Evening Update

Bulls Overcome Sour Jobs Report

Markets recovered from yesterday’s losses to finish in the green despite the news of record high unemployment claims. After the poor April retail sales report that sent stocks lower a day ago, consumer-related stocks got a boost this morning from an inline earnings report from Dow component Wal-Mart and positive earnings surprises from Whole Foods Market and Kohl’s. In other equity news, MBIA is now facing a lawsuit from a group of banks that claim the bond insurer illegally restructured its operations to avoid making payments on defaulted bonds, Clearwire missed earnings expectations, while CA Inc beat, DigitalGlobe raised capital in just the fifth IPO in the US this year, and official documents were released showing that nine of the nation’s largest banks were forced to accept TARP funds last October. Treasuries were higher after weekly initial jobless claims rose more than expected and producer price inflation was higher than expected.

The Dow Jones Industrial Average gained 46 points (0.6%) to close at 8,331, the S&P 500 Index rose 9 points (1.0%) to 893, and the Nasdaq Composite increased 25 points (1.5%) to 1,689. In moderate volume, 1.2 billion shares were traded on the NYSE, and 2.0 billion shares were traded on the Nasdaq. Crude oil climbed $0.60 to $58.62 per barrel, wholesale gasoline increased $0.03 to $1.72 per gallon, and gold increased $0.50 to $926.80 per ounce.

Dow member Wal-Mart (WMT $49) reported 1Q EPS of $0.77, inline with the Reuters estimate, as revenues dipped 0.6% to $93.5 billion. The world's largest retailer said its results were achieved in the face of a "very challenging global economy," and it is pleased to report that its fiscal year is off to a very good start as a result of the increasing shift to value. The company's CEO Mike Duke added that when economic conditions improve, the company believes customers who shop Wal-Mart today will stay with it, because of the business improvements it is making. Looking ahead, WMT issued a 2Q EPS outlook that matched the Street's expectations, saying that its guidance takes into account the company's strong underlying performance and the difficult economic environment. Shares were under modest pressure.

Kohl's (KSS $41) posted 1Q EPS of $0.45, one penny ahead of the consensus estimate, as revenues increased 0.4% to $3.6 billion and same-store sales decreased 4.2% for the quarter. The clothing retailer said it gained market share and its merchandise margins improved through strong inventory management, while it also managed expenses well. KSS said it continues to expect 2009 to be challenging and it remains conservative in its sales expectations, inventory levels and expenses. KSS raised its profit guidance for the full-year to $2.19-2.42 per share, from its initial guidance of $2.00-2.30 per share. Shares were lower.

MBIA (MBI $6), the nation’s largest bond insurer, received word that a group of major banks have filed a lawsuit against the company charging that it illegally restructured its operations by moving $5 billion of assets out of a key unit, leaving the unit "effectively insolvent." In February, MBIA received regulatory approval to split its operations into two units—separating its troubled mortgage-backed assets from its profitable municipal-bond portfolio. The mortgage-backed asset unit was subsequently downgraded to non-investment grade by credit rating agencies as the unit was left with a reduced amount of capital to pay claims of policy holders. The group of 20 financial firms is seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds. MBIA responded that the lawsuit is “without merit.” Shares of MBIA shrugged off news of the lawsuit to move ahead nearly 6%.

Whole Foods Market (WFMI $20) reported 2Q EPS ex-items of $0.24, six cents ahead of the Street's forecast, but revenues were flat at $1.9 billion, which came in just below analysts' expectations. The company said despite posting flat sales versus last year, it exhibited strong expense control, which led to a 10% increase in income from operations. The natural and organic grocery store chain maintained its full-year earnings forecast, based on its "strong year-to-date results." WFMI traded higher.

Clearwire (CLWR $5) released 1Q results showing the company lost $0.37 per share, worse than the consensus estimate of a loss of $0.30. Revenue grew nearly 21% to $62.1 million. CLWR gained 25,000 additional subscribers to end the quarter with 500,000 subscribers. Average revenue per user rose slightly from $36.86 to $39.52, which management attributed to less promotional pricing and more sales of bundled services.

CA Inc. (CA $19), the second largest maker of software for mainframe computers, reported 4Q EPS ex-items of $0.31, two cents higher than analyst expectations. Revenue dropped 5% to $1 billion during the quarter. Subscription and maintenance revenue fell 4% and professional services revenue dropped 18%, which was offset by 23% growth in software fees and other revenue. Management issued guidance for fiscal year 2010 of EPS between $1.51-1.61, compared to the $1.58 EPS that analysts had been predicting for 2010.

Shares of DigitalGlobe (DGI $22) rose in its first day of trading. This marks just the fifth IPO in the US this year, and in an encouraging sign the issue had surprisingly strong interest – pricing at $19, above the expected range of $16-18 – and shares rose over 10% in their debut. The provider of satellite photography to customers such as Google (GOOG $388) and the US government raised nearly $280 million in its listing on the New York Stock Exchange.

Coming after news last week that several of the nation’s largest banks are looking to repay the government bailout funds they received as part of the Troubled Asset Relief Program (TARP), official documents released today show that nine of the nation’s largest banks had no choice but to accept the funds. The documents, obtained and released by Judicial Watch – a public interest group that investigates government corruption – reveal former Treasury Secretary Hank Paulson’s talking points in a meeting with bank CEOs last October informed the banks that “if a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.” The report also lists Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke, and FDIC Chairman Sheila Bair as those that participated in the meeting, although according to Judicial Watch, the documents showing Geithner’s contribution to the meeting are still being withheld by the Obama administration. The nine banks forced to accept the funds were Citigroup (C $138), JP Morgan Chase (JPM $38), Wells Fargo (WFC $27), Morgan Stanley (MS $28), Goldman Sachs (GS $), Bank of New York Mellon (BK $32), State Street Bank (STT $43), Bank of America (BAC $14 ¹), and the soon-to-be-acquired Merrill Lynch. Neither the government nor any of the banks have yet commented on the report.

Jobless claims rise, inflation at the wholesale level slightly higher

Wekly initial jobless claims (chart) rose by 32,000 to 637,000, versus last week's figure that was upwardly revised by 4,000 to 605,000. The increase in claims was above the Bloomberg consensus of 610,000. The four-week moving average increased by 6,000 to 630,500, and continuing claims jumped again to another record, rising 202,000 to 6,560,000, versus the forecast of 6,400,000. A labor department official said a large portion of the increase is due to automotive industry conditions, which were exacerbated by plant closures following the bankruptcy announcement at the end of April by US automaker Chrysler.

Today's larger-than-expected increase in claims dampened some of the enthusiasm about the economic recovery as we had seen a recent moderation in jobless claims. As Schwab’s Chief Investment Strategist Liz Ann Sonders, and Director of Sector and Market Analysis, Brad Sorensen, CFA, note in their bi-weekly Schwab Market Perspective: A Refreshing Market Pause?, unlike the unemployment rate, which is a lagging indicator, initial jobless claims is a leading indicator. And a key leading indicator of claims is layoff announcements, which have been falling. If the improvement in claims is sustained, it could be a precursor to a better economy, as peaks in claims have tended to mark the end of recessions historically. Read more on their market perspective at www.schwab.com/marketinsight.

The Producer Price Index (chart) rose 0.3% in April, slightly higher than the 0.2% increase economists had been expecting. This marks a big change relative to March when prices fell by 1.2%, driven by a 5.5% drop in energy prices. Commodity prices have stabilized recently along with improved sentiment towards the economic outlook. Today’s report showed that the month-over-month drop in energy prices slowed to just 0.1% in April, led by an increase in gasoline prices of 2.6%. Meanwhile, food prices increased 1.5% after falling each of the last two months. The core rate, which removes food and energy, increased 0.1%, which was inline with expectations and slightly above the flat growth seen in March. When compared to April of last year, producer prices are 3.7% lower which was inline with forecasts, while core prices are 3.4% higher on a year-over-year basis.

Treasuries were higher following the economic data. The yield on the 2-year note lost 2 bps to 0.85%, while the yield on the 10-year note fell 3 bps to 3.09%, and the yield on the 30-year bond declined 4 bps to 4.06%.

Looking ahead: one more inflation reading yet to come

Industrial production will be released tomorrow with an expected decline of 0.6% in April, following a drop of 1.5% in March. Capacity utilization is forecast to fall from an already record low of 69.3% in March to a still lower 68.8% in April. Data for this series goes back to 1967.

Following the unexpected rise in inflation data each of the past two days, the market will be closely watching the release of another reading on inflation tomorrow. The Consumer Price Index is projected to show prices were flat in April, after dropping 0.1% in March. The core rate, which excludes food and energy, is forecast to rise 0.1%, slightly below the 0.2% increase witnessed in March. Relative to last April, consumer prices are expected to have fallen 0.6%, slightly faster than the 0.4% year-over-year (y/y) drop in March which was the first annual decline since August 1955. Energy prices fell 23% y/y in March which helped keep a lid on inflationary pressures. Core inflation is expected to remain at 1.8%, in-line with the March figure.

In other economic news, the Empire State Manufacturing Survey, a monthly survey of manufacturers in New York State, will be released tomorrow. Economists are expecting a level of -12.00, slightly better than the -14.65 result in April. The preliminary reading for the University of Michigan Consumer Sentiment Index will also be released, with economists predicting a preliminary reading of 67.0 for May, up slightly from 65.1 in April.