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Thursday, September 29, 2011

Evening Market Update


Volatile Session Leaves Stocks Mixed as Tech Lags

The US equity markets finished mixed after enduring another choppy day of trading, with the Dow rising sharply at the open, only to fall into negative territory, then rally to finish solidly in the green. Meanwhile, the tech-heavy Nasdaq Composite Index lagged the rest of the market and finished lower, as Advanced Micro Devices lowered its 3Q revenue and gross margin outlooks on manufacturing issues in Germany and a smaller-than-forecasted supply of its chips. The early gains came courtesy of some encouraging US economic data, as jobless claims tumbled below the key 400,000 level, 2Q GDP was revised higher in its final revision, and pending home sales declined by a smaller rate than anticipated. Additionally, Federal Reserve Chairman Ben Bernanke noted that further monetary policy action could be needed if inflation and/or expectations fall. Elsewhere on the equity front, Thor Industries beat the Street’s profit expectations, and Harleysville Group agreed to be acquired by Nationwide Mutual Insurance Co. Treasuries were mixed amid the wild ride in equities.

The Dow Jones Industrial Average rose 143 points (1.3%) to 11,154, the S&P 500 Index gained 9 points (0.8%) to 1,160, while the Nasdaq Composite declined 11 points (0.4%) to 2,481. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.29 to $82.50 per barrel, wholesale gasoline lost $0.01 to $2.64 per gallon, and the Bloomberg gold spot price gained $8.99 to $1,618.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 77.91.

Advanced Micro Devices Inc.
(AMD $5) lowered its 3Q revenue forecast from a projected increase of 10% quarter-over-quarter (q/q), plus or minus 2%, to an increase of between 4-6%, and reduced its 3Q gross margin to a range of 44-45%, from a previous estimate of about 47%. AMD posted 2Q revenues of $1.57 billion, and analysts surveyed by Reuters were expecting the chipmaker to report revenues of $1.71 billion in 3Q.

The company said its updated revenue outlook is primarily due to yield performance of its 32 nanometer (nm) chips, manufacturing issues in its facility in Dresden, Germany, and supply of its 45nm chips that was less than expected. Also, its lowered gross margin outlook was attributed to lower-than-expected supply of its Llano chips and associated products with higher selling prices, and shipments of its next-generation server processor that occurred later in 3Q than originally expected. AMD traded sharply lower.


Thor Industries Inc.
(THO $23) reported 4Q EPS of $0.66, five cents above the Street’s expectation, with revenues growing 16% year-over-year (y/y) to $771 million, compared to the $769 million that analysts were expecting. The maker of recreation vehicles said its towable RV sales jumped 21%, more than offsetting a 10% decline in sales of motorized RV. THO added that, “We look to RV retail sales to pull through wholesale shipments in the year ahead, and to improving conditions in the 2012 public transportation market to fuel better bus sales ahead for Thor.” Shares were sharply higher.

In M&A news, shares of
Harleysville Group Inc. (HGIC $58) were up over 80% after privately held Nationwide Mutual Insurance Co. agreed to acquire the company for $60.00 per share in cash or about $840 million. The combined company will have an estimated net surplus of more than $13.5 billion and over $16 billion in annual direct written premiums.

Jobless claims fall, 2Q GDP revised higher, pending home sales drop less than expected


Weekly initial jobless claims
fell by 37,000 to 391,000, following a 5,000 upward revision to last week's figure to 428,000, and well below the 420,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, dropped by 5,250 to 417,000, and continuing claims declined by 20,000 to 3,729,000, slightly below the forecast of economists, which called for a 3,730,000 reading. However, a Labor Department official did note that the sizeable drop in initial claims came amid a “slight mistiming” in the seasonal factors used to adjust the figures, per Bloomberg.

Meanwhile, the final look at
2Q Gross Domestic Product, the broadest measure of economic output, showed a larger-than-forecasted upward adjustment to the rate of expansion reported in the first revision as q/q annualized growth was revised from a rise of 1.0%, to a pace of 1.3%. This compared to the modest 0.4% increase in 1Q, and the 1.2% growth that was forecasted by economists. Personal consumption was unexpectedly revised higher to a gain of 0.7%, helping the favorable read on output, from the previous 0.4% increase that economists expected it to remain, but still down from the 2.1% that was posted in 1Q.

The
GDP Price Index was unexpectedly adjusted upward to a rise of 2.5%, compared to the unrevised 2.4% increase that economists anticipated, and the core PCE Index, which excludes food and energy, was also surprisingly revised higher to a gain of 2.3%, compared to the unchanged increase of 2.2% that was expected.

Elsewhere,
pending home sales fell slightly less than expected in August, declining 1.2% month-over-month (m/m), compared to the 2.0% decrease that economists had projected, and July’s 1.3% drop was unadjusted. However, compared to last year, sales were up 13.1% in August, after increasing 10.1% in July, compared to the 6.4% gain that was forecasted. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than anticipated in August.

Treasuries were mixed, as the yields on the 2-year and 10-year notes were 1 bp higher at 0.26% and 1.99%, respectively, while the 30-year bond rate declined 2 bps to 3.05%.


Europe supported by positive German vote and US data, but Greek concerns remain

Sentiment in Europe got a boost following a key vote in German in favor of the expansion of the eurozone’s bailout fund and the favorable US data. However, investors remained cautious as Greece is set to meet with the troika of the International Monetary Fund, European Commission and the European Central Bank (ECB) to discuss its progress on its deficit reduction efforts. Greece and its lenders will review its austerity measures and if it is deemed that the troubled nation is making sufficient progress on reducing its deficit, it will receive the next installment of bailout aid to help it cover its debt obligations that come due next month as Greece is running low on cash.


Meanwhile, Germany’s Parliament approved the ratification of the expansion of the scope of the European Financial Stability Facility (EFSF), as expected, helping ease concerns about debt contagion in region, but more eurozone members still have to vote in the coming weeks to fully ratify the EFSF. The ratification of the EFSF is needed to allow the fund to purchase bonds in the secondary market, possibly helping stabilize Europe’s financial markets, and lend support the region’s banking sector. There have been proposals made by EU officials recently regarding leveraging the EFSF. Elsewhere, the German vote and the US data are overshadowing Italy’s bond auction today, which saw borrowing costs rise and the capital raised come in smaller than the maximum target.


In economic news, UK home prices unexpectedly rose m/m in September and the nation’s mortgage approvals rose more than expected for August, while the German unemployment rate unexpectedly fell in September. Elsewhere, eurozone consumer confidence and a read on economic sentiment came in below forecasts for September.


The lone economic release from the Asia/Pacific region came out of Japan, as a report showed the nation’s retail sales fell much more than economists had forecasted for August. However, volume was lighter than usual as markets in Hong Kong were closed due to Typhoon Nesat.


Personal income and spending on tap for tomorrow, along with consumer confidence

Tomorrow’s US economic calendar will yield
personal income, expected to increase 0.1% in August, as well as personal spending, which is predicted to advance 0.2%. Also, the PCE Price Index will be announced, with economists looking for a 2.9% y/y rise, while the core PCE Price Index, which excludes food and energy, is expected to increase 0.2% on a m/m basis. Additionally, the final reading of the University of Michigan Consumer Confidence Survey is predicted to show no change from the last reading.

The international economic front will be busy tomorrow, with reports including German retail sales, French producer prices and consumer spending, Italy’s unemployment rate, CPI and PPI, eurozone CPI and unemployment rate, Canadian GDP, South Korea’s industrial production and leading index, and China’s HSBC manufacturing PMI. Additionally, Japan will release a slew of data, including its jobless rate, CPI, industrial production, vehicle production, and construction orders. 


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