Evening Market Update

Stocks Lose Steam, Close Near Lows of the Day

Despite an increase in small business optimism and a larger-than-expected rise in wholesale inventories, which provided a boost to stocks in early trading, the equity markets were unable to shift gears and instead moved in reverse, closing solidly lower on the day. The US dollar again gained strength against its foreign counterparts, continuing the recent trend of an inverse relationship with stocks, while gold hit an intra-day high. In equity news, Dow member Chevron agreed to acquire natural gas producer Atlas Energy for $4.3 billion, including debt, while on the earnings front, Priceline.com, Sara Lee and Tyco International all beat the Street’s earnings estimates, but Dean Foods fell short of bottom-line estimates and slashed its guidance. Elsewhere, bond insurer Ambac Financial Group filed for Chapter 11 bankruptcy protection as widely expected by analysts. Despite the weakness in the equity markets, Treasuries ended markedly lower following the economic reports.

The Dow Jones Industrial Average fell 60 points (0.5%) to 11,347, the S&P 500 Index lost 10 points (0.8%) to 1,213, and the Nasdaq Composite declined 17 points (0.7%) to 2,563. In heavier volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $0.34 to $86.72 per barrel, wholesale gasoline gained $0.01 to $2.19 per gallon, while the Bloomberg gold spot price fell $20.35 to $1,389.20 per ounce after hitting a record intra-day high of $1424.30. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.6% higher at 77.80.

Dow member Chevron Corp. (CVX $85) reached a definitive agreement to acquire Atlas Energy Inc. (ATLS $43) for $43.34 per share, which values Atlas at $4.3 billion, including the assumption of net debt. Atlas is one of the largest independent natural gas producers in the Appalachia and Michigan Basins, and a leading developer in the Marcellus Shale in Pennsylvania. CVX commented that the acquisition will “further advance Chevron’s global shale gas positions, complementing the company’s recent entrance into shale gas opportunities in Poland, Romania and Canada.” Shares of CVX were lower, while ATLS was up sharply.

Priceline.com Inc. (PCLN $421) reported 3Q EPS ex-items of $5.33, compared to analysts’ estimates of $4.97, while revenue for the quarter grew 37% to $1.0 billion, also higher than the $690 million estimate. Gross bookings, which represent the value of all travel services bought online through Priceline’s websites, surged 47% to $4 billion and hotel room nights jumped 54%, although airline ticket volume fell 4.6%. Shares of PCLN traded higher.

Sara Lee Corp. (SLE $15) announced 1Q EPS from continuing operations of $0.21, four cents above the Street’s forecast, as revenue fell 0.5% to $2.58 billion. The company also released plans to sell its North American fresh bakery business to Mexican bakery giant Grupo Bimbo (GRBMF $8) for $959 million, which follows a series a divestitures in the past year that have included SLE’s international household and body-care business. Shares of SLE moved higher.

Shares of Tyco International Inc. (TYC $39) were modestly higher after the diversified industrial company reported 4Q EPS of $0.74 and revenue of $4.49 billion, both higher than analysts’ estimates of $0.66 and $4.4 billion. TYC also announced that it is selling a 51% stake in its metals processing and distribution business to private equity firm Clayton Dubilier & Rice LLC for $720 million and will use the proceeds to accelerate its $1 billion share buyback program.

Dean Foods Co (DF $9) disappointed analysts after it reported a 51% y/y drop in 3Q earnings, due in large part to struggles in its largest unit – dairy operations. The company said U.S. consumers are cutting spending on food staples such as milk and other basic items, and sees the soft market continuing through 2011, leading to a 4Q earnings forecast that fell well below analysts’ estimates. DF achieved 3Q EPS of $0.13, well below the Street’s forecast of $0.27, although revenue did rise slightly to $3.1 billion. Shares of DF were down nearly 18%.

In a widely-expected move, bond insurer Ambac Financial Group (ABK $1) filed for Chapter 11 bankruptcy protection. The company’s board had already announced its plan to file by the end of the year and recently voted to skip a $2.8 million interest payment, following an IRS inquiry into the accounting practices that allowed ABK to receive more than $700 million in tax refunds. Trading in the stock was suspended before regular trading began.

Business optimism rises, wholesale inventories on deck

The NFIB Small Business Optimism Index moved higher in October, rising from 89.0 in September to 91.7, well above the expectation of economists surveyed by Bloomberg, which called for the index to improve to 90.0. The increase came as the number of firms reporting expectations of a better economy improved, while those expecting higher sales and selling prices also moved higher. Moreover, firms planning to hire over the next three months rose four points to net 1%.

In other economic news, wholesale inventories for September increased 1.5% month over month, above the 0.7% advance that economists surveyed by Bloomberg had forecasted, and August’s 0.8% rise was revised higher to a 1.2% increase. Inventories of durable goods rose 0.7% m/m, hardware, plumbing and heating equipment and supplies increased 1.2%, and stockpiles of motor vehicles and motor vehicle parts and supplies gained 0.9%. Meanwhile, inventories of nondurable goods rose 2.8%, farm product raw materials jumped 14.8%, and levels of apparel, piece goods, and notions were up 4.0%. Wholesale sales increased 0.4% in September, led by a 0.6% in nondurable goods and an increase of 2.7% in sales of metals and minerals, excluding petroleum. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—increased from 1.16 months to 1.18.

Treasuries finished solidly lower following the reports, and as traders continue to analyze the affect of the Federal Reserve’s announcement of another round of quantitative easing (QE2). The yield on the two-year note gained 4 bps to 0.44%, the yield on the 10-year note rose 10 bps to 2.66%, while the 30-year bond yield jumped 12 bps to 4.25%.

UK economic data headlines Europe

Economic data in Europe was dominated by mostly positive reports out of the UK. Manufacturing production output in the nation increased 0.1% in September, the fifth straight month of expansion and the highest level in nearly two years, albeit below economists’ expectations for an increase of 0.2%. Overall industrial production rose by 0.4% in September, matching the forecast of economists, while, the trade deficit for September narrowed to 8.2 billion pounds from 8.5 billion pounds in the month prior as exports increased 2.2% and imports rose 0.8%. Rounding out data in the country, a measure of housing prices experienced a larger decline than expected. In other economic news in the region, Germany’s consumer price index met estimates of a 0.1% increase, and France’s trade balance narrowed in September.

The lone economic report in the Asia/Pacific region was Japan’s trade balance which widened by 24%, with exports increasing 16%, as demand from Asia helped to compensate for the yen’s record highs against the US dollar of late.

Tomorrow will be the heaviest day for the US economic docket, with releases to include the trade balance, forecast to narrow slightly to $45 billion along with the Import Price Index which is expected to increase 1.1% m/m during October following a 0.3% decline in September, and MBA Mortgage Applications. Also, as a result of the Veteran’s Day holiday on Thursday, weekly initial jobless claims will be released tomorrow—a day earlier than normal—and are forecast to fall to a level of 450,000 from the 457,000 reported last week.

Internationally, France will report CPI and industrial production, while Italy will also provide industrial production numbers, China releases its trade balance, and Japan offers consumer confidence and machinery orders.