Evening Update

Stocks Surge on Renewed Optimism

A larger-than-expected decline in jobless claims and a bullish profit report from Dow member Cisco Systems sparked a rally on Wall Street today, helping the Dow regain the 10,000 level. Other equity news included another surprising quarterly profit from the auto sector, this time coming from Toyota, as well as strong initial sales of Microsoft’s Windows 7 software and mixed monthly sales data from the retail sector. Also attracting attention was a profit-miss from Qualcomm, although the wireless chip supplier rallied after an upbeat outlook, while Whole Foods Market suffered the opposite fate when it beat quarterly earnings expectations but its shares suffered a steep sell-off after a disappointing outlook. Elsewhere, CVS Caremark was under heavy pressure on contract cancellations, and Congress passed a bill to extend the first-time homebuyer credit, which had been scheduled to expire at the end of the month. In bond markets, Treasuries were little changed, although the yield curve steepened slightly for the second-consecutive session.

The Dow Jones Industrial Average gained 204 points (2.1%) to close at 10,006, the S&P 500 Index rose 20 points (1.9%) to 1,067, while the Nasdaq Composite climbed 50 points (2.4%) to 2,105. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $0.78 lower at $79.62 per barrel, while wholesale gasoline was down $0.02 to $1.99 per gallon, and the Bloomberg gold spot price fell $1.30 to $1,090.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.1% to 75.73.

Cisco Systems (CSCO $24) reported fiscal 1Q EPS ex-items of $0.36, five cents above the consensus forecast of Wall Street analysts, as revenues fell 13% versus last year to $9.0 billion, but also above the Street’s forecast that called for the Dow member to post revenues of $8.7 billion. The networking firm’s CEO John Chambers said, “Building off what we saw as a clear tipping point in 4Q, our 1Q results continued to reflect strong sequential growth trends that meet or exceed expectations during normal economic times.” CSCO offered 2Q revenue guidance that exceeded analysts’ estimates. Shares were higher.

In related industry earnings news, Qualcomm (QCOM $44) reported fiscal 4Q EPS ex-items of $0.48, a decline of 11% versus last quarter, and below the $0.52 that analysts had expected. Revenues of $2.7 billion were down 2% sequentially, which was inline with the Street’s projections. Also, the wireless chip supplier issued full-year EPS and revenue guidance that fell short of analysts’ forecasts as the company told Reuters that aggressive competition in the mobile phone chip market would impact profits next year. The company also announced that it has extended its license agreement with Samsung Electronics (SSNLF $685) covering both 3G and 4G—enhanced mobile telecommunication technologies—and said it still continues to forecast growth for 3G in 2009 despite industry forecasts of a decline in the total handset market. Shares were higher despite the disappointing report.

Shares of Whole Foods Market (WFMI $27) were approximately 15% lower after the company issued full-year 2010 EPS guidance that missed analysts’ expectations, as WFMI’s CEO said the company is taking a cautious, conservative attitude. The outlook overshadowed its fiscal 4Q profit report where its posted EPS of $0.20, two cents above the Street’s forecast, as 4Q revenues increased 2.3% versus last year to $1.8 billion, matching analyst expectations.

CVS Caremark Corp (CVS $29) was under heavy pressure with shares down approximately 20% after its 3Q results met expectations but the company revealed large contract losses. 3Q operating EPS at the drugstore operator was $0.65, slightly ahead of the $0.64 consensus forecast, while sales rose 18% to $24.6 billion. By division, revenue at CVS drugstores rose 17.9%, while same-store sales growth notched 5.7%. Meanwhile, revenue from CVS’s Caremark pharmacy benefits management business was up 23.4%. Looking ahead to 2010 though, the company warned that earnings at Caremark could drop between 10-12% after the company lost almost $4 billion in business from the pharmacy benefits management unit in 3Q. The division, which negotiates drug prices with manufacturers on behalf of corporate and government customers, lost the contracts primarily on the basis of price and service, according to CEO Tom Ryan. “We’re committed to turning around the PBM business,” Ryan said. CVS entered that business in 2007 when it bought Caremark Rx Inc. for $22 billion.

Toyota Motor Corp. (TM $81), the world’s largest carmaker by sales, reported an unexpected profit and slashed its full-year loss forecast today. For the quarter just ended, Toyota reported an operating profit of 58.0 billion yen, down 66% from a year earlier but above the average estimate that called for a loss of 63 billion yen. The Japanese automaker now expects an operating loss of 350 billion yen ($3.9 billion) for the full-year, which brings it more in line with the loss of 293 billion yen that analysts had forecasted. This report mirrors the announcement from US rival Ford (F $7) earlier this week, which also defied Wall Street forecasts by turning in a quarterly profit. Both stocks were higher.

Elsewhere, Microsoft (MSFT $29) was higher after CEO Steve Ballmer said sales of its new Windows 7 operating system were “fantastic,” exceeding revenues from any of its previous operating software releases in their first 10 days. Most people who buy new PCs will get Windows 7, he added.

Meanwhile, the nation’s retailers are reporting October same-store sales, or sales at stores open at least a year, headlined by Target (TGT $50) posting a 0.1% decline in sales, compared to the Reuters estimate of a flat reading for October, which the company said was inline with its expectations. TGT added that same-store sales in apparel were slightly stronger than for the company overall, and that it is heading into the holiday season with very clean inventories and it believes it is positioned to perform well in what continues to be a challenging economic environment. Shares were modestly higher.

Costco Wholesale (COST $59) announced that its October same-store sales rose 5%, including the negative impact of gasoline deflation and the positive impact of foreign exchange, above the gain of 4.7% that analysts’ had expected. Excluding fuel and foreign exchange, COST’s sales would have gained 4%. Shares were higher.

Department stores disappointed with their respective October performances, with Macy’s (M $18) reporting its comparable store sales were down 0.8% for the month, a larger decline than the 0.1% dip that the Street had expected, and JC Penney (JCP $30) saying its October same-store sales fell 4.5%, a larger decline than the 2.3% decrease that analysts projected. Elsewhere, Kohl’s (KSS $56) announced that its sales increased 1.4%, missing the 6.2% growth that the Street forecasted. Shares of the three firms were mixed as the sales reports overshadowed increased EPS guidance from JCP and KSS.

Elsewhere, Gap Inc. (GPS $23) was higher after it announced that its sales increased 4%, higher than the 1.6% gain that had been anticipated. American Eagle Outfitters (AEO $16) was down sharply after it said its October sales unexpectedly fell, dropping 5% compared to the Street’s expectation for the company to report a 1.7% gain.

Jobless claims fall, productivity jumps

Weekly initial jobless claims fell by 20,000 to 512,000, versus last week's figure that was upwardly revised by 2,000 to 532,000. The Bloomberg consensus called for claims to fall to 522,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 3,000 to 523,750. Continuing claims followed last week’s steep drop with a solid decline of 68,000 to 5,749,000, versus the forecast of 5,750,000.

Elsewhere, nonfarm productivity rose at a 9.5% annual rate in 3Q, well above the Bloomberg forecast of 6.5%. Productivity rose at the fastest pace in six years, due to hours worked falling 7.5%, more than output, which declined 3.5% versus the same period a year ago. Unit labor costs fell 5.2%, versus a drop of 4.2% that was estimated.

Treasuries were little changed, although the yield curve steepened slightly for the second-consecutive session. The yield on the 2-year dropped 2 bps to 0.87%, while the yield on the 10-year note was flat at 3.53%, and the yield on the 30-year bond was unchanged at 4.40%.

Elsewhere, Congress approved an extension of the $8,000 tax credit for first-time homebuyers today. This comes following some signs of weakness in housing data as the expiration of the subsidy approached at the end of this month. The bill still needs to be signed into law by President Obama, at which point it will extend the program through April 30 of next year. It will also raise the income ceiling for eligible individuals from $75,000 to $125,000, and initiate a new tax credit of $6,500 for move-up buyers who have lived in their current resident for at least five years. More than 1.4 million Americans have claimed the homebuyer credit so far, at a cost of approximately $10 billion, according to the Treasury Department. The newly approved bill also contains an extension of unemployment benefits for jobless individuals and a tax credit for businesses which incurred losses in 2008 or 2009.

Job loss pace expected to slow

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting payrolls fell 175,000 in October after an unexpected accelerated decline of 263,000 in September, and the unemployment rate is estimated to have increased to 9.9% in October from 9.8% in September.

Other releases on tomorrow’s economic calendar include wholesale inventories, expected to decline 1.0% in September, and consumer credit, forecasted to fall $10.0 billion in September.

Key central bank decisions announced in Europe

International economic news today was dominated by monetary policy, as the Bank of England and the European Central Bank both kept their main interest rates unchanged at 0.5% and 1.0%, respectively. ECB President Jean-Claude Trichet announced that the ECB will withdraw some of its stimulus efforts that it deployed to fight the financial crisis, saying “Not all our liquidity measures will be needed to the same extent as in the past,” adding that extraordinary liquidity measures will be “phased out in a timely and gradual fashion” in order to combat any threat to price stability. Meanwhile, the BoE announced that it will expand its quantitative easing program by purchasing an additional 25 billion pounds ($41.4 billion) in assets, bringing its total purchase amount to 200 billion pounds ($331 billion), the equivalent of more than 14% of the UK’s economic output, per Reuters. However, the BoE’s asset purchase program was increased by a smaller amount than the 225 billion pounds that economists surveyed by Bloomberg had expected.

Elsewhere in Europe, the UK reported that its manufacturing sector expanded 1.7% month-over-month in September, well above the 1.0% advance that was expected and the largest increase in seven years according to Bloomberg. The UK economy contracted at a disappointing 0.4% pace in 3Q, with industrial production dropping a revised 0.8%.

Rounding out the economic news in Europe, a report showed eurozone retail sales fell more than expected in September. The 3.6% year-over-year drop followed a revised 2.3% fall in August, and made it the 16th-consecutive month of lower sales data. Economists had predicted a decline of just 2.3%. On a month-over-month basis, sales were 0.7% lower in September than August – the largest drop since October 2008. The disappointing data highlighted the slow pace of recovery in consumption, in spite of other bright spots in the eurozone economy. Earlier this week, the EU raised its 2010 economic forecast from a 0.1% contraction to a 0.7% growth, after data showed that the manufacturing and services sectors expanded for a third-straight month in October.

In Asia, the minutes to the Bank of Japan’s October policy meeting were released today, showing that the central bank feels it is necessary to assure investors that the easy money policy will remain in place even after the end of some of the emergency credit-stabilizing measures. “It was most important that the bank clearly explain its basic policy stance of steadily implementing measures to maintain the accommodative financial environment,” the minutes showed. The Bank of Japan decided on October 30 to cease purchasing corporate debt in December, while interest rates were maintained near zero in an attempt to stimulate the economy back to growth.