Morning Update

Retailers, Wal-Mart Take Shares Lower

A bleak retail outlook for the first half of the year is putting pressure on stocks in early action as shares extend Wednesday's losses after macroeconomic worries resurfaced yesterday. Wal-Mart cut profit guidance, which is leaning heavily on sentiment, while Macy's, Limited Brands, and Gap are adding to the glum mood after also reducing their respective forecasts. Costco posted a larger-than-expected drop in same-store sales, and Bed Bath and Beyond issued a profit outlook below forecasts. Stocks did edge off lows after jobless claims unexpectedly fell. Treasuries are up and world markets are falling.

As of 8:35 a.m. ET, the March S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 10 points below fair value, and the DJIA is 85 points below fair value. Crude oil is down $1.65 to $40.98 per barrel, and gold is up $6.10 at $847.80.

A wall of worry

Dow component Wal-Mart (WMT $55) is under heavy pressure after cutting profit guidance and reporting December same-store sales excluding fuel increased 1.7%, behind the Reuters estimate of 2.8%. The number one retailer in the world said the difficult economy and severe winter weather in some regions hampered the holiday season at Wal-Mart Stores, with softness in apparel and jewelry. Sales at Sam's Club were below expectations, the company said.

Looking ahead, Wal-Mart said customers are focused on "value and necessities" and it expects comparable sales to be flat to up 2%. Given below trend sales at Sam's Club and Wal-Mart International, the company cut 4Q profit guidance from $1.03-1.07 per share to $0.91-0.94, including six cents in litigation charges that were not included in the original estimate.

Gap (GPS $14) reported same-store sales tumbled 14%, worse than analysts' estimates of a 9.3% decline. The company said it responded to the challenging environment by discounting merchandise, which cut margins. As a result, Gap cut its full-year profit guidance.

Costco (COST $50) reported same-store sales in December, including fuel, fell 4%, just below the Street's view of a 3.7% decline, as falling gasoline prices and the stronger dollar hurt sales. Pull out gasoline sales, US comparable sales were up 2%.

Jobless claims fall again

Weekly initial jobless claims fell 24,000 to 467,000, below the Bloomberg forecast of 545,000. The four-week moving average dropped 27,000 to 525,750, but continuing claims jumped 101,000 to 4,611,000, a fresh 26-year high. The Labor Department said seasonal factors did not have much of an impact. Though Wall Street is braced for bad news when the government reports nonfarm payrolls tomorrow, the drop in weekly claims is providing a little bit of good news in an otherwise weak economic environment. Treasuries are higher.

Economic realities undermine Europe

Yesterday's slide on Wall Street, weak guidance, and a batch of bad economic news are putting pressure on European markets in afternoon action. UPM-Kymmene (UPMKY $13), the second largest papermaker in Europe, is down over 10% after cutting guidance issued just six weeks ago and saying demand for its products are falling. Yesterday's huge decline in crude prices is also creating waves among mining shares, which are down sharply. Crude, along with other raw material prices, had rallied recently, suggesting the many policies designed to stimulate demand might be starting to create some reflationary conditions, but yesterday's steep slide is causing some traders to second guess themselves.

The business climate indicator in the eurozone fell more than expected in December, dropping to its lowest level since records began in 1985. The latest reading, coupled with the steepest monthly drop in German exports since the country reunified in 1990, is bolstering the case that more rate cuts are needed from the European Central Bank. The ECB meets next Thursday. The Bank of England announced a 50 bp rate cut to 1.50%, matching expectations, noting that output is expected to continue to fall sharply and there is a significant risk of undershooting its 2% inflation target.

Asia follows US lower

The grim jobs reports from ADP on Wednesday and the subsequent drop in New York spread across Asia, sending shares down almost 4% in Japan and snapping a seven-day winning streak. Taiwan was the biggest loser, falling 5.3%, after Intel's (INTC $14) revenue warning hit shares of chipmakers and United Microelectronics (UMC $2), the world's second-biggest contract chipmaker, said sales fell 45.5% in December versus a year ago. A government report that exports in December fell at a record pace added to the bleak mood.