Evening Market Update

Lack of Fresh Concerns Results in Stocks Rising

Weak US economic reports and downgrades of European sovereign debt were generally as expected, and the lack of new concerns resulted in stocks advancing in today’s trading. Treasuries were lower as equities rose and while a decline in US housing prices in January and fall in US consumer confidence were inline with estimates. Meanwhile, the uncertainties from the nuclear situation in Japan and geopolitics in the Middle East were little changed, and new credit rating downgrades for Greece and Portugal had little impact outside the credit markets for the two nations. In a day of light equity news, Halliburton lowered its 1Q guidance but shares ended higher, Phillips-Van Heusen Corp beat the Street, Dow member General Electric announced the purchase of 90% of Converteam for $3.2 billion, and Home Depot added to its share repurchase program.

The Dow Jones Industrial Average rose 81 points (0.7%) to 12,279, the S&P 500 Index gained 9 points (0.7%) to 1,319, and the Nasdaq Composite advanced 26 points (1.0%) to 2,756. In moderately light volume, 806 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.81 to $104.79 per barrel, wholesale gasoline gained $0.01 to $3.04 per gallon, while the Bloomberg gold spot price decreased $2.75 to $1,417.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 76.20.

Halliburton Co . (HAL $49) announced that the oilfield services company has experienced disruptions due to geopolitical issues in certain locations in the Middle East and North Africa that will “severely affect first quarter results,” in the range of $0.03-0.04 per share. Additionally, the company said it may incur additional charges such as asset impairments or allowances as a consequence of the events in the Middle East and North Africa, particularly due to the sanctions imposed on Libya. HAL will provide an update during its 1Q earnings release scheduled on April 18, 2011. Despite the warning, shares rose.

In earnings news, shares of Phillips-Van Heusen Corp. (PVH $65) were nicely higher after the parent of Calvin Klein reported 4Q EPS ex-items of $0.93, ten cents above the consensus estimate of analysts surveyed by Reuters. Meanwhile, the company posted revenue growth of more than $780 million year-over-year (y/y) to $1.4 billion, roughly inline with the Street’s forecast, mostly attributed to revenue generated by its Tommy Hilfiger business. PVH also issued full-year 2011 guidance that exceeded expectations.

In M&A news, Dow member General Electric Co. (GE $20 ¹) announced that it has reached an agreement to acquire approximately 90% of privately-held electrification and automation equipment and systems company Converteam for about $3.2 billion. The acquisition will increase GE’s technology offerings in the oil and gas and renewable-energy sectors. GE erased an early loss and traded higher.

Meanwhile, fellow Dow component Home Depot Inc. (HD $38) announced that it priced a $2 billion senior note issuance, with the net proceeds to be used to refinance $1 billion of senior notes that matured in March 2011 and to repurchase $1 billion of outstanding shares, in addition to its previously announced $2.5 billion repurchase plan. HD was higher. 

Home prices slump again, consumer confidence falls on inflation concerns 

The S&P/Case-Shiller Home Price Index showed a decline in home prices of 3.06% y/y in January, compared to the 3.20% drop that economists surveyed by Bloomberg had expected, with San Diego and Washington DC the lone cities out of the twenty recording positive y/y figures. Month-over-month (m/m), home prices were 0.22% lower—the seventh-straight monthly decline—compared to forecasts, which called for a decline of 0.44%, as Washington DC the only city to post a gain. The Chairman of the Index Committee David Blitzer commented on the report, saying, “Keeping up with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future.” Prices have come under pressure amid tight credit conditions encouraging all cash buyers, which have an upper hand in negotiating purchase prices, and the flood of foreclosures boosting the supply of homes on the markets and applying further pressure on prices.

Meanwhile, the recent surge in commodity prices is putting a damper on consumer sentiment, illustrated by today’s larger-than-forecasted decline in the Consumer Confidence Index, which dropped from an upwardly revised 72.0 in February to 63.4 in March. The inflation outlook component of the report showed consumers expect inflation to increase to 6.7%, up from 5.6% in February, twelve months from now. Moreover, consumers’ short-term outlook on business conditions and expectations of higher incomes in six-months both declined, while their appraisal of the job market deteriorated. However, the assessment of the current conditions did improve.

Treasuries were lower following the home price and consumer sentiment data, with the yield on the 2-year note rising 4 bps to 0.82%, the yield on the 10-year note gaining 6 bps to 3.49%, and the 30-year bond rate advancing 5 bps to 4.55%.

European bank fundraising adds to existing concerns 

Sentiment in Europe took a dip on concerns about the need for banks to raise capital as well as the ongoing overhang from the sovereign debt crisis. Financials were pressured by broad-based declines out of the banking sector in Italy, led by a sharp drop in shares of UBI Banca (BPPUF $11) after the company announced that it plans to sell 1 billion euros ($1.4 billion) of additional shares to boost capital. The announcement appeared to catch most by surprise and prompted speculation that more share offerings in the sector could be in the offing as the industry is undergoing another round of stress tests and will eventually need to address the new Basel III global capital rules. Additionally, as previewed yesterday, Standard & Poor’s downgraded the sovereign debt ratings on both Greece and Portugal, with the rating cut to BBB- on Portugal being the second in four days and being only one notch away from non-investment grade. In making today’s rating actions, S&P said that the new European Stabilization Mechanism that begins in mid-2013 is likely to ask bondholders to accept losses before receiving bailout funds, and therefore is “detrimental” to private creditors of both nations, and maintained a negative outlook for both countries.

However, the European economic calendar yielded positive news, as Consumer Confidence in Germany—Europe’s largest economy—declined by a smaller amount than economists forecasted, French consumer spending was stronger than anticipated and Italian business confidence unexpectedly improved. Moreover, UK 4Q GDP was revised to a modestly smaller contraction quarter-over-quarter (q/q) than initially reported, and UK mortgage approvals rose more than estimated.

The situation at the Japanese nuclear facility continued to weigh on sentiment while efforts continue to try to repair the cooling system of the reactors at the nuclear facility north of Tokyo to avoid a meltdown. In Asian economic news, Japan’s unemployment decreased and retail sales unexpectedly rose, but the data may have had little impact on the markets as the reports were for the month of February, before the tragedy struck the world’s third largest economy.

Tomorrow’s economic news a possible preview of Friday’s labor report

Tomorrow’s ADP Employment Change Report is expected to show private sector payrolls rose by 210,000 jobs in March, roughly the same as February’s 217,000 gain. The release does not include government hiring and firing and is watched for changes in size and direction ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 190,000 jobs in March after posting a 192,000 gain in February, while excluding government hiring, private sector payrolls are expected to increase 210,000, after expanding by 222,000 in February. The other release on the US economic calendar is the MBA Mortgage Applications Index.

International economic releases will include Japanese industrial production in February, euro-zone consumer and business confidence, Canadian industrial and raw materials price indexes, and Australia building approvals and retail sales.