Evening Market Update

Greek Debt Fears Snap Five-Day Winning Streak

Despite a late-day push by the bulls, US equities snapped a five-day winning streak and finished in the red. The negative sentiment came courtesy of continued concerns surrounding the European debt debacle, as a weekend summit between European officials failed to inspire optimism of the leaders’ ability to solve the dilemma, and Greece began talks with European Union and International Monetary Fund officials to report on its progress in austerity measures. Meanwhile, in equity news, Lennar bested analysts’ EPS estimates, Netflix and Tyco International both announced that they will split their respective companies, and Dow member United Technologies is reportedly interested in acquiring Goodrich. Treasuries finished higher amid the weakness in stocks and as a read on US homebuilder sentiment unexpectedly dropped, while the dollar gained ground against its counterparts and gold and crude oil prices were under pressure. 

The Dow Jones Industrial Average lost 108 points (0.9%) to 11,401, the S&P 500 Index declined 11 points (1.0%) to 1,204, and the Nasdaq Composite shed 9 points (0.4%) to 2,613. In modest volume, 908 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.26 to $85.70 per barrel, wholesale gasoline lost $0.08 to $2.70 per gallon, and the Bloomberg gold spot price tumbled $35.80 to $1,778.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.7% to 77.07..

Lennar Corp. (LEN $14) reported fiscal 3Q earnings of $0.11 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues dipping 1% year-over-year (y/y) to $820 million, versus the $821 million that the Street had forecasted. The homebuilder said new orders increased 11% y/y, while deliveries declined 3% y/y. LEN said economic conditions were “very challenging,” but it has seen demand for home purchases “slowly return to the marketplace,” driven by low home prices and all-time low interest rates. However, the company said demand was limited by “tight and tightening lending standards, high unemployment and low overall consumer confidence.” LEN traded solidly to the upside.

Netflix Inc. (NFLX $144) announced that it will separate its movie-streaming business and its DVD-by-mail unit. The DVD-by-mail business will be known as Qwikster, which will be a wholly owned subsidiary of NFLX. The company’s CEO wrote that he “messed up,” with his recent decision to increase by-mail subscription service prices this summer, and “I should have personally given a full justification to our members.” Shares were over 7% lower..

Elsewhere on the corporate restructuring front, Tyco International Ltd. (TYC $44) announced that it plans to separate the company into three independent, publicly-traded companies. The three companies will consist of: the ADT North American residential security business, flow control products and services, and commercial fire and security business. TYC said it and the Board of Directors concluded that creating three independent companies is the next logical step for the company. TYC moved higher.

In M&A news, shares of Goodrich Corp. (GR $108) were sharply higher amid a report from the Wall Street Journal that Dow member United Technologies Corp. (UTX $76) is in talks to acquire the aircraft-systems maker. According to people familiar with the deal, the report said that talks were advanced enough that UTX has had serious discussions with banks about securing $15 billion in financing for the deal. UTX and GR did not comment. UTX traded lower.

Homebuilder sentiment surprisingly slips

The NAHB Housing Market Index, a gauge of homebuilder sentiment, unexpectedly dipped in September, declining to 14 from 15 in August, where economists surveyed by Bloomberg had expected the index to remain. A reading below 50 shows that more homebuilders consider the housing market is poor. The National Association of Home Builders (NAHB) said builders continue to confront the same challenges in accessing construction credit, obtaining accurate appraisal values for new homes, and competing against foreclosed properties that they have seen for some time. Also the NAHB said, “Beyond this, both builder and consumer confidence took a hit in recent weeks with the market disruptions caused by the S&P downgrade and congressional gridlock on the budget deficit.”

Treasuries finished higher amid the weakness in stocks and the data from the home front, with the yield on the 2-year note down 1 bp to 0.15%, the yield on the 10-year note 9 bps lower at 1.95%, and the 30-year bond rate decreasing 10 bps to 3.22%.

Today’s data is the first of several reports on the housing market, continuing tomorrow with the release of housing starts, expected to fall 2.3% month-over-month (m/m) in August to an annual rate of 590,000 units, along with building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, forecasted to decline 1.8% m/m, also to a rate of 590,000 units.

However, the focus of the week will likely be on the conclusion of the Federal Open Market Committee’s (FOMC) monetary policy meeting on Wednesday. The meeting was changed to a two-day meeting to “provide more time” to discuss the possible costs and benefits of various potential tools at the Fed’s disposal. In the August meeting, the Fed placed a mid-2013 timeframe for the exceptionally low level of the fed funds rate, which resulted in three dissenters to the decision. Amid the weak economic data, traders will be looking for any signs the Fed feels a stepped up response is necessary or would be effective to stem a further slowing of the economy. In particular, some in the market believe the next step for the Fed may be a “twist” of their balance sheet maturity, in reference to reducing its share of short-term securities and increasing its longer-term holdings. The effect of this action would be somewhat similar to QE, as it would reduce the supply of longer-term securities in the market and potentially lower longer-term rates, with the hope of pushing investors toward higher-risk securities elsewhere.

Europe solidly to the downside as debt concerns fester

Continued concerns about a potential Greek default and a weekend meeting between EU finance ministers that came and went without fostering optimism that policymakers are on the same page in battling the region’s debt crisis dampened the mood across the pond. Meanwhile, another defeat in a regional election of German Chancellor Angela Merkel’s ruling party exacerbated sentiment that Europe’s largest economy is committed to providing aid to the troubled European nations to keep the eurozone intact. Also, Greece held a conference today with EU and IMF officials to discuss the nation’s progress in meeting its austerity plan to qualify for the next installment of bailout aid, which could come in October. Greece has said it only has cash to cover its obligations for a couple more weeks, which amplified the uneasiness regarding a potential default of the troubled nation’s debt. Greece’s finance ministry released a statement indicating that the talks would continue into Tuesday, adding that no official announcement is expected at the conclusion of the call.

Economic news in the region was light, with reports showing eurozone construction output rose 1.4% m/m in July, after falling a favorably revised 1.3% in June, while UK home prices rebounded by 0.7% m/m in September, after dropping 2.1% in August.

The eurozone debt crisis remained a drag on sentiment in Asia, as the weekend meeting between EU finance ministers failed to instill confidence that policymakers in the region have a handle on solving the sovereign debt crisis. Meanwhile, volume in Asia was lighter than usual, with the markets in Japan closed for a holiday and as there were no major economic releases today.

Tomorrow, however, the international economic calendar will be more active with reports to include German PPI and the ZEW Economic Sentiment Survey, industrial sales and orders from Italy, GDP from Sweden, Switzerland’s trade balance, Canada’s leading index and wholesale inventories, while Japan will release its leading index.