Evening Market Update

Stocks Fall Off M&A Wave Late in the Day

US equity markets were in the green for most of the day, but gave up ground late in the afternoon and finished mixed. Early gains were seen as a result of optimism from two major M&A announcements, as well as a US October retail sales report that was better than economists expected. In other economic news, New York manufacturing activity experienced an unexpected contraction in November, while business inventories increased more than economists expected. On the equity front, Dow member Caterpillar Inc. agreed to acquire mining equipment maker Bucyrus International Inc. for $7.6 billion and EMC Corp. announced plans to purchase Isilon Systems Inc for $2.3 billion. Additionally, Lowe’s Companies Inc. beat the Street’s profit expectations, but missed on the revenue front, and BHP Billiton Ltd dropped its bid to acquire Potash Corp. Treasuries finished the day lower.

The Dow Jones Industrial Average gained 9 points (0.1%) to 11,202, the S&P 500 Index lost 1 point (0.1%) to 1,198, and the Nasdaq Composite declined 4 points (0.2%) to 2,514. In moderately light volume, 880 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil fell $0.28 to $84.60 per barrel, wholesale gasoline was $0.01 lower at $2.20 per gallon, and the Bloomberg gold spot price fell $10.15 to $1,358.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% higher at 78.66.

Dow member Caterpillar Inc. (CAT $82 ¹) reported that it has reached an agreement to acquire Bucyrus International Inc. (BUCY $90) for $92 per share or about $7.6 billion in cash excluding the assumption of debt. CAT said the deal is based on its key strategic imperative to expand its leadership in the mining equipment industry. CAT traded higher, while BUCY was up nearly 30%.

In other M&A news, EMC Corp. (EMC $21) announced that is has agreed to acquire network storage systems firm Isilon Systems Inc.(ISLN $34) for $33.85 per share in cash or about $2.3 billion, net of ISLN’s cash position. EMC said the deal is expected to be accretive to its EPS in 2011. EMC moved lower, while ISLN finished sharply higher.

Lowe’s Companies Inc. (LOW $21) reported 3Q EPS ex-items of $0.31, one penny above the $0.30 consensus estimate of analysts surveyed by Reuters, with revenues rising 1.9% year-over-year (y/y) to $11.6 billion, just shy of the $11.7 billion that the Street had expected. The company said, “Ongoing uncertainty in employment and housing continues to pressure our industry, but we are prepared to operate effectively in a slow-growth environment.” 3Q same-store sales—sales at stores open at least a year—rose 0.2% y/y. The number-two home improvement retailer lowered its full-year outlook. Shares gave up early gains and finished lower.

BHP Billiton Ltd. (BHP $88) announced that it has abandoned its $39 billion bid to acquire Canadian fertilizer company Potash Corp. (POT $137). The Industry Canada ministry rejected the deal earlier this month because it would not bring new mining techniques to the country or boost potash sales to help improve Canada’s economy, but gave BHP 30 days to appeal or drop the bid. Shares of BHP traded higher, while POT lost ground.

Retail sales rise but NY manufacturing activity contracts, kicking off busy economic week

Advance retail sales for October rose 1.2% month-over-month (m/m), compared to the forecast of economists surveyed by Bloomberg that called for an increase of 0.7%, and September’s 0.6% gain was revised higher to a 0.7% advance. October sales ex-autos gained 0.4%, matching expectations, and September’s 0.4% rise was revised to a 0.5% advance. Sales ex-autos and gas rose 0.4% in October, versus the 0.2% increase that was anticipated, and its September figure was unrevised at a 0.4% increase. Treasuries moved, lower, with the middle and long parts of the curve losing the most ground. The yield on the two-year note was 2 bps higher at 0.53%, the yield on the 10-year note gained 16 bps to 2.95%, while the 30-year bond yield advanced 12 bps to 4.40%.

Retail sales have been surprisingly strong despite concerns about the death of the US consumer. Retailers have reported signs of frugality fatigue, where consumers have saved and scrimped for so long and now feel comfortable spending a little more at the margin.

Elsewhere, the Empire Manufacturing Index, a measure of manufacturing in the New York region, fell in November to a level of -11.14, compared to the estimates of economists, which expected a decrease to 14.00, from the previous month’s level of 15.73. The index fell below the level of zero, the demarcation point between contraction and expansion. The report is the first major piece of data looking at manufacturing conditions in November, and on Thursday, the Philly Fed Manufacturing Index will be released, expected to increase from 1.0 in October to 5.0 in the current month, providing further insight into the health of the sector.

Meanwhile, business inventories rose 0.9% m/m in September, above the 0.8% increase that was expected, and August’s 0.6% increase was revised to a 0.9% gain. Sales rose 0.5% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at 1.27.

Upbeat euro-zone trade data offset lingering debt concerns, Japan’s GDP grows

In European economic news, the euro-zone trade balance swung to a surplus of 2.4 billion euros for September after running a deficit of 1.7 billion euros in August, and compared to the 1.0 billion euro surplus that economists had expected. Exports in the euro-zone led the way, rising 1.0% m/m, but recently the euro has jumped to a six-week high versus the US dollar, which may dampen export growth in the coming months’ reports. In other economic news, UK home prices fell 3.2% m/m in November, after increasing 3.1% in October. Meanwhile, Ireland continued to command attention, after a European Central Bank official said the debt-laden nation would be able to tap into the European Union’s (EU) near $1 trillion euro-area bailout package, but Ireland reiterated that it would not require assistance. However, media reports suggested that Ireland has been in discussions with EU officials about some assistance for its banks, but the nation did not confirm the reports.

In Asia/ Pacific, Japan’s 3Q GDP expanded by 0.9% quarter-over-quarter (q/q), compared to the 0.6% growth that economists expected, and on an annualized basis, the country’s output increased by 3.9%, well above the 2.5% expansion that was anticipated. Meanwhile, a separate report showed Japan’s industrial production was favorably revised to a 1.6% contraction, compared to a preliminary reading of a 1.9% decline.

PPI to headline busy domestic economic calendar tomorrow

Tomorrow, the US economic calendar will yield the release of the Producer Price Index, forecasted to show prices at the wholesale level increased 0.8% m/m in October, while excluding food and energy, the core rate is anticipated to remain subdued at a 0.1% m/m rate of growth. Also, October industrial production and capacity utilization will be reported, with production forecasted to rise 0.3% while utilization is expected to increase to 74.9%, from 74.7% in September.

Both the releases are not expected to diverge from the current view by the Fed that inflation remains “somewhat low,” with the core rate at arm’s length of the unchanged mark and capacity utilization expected come in near six percentage points below its average. However, the headline PPI suggests growing pricing pressures from higher commodity and food prices, or so-called “bad inflation,” which if persistent, could make their way to the consumer, causing some headwinds to economic prosperity as they account for about 70% of the economy. Meanwhile, industrial production may be a report that garners the most attention tomorrow, as September’s reading was the first monthly decline since June 2009 and traders will be looking for a rebound in the manufacturing sector that has been one of the leaders of the recovery.

The only other release on the domestic calendar will be the NAHB Housing Market Index for November, which is expected to increase to 17 from a October reading of 16.

Releases on the international calendar include Italian, UK and euro-zone CPI, French non-farm payrolls, the German Zew survey of economic conditions, Canadian manufacturing sales, UK house prices and retail price index, China’s leading economic index and Japanese machine tool orders.