Evening Update

Dow Extends Streak to Six

Stocks rose again today as the Dow extended its winning streak to six consecutive sessions and the S&P 500 was higher for the seventh day in the last eight. Economic news in the US was absent today and bond traders had the day off in observance of the Veteran’s Day holiday. There was ample economic data on the international front though and the generally better-than-expected reports from China, which included a 19-month high in industrial production growth, added to the bullish sentiment. In US equity news, Macy’s had better-than-expected quarterly earnings, although the retailer came under pressure after issuing disappointing guidance, while luxury homebuilder Toll Brothers reported much-better-than-expected preliminary 4Q data and UPS said it intends to raise shipping rates next year as the market continues to improve. Elsewhere, the Obama administration’s pay restrictions were in focus after AIG’s CEO reportedly threatened to quit, and General Motors also complained that the pay limits are impeding its efforts to turn the company around.

The Dow Jones Industrial Average rose 44 points (0.4%) to close at 10,291, the S&P 500 Index was up 6 points (0.5%) at 1,099, and the Nasdaq Composite gained 16 points (0.7%) to 2,167. In light volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil was $0.23 higher at $79.28 per barrel, while wholesale gasoline rose $0.02 to $2.00 per gallon, and the Bloomberg gold spot price added $12.55 to $1,118.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% at 75.11.

Macy’s (M $18) announced that excluding restructuring costs, the department store posted a loss of $0.03 per share, narrower than the $0.07 loss that Wall Street analysts had forecast, with revenues down 3.9% versus last year to $5.3 billion, which was inline with the Street’s expectation. The company posted a same-store sales decline of 3.6% versus the same period a year ago and said that its results benefitted from strong sales performance at Bloomingdale’s and outstanding growth in its internet businesses. The company said it is entering the holiday season “confident,” and it currently expects 4Q same-store sales to decline between 1-2%, resulting in a second-half same-store sales decline of 2.1-2.6%, compared to its previous guidance of a 5-6% drop. However, shares were under pressure as the company issued 4Q and full-year EPS guidance that missed analysts’ estimates.

Toll Brothers (TOL $21) was sharply higher after the luxury homebuilder reported preliminary 4Q results showing total homebuilding revenue is expected to be about $487 million, compared to the $386 million that was forecasted by analysts. TOL said its net signed contracts of about 765 units and $431 million were up 42% and 62%, respectively, despite having fewer selling communities. The company added that its contract cancellation rate—cancellations divided by signed contracts—was at 6.9% for the quarter, which was inline with its pre-downturn historical averages. TOL commented, “Home buyers began to emerge from their bunkers in late March 2009 and the market continued to gain momentum up to Labor Day. Since then demand has been volatile: This may be due in part to typical seasonality, but the more likely cause is concern about unemployment and the overall economy.” The company is expected to release its final 4Q report with EPS data on December 3rd.

American International Group (AIG $37) was under some pressure after the Wall Street Journal reported that CEO Robert Benmosche told the company’s board last week that he was ”done” after just three months on the job, according to people familiar with matter, although he is reportedly reconsidering his stance in the face of the board's dismay. A new CEO would be AIG’s third since the bailout in September 2008 and the fifth in less than 18 months. The report said the insurer’s chief, who was formerly the CEO of MetLife (MET $36), is unhappy with constraints imposed by the US government, which owns about 80% of AIG, particularly a recent compensation review by the Obama administration’s pay czar Kenneth Feinberg. AIG is one of seven firms the Treasury has ordered to reduce top executives' salary and bonuses. Under the plan, cash salaries for the top 25 highest-paid executives will in most cases be capped to $500,000 and perks in most cases will be limited to $25,000, although the package approved for the AIG CEO will grant him compensation of approximately $10.5 million – the largest under the program. The struggling insurer reported last week that it was profitable for the second-straight quarter and its core insurance operations continue to stabilize, while the amount of its government financial assistance fell by 4% during the period. AIG did not comment on the report.

In related news, General Motors’ new chairman Ed Whitacre said that pay restrictions from the government could hurt the company, making it more difficult to recruit and retain talented employees. Under the plan the Treasury Department approved for GM, cash salaries for the top 25 executives were cut by 31% and only one unnamed executive besides CEO Fritz Henderson will be paid more than $500,000 for 2009. "To find top-level people where you need them, that's a more difficult thing to do at that salary level," Whitacre said.

Elsewhere, United Parcel Service (UPS $58 ¹) was higher after announcing that it will raise shipping rates next year, as it expects volume growth in 2010 amid a gradual economic recovery. The rate hike follows a similar move by rival Fedex (FDX $83), and UPS said it will announce the size of the increase later this month. With regards to the economy, CEO Scott Davis said "I believe the recovery is real, but it is gradual. It is sustainable but vulnerable." In terms of the upcoming holiday season, Davis said "We talked to our customers in recent months, mainly our retail and technology customers, and many of them are quite bullish on this Christmas season while others are pretty cautious." Davis added that "Most people, the consensus, are saying it is going to be a pretty flat holiday in the U.S. I think it will be slightly better than that."

Adobe Systems (ADBE $36) announced that it plans to eliminate approximately 680 full-time positions worldwide, resulting in an aggregate pre-tax restructuring charge of $65-71 million. The software maker said the workforce reduction is aimed at aligning its costs with its 2010 operating plan and the reduction relates to only those employees and facilities that were associated with ADBE prior to its acquisition of Omniture, Inc. Shares were lower.

Bond markets closed for Veterans Day

Today’s US economic calendar was quiet and bond markets were closed in observance of the Veteran’s Day holiday. Weekly data on mortgage applications and crude inventories, typically released on Wednesdays, were postponed until tomorrow as a result of the holiday. Tomorrow’s calendar also holds a report on weekly initial jobless claims.

There was some news of note on the currency front though, with US Treasury Secretary Timothy Geithner saying on his Asian trip that, “I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar.” The dollar was up slightly versus most major global currencies after his comments. Elsewhere, the British pound came under pressure after Bank of England Governor Mervyn King said, “The depreciation of sterling should lead to a recovery in economic activity.” The BoE governor added that, “We have a completely open mind as to whether to do more asset purchases or not.” The comments followed the BoE’s quarterly inflation report, where it said after rising sharply in the near term, inflation is likely to fall back below the target of 2%, as the impact of past depreciation of sterling fades and as the margin of spare capacity pushes down CPI inflation. Elsewhere, the Chinese central bank made a change in language with regard to their yuan peg to the US dollar.

China changes yuan policy language in light of strong economic growth and strengthened surplus

The Chinese central bank, the Bank of China, said that policymakers would set the yuan rate in a “proactive, controlled and gradual manner and based in international capital flows and movements in major currencies,” prompting speculation it will allow the yuan to strengthen, as prior language used to describe yuan policy said it aimed to keep the yuan “stable.” While maintaining “moderately loose” monetary policy, the central bank said that policymakers should consider “broad” measures of price stability, rather than just consumer prices, in a nod to rising concerns about the potential for asset bubbles. The yuan’s peg to the dollar has not changed since July 2008, and today’s report that the trade surplus nearly doubled in October versus September, to $24 billion from $12.9 billion in September will likely increase calls for the country to allow a more flexible currency policy.

In international economic news, data poured in from China today, as the world’s third-largest economy released a host of reports. China’s industrial production increased at a 16.1% pace in October, a 19-month high. That was up from the 13.9% growth seen in September and handily beat the estimate of 15.5% from economists. However, a slowdown in new loans to 253 billion yuan in October from 516.7 billion in September tempered enthusiasm somewhat. Lending activity typically slows in the fourth quarter, but the result still sparked debate as to whether the largely government-controlled banking sector was reining in new loans as policymakers attempt to stave off inflation. Economists had expected a more modest slowdown to 370 billion yuan in new loans.

Other figures released in China showed a slight slowdown in the pace of fixed asset investment as year-to-date investment in assets such as roads and factories rose at a 33.1% pace in the first 10 months of the year, slightly below the 33.5% that economists had expected. Elsewhere, retail sales growth came in at 16.2% in October – well above the 13.9% increase in September and also ahead of the 15.7% growth that economists had predicted. Finally, data released today showed that the decline in exports slowed to a 13.8% annual pace in October. At its peak in May, exports were declining at a 26.4% rate and last month’s report showed a 15.2% fall for the month of September.

Meanwhile, South Korea’s unemployment rate declined from 3.6% in September to 3.4% in October, the lowest level in nine months. The report showed that the number of people self-employed or working in the public service sector rose 5.6%, while employees in the manufacturing sector declined 2.2% and jobs at retailers, hotels, and restaurants were down 3.1%.

Rounding out the Asian data, Japan’s machine orders showed a jump of 10.5% month-over-month in September, after rising 0.5% in August and compared to the 4.1% that economists had expected. On a year-over-year basis, orders were 22% below the same period in 2008.

In European economic news, the UK reported that its jobless claims increased by 12,900 in October—the slowest pace in 18 months–after increasing by 20,600 in September. That was better than the 20,000 increase that economists had anticipated. The unemployment rate in the UK currently sits at 7.8%, below the 10.2% rate in the US and the 9.7% rate for the 16 nations using the euro as a currency.