Evening Market Update

Financials Pressure Blue Chips

Despite the announcement that Ireland will receive financial support for its troubled banking sector, financials pressured blue chips following reports of FBI office raids on three hedge funds surrounding an insider-trading investigation of the sector. However, strength in tech shares was able to cut a sizable portion of those losses and help the Nasdaq Composite post a slight advance. As well, the lack of details of the Irish aid and uncertainty over any contagion in the euro-area may have added to the negative sentiment toward the banking group. Treasuries moved higher following the office raid report, as a dormant US economic calendar on this Thanksgiving holiday-shortened week was unable to provide any aid. Elsewhere on the equity front, Netflix unveiled a $7.99 streaming-only plan, Tyson Foods bested the Street’s profit projections. and privately-held Attachmate inked a deal to acquire Novell for about $2.2 billion.

The Dow Jones Industrial Average fell 25 points (0.2%) to 11,178, the S&P 500 Index lost 2 points (0.2%) to 1,198, while the Nasdaq Composite gained 14 points (0.6%) to 2,532. In moderate volume, 918 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil fell $0.24 to $81.74 per barrel, wholesale gasoline lost $0.05 to $2.15 per gallon, and the Bloomberg gold spot price was $13.73 higher at $1,366.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% higher at 78.62.

Financials came under solid pressure following reports that the Federal Bureau of Investigation raided the offices of three hedge funds as part of an insider-trading investigation reported by the Wall Street Journal (WSJ) that could encompass financial consultants, investment bankers, as well as hedge-fund and mutual-fund traders across the US, according to people familiar with matter. Goldman Sachs Group Inc. (GS $160) led those financials in the red, as the WSJ report noted that the firm is being examined regarding if it leaked information about transactions in ways that benefited certain investors. GS did not comment on the story.

Netflix Inc. (NFLX $188) was solidly higher after the video company unveiled its $7.99 streaming-only subscription plan in the US—the company’s first 100% streaming option in the US. The plan allows members to stream unlimited movies and TV episodes to their TVs and computers, available to both new and existing clients. NFLX is also increasing by $1 per month to $9.99, the price of its popular subscription plan that combines streaming and unlimited DVDs delivered by mail, effective now for new sign-ups and in January for existing members.

Tyson Foods Inc. (TSN $17) reported fiscal 4Q EPS ex-items of $0.64, above the $0.57 consensus estimate of analysts surveyed by Reuters, with revenues increasing 3.1% year-over-year (y/y) to $7.4 billion, but was short of the $7.8 billion that the Street was looking for. The protein company said it produced record sales and earnings despite headwinds, due to its diversified business models and its operational improvements. TSN was nicely higher, aided by the company’s increased outlook.

Attachmate Corp—a company owned by a consortium of private equity firms—announced that it has reached a definitive agreement to acquire Novell Inc. (NOVL $6) for $6.10 per share in cash valued at about $2.2 billion. NOVL also announced that it has reached an agreement for the concurrent sale of certain intellectual property assets to a consortium of technology companies organized by Dow member Microsoft Corp. (MSFT $26) for about $450 million in cash, which is reflected in the merger consideration to be paid by Attachmate Corp. NOVL was solidly higher, while shares of MSFT saw a modest gain.

Economic calendar weak to start the week, plethora of reports on tap tomorrow

Treasuries moved higher following the report of office raids surrounding an insider-trading investigation and as the US economic calendar was void of any releases. The yield on the two-year note fell 4 bps at 0.46%, the yield on the 10-year note lost 8 bps to 2.80%, and the 30-year bond yield declined 4 bps to 4.21%. Note: Markets will be closed on Thursday for Thanksgiving, but will be open for a shortened session on Friday.

Tomorrow’s heavy day of data starts with the second reading of 3Q gross domestic product (GDP), expected to be revised up to 2.4% from a 2.0% quarter-over-quarter (q/q) annualized rate, after expanding by 1.7% in the second quarter. The largest component of GDP, personal consumption, is expected to be revised slightly lower to 2.5% from 2.6% in 3Q, after advancing 2.2% in 2Q. Inflation readings are expected to be generally inline with the initial estimate, with the GDP Price Index rising 2.3%, and the core PCE Index, which excludes food and energy, forecasted to increase 0.8%, well below the Fed’s informal target of 1.5-2.0%.

Meanwhile, shortly after trading begins, existing home sales will be released, which reflect closings from contracts entered one to two months earlier, forecasted to fall 1.1% month-over-month (m/m) in October to an annual rate of 4.48 million units after rising 10.0% in September.

The day caps off with the midday release of the minutes from the November Federal Open Market Committee (FOMC) meeting. The minutes may bring fewer surprises than recent releases, as the Fed ended speculation over whether a new program of asset purchases, or quantitative easing (QE), would be pursued by announcing another $600 billion in new purchases at the meeting. The Fed said that in light of “disappointingly slow” economic progress in output and employment, as well as a downward trend in measures of core inflation, the Fed deemed a new program was necessary to promote a stronger recovery.

Bernanke indicated in a recent Washington Post op-ed piece that the program may ease financial conditions by lowering corporate bond rates and boosting stock prices, which in turn would increase consumer wealth and confidence, creating a virtuous circle that could spur spending and corporate profits. There are unintended consequences of the Fed's actions, including pressure on the US dollar. While this is typically beneficial to exports, they make up only about 12% of our economy. But the weakening dollar also increases protectionist rhetoric and pushes commodity prices higher, which hurts the 70% of the economy that is consumer-driven. Meanwhile, economic data is showing glimmers of improvement, which may indicate the full $600 billion program may not be needed.

The other release on the US economic calendar is the Richmond Fed Manufacturing Index, expected to increase to 6 in November from a reading of 5, where zero marks the level that divides expansion from contraction.

Ireland receives aid

Ireland agreed to a three-year bailout package by the European Union (EU) and the International Monetary Fund (IMF) over the weekend, the first installment of which could be received by January to help the debt-ridden nation’s struggling banking sector. While details of the plan have yet to be disseminated, the total amount has been estimated to potentially exceed 73 billion euros ($100 billion), with the UK contributing about 7 billion pounds ($11.1 billion). The announcement came with some trepidation however, as uncertainty of what the final bailout package entails and concerns of contagion in the euro-area remained at the forefront. Adding to the anxiety in the sector, Moody’s Investor Service warned that it would likely downgrade Ireland’s credit rating by several notches as the rescue package for the nation may increase the debt burden it faces and pose a “credit negative,” for the country, per Bloomberg.

Meanwhile, the European economic calendar was light, as the lone major report was euro-zone consumer confidence, which unexpectedly improved.

Further east, the Asian economic calendar also had little to offer with Hong Kong’s hotter-than-anticipated Consumer Price Index for October being the region’s only major release.

International reports scheduled for release tomorrow include Canadian CPI and retail sales, euro-zone manufacturing and services PMIs, German final 3Q GDP and GfK survey of consumer confidence, as well as Australia’s leading index.