Evening Update

Disappointing Housing Data Sends Shares Modestly Lower

Stocks suffered modest losses today as traders opted to book profits from the recent rally, spurred on by unexpected declines in housing starts and building permits, as well as disappointing guidance from software maker Autodesk. In other equity news, a slew of companies including Salesforce.com, BJ’s Wholesale, and Chico’s all either exceeded or met profit expectations, while Delta Airlines announced that it will attempt to woo Japan Airlines away from its current alliance with American Airlines, and Hershey’s and privately-owned Ferrero both confirmed that they were considering making rival bids for Cadbury, which has already shunned a takeover offer from Kraft as too low. In a turn of events, Microsoft was ordered to stop selling its Windows operating system in China by a Chinese court. Other economic news today included a higher-than-expected inflation reading and a decline in mortgage applications. Treasuries were mixed following the reports.

The Dow Jones Industrial Average lost 11 points (0.1%) to close at 10,426, the S&P 500 Index fell 1 point (0.0%) to 1,110, and the Nasdaq Composite declined 11 points (0.5%) to 2,193. In moderately light volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $0.44 higher at $79.58 per barrel, while wholesale gasoline added $0.01 to $2.01 per gallon, and the Bloomberg gold spot price gained $0.50 at $1,141.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 75.09.

Software maker Autodesk (ADSK $24) reported 3Q EPS ex-items of $0.27, five cents above the Street’s consensus forecast, as revenues of $417 million were flat versus last quarter and down 31% compared to last year, just above the $415 million that analysts were looking for. The software and services firm said, “Our business appears to be increasingly stable,” reflecting the business environment that began stabilizing in 2Q of the year. However, the design and engineering software maker warned that operating margins in 1Q 2010 would be flat or down from a year ago, as the company is hesitant to make too many cost cuts, so that it will be in a position to take advantage of the economic recovery as it happens. "We try to get ahead of the downturn by making cuts early, but we want to make sure we have the appropriate structure in place and the appropriate resources as we go forward to make sure we can really take advantage of this," CEO Carl Bass said. ADSK also said it expects to earn between $0.19-$0.24 per share in 4Q, which is below the $0.25 that analysts had thought possible. Shares were solidly lower.

Fellow software maker Salesforce.com (CRM $64) reported 3Q EPS of $0.16, inline with analysts’ projections, with revenues jumping 20% versus last year to $330.5 million, above the $324 million that the Street had expected. The business software company said its subscription and support unit led the way with a 21% increase in revenues versus last year, with net paying customers growing by about 31% compared to the same period last year. CRM issued 4Q revenue guidance that topped the Street’s estimates, while it raised its full-year outlook, and said it expects EPS between $0.62-$0.63 this year, compared to the average analyst projection of $0.62. "We are getting our excitement back," CEO Marc Benioff told analysts. However, shares traded lower, as some analysts pointed out that given the run in the stock, some investors may have expected better performance.

BJ’s Wholesale (BJ $36) reported 3Q EPS ex-items of $0.45, matching the expectations of Wall Street analysts, with revenues increasing 2% to $2.45 billion, roughly inline with the Street’s forecast. BJ said including a negative 6.4% impact of gasoline sales, the company’s same-store sales fell 2.5%. The company said it expects 4Q revenue to increase between 10.5 -12.5%, which is above analysts’ expectations, while same-store sales are expected to rise between 5-7%. Shares were lower.

Chico’s FAS (CHS $15) was higher after the specialty retailer reported 3Q EPS of $0.13, topping the $0.07 that had been expected by analysts, with revenues jumping 13% versus last year to $446.9 million, above the $414.7 million that had been forecasted by the Street. 3Q same-store sales rose 12.8%, supported by a 14.4% increase in the company’s White House/Black Market women’s clothing boutique sales, which posted a 4.8% decline in the same period last year.

Delta Airlines (DAL $8) said today that it has offered loss-making Japan Airlines (JALSF $1) $1 billion, including a $500 million equity investment, to switch its affiliation from American Airlines’ (AMR $6) OneWorld alliance to Delta’s SkyTeam alliance. Delta also offered to cover the entire cost of switching from the present OneWorld alliance it has with AMR, which is estimated to run at $20 million, according to Delta. Japan Airlines, Asia's biggest airline, has extensive routes in Japan and China and has partnered with AMR since the mid-1990s, but it has been forced to seek government aid this year as losses have mounted. A JAL spokesman said the company is aware of Delta’s offer, but could not comment. Meanwhile, AMR responded to the offer by saying “We stand ready to make a significant investment in JAL, superior to anything a competitor will offer.” All three stocks were lower, with JAL touching a record low after Japan’s transport minister hinted that bankruptcy for the carrier was still a possibility.

Cadbury (CBY $53) was modestly lower despite reports that both US candy maker Hershey (HSY $38) and Italian firm Ferrero are considering making rival bids for the UK confectionary maker, which may thwart Dow member Kraft’s (KFT $28) more than $16 billion takeover offer. HSY and Ferrero both confirmed that they are reviewing their options on Cadbury, and at this stage there can be no assurance that any proposal or offer from the company’s will be forthcoming. Both statements failed to clarify several media reports that suggest HSY and Ferrero may be mulling a joint offer. CBY said it is focused on remaining a standalone pure-play confectioner but it would give proper consideration to any serious offer that delivers full value, and it cannot comment further “unless and until” that situation occurs.

Microsoft (MSFT $30) has has been ordered by a Chinese court to stop selling versions of its Windows operating systems that include Chinese character fonts designed by Chinese technology company Zhongyi Electric, citing a violation of the scope of licensing agreements. Microsoft will have to stop selling the Chinese versions of its Windows 98, 2000, 2003 and Windows XP, according to the court. Microsoft said it will appeal the ruling, saying "Microsoft respects intellectual property rights. We use third party IPs only when we have a legitimate right to do so." Shares were flat on the day.

Consumer prices rise, housing starts and building permits unexpectedly fell

The Consumer Price Index showed prices rose more than expected in October, increasing 0.3%, above the 0.2% that economists surveyed by Bloomberg had anticipated. The core rate, which strips out food and energy, also increased more than anticipated, gaining 0.2% in October, versus the 0.1% that the Street had expected.

The increase in the headline number largely reflected advances in the indexes for energy and for new and used motor vehicles. Energy prices were up for the fifth time in six months, advancing 1.5% during October. As for the core rate, the price of vehicles accounted for over 90% of the increase and partly reflected new model-year introductions. On an interesting note, despite increases at the consumer level for vehicles, prices at the wholesale level declined, and lower vehicle prices accounted for the majority of the decrease in the core rate of the Producer Price Index released yesterday. On a year-over-year basis, headline consumer prices were down 0.2% in October, compared to the -0.3% expected, and the core CPI was up 1.7% year-over-year, above expectations of 1.6%.

Year-over-year comparisons to the $140 per barrel level of crude have been lapsed, and given recent increases in the price of energy, headline inflation numbers are likely to start ticking up. However, prices at the core level are unlikely to get overheated near-term, as consumers are in no mood to accept price increases – they will simply postpone purchases. At the Fed’s last monetary policy meeting on November 4th, they outlined a trio of indicators that warranted “exceptionally low levels” of the federal funds rate for an “extended period” – namely low rates of resource utilization (also called the output gap, a combination of factory utilization and the unemployment rate), subdued inflation trends and stable inflation expectations.

Elsewhere, housing starts for October were reported, showing an unexpected drop, as they fell 10.6% month-over-month (m/m) to an annual rate of 529,000 units from an upwardly revised 592,000 last month. Economists had predicted 600,000 starts. Meanwhile, building permits also negatively surprised, falling 4.0% m/m to an annual rate of 552,000 from last month’s upwardly revised 575,000. The expectation was for a gain to 580,000 units.

Some of the decline in today’s housing data can be attributed to intense weakness in multi-family starts and permits, down 33% and 18% m/m respectively. However, single-family starts were down 6.8% and permits were lower by 0.2% m/m. As the extension and expansion of the homebuyer tax credit did not occur until November 6, homebuilders and buyers were in a “holding pattern” according to the National Association of Home Builders, and as a result, future months housing reports will hold more information about the status of recovery in the housing market.

In other economic news, the US MBA Mortgage Application Index fell 2.5% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 3.2% in the previous week. The decrease came despite another 7 basis-point decline in the average 30-year mortgage rate to 4.83% versus the previous week. The decrease in the index was attributed to a 1.4% decline in the Refinance Index, and a 4.7% drop in the Purchase Index. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Elsewhere, Fed watchers got additional commentary today, in what has been a heavy weak for Fed speak. St Louis Fed President James Bullard said the market’s intense focus on interest rates is “disappointing” given the current importance of quantitative easing to Fed policy. "Markets should be focusing on quantitative monetary policy rather than interest rate policy," he said. "The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero." Bullard also reminded investors that in the past the Fed has waited between two and a half to three years after the end of a recession to begin raising rates. "Assuming that the (Fed) would behave the same way that it's behaved in the past, this could mean that the (Fed) would not start increasing rates until early 2012," he said, although he admitted that the Fed would take into account the recent criticism that it helped fuel the housing bubble by keeping rates too low for too long as it sets policy in the future.

Treasuries finished mixed following the reports. The yield on the 2-year was down 1 bps to 0.75%, while the yield on the 10-year note rose 4 bps to 3.37%, and the yield on the 30-year bond was 4 bps higher at 4.30%.

Looking ahead to tomorrow, the economic calendar includes a weekly reading of initial jobless claims, the Philadelphia Fed regional manufacturing index, and the Index of Leading Economic Indicators.

Bank of England minutes released, British deficit to be targeted, Chinese monetary policy in focus

In European economic news, the Bank of England released the minutes from its last monetary policy meeting that occurred earlier this month, where it maintained its key lending rate at 0.5% and boosted its bond-purchase program,. The minutes showed BoE policymakers were split on the decision to increase asset purchases, with seven of the nine members supporting the 25 billion pound increase, while one wanted to extend the program even further, and the last member wanted no increase at all.

Elsewhere, Britain’s Labor government – in power since 1997 but trailing in polls ahead of next year’s election – today said it aims to reduce the current 175 billion pound shortfall in the budget by half over four years, as the budget deficit is scheduled to reach more than 12% of GDP this year. Prime Minister Gordon Brown reported "We have taken the action that is necessary to cut the deficit in half over the next few years," pointing to plans to increase taxes for wealthiest individuals and raise contributions for state benefits. Brown also criticized the proposals of the opposition Conservative party, saying that an attempt to reduce the deficit more rapidly could endanger the UK’s economic recovery.

Meanwhile, traders got some clues into potential Chinese monetary policy today, as a member of the People's Bank of China's monetary policy committee gave a speech in Hong Kong. The official noted that headline inflation is unlikely to be a risk for some time, but nevertheless China needs to be alert for the creation of possible asset bubbles. Adding to other recent criticism out of China of US monetary policy, he said the current US easy money policy "is boosting speculative investment in stock and property markets and will pose new, insurmountable risks to the global recovery and, particularly, to the recovery in emerging markets." Fed policy is particularly important to China because the currency has been pegged to the dollar. The policymaker also noted that Chinese GDP growth could be between 8-9% in 2010, and growth this year will likely be above the government's target of 8%. Lastly, the official commented on local property prices in China, saying they were not “crazy.”