Evening Update

Choppy Trading Leaves Markets Mixed

Investors had trouble interpreting the day’s economic news, leading to back and forth trading today, and markets ended essentially unchanged. The largest piece of news was the labor report released this morning which showed a dramatic drop in jobs lost, although the unemployment rate continues to climb. Also released was a consumer credit report showing that loans are still hard to come by for consumers. Treasuries continued to be under heavy pressure as yields on the 2-year note in particular soared. Equity news was light, with a share buyback announcement from Wal-Mart, news that a shakeup in Citigroup’s management may be forthcoming, the sale of another of GM’s car brands, disappointing results in a drug test from Merck, and a better-than-expected earnings report from Guess rounding out the day’s reports. In overseas news, European stocks were helped by a large M&A announcement in the mining sector.

The Dow Jones Industrial Average rose 13 points (0.2%) to close at 8,763, the S&P 500 Index lost 2 points (0.3%) to 940, and the Nasdaq Composite fell 1 point (0.03%) to 1,849. In relatively light volume, 1.3 billion shares were traded on the NYSE, and 2.3 billion shares were traded on the Nasdaq. Crude oil lost $0.37 to $68.44 per barrel, wholesale gasoline fell less than $0.01 to $1.95 per gallon, and gold lost $24.95 to $955.30 per ounce. For the week, the DJIA gained 3.1%, the S&P 500 Index rose 2.3%, and the Nasdaq Composite advanced 4.2%.

Dow member Wal-Mart (WMT $51) was in the green as the world's largest retailer said its board of directors has approved a $15 billion share repurchase plan. This plan replaces the previous $15 billion program that had about $3.4 billion in authorization remaining. CEO Mike Duke spoke at the company’s annual shareholder meeting today, affirming that the company can retain the new customers it has gained during the recession. “We are building long-term loyalty,” Duke said. “When they have more discretionary spending, they’ll stay with Wal-Mart.”

The Wall Street Journal is reporting that the FDIC is pushing for a shake-up of former Dow member Citigroup's (C $4) management, including the ousting of Chief Executive Vikram Pandit, citing people familiar with the matter. The FDIC did not comment on the report, but Citigroup's chairman Richard Parsons confirmed his confidence in the bank’s management, stating “we are confident in our management and confident that we will continue to position Citi for a return to sustained profitability.” In a statement emailed to the Wall Street Journal, Parsons claimed "we went through a rigorous stress test process, the results of which were agreed to by appropriate regulatory agencies and clearly reflect the significant progress made by this management team over the last 15 months to turn Citi around." Parsons added that Citigroup has reduced its "riskier" assets by over 50% and is on track to be "among the best-capitalized banks in the world." Citigroup shares were down less than 5%.

The stimulus plans continue to work their way through the economy, but there’s a growing sentiment among investors that the government may have overreached, resulting in concerns about increasing growth-stifling regulation and growing debt levels. We’ve supported some government intervention in order to stem the collapse in the financial system that seemed imminent. However, we now believe that the amount of intervention—from managing banking operations, pushing them to seek immediate TARP paybacks, to rearranging the capital seniority of automakers in order to pacify unions and facilitate massive restructurings—is threatening to short-circuit an economic recovery and increasing the risk of a “double-dip” recession.

Dow member Merck & Co. (MRK $26) was under pressure after announcing that preliminary results for the pivotal Phase III study of rolofylline—the company's investigational medicine for the treatment of acute heart failure—show that the treatment did not meet the primary or secondary efficacy endpoints. MRK will not file applications for regulatory approval this year, although it will continue to analyze the data with outside experts.

Guess Inc. (GES $29) reported 1Q EPS tumbled 30% to $0.35, but came in six cents ahead of the Reuters estimate, and revenues declined 9.8% to $441 million. The apparel maker said its results exceeded its expectations as it managed its business effectively, reducing inventory levels and capital spending, while aggressively cutting costs. Looking ahead, the company said it expects the challenging economic conditions to persist for some time. Nonetheless, it issued 2Q EPS guidance that topped the Street's forecast. Shares finished over 5% higher.

General Motors (GMGMQ $1) has agreed to sell its Saturn brand to Penske Automotive Group (PAG $15). Penske’s owner, former race car driver and auto dealer Roger Penske, said he intends to retain Saturn’s 13,000 employees for at least the immediate future. PAG owns the second-largest auto retail chain in the US in terms of sales.

Rio Tinto (RTP $194) was nicely higher after it announced a $15.2 billion rights issue after walking away from a $19.5 billion investment from the Aluminum Corp. of China (ACH $26), also known as Chinalco, while also agreeing to a joint venture deal with rival BHP Billiton (BHP $60). After BHP agreed to pay RTP $5.8 billion to create a 50-50 iron ore venture, RTP will have raised about $21 billion and will help it reduce the $38.9 billion in debt that the company is carrying. Chinalco said it was very disappointed with the outcome, and RTP, which will pay a $195 million break-up fee to Chinalco, said it has long recognized the natural fit of RTP's and BHP's iron ore businesses and the industrial logic of bringing them together. BHP's CEO said it is comfortable that the deal—which will require European Commission regulatory approval—is achievable.

Slide in Treasuries continues after this morning’s jobs report

Treasuries continued their slide after the day’s economic announcements. The yield on the 2-year note soared 35 bps to 1.3%, steepening the yield curve as the yield on the 10-year note advanced 14 bps to 3.85%, and the yield on the 30-year bond increased 7 bps to 4.65%.

Nonfarm payrolls (chart) fell 345,000 in May, much less than the Bloomberg estimate that called for a 520,000 job decline. April was favorably revised to -504,000 from -539,000, and March was revised from -699,000 to -652,000. The unemployment rate rose from 8.9% to 9.4%, above the consensus forecast of a rise to 9.2%. Average hourly earnings rose 0.1%, in line with the Street's forecast. The average workweek fell to 33.1 hours from 33.2. Since the recession began in December 2007, 6.0 million jobs have been lost. Job losses continued in manufacturing, but the rate of decline moderated in construction, professional and business services, and retail trade, while healthcare added 24,000 and government was little changed in May, after adding 92,000 in April.

Sometimes overlooked is that the report is a mix of both some companies hiring, while others are cutting jobs—a net number. Post-Lehman, the activity came to a virtual stand-still, and the pullback in manufacturing and resulting “real-time” job cuts were just too extreme to continue, and are now reversing, with some companies now rehiring laid off workers. Also, the decline in the rate of loss in temporary help services jobs is notable, as employers will often add temporary positions before committing to permanent additions to payrolls.

Also released today was consumer credit, which showed a decline of $15.7 billion in April, much worse than the $6.0 billion loss that had been expected. March’s data was downwardly-revised to show a $16.6 billion fall. Both of these figures now mark the first and second-largest monthly declines since records began being kept in 1943.

Week in review: stocks maintain groove as economic outlook improves

Although the week began on a somber note as 100-year old General Motors (GMGMQ $1) filed for bankruptcy, which was the third-largest in US history, stocks posted another week of solid gains. With the exception of more capital raising efforts by major US banks in hopes to quickly pay back the government loans received from the TARP, and a plethora of disappointing same-store sales reports from retailers, excluding Wal-Mart, the sustenance for the bulls came from the economic pasture.

Manufacturing data in the form of another improvement in the ISM Manufacturing Index, complimented by further expansion in China's manufacturing sector and a surprising second-straight increase in construction spending, got the bullish sentiment rolling. An unexpected surge in pending home sales—a key gauge of the pipeline of existing home sales—added to the growing argument that the global recession may only be seen again in the history books.....( lol...Yeah right! ) The sentiment was further sweetened by a surprising increase in personal income for April, and support also came from a relatively unlikely source as weekly initial jobless claims posted a modest decline and continuing jobless claims fell slightly—the first since the first week in January—failing to post another record level for the first time in 17 weeks.

However, even as the economic optimism was boosted and stocks moved solidly higher, there may be some growing headwinds that may be worth keeping an eye on. Commodity prices are gaining strong momentum amid the increased economic sentiment, which could stoke inflationary concerns. Also, Federal Reserve Chairman Ben Bernanke warned that “in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” due to concerns about large federal deficits, although Bernanke noted that other factors such as the aforementioned economic optimism are also at play. However, Bernanke noted that “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”

Reading on the state of the consumer next week

Advance retail sales will be reported on Thursday, and are expected to have risen 0.5% in May after falling 0.4% in April. Ex-autos, sales are expected to have increased 0.2%. The trend in retail sales has been erratic in 2009, with increases in the first two months being reversed in the following two months. The data illustrates the uncertain environment retailers face as the economy bounces off the bottom. Consumers remain bruised—they're embracing frugality, saving more and working to make their dollars stretch further by postponing purchases. Additionally, debt levels remain elevated, and consumers have only just begun the long process of deleveraging. However consumer confidence and expectations have begun to rise, an important piece to the recovery, and the easing of lending standards typically leads improvement in consumer spending.

The Federal Reserve Beige Book will be released Wednesday, which reports on anecdotal information on monthly regional economic conditions by the twelve district banks. The data is gathered in preparation for the next Federal Open Market Committee meeting, which will be held on June 23-24. Recent data has continued the trend of a slowing rate of decline, and the ISM Manufacturing report showed that while manufacturing is still contracting, the level was consistent with growth in the overall economy. The rate of job losses has also moderated and there are signs of stabilization in the housing market. However, the recent rise in Treasury yields has been giving the market indigestion, and higher mortgage rates have slowed the refi market.

Other releases on next week’s economic calendar include wholesale inventories, the trade balance, initial jobless claims, business inventories and University of Michigan consumer sentiment.