Evening Update

Stocks Take a Break as Bank Rally Cools Off, Treasury Auction Disappoints

Stocks failed to hold onto early gains despite positive newsflow this morning coming from upbeat same-store sales reports from some of the nation’s largest retailers and a smaller-than-expected loss from General Motors. The financials sector retraced some of its recent gains and the technology sector was also weak, despite a positive earnings report from Cisco. In other equity news, Target reported same-store sales that were slightly below expectations but issued upbeat 1Q earnings commentary. Wal-Mart, Aeropostale, and The Buckle were among retailers with positive monthly sales reports, while major department stores announced that April sales were mixed. In economic news, reports showed that jobless claims fell and nonfarm productivity rose more than anticipated. Treasuries were lower after an auction today attracted less interest than expected.

The Dow Jones Industrial Average lost 103 points (1.2%) to close at 8,409, the S&P 500 Index fell 12 points (1.3%) to 907, and the Nasdaq Composite dropped 43 points (2.4%) to 1,716. In relatively high volume, 1.6 billion shares were traded on the NYSE, and 2.9 billion shares were traded on the Nasdaq. Crude oil gained $0.37 to $56.71 per barrel, wholesale gasoline rose $0.04 to $1.67 per gallon, and gold increased $0.88 to $910.35 per ounce.

The government is scheduled to release the official final results of its stress test of the banking sector at 5 p.m. ET today. It is unclear how much new information remains to be revealed though, after tidbits of information have been persistently leaked to the media throughout the week, all coming from unnamed sources. A variety of media outlets have reported that Dow component Bank of America (BAC $13 ¹) has the largest capital needs, at $34 billion, while Wells Fargo (WFC $25), GMAC LLC, Citigroup (C $4), Morgan Stanley (MS $27), and Regions Financial (RF $5) all need to improve their capital positions. BAC has verified this figure but notes that it will have many options in making up the capital shortfall. Among the banks that are reported to have passed the tests with no shortcomings are JP Morgan (JPM $35), Goldman Sachs (GS $133), Metlife (MET $32), Bank of New York Mellon (BK $29), and American Express (AXP $26 ¹), and Capital One Financial (COF $26). The results of the remaining banks are still unknown. With the exception of Bank of America, none of these firms has released comment on the reports.

Federal Reserve Chairman Ben Bernanke spoke today at the Chicago Fed's annual conference on bank supervision and reiterated the urgency of increasing the effectiveness of banking oversight to avoid or at least mitigate future crises. Bernanke did not offer details to the impending results of the stress tests, but he did say the tests should give investors confidence as they were "comprehensive” and “rigorous”. He outlined steps that the Fed has already taken in the wake of the current crisis to strengthen capital, liquidity, and risk management in the banking sector, as well as to improve the supervisory process itself.

Meanwhile, many major retailers reported monthly same-store sales results for the month of April, with several positive surprises. Dow member Wal-Mart (WMT $50) posted an increase of 5.0%, beating the analysts' estimates of 2.9%. Apparel retailers Aeropostale (ARO $35) and The Buckle (BKE $35) had the strongest results. ARO same-store sales growth was 20%, much better than the 8.5% expectation, and BKE’s 18.2% figure also easily bested the 10.6% that analysts had been expecting. Target (TGT $43) slightly disappointed by posting a 0.3% rise versus the Street's estimate of a 0.4% gain, but management said 1Q earnings will be above analysts' forecasts and the stock reacted positively to that announcement. On the downside of the reports was Costco Wholesale (COST $46), which reported that its April same-store sales fell 8%, worse than the drop of 6.8% that analysts had foreseen.

Department stores dampened the positive retail sentiment after that sector posted more mixed April same-store sales data. JC Penney (JCP $31) reported sales fell 6.6%, versus the Street's forecast of a 6.4% decline, and Macy's (M $13) announced that its April comparable store sales dropped 9.1%, which was a larger drop than the consensus that called for a decline of 7.5%. However, shares of Kohl's (KSS $45) were higher after it reported a 6.2% decline, better than the 7.5% drop the Street forecasted. KSS also took the opportunity to raise its 1Q EPS guidance. .

Cisco Systems (CSCO $19) reported fiscal 3Q EPS ex-items of $0.30, five cents ahead of the Reuters estimate, as revenues fell 17% to $8.2 billion. The largest maker of routers and switches for the internet said it delivered solid results despite the challenging environment, and its CEO said customers are seeing some signs of stabilization. Shares were modestly lower.

Dow member General Motors (GM $2) reported a 1Q adjusted net loss ex-items of $9.66 per share, narrower than the Street's forecast that called for a loss of $11.05 per share. Revenues fell almost 50% to $22.4 billion due to GM's production volume decline of approximately 40% year-over-year. GM's 1Q cash burn was $10.2 billion. GM's CFO said the company is planning to restructure out of court but is ready for bankruptcy if needed. Shares were down.

Jobless claims fall and productivity rises, consumer credit tumbles

Treasuries were lower amid weak auction results. The yield on the 2-year note added 2 bp to 0.99%, while the yield on the 10-year note rose 11 bps to 3.29% and the yield on the 30-year bond gained 16 bps to 4.26%. Today’s auction of $14 billion of the securities showed that the market required a higher yield than expected to buy the bonds. The benchmark 30-year bond drew a yield of 4.29%, higher than the 4.19% average forecast in a Bloomberg survey of seven primary dealers. 30-year bonds had yielded just 3.64% at the last auction on March 12.

Weekly initial jobless claims (chart) fell by 34,000 to 601,000, versus last week's figure that was upwardly revised by 4,000 to 635,000. The drop in claims was well below the Bloomberg consensus of 635,000. The four-week moving average fell by 14,750 to 623,500, and continuing claims jumped again, gaining 56,000 to 6,351,000, slightly more than the forecast of 6,350,000.

Preliminary nonfarm productivity (chart) rose at a 0.8% annual rate in 1Q, above the Bloomberg forecast of 0.6%. Output fell 4.1%. Unit labor costs rose 3.3%, versus a 2.7% estimate, as the number of hours worked declined 5.8% versus last year.

Consumer credit was reported to have fallen $11.1 billion in March, well below the -$4.0 billion that had been expected. The February reading was downwardly revised from -$7.5 billion to -$8.1 billion.

All eyes now focused on tomorrow’s labor report

Nonfarm payrolls will be released tomorrow, and are expected to have fallen 600,000 in April, after falling 663,000 in March. The unemployment rate is expected to increase to 8.9% from 8.5%. Since the recession began in December 2007, 5.1 million jobs have been lost. Since August, the number of people who are working part-time for economic reasons, those who would like to work full-time but were unable to, has risen by 3.2 million. The market has rallied over 35% on a couple of months of economic data and 1Q earnings reports deemed “less bad.” Additionally, after the ADP report on Wednesday showed 491,000 private sector jobs were lost in April subsequent to falling 742,000 in March, the market has high hopes for the labor report, and if the report fails to surprise positively, the market reaction could be negative.