditions, and two suggested slow growth. On the positive side of the ledger, manufacturing continued to expand, with production and new orders rising across most districts. Additionally, consumer spending was “steady to up slightly,” with retailers reporting consumers were slowly regaining confidence, but remain price-conscious and spending continued to focus on necessities. Lending was described as stable at low levels, but there were some reports of an increase in demand. Increases in input costs were being absorbed by producers instead of being passed on to consumers. On the negative side of the ledger, the housing market was characterized as weak.

In the meeting minutes from the last FOMC meeting, many participants noted that unless unemployment and inflation levels improved adequately, it would be appropriate to take action to support economic recovery. While the improvements described in the Beige Book are good news for the economy, they are minor and are unlikely to sufficiently change the Fed’s outlook that it will take more than five years for the economy to return to levels that are consistent with the Fed’s dual mandate of maximum employment and price stability. As Schwab’s Chief Investment Strategist Liz Ann Sonders, Director of Market and Sector Analysis, Brad Sorensen, CFA, and Senior Market Analyst, Michelle Gibley, CFA point out in their latest bi-weekly Schwab Market Perspective: Shift in Focus?, we’re not sure a new round of quantitative easing, or QE2, is the best course of action, but the prospect of additional Fed accommodation has propelled a stock market rally and fall in the dollar. By purchasing assets and adding to the supply of money, the Fed is reducing the value of money, devaluing the dollar. While a weaker dollar benefits exports in the short-term, it also increases commodity prices, reducing the purchasing power of consumers. The impact on consumer spending and the inability of QE to propel an expansion in lending remain among the questions regarding the viability of another round of QE. Read more at www.schwab.com/marketinsight.

Treasuries were mixed, with the yield on the two-year note down 1 bp to 0.35%, the yield on the 10-year note flat at 2.48%, and the 30-year bond yield falling 2 bps to 3.90%.

Mortgage applications fall as refis stall

The MBA Mortgage Application Index fell 10.5% last week, after the index that can be quite volatile on a week-to-week basis, jumped 14.6%, led by a surge in refinancing in the previous week. The solid decline came as the Refinance Index fell 11.2%, teaming up with a 6.7% drop in the Purchase Index. The decrease in the overall index came amid an increase in the average 30-year mortgage rate from the record low of 4.21% on October 8, to 4.34% last week.

Bank of England suggests possibly more easing, while sharp fiscal cuts forthcoming

The minutes from the last Bank of England meeting indicated policy makers may be nearing the deployment of further monetary policy easing. The BoE report showed members were split three ways as to the direction its policy should take, with some feeling that the “likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months.” However, the UK government is moving forward with deficit reduction plans. Britain’s Head of the Treasury George Osborne outlined his five-year fiscal austerity plan in which he proposed eliminating almost 500,000 public sector jobs, cutting benefits, imposing a levy on banks, and spending cuts of about 83 billion pounds ($131 billion) through 2015.

In European economic news, German producer prices rose more than economists expected in September, Italian industrial orders more than doubled forecasts, and the UK fiscal budget deficit grew by a larger amount than expected to the biggest for any September since records began in 1993, per Bloomberg.

In Asia/Pacific news, South Korea’s unemployment rate rose to 3.7% for September, Taiwan’s exports were higher than forecasted, Japan’s Leading Index was revised slightly higher, while Australia’s Leading Index declined.

Elsewhere, the Bank of Canada cut its economic outlook for the next five quarters, saying 3Q gross domestic product likely grew 1.6% versus its July forecast of 2.8%, and the core inflation rate would remain below 2% until the fourth quarter of 2012. Canada’s central bank left rates unchanged yesterday, and noted in today’s report that the lower growth reflects a more gradual global recovery and a “more subdued profile for household spending.” The bank pushed back the timing for Canadian output to reach full potential by a year, until the end of 2012. Governor Mark Carney said that the forecast included an “expectation” that there would be more monetary stimulus in the US, Canada’s largest trading partner.

Tomorrow’s data includes US jobless claims and China economic data

The US economic calendar tomorrow yields weekly initial jobless claims, expected to fall to 455,000 from 462,000 the prior week, the Conference Board’s Index of Leading Indicators for September, forecasted to rise 0.3%, and the Philly Fed Manufacturing Index, expected to rise to 2.0 in October from -0.7.

International news will be highlighted by the majority of China’s monthly data, including PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending, as well as 3Q GDP. Other releases include euro-zone PMI reports on manufacturing and services, as well as consumer confidence, UK retail sales, Canada’s leading indicators, and the Bank of Brazil meets to discuss monetary policy, expected to keep rates unchanged.