Evening Update

Stocks Finish in the Green Despite Weak Labor Data

Stocks opened lower after a weaker-than-expected labor report – which included an unemployment rate above 10% for the first time in over 20 years – spooked investors. Markets showed some late-day resiliency though and stocks finished slightly higher, led by gains in the industrial sector. Other economic data today included the 14th-straight drop in wholesale inventories and a larger-than-expected fall in consumer credit. Treasuries finished the day slightly higher following the reports. In equity news, a string of companies including Starbucks, AIG, CBS, Nvidia, VeriSign, and Activision Blizzard all showed quarterly profits inline or ahead of forecasts. Elsewhere, government-controlled mortgage lender Fannie Mae came under pressure after it posted another quarterly loss and turned to the Treasury Department for $15 billion in additional capital.

The Dow Jones Industrial Average rose 17 points (0.2%) to close at 10,023, the S&P 500 Index gained 3 points (0.3%) to 1,069, and the Nasdaq Composite advanced 7 points (0.3%) to 2,112. In light volume, 1.1 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil was $2.19 lower at $77.43 per barrel, while wholesale gasoline was down $0.07 to $1.92 per gallon, and the Bloomberg gold spot price added $5.20 to $1,095.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 75.78. For the week, the DJIA gained 3.2%, the S&P 500 Index also climbed 3.2%, and the Nasdaq Composite was up by 3.3%.

Starbucks Corp. (SBUX $21) reported fiscal 4Q EPS ex-items of $0.24, three cents above the consensus estimate of Wall Street analysts, with revenues falling 4% versus last year to $2.4 billion, roughly inline with the Street’s expectations. The coffee company said same-store sales trends improved in its US and international segments, on both sequential quarter-over-quarter and year-over-year basis. The company said its performance was favorably impacted from permanent changes to its cost structure, adding that it is seeing broad-based improvement across its global business, and it is “cautiously optimistic” about the upcoming holiday period. SBUX also raised its full-year 2010 EPS outlook and shares were higher.

Activision Blizzard (ATVI $11) reported 3Q EPS ex-items of $0.04, matching the consensus estimate of analysts, with revenues of $755 million topping the Street’s forecast of $722 million. The video game publisher said it benefitted from positive audience responses to its “Guitar Hero,” “Call of Duty,” and “World of Warcraft” game franchises. The company’s CEO said, “We believe we have the industry’s strongest holiday release schedule,” and its “Call of Duty: Modern Warfare 2” “has the potential to be the biggest entertainment launch and not just of a video game.” ATVI kept its full-year outlook calling for EPS of $0.63 unchanged. Analysts have predicted 2009 EPS of $0.64. Shares were higher.

CBS (CBS $13) reported 3Q EPS ex-items of $0.25, two cents above the Street’s forecast, with revenues of $3.4 billion topping analysts’ forecasts, as the company said lower advertising sales were largely offset by higher syndication sales. CBS’ CEO said the operating environment for its businesses continues to improve and it is finishing the year with strong momentum. "The light at the end of the tunnel continues each day to get brighter," the company said. "As the economy recovers, CBS will be a leading beneficiary in the upturn." The company also maintained its full-year earnings outlook. On a conference call with investors, management addressed rumors that Oprah Winfrey’s talk show may leave broadcast television to her own cable channel, The Oprah Winfrey Network, which has yet to launch. CEO Leslie Moonves said talks were under way to keep her show from leaving. In a statement yesterday, Winfrey's production company said "she has not made a decision yet" on a move to cable but will make one before the end of the year. Shares were lower.

Former Dow member and government bailed out insurance group American International Group (AIG $36) reported adjusted 3Q EPS of $2.85, topping the $1.98 that the Street had anticipated. AIG said its profit during the quarter resulted from certain businesses continuing to stabilize, as pricing in its commercial property casualty business has been stable. In addition to the improved market performance, the company said the application of new accounting standards for impaired investments also positively contributed to the results. Looking forward, the company said it expects “continued volatility in reported results,” and a $5 billion charge is expected in 4Q as a result of the company’s special purpose vehicles. Shares were under heavy pressure.

Nvidia (NVDA $13) reported 3Q EPS ex-items of $0.19, above the $0.10 that analysts had been expecting, with $903 million in revenues growing 16% versus the previous quarter and slightly higher than a year ago, topping the $837 million forecast of the Street. The graphics chipmaker said its revenues increased from a year ago with improvement in each of its PC, professional solutions and consumer businesses. NVDA issued 4Q revenue guidance that topped the Street’s forecast. Shares were higher.

VeriSign (VRSN $23) reported 3Q ex-items of $0.33, one penny ahead of analysts’ estimates, with revenues growing 5% versus last year to $258 million, roughly inline with analysts’ expectations. However, shares were solidly lower after the internet infrastructure services firm issued a 4Q forecast that missed the Street’s expectations.

Government-controlled mortgage lender Fannie Mae (FNM $1) reported a 3Q loss of $18.9 billion, or $3.47 per share. That is 35% less than the loss suffered in 3Q last year but significantly above the $14.8 billion loss from 2Q. Revenues were 47% higher year-over-year at $6.0 billion. As a result of the heavy losses, the company announced that it has requested an additional $15 billion in funding from the Treasury Department in order to keep operating. Fannie has already received assistance totaling $44.9 billion. The company attributed the losses to “"the increasing number of loans that were acquired from mortgage-backed securities trusts in order to pursue loan modifications." Fannie Mae also reported that its assistance to struggling homeowners "could adversely affect our economic returns, possibly significantly." The bank’s loans at least three months past due rose from 3.9% to 4.7% of total loans outstanding. Looking ahead, Fannie lowered its forecasted drop in 2009 home prices to 6% from an earlier outlook of 7-12%. Shares were solidly lower.

Unemployment rate at 10.2%, but prior months revised positively

Nonfarm payrolls fell 190,000 in October, more than the Bloomberg estimate that called for a 175,000 decline. However, September was favorably revised to -219,000 from -263,000, and August was also upwardly adjusted to -154,000 from -201,000, for a combined positive revision of 91,000. The unemployment rate rose to 10.2% from 9.8%, above the consensus forecast calling for the rate to increase to 9.9%. Average hourly earnings increased 0.3%, versus the Street's forecast of 0.1%, and the average workweek remained flat at 33.0 hours, versus the estimate of an increase to 33.1.

Treasuries wobbled but eventually finished slightly higher following the data. The yield on the 2-year note dipped 2 bps to 0.85%, the yield on the 10-year note inched 2 bps lower to 3.50%, and the yield on the 30-year bond was unchanged at 4.40%.

In the most recent 3 months, job losses have averaged 188,000 per month, compared with losses averaging 357,000 during the prior 3 months. In contrast, losses averaged 645,000 per month from November 2008 to April 2009. The largest losses in October were in construction, manufacturing and retail trade, while health care and education continued to be areas of strength. Since the start of the recession, health care has added 597,000 jobs.

There were indicators that future reports will show further improvement, despite the negative headline of an unemployment rate above 10%. There was little change in the number of people who are working part-time for economic reasons, those who would like to work full-time but are unable to. Temporary help services added 34,000 in the month, and including upward revisions to prior months, has added 44,000 jobs in the past 3 months. Employers will likely first make adjustments to their workforce by adding temporary positions and by shifting part-time workers to full-time.

Elsewhere, the US Department of Commerce said that wholesale inventories fell 0.9% in September, a smaller decline than the Bloomberg consensus, which called for a 1.0% drop, and August’s 1.3% decline was left unrevised. Wholesalers’ stockpiles in durable goods, particularly in machinery, led the decline, more than offsetting a solid rise in computer equipment. Total sales rose 0.7%—the fifth-straight increase—boosted by machinery sales, which explain the group’s aforementioned depletion in stockpiles, resulting in the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dropping from 1.20 months in August to 1.18 in September. The decline in inventories at the wholesale level was the 13th-straight monthly decline and inventories sit at the lowest level since May 2006.

Elsewhere, a report from the Federal Reserve showed that US lenders reduced consumer credit for the eighth-consecutive month in September. That is the longest string since records began in 1943. Total consumer debt outstanding was reduced by $14.8 billion – a 7% annual rate, which was more than the $10 billion that economists had forecast. Meanwhile, data for August was revised from the previously announced drop of $12 billion to $9.9 billion. Examining the report in detail, most of the decline was attributed to credit cards and other revolving debt – which fell $9.9 billion or 13%, while auto loans and other non-revolving debt dropped just $4.9 billion, or 4%. The Fed’s report doesn’t cover lending secured by real estate.

In a light week, the economic calendar next week includes MBA Mortgage Applications, initial jobless claims, the Treasury’s monthly budget statement, the trade balance, the import price index and the University of Michigan consumer sentiment survey. Also note that the bond market will be closed on Wednesday in observance of the Veteran’s Day holiday.

Bumpy ride for stocks as markets claw back last week’s losses

It was a volatile week on Wall Street with markets reversing course several times in intraday trading, although stocks managed to finish the week with nice gains. The unpredictable trading followed large losses last week that caused the S&P 500 to suffer its first monthly loss since February as traders attempted to determine if the economic recovery is real, and how much of the improved economic outlook is already reflected in stocks following the almost 60% rally off of the March lows.

3Q earnings season delivered more positive results this week, and according to data compiled by Bloomberg, 83% of S&P 500 companies that have reported so far have exceeded the average analyst earnings estimate. That would make it the best quarter since records began being kept in 1993. Cisco Systems (CSCO $24), Ford (F $8), Toyota Motor Corp. (TM $81), Clorox (CLX $59), and Viacom (VIAB $29) were among the companies benefiting from strong results this week.

M&A activity was also back in the spotlight this week, with no announcement bigger than the $34 billion deal announced by billionaire investor Warren Buffett when his firm Berkshire Hathaway (BRKA $100,450) bought railroad Burlington Northern Santa Fe (BNI $98) in the biggest investment of Buffett’s career. A $4.5 billion tie-up between tool makers Stanley Works (SWK $47) and Black & Decker Corp. (BDK $62), and a $4.5 billion merger in the oil & gas sector between Denbury Resources (DNR $13) and Encore Acquisition (EAC $45) also fanned the flames of a recently revitalized M&A sector.

On the economic front, the Federal Open Market Committee (FOMC) headlined the week’s announcements when it kept interest rates on hold, as widely expected, and decrease its agency debt purchase program to $175 billion from $200 billion, citing a lack of supply of the bonds in the market for it to buy. The Fed statement also highlighted several areas of improvement within the economy, such as the housing market and an uptick in household spending, although ongoing challenges remain evident, the Fed said. Also announced this week were separate reports showing a positive surprise in manufacturing sector growth, and another indication of growth in the services sector, although at a slower pace than economists had anticipated.

Australian growth forecast upgraded, while Canada labor report disappoints

Australia’s S&P/ASX 200 Index jumped almost 2% after the Reserve Bank of Australia boosted its economic growth forecast. The RBA said given the resiliency of the economy, its GDP is expected to increase by a little more than 2% over the year to mid 2010, “a considerably better outcome than thought likely earlier in the year,” with the economy expected to expand by 3.25% over the year to mid 2011. The RBA added that growth in business investment and exports is expected to be strong, underpinned by the ongoing expansion of the resources sector. The RBA—which has increased its main lending rate twice in the past month and became the first G20 central bank to do so—suggested that more tightening may be in the offing after it said, “The cash rate remains at a low level, and a further gradual lessening of monetary stimulus is likely to be required over time if the economy evolves broadly as expected.”

Elsewhere, the Canadian government reported that its unemployment rate rose to a level higher than expected, after its net change in employment unexpectedly fell. Canada's economy shed more than 43,200 jobs last month, confounding the consensus of economists that had called for a gain of 10,000 jobs, pushing the unemployment rate up from 8.4% to 8.6%. Total jobs lost since last October now total 400,000, or 2.3% of the labor force, Statistics Canada said. "Since October 2008, employment has fallen in most industries, with the steepest declines in manufacturing (-11 per cent), natural resources (-11 per cent), construction (-5.8 per cent), and transportation and warehousing (-5.8 per cent)," the agency added.

In economic news in the eurozone, German factory orders rose slightly less than expected. It was the seventh-consecutive month of rising orders, this time by 0.9% over August, when they gained a revised 2.1%. That narrowly missed the expectation of analysts for a 1% gain in September. The monthly improvement in orders was driven by a 3.7% increase in foreign demand, which was tempered as domestic orders fell 2.3%.Overall orders were still 13.1% lower than a year earlier.