Evening Update

Stocks Recover from Retailer Weakness

Stocks began the day under pressure as cautious holiday outlooks from several US retailers spooked investors. A smaller-than-expected increase in industrial production also served to make traders hesitant. However, stocks proved resilient and eventually finished modestly higher, keeping the rally intact as all three major US indices set new 2009 highs today and the Dow has now posted gains in nine of the last 10 sessions. The aforementioned retailer outlooks dominated equity news, as Home Depot, Target, TJX Companies, Saks, and Pacific Sunwear all reported profits ahead of expectations, but for the most part the companies hesitated in predicting a strong holiday season, noting that conditions in the industry remain challenging. Elsewhere, FedEx was higher as its CEO offered a more upbeat view for his company’s prospects this holiday season. In other economic news, wholesale price increases were tame and homebuilder confidence failed to increase as expected, although economists noted that the survey was taken before Congress voted to extend and expand the tax credit for first-time homebuyers. Meanwhile, Fed watchers got more comments to digest, as central banker Jeffrey Lacker warned that rate hikes may be needed before the economy has fully returned to robust growth, and Treasuries traded higher.

The Dow Jones Industrial Average rose 30 points (0.3%) to close at 10,437, the S&P 500 Index gained 1 point (0.1%) to 1,110, and the Nasdaq Composite advanced 6 points (0.3%) to 2,204. In light volume, 970 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $0.24 higher at $79.14 per barrel, while wholesale gasoline added $0.01 to $2.00 per gallon, and the Bloomberg gold spot price gained $1.50 at $1,140.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 75.31.

Dow member Home Depot (HD $27) reported 3Q EPS of $0.41, five cents above the expectation of Wall Street analysts, as revenues fell 8% versus last year to $16.4 billion, slightly higher than the $16.3 billion that analysts had expected. The number-one home improvement retailer said same-store sales—sales of stores open at least a year—dropped 6.9%, with US same-store sales falling 7.1%. The company’s CEO said, “There is still a great deal of pressure in the housing and home improvement markets, though there are some positive signs of stabilization.” HD issued full-year EPS guidance that topped analysts’ expectations, but its full-year revenue guidance came in short of the Street’s forecasts. Shares were lower.

Target (TGT $49) reported 3Q EPS increased 18.6% to $0.58, above the Street’s forecast, which called for the retailer to post earnings of $0.50 per share. Sales rose 1.4% to $14.8 billion, missing analysts’ expectations of $15.3 billion, as a 1.6% decline in same-store sales partially offset the contributions of its new store expansion. But, the company added that in light of the current and projected economic environment and expectations for a “highly promotional” holiday season, it remains cautious about 4Q performance and is planning conservatively. Results so far in November “provide additional justification for being cautious in this uncertain environment,” CEO Gregg Steinhafel told investors. TGT traded lower.

TJX Companies (TJX $39) reported 3Q EPS $0.81, one penny ahead of analysts’ expectations, with sales increasing 10% to $5.2 billion, matching the Street’s forecast, as a consolidated same-store sales gain of 7% over last year contributed to the revenue growth. “We are pleased to see the strong momentum in our business continue despite the challenging economic environment,” CEO Carol Meyrowitz said, adding that because of strong momentum continuing into November, the company is raising its guidance for next quarter. The company now expects to earn between $0.65-$0.71 in 4Q, compared to the average analyst forecast of $0.71. Sales at stores open at least a year are expected to rise between 5-7%. Shares were under pressure.

Saks Inc. (SKS $7) was up solidly after the luxury retailer reported an unexpected 3Q profit of $0.01 per share, compared to the forecast of analysts that called for the company to post an $0.11 per share loss. It was the first quarterly profit for the company since 1Q 2008. Meanwhile, sales fell by 8.5% to $631 million, but also topped the $624 million that analysts had expected, with same-store sales falling 10.1% compared to last year. The company said it was able to post a modest 3Q profit due to improved gross margin performance and diligent expense control, in spite of its same-store sales decline. Looking ahead, the company told analysts it expects 4Q revenues to be down “in the high single digits” and that the retail environment remains uncertain. “It’s a fragile period for everyone in this industry,” the CEO reported.

Meanwhile, troubled retailer Pacific Sunwear of California (PSUN $4) plunged more than 20% today after its outlook disappointed investors. The teen clothing retailer said it lost $0.17 per share in 3Q, better than the loss of $0.20 that had been expected, as revenues dropped 17% to $268 million – also better than forecasts – and same-store sales tumbled 18%. Looking to the important holiday quarter though, the company warned that sales at stores open at least a year will likely sink at least another 20%, and it expects to lose between $0.28-$0.35 per share, much worse than the average analyst expectation of a $0.11 per share loss. Management explained that sales through most of last quarter were at the higher end of internal forecasts, led by improving trends in its young men’s business, but since then there has been a "precipitous decline across both genders during the last two weeks of the third quarter and into the first two weeks of the fourth quarter." The weakness was said to extend across most geographic areas, and increased promotional activity from competitors is expected to pose additional challenges.

FedEx Corp’s (FDX $85) CEO told the Wall Street Journal that he expects holiday season volume to rise over 8% compared to last year, saying that, “Christmas won’t be a disaster.” During the Wall Street Journal’s CEO Council conference, FDX’s chief said the company already sees increased traffic volume, helped by the Asia/Pacific region and its shipping business “came to life” last month, while he sees a little improvement in the housing sector. He added that FDX plans to hire extra seasonal workers to handle the holiday volume, while declining to comment on plans for hiring permanent employees. Shares were modestly higher.

Producer prices rise, industrial production increases slightly

The Producer Price Index (chart) showed prices at the wholesale level increased 0.3% month-over-month (m/m) in October, below the average economist forecast of 0.5%. Meanwhile, the core rate, which excludes food and energy, unexpectedly fell 0.6%, compared to the forecast for a 0.1% increase. This index is one of three monthly inflation measures released by the Labor Department. Import prices were already reported, and showed a benign 0.4% increase excluding energy, while the Consumer Price Index will be announced tomorrow. Fed Chairman Ben Bernanke discussed the inflation outlook in a speech yesterday, where he noted that “Although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends.” Because of that, Bernanke stated that inflation is likely to remain subdued “for some time” and the Fed’s easy money policy is expected to remain in place for an extended period.

Industrial production (chart) was also released this morning, and showed just a 0.1% increase, compared to the 0.4% gain that had been expected. Meanwhile, last month’s previously reported 0.7% gain was revised down to 0.6%. The auto sector continues to be the source of much of the volatility in this report. According to Bloomberg, auto manufacturing is coming off its largest three-month surge since the 1970s, and the October data was correspondingly weak – reflecting the difficult comparison basis and expiration of the government’s “Cash-for-Clunkers” program. That was not the sole explanation of the report’s weakness, however, as manufacturing ex-autos declined by 0.1%, following last month’s 0.5% increase. The report also showed that capacity utilization improved from 70.5% to 70.7%, narrowly missing the 70.8% forecast. After falling sharply, capacity utilization has now rebounded for four consecutive months, although it remains more than 10 percentage points below its long-term average.

Elsewhere, the NAHB Housing Market Index, a gauge of homebuilder confidence, came in at 17 in November, below expectations of a rise to 19, although the survey was taken before tax credits for first-time homebuyers were extended by Congress. Furthermore, last month’s reading was revised down from 18 to 17. A reading below 50 means most respondents still view conditions as poor.

Also, Federal Reserve commentary continues to be heavy. Following yesterday’s speech from Chairman Ben Bernanke, Richmond Fed President Jeffrey Lacker gave a speech where he noted that the economic recovery is solidly under way, and reiterated his view that the Fed may have to raise interest rates before the economy has fully returned to robust growth. "If we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery," he said. Further explaining his view, Lacker noted "In assessing when we will need to begin taking monetary stimulus out, I will be looking for the time at which economic growth is strong enough and well-enough established, even if it is not especially vigorous."

Treasuries finished modestly higher following the reports. The yield on the 2-year was down 1 bp to 0.76%, the yield on the 10-year note fell 1 bp to 3.32%, and the yield on the 30-year bond was 2 bps lower at 4.25%.

More data on inflation and the start of monthly housing data on the docket

Housing starts for October will be reported tomorrow, expected to show a 1.7% month-over-month (m/m) increase to an annual rate of 600,000 while building permits, one of the Leading Economic Indicators tracked by the Conference Board, are forecasted to increase 0.9% m/m to an annual rate of 580,000 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 and expanded, so discerning future trends from this report may be difficult, while future reports will hold more significance.

Also on Wednesday, the Consumer Price Index is 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. The release is a compliment to today’s Producer Price Index release, which showed prices at the wholesale level increased 0.3% m/m in October, while the core rate unexpectedly fell 0.6%.

The other release on tomorrow’s US economic calendar is the weekly MBA Mortgage Applications Index.

Inflation in Europe slightly above forecasts, Japan may need to reduce spending plans

In economic news in Europe, the UK reported that its Consumer Price Index rose 0.2% month-over-month in October, above the 0.1% that economists surveyed by Bloomberg had expected. It was the first increase in eight months in the index. The October data brought the year-over-year inflation rate to 1.5%, versus the consensus of 1.4%. That was an acceleration from the 1.1% gain in consumer prices seen in September, which had been the lowest inflation level in five years in the UK.

Meanwhile in Australia, the minutes to the most recent policy meeting of the Reserve Bank of Australia were released, leading to increased speculation as to whether the nation’s central bank will raise rates again at its next meeting in December, after already boosting its key lending rate in the past two meetings. The minutes showed that the pace of tightening remains “an open question,” with policy makers concerned about choking off an economic recovery by tightening too quickly, while leaving rates low for too long presents “its own risks.” Also included in the report was an improved economic growth outlook, as RBA board members reported that economic growth of Australia’s major trading partners in Asia are “generally growing at quite solid rates.” China is the largest purchaser of Australian exports, and its demand for Australian commodities was one factor that kept Australia out of recession during the global financial crisis.

Elsewhere, Japan’s Finance Minister Hirohisa Fujii told parliament today that the government may not be able to honor some of its campaign spending promises. Fujii said if the government is forced to issue more than 44 trillion yen ($494 billion) next year, it could be a “big problem,” and as a result, some election pledges may not be able to be kept. The Vice Finance Minister said on his website that vice ministers will meet this week to prioritize spending on areas such as reduced tuition fees, a childcare allowance, and an end to a gasoline tax. According to Bloomberg, 10-year government bond yields in Japan have risen to 1.49%, from just 1.31% before the August 30 election. Fujii said last week that he was “very concerned” about the increase in yields.