Stocks: A Positive Start to May

U.S. stocks started May on a positive note, closing higher Friday as a late flurry of buying catapulted the market out of an earlier mixed performance. Indexes had been churning within a narrow range after having posted solid gains in April, and as investors mulled over mixed reports focusing on manufacturing, consumer sentiment and factory orders.

Higher oil prices buoyed energy issues. Other economically sensitive sectors like industrials also rose.

Many markets around the world were closed for the May Day holiday.

On Friday, the 30-stock Dow Jones industrial average finished higher by 44.29 points, or 0.54%, at 8,212.41. The broader S&P 500 index gained 4.71 points, or 0.54%, to 877.52. The tech-heavy Nasdaq composite index added 1.90 points, or 0.11%, to 1,719.20. On the New York Stock Exchange, 19 stocks were higher in price for every 11 that declined. Breadth on the Nasdaq was 14-13 positive. Trading was slow.

Treasury prices were lower, with yields rising. The U.S. dollar index was lower. Gold futures were off.

Despite an improving tone in the economic outlook and ongoing signs of thaw in the credit markets, there's no lack of potential pitfalls on the immediate horizon, according to Action Economics, including stress test results and the health of the banking sector, key data on the economy, and ongoing updates on the swine flu. "All of these factors will be front and center [next] week, challenging the hefty April gains on Wall Street," says Action Economics.

The Labor Dept.'s employment report for April, scheduled for release on May 8, is also likely to keep traders jumpy. Economists expect a decline of 635,000 jobs, less than the 685,000 monthly average during the first quarter. They also look for the unemployment rate to jump another 0.3 percentage points to 8.8%.

Traders Friday were eying the latest developments in the government's stress tests of major U.S. banks. The Federal Reserve will release results on Thursday afternoon, May 7, according to news reports. The results were initially planned for Monday, but apparently there has been an ongoing debate over the conclusions of the tests and how best to disseminate them to the markets, such that a Monday release became infeasible.

The announcement will include potential capital needs for each of the 19 bank holding companies that underwent the "what if" scenarios, along with an aggregate total, according to an unidentified government official. Regulators have reiterated the tests are not a "pass/fail" and aren't meant to be taken as solvency measures but rather are designed to ensure banks have a solid capital base.

There was some speculation that the government was fearful or uncertain of how to relay bad news on banks, says Action Economics. "While the anxiety level in the markets will remain high until the Thursday afternoon release, we wouldn't be surprised to hear various leaks, which could help soften the blow."

Also Friday, the Fed said it is expanding the eligible collateral under its TALF program. Beginning in June the Fed will accept collateralized mortgage-backed securities (CMBS) and insurance premium asset-backed securities (ABS) as collateral. The Fed also authorized the extension of TALF loans to 5-year maturities, from the 3-year currently in place. The Fed indicated that up to $100 billion of TALF loans could have 5-year maturities. The Fed believes the inclusion of CMBS as collateral will "help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties," while the insurance premium ABS collateral is expected to help facilitate small business loans.

Wall Street also received updates on the consumer and the manufacturing sector on Friday.

U.S. consumer confidence improved to 65.1 in the final April reading of the Reuters/University of Michigan survey index, much better than expected. The index was up from its 61.9 preliminary reading, and from 57.3 for March, not to mention a 30-year low of 55.3 in November. The index was 62.6 a year ago. The current economic conditions index rose to 68.3 from the preliminary 66.6 and from 63.3 in March (77.0 a year ago). The future index rose to 63.1 from the preliminary 58.9 and 53.5 in March (53.3 a year ago).

The Institute for Supply Management's U.S. manufacturing index rose to 40.1 in April from 36.3 in March, a fourth consecutive monthly gain. The index was at 48.6 last April. The employment index edged up to 34.4 from 28.1. New orders were 47.2 from 41.2. Production was 40.4 from 36.4. Prices paid inched up to 32.0 from 31.0.

"This slowing in the pace of contraction in the national index was presaged by gains in regional measures, and has been an encouraging sign that perhaps the worst of the slump is behind us," says Action Economics.

U.S. factory orders dipped 0.9% in March, reversing the 0.7% increase in February (revised down from 1.8%). Durable goods orders at -0.8% in the advance report were not revised. Excluding transportation, orders were down 0.9%. Shipments fell 1.2% after a 0.5% dip in February (revised from -0.1%). Inventories dropped 0.8% following a 1.3% February decline (revised from -1.2). The inventory-shipment ratio (IS) edged up to 1.46 from 1.45.

Also, U.S. automakers were posting April sales results. Analysts were looking for automakers to post sales at a 9.8 million-unit annual rate in April. Sales at General Motors Corp. (GM) posted a smaller than expected year-over-year decline of 34%. Ford Motor Co. (F) also reporting sales better than expected, with a decline of 30%. Results from both Toyota (-42%) and Nissan (-38%) wore worse than expected.

In company news Friday, shares of Citigroup (C) were poised to move higher after it agreed to sell its Japanese domestic securities business, conducted principally through Nikko Cordial Securities Inc., to Sumitomo Mitsui Banking Corp. (SMBC) in a deal with total cash value to Citi of $7.9 billion (at an exchange rate of JPY97.75 to US$1). The deal is expected to generate about $2.5 billion of tangible common equity for Citi at closing, with the company expected to recognize an after-tax loss of about $0.2 billion.

Berkshire Hathaway (BRKA) CEO Warren Buffett said that after the economic "Pearl Harbor" in September the authorities did a credible job of stabilizing the financial markets, but "we're at war now" on the economy.

In earnings news Friday, MasterCard (MA) posted better than expected first-quarter earnings per share (EPS) of $2.80, vs. $3.37 one year earlier, on a 2.2% revenue drop.

MetLife (MET) reported first-quarter operating EPS of $0.20, vs. $1.46, on 23% lower net investment income and a 2% drop in premiums, fees and other revenues. On a GAAP basis, MetLife posted a $0.71 first-quarter loss per share vs. $0.84 EPS.

Hartford Financial Services Group (HIG) shares slumped after the company posted a first-quarter non-GAAP loss of $3.66 per share, vs. $2.51 EPS, noting the challenging environment affected both its life and property and casualty results. First-quarter 2009 results included the effect of a $1.5 billion after-tax charge tied to Hartford's revision of its estimates of future gross profits in its life operations, commonly referred to as a "DAC unlock." Including the Q1 DAC unlock charge, the company sees 2009 non-GAAP EPS of $0.05-$0.45. Hartford noted that its previous 2009 non-GAAP EPS guidance was $5.80-$6.20, and did not include a DAC unlock.

Fortune Brands (FO) reported first-quarter EPS from continuing operations (before charges/gains) of $0.30, vs. $0.76, on a 20% sales drop. The company reaffirmed its target for 2009 EPS before charges/gains of $2.00-$2.50.

Dean Foods (DF) reported first-quarter adjusted EPS of $0.52, vs. $0.23, as lower cost of sales offset a 12% sales decline. Dean said that that it has commenced a common stock offering of 22.5 million shares. It sees $0.38 second-quarter adjusted EPS, with EPS of $1.55 for all of 2009, both of which assume the issuance of approximately $465 million of newly issued common shares.

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