Evening Update

Consumer Confidence Data Thwarts Rally

Stocks suffered a slight setback today as an unexpected drop in consumer confidence spoiled early gains on Wall Street. Other economic data was positive and included a better-than-expected reading in the S&P/Case-Shiller Index for July, but that was not enough to bring stocks back above the flatline. Treasuries also finished slightly lower after the reports and after another Fed official outlined the potential need for more aggressive action to fight inflation. In equity news, drugstore operator Walgreen Co topped analyst earnings estimates and Gannett Co guided to 3Q profits above analyst projections, while insurance firm MBIA came under pressure after its credit rating was cut by Standard & Poor’s. Elsewhere, Starbucks entered the instant coffee market and the FDIC announced a proposal that would allow it to raise $45 billion from banks to help cover the rising costs of bank failures.

The Dow Jones Industrial Average lost 47 points (0.5%) to close at 9,742, the S&P 500 Index dropped 2 points (0.2%) to 1,061, and the Nasdaq Composite fell 7 points (0.3%) to 2,124. In light volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $0.13 to $66.71 per barrel, wholesale gasoline decreased $0.01 to $1.63 per gallon, while the Bloomberg gold spot price gained $1.15 to $992.20 per ounce.

Walgreen Co. (WAG $37) reported fiscal 4Q EPS of $0.44, five cents above the consensus estimate of Wall Street analysts, as revenues rose 7.6% to $15.7 billion, matching the Street’s forecast. Prescription sales—accounting for 66.5% of sales in the quarter—advanced 9% as the company filled 9.1% more total prescriptions during the quarter versus last year. WAG said it “relentlessly” reduced costs and focused on productivity gains while navigating through the “most severe economic downturn in decades.” Shares were sharply higher.

Insurance firm MBIA Inc. (MBI $8) was under pressure after Standard & Poor’s cut its counterparty credit rating one notch to BB- from BB. S&P said macroeconomic conditions continue to contribute to losses on the group’s structured finance products and sizeable exposures to certain asset classes within the insured portfolio could create significant losses and balance-sheet volatility. S&P also cut MBIA’s structured finance insurance arm two notches to BB+—one level below investment grade—from BBB.

Shares of Gannett Co. (GCI $12) were up over 15% after the news firm announced that it expects 3Q EPS ex-items to be between $0.39-0.42, versus the consensus estimate of analysts, which called for the company to report earnings of $0.28 per share. The parent of the USA Today publication also said it expects revenue for the quarter to be in a range of $1.31-1.32 billion, compared to the Street’s forecast of $1.38 billion. GCI said in 3Q it continued to successfully navigate through the economic headwinds both in the US and UK, and although overall ad revenue comparisons remain difficult, its 3Q year-over-year publishing comparisons improved again versus 1Q and 2Q comparisons. Additionally, the company said its continued efforts to achieve efficiencies and further consolidations company-wide along with significantly lower newsprint expense resulted in another substantial decline in its operating expenses.

Starbucks (SBUX $20) made headlines today by entering the $21 billion instant coffee market with the launch of its new Starbucks Via Ready Brew product. CEO Howard Schultz called it “perhaps the biggest opportunity” in the company’s history, and said he thought Starbucks could take “significant” share in this market that is currently dominated by established global players like Nestle (NSRGF $42) and Kraft Foods (KFT $26). Via will have a much higher selling price than existing products though and Shultz said he didn’t expect Via to be a direct competitor with other instant coffee brands because of its much higher quality. He added that Via did not cannibalize Starbucks’ main business in markets where it was tested. All three stocks finished lower.

General Electric (GE $17 ¹) ended the day lower after CEO Jeffrey Immelt told investors at a conference that he believes the US economic recovery will be slow, and a lot of lost jobs “are never coming back.” More than half of the company’s revenues now come from outside the US though, as Immelt noted. "How the Chinese economy does in the short-term is probably more important than sitting there praying for a robust recovery in the U.S.," he said. "I bet they make it through this crisis and come out stronger." Lastly, Immelt remarked that he still sees tremendous growth opportunities for his company. "We have $3 billion in revenue and we ought to be twice that size," he said. "It's been frustrating to me that we can't be even bigger."

In other news, the Federal Deposit Insurance Corp (FDIC) announced today that US bank failures are expected to cost about $100 billion over the next four years. That is higher than its earlier estimate of $70 billion in failure costs through 2013. The deposit insurance fund had just $10.4 billion available at the end of June as 95 banks have already failed this year and the fund is expected to turn “significantly negative” next year. The $10.4 billion is equivalent to just 0.22% of insured deposits, well below a congressionally mandated minimum of 1.15%. As a result, the FDIC board voted today to propose requiring banks to prepay an estimated $45 billion in regular insurance premiums for the years 2010–2012. The proposal must undergo a 30-day public comment period before taking effect. The FDIC already imposed a $5.6 billion “emergency fee” on banks earlier in the year to shore up the fund. FDIC Chairman Sheila Bair defended the proposal, stating that the $45 billion payment “is not going to constrain lending.”

Home prices fall less than expected, consumer confidence disappoints


Treasuries were slightly lower today as traders attempted to decipher the somewhat conflicting economic data. The yield on the 2-year note rose 2 bps to 0.99%, the yield on the 10-year note added 2 bps to 3.30%, and the yield on the 30-year bond was unchanged at 4.03%.

The S&P/Case-Shiller Home Price Index came in better than expected this morning, showing that home values dropped just 13.3% year-over-year (y/y) in July, compared to the 14.2% expectation. Importantly, that made it the sixth-straight month that the rate of price declines has slowed and the third-straight month that on a month-over-month (m/m) basis, home prices actually increased. Although regional differences in the housing market remain, all 20 metro areas that comprise the index showed an improvement in July’s readings compared to June, and only Detroit, Las Vegas, and Seattle saw prices drop again in July on a seasonally-adjusted month-over-month basis.

Today’s report is a positive but investors will be cautious about reading too much into it because the data is somewhat delayed, with this series lagging the existing home and new home sales data by a month. Both of those reports have already showed some weakness in August relative to July, sparking some skepticism that the recent positive trend has been merely a false dawn created by government stimulus, not a sustainable trend. David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, cautioned that investors not view today’s report as the “all clear” signal for the housing market just yet. “These figures continue to support an indication of stabilization in national real estate values, but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures,” Blitzer said.

Elsewhere, the Conference Board released its consumer confidence (chart) report which unexpectedly decreased to 53.1 in September, below the upwardly revised 54.5 level seen in August, and well below the consensus estimate that predicted a reading of 57.0. The primary driver of the disappointment was deterioration in survey respondents’ depiction of the present situation, with the percentage of respondents saying business conditions were “bad” increasing from 44.6% to 46.3%, and people saying “jobs were hard to get” rising from 44.3% to 47.0%. Although consumer sentiment remains subdued as employment conditions continue to be tough.

Meanwhile, another Fed official reiterated the view that the Central Bank may need to act more aggressively than expected to curtail inflationary pressures. Richard Fisher, president of the Federal Reserve Bank of Dallas, said today that “when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity" to the extraordinary stimulus measures undertaken to fight the recession originally. Fisher also said that "The wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction and that the lending capacity of the banking system is capable of expansion." The comments were in line with statements made by US central banker Kevin Warsh last Friday, although they appear to conflict somewhat with the most recent FOMC policy statement which was released last Wednesday and said that the Fed’s easy money policy will remain in place for an “extended period.”

Looking ahead: final read on 2Q GDP tomorrow

Final Gross Domestic Product (GDP) for 2Q will be released tomorrow, the last of three estimates on the pace of economic activity, considered a proxy for corporate profits. Prior readings indicated that GDP fell at an annualized rate of 1.0%, and tomorrow’s report is forecasted by economists to downwardly revise the decline to 1.2%, as some of the underlying components have been either released or revised in the last month. Personal consumption is expected to be unchanged from the advance reading, declining 1.0% in 2Q. Readings on prices are also expected to be unchanged with a reading of 0.0% for the GDP Price Index, and a 2.0% increase in the core PCE Index, which excludes food and energy.

The other US releases on tomorrow’s economic calendar is the Chicago Purchasing Manager survey, expected to improve to 52.0 in September from 50.0, and the Energy Information Administration oil inventory report.