Evening Update

Stocks Rise as Traders Look Past Economic Data

Stocks were higher again today, in spite of an unexpected fall in consumer sentiment. More positive earnings announcements helped build bullish sentiment as JC Penny added to its guidance and Walt Disney, Abercrombie & Fitch, and Agilent Technologies all had better-than-projected profits, although Nordstrom’s results fell just short of forecasts. In other economic news, the trade deficit grew by the largest amount in more than a decade, and import price increases remained subdued. Treasuries rose following the data.

The Dow Jones Industrial Average rose 73 points (0.7%) to close at 10,270, the S&P 500 Index gained 6 points (0.6%) to 1,093, and the Nasdaq Composite advanced 19 points (0.9%) to 2,168. In light volume, 985 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $0.59 lower at $76.35 per barrel, while wholesale gasoline was down $0.02 to $1.92 per gallon, and the Bloomberg gold spot price added $14.80 to $1,118.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.5% to 75.23. For the week, the DJIA gained 2.5%, the S&P 500 Index climbed 2.3%, and the Nasdaq Composite was up by 2.6%.

Dow member Walt Disney (DIS $30) reported 4Q EPS ex-items of $0.46, five cents above the expectations of Wall Street analysts, with revenues increasing 4% versus last year to $9.9 billion, above the $9.3 billion that the Street had forecasted. The parent of ABC and ESPN had a 14% increase in revenues at its media networks segment, which more than offset a 4% decline in revenues at its parks and resorts unit. DIS said growth at ESPN boosted its cable networks segment, due to higher affiliate revenue primarily driven by contractual rate increases, partially offset by decreased advertising revenue and higher programming costs. Meanwhile, its parks and resorts were impacted by decreased guest spending, principally at its domestic parks and resorts, due to lower average ticket prices, lower average daily hotel and room rates and decreased merchandise spending. Shares were higher.

JC Penney (JCP $31) was nicely higher after the department store increased its full-year EPS guidance from a range of $0.75-0.90, to $0.93-1.08, and boosted its full-year same-store sales outlook from a decrease of about 7-7.5%, to a decline between 6.5-7.0%. Analysts are expecting the company to report full-year EPS of $1.05. Additionally, JCP reported 3Q EPS of $0.30, excluding a $0.19 per share impact of a qualified pension plan expense, compared to the $0.12 that analysts had expected, which may not have included the aforementioned pension charge. Including the pension expense and excluding a $0.03 per share charge in real estate impairments, JCP’s EPS were $0.14. Revenues were down 3.2% versus last year to $4.2 billion, matching the Street’s expectations, with same-store sales falling 4.6%. The department store said its results came from better-than-expected improvement in gross margin as it maintained appropriate inventory levels and reduced both clearance selling and unprofitable discounting.

Fellow department store operator Nordstrom (JWN $34) was modestly lower after its 3Q earnings of $0.38 per share missed by one penny the average analyst estimate. Revenue of $1.9 billion – up 4% year-over-year – was better than the $1.8 billion expectation, however. Sales at stores open at least a year were lower by 1.2%. The company said its fixed costs in the quarter were lower than last year, but salary expenses were higher because the better-than-expected sales performance triggered more in performance-related compensation. For all of 2009, the retailer increased its EPS guidance from $1.50–$1.65 up to $1.83–$1.88, compared to the consensus analyst forecast, which calls for $1.81. However, the retailer also said it expects same-store sales for all of 2009 to decline by 6-7%, which disappointed some analysts. “The customer is continuing to have confidence issues, and there's no question that the economy and other key factors have had a dramatic impact. But what the customer is saying is if there is a compelling reason to shop and it's predominantly around fashion and great product, then they're responding. And so we're encouraged by that,” President and Director Blake Nordstrom said.

In related industry earnings news, shares of Abercrombie & Fitch (ANF $40) gained solid ground after the retailer posted 3Q EPS ex-items of $0.30, ten cents above the Street’s forecast. Revenues decreased 15% last year to $765 million, matching the consensus estimate of analysts, with same-store sales decreasing 22%. The company said it plans to react to the changing consumer environment by introducing some lower-priced items. "Domestically as you all know we are seeing that the customer is extremely deal-driven, price-conscious, and we are aware of that," CEO Mike Jeffries said. "We are aspirational brands for our customer, but are reacting to the current environment and trying to improve the domestic sales trend." Jeffries also said that the company felt its inventory levels were too low, an issue it is now working to correct. "We know that our stores have looked light during the past quarter, and we are working to correct this," he said.

Agilent Technologies (A $29) reported fiscal 4Q EPS ex-items of $0.32, well above the $0.23, that analysts had expected, with revenues of $1.2 billion, down 21% versus last year, but up 10% versus 3Q, and above the $1.1 billion that the Street had anticipated. The electronic equipment testing firm issued a 1Q 2010 outlook that topped analysts’ expectations. Shares were higher.

Sentiment surprisingly falls, trade gap widens, and import prices rise less than expected

The preliminary University of Michigan’s Consumer Sentiment Index (chart) unexpectedly declined from 70.6 in October to 66.0 in November, versus the Bloomberg forecast, which called for a slight increase to 71.0. The current conditions component of the report decreased from 73.7 in October to 69.6, and the expectations component also deteriorated from 68.6 to 63.7. Inflation expectations ticked lower with the one-year outlook slipping from 2.9 to 2.8, while the five-year expectation increased from 2.9 to 3.1. The University’s statement noted, “Confidence tumbled in early November due to the grim financial realities faced by consumers as well as weaker economic prospects for the year ahead—importantly, the decline in confidence was already in place before the announced increase in the unemployment rate to 10.2% on Nov. 6.”

Meanwhile, the trade deficit(chart) widened from a revised $30.8 billion in August to $36.5 billion in September, versus the Bloomberg estimate calling for the deficit to widen more modestly to $31.8 billion. That represented an 18.2% increase, the largest jump in more than a decade. Much of the increase was attributed to foreign oil, as prices of that commodity have now risen for seven-straight months, moving back toward their highest point in nearly a year. That offset a fifth-straight gain in US exports, which have benefitted from the weaker US dollar. Both US exports and imports had their best month since December 2008. So far this year, the trade deficit is running at an annual rate of $366 billion, about half of last year's $695.9 billion deficit.

Elsewhere, the Import Price Index (chart) rose 0.7% month-over-month for October, below the expected increase of 1.0% of economists surveyed by Bloomberg. Year-over-year, import prices are lower by 5.7%. Petroleum imports rose from -0.9% in September to a gain of 0.9% in October, and industrial supplies jumped by 1.8% from a 0.2% gain in September, to support the advance in the index, but food, feed, and drink prices deteriorated from a 0.5% increase in the previous month to a 0.1% rise. Excluding petroleum, import prices rose 0.7% in October.

Treasuries finished higher following the data. The yield on the 2-year was flat at 0.81%, the yield on the 10-year note inched 2 bps lower to 3.42%, and the yield on the 30-year bond fell 4 bps to 4.35%.

European GDP in focus

In international economic news, several major reports on GDP in the eurozone region were announced, all showing growth in 3Q but less than economists had expected. The European Union reported that the eurozone exited the recession, posting a 0.4% quarter-over-quarter (q/q) advance in 3Q GDP, compared to the 0.2% decline seen in 2Q, but the result was just shy of the 0.5% gain that economists had projected. Elsewhere, Germany’s 3Q GDP rose 0.7% q/q, compared to the consensus of economists that called for Europe’s largest economy to expand by 0.8%. Moreover, France’s 3Q GDP increased 0.3% q/q, but that was just half of the 0.6% advance that had been expected. Data for Italy was also released, and its 0.6% quarterly increase in GDP was short of the 0.7% consensus expectation to limit some of the enthusiasm that stemmed from the eurozone emerging from its deepest recession since World War II.

Meanwhile, a Chinese government economist reported that the country’s GDP growth could reach 10% in 4Q, which would bring the nation’s full-year expansion to about 8.3%. The official added that next year’s economic growth would very likely exceed 8%, with inflation unlikely to be a big problem. The consumer price index in China will probably rise about 2.5% next year, he said.

Stocks off to a strong start in November

After a pullback in equity markets in late October that had some traders concerned that stock valuations had more than priced in the recent stabilization in the economy, stocks have roared back in November with back-to-back weekly gains bringing the month-to-date rally above 5%.

Stocks started the week on a positive note as investors cheered a weekend meeting of G20 world finance leaders, where policymakers pledged to hold interest rates low and keep stimulating the economy until growth is assured. The economic calendar was otherwise notably light this week, with the only other report of significance being the Federal Reserve’s quarterly senior loan officer opinion survey, which showed that banks remain reluctant to lend, although conditions are not as dire as they were at the peak of the credit crunch.

Also of note this week were a host of earnings from the consumer sector. Wal-Mart (WMT $53), Kohl’s Corp (KSS $56), and Macy’s (M $18) all had better-than-expected results, although management comments about consumer spending and the important holiday shopping season which is rapidly approaching were generally cautious. Homebuilders also enjoyed support this week after solid results and more optimistic comments from Toll Brothers (TOL $21) and Beazer Homes (BZH $5).

Economic data to heat up next week

The week starts with advance retail sales for October, expected to rise 0.9% month-over-month (m/m), while sales ex-autos are forecasted to increase 0.4%. Later in the week, industrial production will be reported on Wednesday, anticipated to rise 0.4% m/m in October, after jumping 0.7% in September, while capacity utilization is expected to have risen to 70.8% from 70.5%. Last month’s reports on retail sales and industrial production showed consumers have started to increase spending on items not incented by government subsidies and that manufacturers may need to ramp-up production after allowing inventories to fall by record amounts.

On Wednesday, housing starts for October will be reported, expected to show a 1.7% m/m increase to an annual rate of 600,000 while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to increase 0.9% m/m after declining 1.2% m/m in September. This report was one of several disappointing reports last month that had investors wondering if the recovery was stalling. Since this report, the first-time homebuyer tax credit was extended, so future reports on building permits may be given more attention than this report.

Several readings on inflation will be released with the Producer Price Index on Tuesday expected to show prices at the wholesale level were up 0.5% m/m in October, after falling 0.6% in September. While food and energy are the smallest components of the inflation indexes, the volatility of their prices tends to explain a large portion of m/m changes. The core rate, which excludes food and energy, is expected to rise 0.1% after falling 0.1% the prior month. The Consumer Price Index follows on Wednesday, anticipated to have risen 0.2% m/m in October, the same rate of increase reported for September. Ex-food and energy, the core rate is forecasted to have risen 0.1%, after a 0.2% increase in the prior month.

Other reports on the economic agenda next week include Empire Manufacturing, business inventories, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Index of Leading Economic Indicators, and the Philadelphia Fed’s Business Activity Index.