Evening Market Update

Bulls Get Second Wind to Drive Afternoon Rally

US stocks extended yesterday’s gains, in a choppy trading session that was sparked by a better-than-expected read on durable goods orders, which included a favorable revision to prior months’ figures. Treasuries moved lower, as the only other release on the economic front was a decline in mortgage applications. With no major economic releases due out tomorrow, traders have set their sights on Fed Chairman Bernanke’s speech in Jackson Hole, Wyoming on Friday. In equity news, Toll Brothers Inc beat the Street’s 3Q profit expectations, American Eagle Outfitters Inc issued disappointing full-year guidance, and United Therapeutics Corp announced that a trial of its oral treatment for pulmonary arterial hypertension did not meet its primary endpoint. Finally, gold prices fell over 5% on the day, after running up to record price levels in recent weeks.

The Dow Jones Industrial Average increased 143 points (1.3%) to 11,320, the S&P 500 Index gained 15 points (1.3%) to 1,178, and the Nasdaq Composite rose 22 points (0.9%) to 2,468. In moderately heavy volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.23 to $85.21 per barrel, wholesale gasoline added $0.01 to $2.88 per gallon, while the Bloomberg gold spot price tumbled $63.81 to $1,764.82 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 74.00.

Toll Brothers Inc. (TOL $15) reported fiscal 3Q earnings of $0.25 per share, above the $0.02 consensus estimate of analysts surveyed by Reuters, but revenues decreased 13% year-over-year (y/y) to $394 million, below the $404 million that the Street had projected. The luxury homebuilder said 3Q results indicated some “continued stabilization in the upscale housing market,” as its buyers have strong financial profiles, enabling them to secure mortgage financing. TOL posted a 2% y/y increase in 3Q net signed contracts, with the average price roughly flat, while order backlog for the period was 9% higher. However, the company’s 3Q contract cancellation rate increased from 6.2% a year ago to 7.4%, and deliveries fell 14% y/y. TOL said the recent stock market volatility, the US budget impasse and credit rating downgrade “are certainly not helping consumer confidence.” Shares were nicely higher.

United Therapeutics Corp. (UTHR $40) traded sharply lower after the company announced that a phase 3 trial of its oral treatment for pulmonary arterial hypertension did not meet its primary endpoint. However, UTHR said despite the failed trial, “We will now focus on completing the new drug application for filing by the first half of 2012,” due to the positive results from a previous study of the treatment.

American Eagle Outfitters Inc. (AEO $11) reported 2Q EPS of $0.10, one penny shy of analysts estimates, while revenues rose 3.7% y/y to $675.7 million, which exceeded estimates of $649 million. Same-store sales at the clothing retailer were flat compared to 1Q, but gross margins fell on an increase in production costs and rent expenses. AEO cut its full-year earnings guidance to $0.85-0.95 per share, down from its March forecast of $1.02 per share and below the Street’s expectations. Shares of AEO finished lower.

Durable goods orders come in better than expected, while mortgage applications declined

Durable goods orders exceeded expectations, rising 4.0% month-over-month (m/m) in July, compared to the 2.0% increase that was expected by economists surveyed by Bloomberg, and June’s figure was upwardly revised from a 2.1% drop to a 1.3% decrease. Meanwhile, ex-transportation, orders also topped forecasts, surprisingly increasing 0.7% in July, compared to the expectation of a 0.5% decline, and June’s figure was adjusted favorably to a 0.6% gain from the originally reported 0.1% rise. Furthermore, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, came in better than anticipated, falling by 1.5% in July, compared to the 1.6% decrease that was projected, after rising by a revised 0.6% in June, from the initial report of a 0.4% decline.

The gain in durable goods was led by gains in transportation equipment, notably an 11.5% m/m rise in motor vehicles and parts after coming in flat the prior two months, as well as a 10.3% m/m increase in primary metals. However, two categories, computers and electronic products, as well as electrical equipment, appliances and components, disappointingly fell m/m, despite relatively easy comparisons, contributing to the decline in business spending.

Elsewhere, the MBA Mortgage Application Index fell 2.4% last week, after the index that can be quite volatile on a week-to-week basis, rose by 4.1% in the previous week. The decline came as a 1.7% decrease in the Refinance Index was accompanied by a 5.7% drop in the Purchase Index to the lowest level since December 1996. Elsewhere, the average 30-year mortgage rate moved higher by 7 basis points (bp) to 4.39%.

Treasuries moved lower, as the yield on the 2-year note was 1 bp higher at 0.23%, the yield on the 10-year note gained 14 bps to 2.29%, and the 30-year bond rate advanced 16 bps to 3.65%.

Data weak out of Europe, Moody’s downgrades Japan’s debt rating

Europe was hit with another round of disappointing economic data, as the German Ifo Index fell from 112.9 in July to 108.7 in August, compared to the 111.0 expectation of economists, and the gauge of business confidence in Europe’s largest economy is at the lowest level since June 2010. Also, eurozone industrial new orders unexpectedly fell in June, dropping 0.7%, after jumping 3.6% in May, and compared to the 0.4% increase that was projected.

Meanwhile, yields on Greek 2-year bonds rose to a euro-area record high, per Bloomberg, on worries that the recently announced second bailout may not gain approval among eurozone participants. The dampened sentiment toward the Greek bailout came as Finland announced last week that it has reached a collateral deal with Greece to secure its contribution to the bailout fund, which is fostering concerns that other nations may demand separate deals making approval among all the member nations difficult. Finally, after the close in Europe, France cut its outlook for 2012 GDP growth to 1.75% from 2.25%, while also trimming its 2011 growth forecast to 1.75% from 2.0%.

In Asia/Pacific economic news, Moody’s Investors Service downgraded Japan’s government debt rating by one notch to Aa3 from Aa2, as “several factors make it difficult for Japan to slow the growth of debt-to-GDP,” but it said Japan’s outlook was stable. The move comes after Standard & Poor’s downgraded Japan’s rating back in January. Japan’s economy looks like it is starting to rebound from the disasters and there are signs that companies may seize the opportunity to become more globally competitive. Elsewhere, Thailand’s central bank expectedly increased its benchmark interest rate by 25 basis points to 3.50%.

The lone release on tomorrow’s US economic calendar will be weekly initial jobless claims, forecasted to fall to 405,000, after increasing to 408,000 last week.

On the international front, reports will include UK and German consumer confidence, as well as Brazil’s unemployment rate and consumer confidence.