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Monday, October 25, 2010

Evening Market Update



Weekend G20 Agreement Pressures Dollar, Lifts Stocks

US equities ended the first trading day of the week modestly higher after finance ministers from around the globe vowed to avoid competitive currency devaluations at the weekend’s G20 meeting, pressuring the US dollar which supported commodity prices. Also aiding sentiment, existing home sales surprisingly jumped, but the headwinds that continue to beleaguer the sector limited the enthusiasm. After beginning the day higher, Treasuries finished mostly unchanged, showing little reaction to the housing report. News on the equity front was sparse, as RadioShack bested the Street’s earnings forecasts, CommScope confirmed that it is in talks with private equity firm Carlyle Group in a deal that could take the company private, while Office Deport also beat analysts’ expectations and announced that its CEO will resign.

The Dow Jones Industrial Average rose 31 points (0.3%) to 11,164, the S&P 500 Index eked 3 points (0.2%) higher to 1,186, and the Nasdaq Composite advanced 11 points (0.5%) to 2,491. In modest volume, 1.0 billion shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil gained $0.83 to $82.52 per barrel, wholesale gasoline gained $0.02 to $2.07 per gallon, and the Bloomberg gold spot price rose $11.10 to $1,339.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.4% to 77.13. 

RadioShack Corp. (RSH $21) reported 3Q EPS of $0.37, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 6.2% year-over-year (y/y) to $1.1 billion, slightly above the $1.0 billion that the Street was looking for. The electronics retailer noted that it saw continued growth in its wireless business and it is “encouraged” by the improvements in its non-wireless product categories, including accessories and power. Same-store sales—sales at stores open at least a year—increased 6.2% y/y driven by postpaid—under contract—wireless sales, particularly sales of latest technology smartphone devices. Shares were under solid pressure despite the results as the company had a much smaller-than-expected gross margin as sales increased for lower margin phones.

CommScope Inc. (CTV $30) was sharply higher after the communication network infrastructure solutions firm confirmed that it is in discussions with private equity firm Carlyle Group regarding a potential transaction that would result in CTV becoming a private company. CTV said the terms of the potential deal would be for Carlyle Group to acquire all outstanding shares of the company for $31.50 per share.

Office Depot Inc. (ODP $5) announced that its Chairman and CEO Steve Odland has resigned from the company effective November 1, 2010 by mutual agreement with the Board of Directors. Odland had been the office supply chain’s chief executive since 2005 and Neil R. Austrian will serve as interim Chairman and CEO while the Board searches for permanent replacement. Additionally, the company reported that it expects 3Q revenues of $2.9 billion and EPS ex-items of about $0.03, compared to revenues of $3.0 billion and a loss of $0.03 per share that analysts had expected. ODP traded sharply higher.
Housing and first glimpse at 3Q output likely to dominate economic calendar this week

Existing home sales jumped 10% month-over-month (m/m) in September to an annual rate of 4.53 million units, compared to the 4.1% increase to 4.30 million units forecasted by economists surveyed by Bloomberg, and from August’s downwardly revised 4.12 million units. The median existing-home price fell 2.4% from a year ago to $171,700, and was 3.3% lower m/m. The supply of homes fell by 1.9% m/m to 4.04 million units, equating to 10.7 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier.

The steep advance in sales only modestly aided the advance in the equity markets as a deep look into the report reminded traders of the harsh reality facing the housing market. Total sales are 19.1% below the tax credit-inflated period a year ago and distressed home sales accounted for 35% of total sales. Additionally, the annual rates of sales posted in July, August, and September are the first, second, and third low

We may see a brief improvement in some inventory numbers as some major lenders suspended foreclosures due to sloppy paperwork procedures, but that's likely only a temporary phenomenon. According to RealtyTrac, only about 20% of the 1.2 million homes in the foreclosure process are on the market, while only about 30% of the 900,000 homes banks have repossessed after auctions have failed are on the market. This indicates a large "shadow inventory" of homes that are still likely to come to market—further increasing supply. Adding to the uncertainty of coming supply is the moratorium major banks imposed on new foreclosures as they investigate their processes. Of course, there's hope because housing affordability remains quite high as mortgage rates continue to test new lows.

The report is the first of a string of data on the housing market this week, as tomorrow, the S&P/CaseShiller Home Price Index, which lags the sales data by a month, is anticipated to show a 2.2% rise y/y in August, while falling 0.2% m/m. Also, Wednesday will bring the release of new home sales, forecasted to show an increase of 4.2% m/m in September to an annual rate of 300,000.

Meanwhile, Federal Reserve Chairman Ben Bernanke spoke before the opening bell at a housing conference hosted by the Fed and the Federal Deposit Insurance Corp. (FDIC). The topic was on “Mortgages and the Future of Housing Finance,” and the Fed Chief noted that the Fed has been concerned about reported irregularities in foreclosure practices at a number of large financial institutions and it is evaluating the potential effects of these problems on the real estate market and financial institutions.

Treasuries pared early gains and finished mostly unchanged showing little reaction to the housing report. The yield on the two-year note was flat at 0.36%, the yield on the 10-year note was also unchanged at 2.56%, while the 30-year bond yield fell 2 bps to 3.91%.

G20 meeting communiqué in focus

While the weekend G20 meeting of world finance ministers did not produce any new policy initiatives, there appeared to be an agreement among world leaders to not pursue competitive currency devaluations. The communiqué of the meeting said G20 members will “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.” In an interview following the meeting, U.S. Treasury Secretary Timothy Geithner said he expects China to allow its currency, the yuan, to strengthen, saying that while it has a way to go to achieve such, he thinks “they’re committed to do that, because they recognize it’s in their interest.” Additionally, the group of officials agreed that the International Monetary Fund’s surveillance power should be strengthened with regard to financial regulation, foreign exchange policies and budget monitoring. As a result, the US dollar was broadly lower against most of its foreign counterparts, with the Japanese yen one of the best performing major currencies compared to the greenback, and near the record high reached in 1995.

In economic news across the pond, euro-zone industrial new orders rose m/m in August by twice the amount expected by economists, and a report showed loans for home purchases in the UK came in above forecasts.

Further east, Japan’s exports jumped more than anticipated in September, Australia’s producer prices rose more than double economists’ expectations, and while industrial production in Taiwan rose over 12% y/y, it was softer than anticipated.

Looking to tomorrow’s international economic calendar, Germany will report consumer confidence and import prices, Italy will also release consumer confidence, the UK will provide 3Q GDP figures, and Sweden will report its trade balance and the nation’s central bank will meet to discuss monetary policy where it is expected to increase its repo rate by 25 bps to 1.00%. 

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