Evening Update

Rally Loses Steam

Stocks flirted with gains in morning trading thanks to a larger-than-expected decline in jobless claims and a better-than-expected EPS figure from the world’s largest retailer Wal-Mart. Those gains were later lost though as stocks succumbed to profit-taking pressure, ending a multi-day winning streak on Wall Street as the S&P 500 failed to breach the 1,100 level. Trading volume was light again today. In other equity news, Activision Blizzard announced record initial sales of one of its video games, Applied Materials and Kohl’s both beat analyst EPS forecasts, HP announced solid preliminary earnings and said it will acquire networking firm 3Com, GE sold its security business to United Technologies, and Intel settled its legal disputes with AMD. Other economic news today showed a rise in mortgage applications. Treasuries were higher as bond traders returned from yesterday’s holiday.

The Dow Jones Industrial Average fell 94 points (0.9%) to close at 10,197, the S&P 500 Index was down 11 points (1.0%) at 1,087, and the Nasdaq Composite lost 18 points (0.8%) to 2,149. In light volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $2.34 lower at $76.94 per barrel, while wholesale gasoline fell $0.05 to $1.94 per gallon, and the Bloomberg gold spot price dropped $13.30 to $1,104.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.7% at 75.69.

Dow member and the world’s largest retailer Wal-Mart (WMT $53) was modestly higher after reporting 3Q EPS of $0.84, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 1.1% versus last year to $98.7 billion, falling short of the $99.9 billion that the Street had forecasted. 3Q same-store sales at the company fell 0.4%, excluding fuel, and dropped 0.8% including the impact of fuel sales. The same-store sales trend was “driven by price deflation that was well beyond what we had expected, across many food categories, as well as electronics.” That decline was offset by higher customer traffic as the lower prices attracted shoppers. The company said 4Q same-store sales are expected to be flat, plus or minus 1%, adding that the sales environment has been difficult, but customer traffic is up throughout the company, and it gained market share, especially in the US, UK and Mexico. Looking ahead, WMT said it continues to operate in a very challenging economy and it believes it is positioned better than any other retailer to succeed with customers this holiday season. The company raised its full-year EPS outlook and said 4Q EPS are expected to be between $1.08-1.12, compared to the Street’s forecast of $1.12.

Fellow retailer Kohl’s Corp (KSS $55) reported 3Q EPS of $0.63, two cents above the Street’s forecast, with revenues increasing 6.5% to $4.1 billion, topping the $4.0 billion analyst estimate, as same-store sales rose 2.4%. KSS issued 4Q EPS guidance that missed forecasts, while it raised its full-year EPS outlook. The department store chain also raised its full-year EPS guidance from $2.59–$2.70 up to $2.98–$3.08, compared to the $3.02 that analysts expect. Shares were unchanged.

In M&A news, fellow Dow component Hewlett-Packard (HPQ $50) announced that it will acquire networking firm 3Com (COMS $7) for $7.90 per share in cash – a 39% premium to its previous price and valuing the firm at approximately $2.7 billion. 3Com – whose shares briefly topped $100 in 2000 but have since fallen below $5, is a manufacturer of computer networking equipment such as switches and routers that direct internet and other data traffic. The acquisition is expected to help HPQ more effectively compete in that market. “What we’ve been missing is networking for the core of the data center,” an HPQ executive said. “That’s where Cisco (CSCO $23) is strong, and before, H.P. couldn’t attack that.” Meanwhile, HPQ also today reported preliminary 4Q EPS ex-items were $1.14, two pennies above the Street’s forecast and revenues were down 8% versus last year to $30.8 billion, above the $29.8 billion that analysts had expected. HPQ noted that its 4Q results were “fueled by significant growth in China.” The company also increased its full-year 2010 EPS and revenue outlook. HPQ was modestly lower, as was CSCO, while COMS was sharply higher.

Meanwhile, the M&A theme continued for the Dow Jones Industrials with member General Electric (GE $16 ¹) announcing that it signed a definitive agreement with fellow Dow component United Technologies Corp. (UTX $67) for UTX to acquire GE’s security business for $1.8 billion. GE said the security business required significant investment to better serve the security industry and the security unit is a more natural fit for UTX. Both stocks were slightly lower.

Applied Materials (AMAT $13) reported fiscal 4Q EPS ex-items of $0.13, compared to the $0.03 that the Street had forecasted, with revenues rising from $1.1 billion last quarter to $1.5 billion, above the $1.3 billion that analysts had anticipated. The chip equipment maker issued full-year 2010 revenue guidance above the Street’s forecast, saying it expects net sales growth of 30%, and announced that it will slash up to 1,500 jobs, or 12% of its workforce to reduce costs. The job cuts and other cost-saving measures are expected to save the company about $450 million when completed. Shares were under pressure.

In related industry news, Dow member Intel (INTC $20) and fellow chipmaker Advanced Micro Devices (AMD $7) announced a comprehensive agreement to end all outstanding legal disputes between the two companies, including antitrust litigation and patent cross-license disputes. Under the terms of the agreement, AMD and INTC obtain patent rights from a new 5-year cross-license agreement, and INTC will pay AMD $1.25 billion. “While the relationship between the two companies has been difficult in the past, this agreement ends the legal disputes and enables the companies to focus all of our efforts on product innovation and development,” the two firms said in a joint statement. AMD was over 20% higher, while INTC was modestly lower.

Elsewhere, Activision Blizzard (ATVI $11) was higher after the first day sales of its “Call of Duty: Modern Warfare 2” game broke records. Sales totaled an estimated $310 million in North America and the UK alone – the only two markets ATVI provided figures for, although the video game went on sale all over the world. The company estimated that it sold around 4.7 million copies of the game, at an average price of approximately $60 each, within the first 24 hours in those two markets. Analysts had predicted that ATVI’s launch-day sales would range between $300– $340 million. That made it the largest-selling launch in the history of entertainment, including video games as well as other types of media. The previous record was held by "Grand Theft Auto IV," a video game from Take-Two Interactive Software (TTWO $12), which sold 3.6 million units and brought in $310 million worldwide – a level that ATVI reached in just two markets. Last year's opening weekend for the Batman movie "The Dark Knight," which brought in $155 million, was the largest movie release on record, according to the Associated Press. The record-breaking results show “the power of video games as an entertainment medium," CEO Mike Griffith said.

Following yesterday’s report that American International Group’s (AIG $36) CEO Robert Benmosche was contemplating stepping down after three months, the Wall Street Journal reported that the company’s chief executive told employees in an internal memo that he “remains totally committed” to leading AIG. In the memo, Benmosche said he and the government-controlled company’s board “are indeed frustrated” over pay oversight matters being negotiated with the Obama administration’s pay czar, Kenneth Feinberg, and the issue is a “barrier” that “stands in the way of restoring AIG’s value” and paying back government aid, which amounts to about $90 billion, per the Wall Street Journal. AIG said it does not comment on board activities and a Treasury spokesperson declined to comment. AIG traded lower.

Jobless claims fall more than expected, mortgage applications increase

Weekly initial jobless claims fell by 12,000 to 502,000 from a revised 514,000 the previous week. Economists had expected claims would dip slightly from the initially reported 512,000 to 510,000. This continues a steady decline of new claims for jobless benefits from a high of 674,000 in late March. Meanwhile, the four-week moving average, considered a smoother look at the trend in claims, declined by 4,500 to 519,750. That continues a steady downward trend since August, bringing the average to its lowest level since last November. Continuing claims – the number of workers still collecting benefits beyond their initial week – also fell sharply again, dropping 139,000 to 5,631,000, versus the forecast of 5,700,000. Elsewhere, President Obama today announced that the White House will hold a forum on job growth in December to explore ways to “encourage and accelerate job creation in this country.”

Treasuries were higher following the jobless report. The yield on the 2-year note inched down 2 bps to 0.81%, the yield on the 10-year note dipped 4 bps to 3.44%, while the yield on the 30-year bond was down 2 bps to 4.40%.

In other economic news, the US MBA Mortgage Application Index rose 3.2% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 8.2% in the previous week. The increase was attributed to a 7 basis-point decline in the average 30-year mortgage rate to 4.90% versus the previous week, and the Refinance Index, which rose 11.3%. However, the Purchase Index fell 11.7% to limit the advance. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Looking ahead to Friday, the economic calendar includes the import price index, a preliminary reading for November in the University of Michigan Consumer Sentiment Index, and a report on the nation’s trade balance.

Busy day on international economic calendar yields mostly positive results

Economic data was mixed across the pond as a report showed eurozone industrial production rose less than expected month-over-month in September, but the year-over-year decline fell less than economists had projected. The 0.3% rise in production in September made it the fifth month in a row of positive figures, although it fell short of the 0.5% growth forecast. On a year-over-year basis, output fell 12.9% whereas economists had predicted a 14.1% decline.

Spanish GDP data was also released today, showing a 0.3% decline from the previous three months. That was better than the 0.4% contraction economists had projected. On a year-over-year basis, the economy shrank at a 4% pace. Spain’s Finance Minister today repeated the government’s forecast that the economy will shrink 3.6% this year. The country currently has the highest unemployment rate in the eurozone region at 19.3%.

Meanwhile, Russia said today that its GDP contracted 8.9% in 3Q on a year-over-year basis, better than the record-large 10.9% drop suffered in 2Q. On a quarter-over-quarter basis, economic output expanded a non-seasonally adjusted 13.9%. Earlier this month the World Bank said it expects the Russian economy will grow 3.2% in 2010 after tumbling 8.7% this year. That would represent a larger turnaround than Russia achieved after its 1998 crisis that was marred by a debt default and currency devaluation.

Australian labor market data surprised on the upside for the second-consecutive month as 24,500 jobs were created in October, and employment is now up 64,300 in the past two months. Economists had expected employment to decline by 10,000 in October. However, the jobless rate ticked up slightly from 5.7% to 5.8% in October, inline with expectations, as more people entered the workforce. The government this month reduced its outlook for the jobless rate significantly, forecasting a peak of 6.75% compared to the previous view of 8.5%.

In Japan, wholesale deflation – as measured by the corporate goods price index (CGPI) – showed that prices were 6.7% lower in the year to October. That price decline was slightly higher than the 6% fall that economists expected, although it represented a moderation of the trend from the 8% deflation seen in the year to September and the record-high level of 8.5% seen in the prior two months. On a month-over-month basis, prices were 0.7% lower in October from September. The Bank of Japan has forecasted deflationary conditions to remain through at least the next three years.

The Bank of Korea announced today that it decided to keep its key interest rate unchanged at a record-low 2.0% - inline with where it has been for nine-straight months now. The central bank lowered rates by a total of 3.25 percentage points over a four month span starting last fall. A Reuters poll this week showed 13 out of 14 analysts believed rates would remain on hold at this meeting, although most forecast one or two rate hikes.