Evening Update

Stocks Zig-Zag, Finish Where They Started

Markets were mixed and little changed today as strength in financials was offset by weakness in defensive sectors such as health care and consumer staples. The Street received the first major earnings report of the second quarter today, as aluminum producer Alcoa reported a smaller-than-expected loss. That helped commodity prices recover from their recent sharp sell-off to give some support to markets. Meanwhile, Treasuries gave back some of yesterday’s strong gains after a 30-year auction saw low demand. In economic news, wholesale inventories continue to shrink and initial jobless claims fell again last week. Elsewhere, retailers were under pressure after June same-store sales figures at many of the nation’s retailers were released, with mixed results. In M&A news, Data Domain accepted EMC’s merger bid, ending speculation that NetApp would make a counter offer, while Emulex rejected a hostile takeover from Broadcom.

The Dow Jones Industrial Average rose 5 points (0.1%) to close at 8,183, the S&P 500 Index increased 3 points (0.4%) to 883, and the Nasdaq Composite advanced 4 points (0.2%) to 1,751. In light volume, 1.0 billion shares were traded on the NYSE, and 1.9 billion shares were traded on the Nasdaq. Crude oil increased $0.24 to $60.38 per barrel, wholesale gasoline was up $0.03 to $1.66 per gallon, and gold gained $3.13 to $912.63 per ounce.

Alcoa's (AA $9) was the first Dow member to report its 2Q earnings, which showed the aluminum producer posted a smaller-than-expected net loss for the quarter of $0.26 per share, excluding restructuring charges, compared to the Reuters estimate, which called a loss of $0.38 per share. Revenues fell 41% year-over-year to $4.2 billion, but were up 2% versus last quarter as aluminum prices rose from 1Q but declined from last year. AA's CEO Klaus Kleinfeld reported that the outlook for aluminum could be improving. Economic stimulus in China has pushed domestic aluminum demand beyond supply for the first time since the recession began, Kleinfeld said, while adding that “one of the things that the Chinese government very smartly does these days is that they are stimulating people that it’s good to not have too much savings and to buy new cars and get a new air-conditioner.” Shares were down.

EMC Corp. (EMC $13) announced that it has reached a definitive agreement to acquire Data Domain (DDUP $33) in a cash tender offer for $33.50 per share, expected to have a total enterprise value of about $2.1 billion. This puts to rest the battle with NetApp (NTAP $19) to acquire DDUP and EMC said the acquisition is expected to be neutral to its EPS ex-items in 2009 and add to EPS in 2010. EMC added that the merger will form a powerful force in next-generation disk-based backup and archive. EMC and NTAP were higher but DDUP was lower, suggesting traders may have thought NTAP would counter with a higher bid.

In related M&A news, data storage technology maker Emulex Corp.'s (ELX $9) board unanimously rejected a sweetened take-over offer from Broadcom Corp. (BRCM $24) of $11.00 per share. ELX said it believes it will deliver significantly more value than BRCM's revised offer, which represented a premium of more than 60% to its prior stock price, and it would give full consideration to a bona fide offer from any party that reflects the full value of the company. BRCM reported that it will now cease all efforts to pursue the acquisition further. Shares of BRCM were higher, while ELX was down 8%.

Target (TGT $38) announced June same-store sales decreased 6.2%, a larger decline than the Reuters estimate of a 5.6% decline. The company said the month of June continued to reflect a very challenging economic environment, but it said it continues to mitigate the impact of the sales shortfall through continued expense discipline. As a result, TGT said it expects 2Q EPS to meet or exceed the current FirstCall estimate of $0.64 per share and shares were higher.

Costco Wholesale (COST $46) was down slightly after reporting June same-store sales—including fuel sales—fell 6%, which matched the Street's forecast, but excluding gas-price deflation, the retailer said sales actually rose 1%.

Department stores are fairing relatively well versus analysts' estimates as Macy's (M $11) posted June same-store sales that fell 8.9%, a slightly smaller decline than the 9% drop that analysts had anticipated. JC Penney (JCP $27) said comparable-store sales fell 8.2%, which was a smaller loss than its previous guidance and the Street's forecast of a 9.3% decline. JCP also raised its 2Q guidance, now calling for a loss of $0.08-0.12 per share, compared to earlier projections of a loss of $0.15-0.25 per share. The average analyst estimate as compiled by Bloomberg is a loss of $0.10 in 2Q. Meanwhile, Kohl's (KSS $43) reported sales fell 5.6% on a same-store basis, versus the Street's forecast for sales to fall by 6.8%. Shares of all three firms were lower.

However, inside the mall, retail shops' June same-store sales were disappointing, with Gap Inc. (GPS $15) reporting a 10% drop in sales compared to analysts estimates of an 8.6% decline, Limited Brands (LTD $11) posting a 12% sales decline, versus the Street's forecast of a 7.9% drop, and Abercrombie & Fitch (ANF $23) announcing sales tumbled 32%, larger than the drop of 26.6% that was anticipated by analysts. Shares of all three companies were lower

Jobless claims tumble, inventories continue to shrink

Treasuries retreated today, giving back some of yesterday’s strong gains. The government’s final auction of government debt this week – this time for 30-year bonds – drew disappointing investor interest, snapping a string of better-than-expected auctions. Yesterday’s sale of $19 billion worth of 10-year notes received a very high bid-to-cover ratio of 3.28 but today’s auction of $11 billion drew a bid-to-cover ratio of just 2.36, which was well below the level of 2.68 seen in the June offering of 30-year debt. The sale priced at a yield of 4.30%, which was significantly higher than the 4.18% yield seen in trading of 30-year Treasuries yesterday. As a result, the yield on the 2-year note added 1 bp to 0.92% today, while the yield on the 10-year note jumped 8 bps to 3.39%, and the yield on the 30-year bond climbed 8 bps to 4.27%.

Weekly initial jobless claims (chart) fell a much more-than-expected 52,000 to 565,000, versus last week's figure that was upwardly revised by 3,000 to 617,000. This is the smallest level of jobless claims since January but the decline was amplified by seasonal adjustments, mainly related to the automotive sector, the Labor Department said. The Bloomberg consensus called for claims to reach 603,000. The four-week moving average, which smoothes distortions in the week-to-week data, fell by 10,000 to 606,000, while continuing claims jumped, rising 159,000 to 6,883,000, a record level, versus the forecast of 6,710,000.

The Commerce department said that wholesale inventories (chart) fell 0.8% in May, a smaller decline than the Bloomberg consensus, which called for a 1.0% drop, and last month's 1.4% decline was favorably revised to a 1.3% drop. Wholesalers’ stockpiles in durable goods, particularly in the computer equipment sector led the decline, but total sales rose 0.2%, boosted by a 4.4% increase in the automotive sector, resulting in the inventory-to-sales ratio—the amount of time it would take to deplete inventories—dropping from 1.31 months in April to 1.29 in May.

The decline in inventories at the wholesale level was the ninth-straight monthly decline and inventories now sit at a level not seen since August 2007.

Tomorrow’s economic calendar will include the preliminary reading of the University of Michigan Consumer Sentiment Index for July, as well as the nation’s trade balance for May.