Evening Update

Stocks Fall as Commodities Slide

Stocks sold off today as some of the previously best performing sectors suffered the most selling pressure, led by materials and energy shares which suffered from commodity price declines. Technology stocks were also under pressure after an analyst reduced its 2010 growth forecast for the global chip industry. Economic news was mixed today as the Philly Fed Manufacturing Index increased more than expected but initial jobless claims failed to decline last week. Similarly, the Index of Leading Economic Indicators came in slightly below expectations, although it still marked the seventh-straight month of increases. Treasuries rose following the data, amid the general avoidance of risk taking in financial markets. Equity news today included numerous retailer earnings reports that were above forecasts, although Dick’s Sporting Goods offered disappointing guidance. Elsewhere, Microsoft said its Windows 7 operating system continues to see strong demand, while Aetna and AOL each announced workforce reductions, JPMorgan Chase announced an M&A transaction, and Vivendi said it will exit its participation in NBC Universal if GE sells a portion of its stake in the media company to Comcast, as rumored.

The Dow Jones Industrial Average lost 94 points (0.9%) to close at 10,332, the S&P 500 Index fell 15 points (1.3%) to 1,095, and the Nasdaq Composite declined 36 points (1.7%) to 2,157. In moderately light volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $2.12 lower at $77.46 per barrel, while wholesale gasoline dropped $0.04 to $1.97 per gallon, and the Bloomberg gold spot price sank $0.68 to $1,144.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% at 75.29.

Sears Holdings (SHLD $73) reported a 3Q net loss ex-items of $0.81 per share, narrower than the $1.09 loss that Wall Street analysts had forecasted, with revenues declining by $470 million to $10.2 billion, but above the Street’s expectation of $9.9 billion. The company said it saw some encouraging signs of progress, with same-store sales increasing at Kmart and the decline in sales at Sears moderating during the quarter. Shares dropped.

Dick’s Sporting Goods (DKS $23) posted 3Q EPS of $0.16, above the $0.09 that the Street anticipated, with revenues rising 7.1% versus last year to $990 million, compared to the $961.5 million that analysts forecasted. DKS said it believes that the growth in sales came from a shift of cold weather product sales from 4Q to 3Q as a result of colder weather conditions relative to last year. The company said it successfully managed inventory and controlled expenses while executing effective merchandising and marketing strategies. However, shares were under pressure as the company issued 4Q and full-year EPS guidance that came in below analysts’ expectations.

Limited Brands (LTD $18) fell after it reported adjusted 3Q earnings of $0.02 per share, compared to a loss of $0.05 per share that analysts had expected, with revenues declining 3.5% to $1.8 billion, matching the Street’s forecast, and same-store sales falling 2%. LTD issued 4Q EPS guidance that was inline with analysts’ forecasts, while it raised its full-year EPS outlook.

Williams-Sonoma (WSM $22) was higher after the home products retailer reported 3Q EPS ex-items of $0.16, easily topping the $0.05 that the Street had expected, with revenues declining 3% to $729 million, but also topping the consensus estimate of analysts, which called for revenues of $686.1 million. The parent of Pottery Barn and stores bearing its namesake said it saw a progressively stronger than anticipated consumer response and it benefited from its cost containment and inventory management initiatives. WSM raised its 4Q and full-year guidance.

Meanwhile, GameStop (GME $24) reported 3Q EPS ex-items of $0.32, two pennies ahead of the Street’s forecasts, with revenues increasing 8.2% versus last year to $1.8 billion, just ahead of the $1.7 billion that was expected by analysts. The video game retailer said it saw new software sales grow 9.4%, while used product sales increased 19.4%, but same-store sales fell 7.8%, primarily due to a decline in new video game hardware sales. Looking ahead, GME said the holiday season has started strong, due to the early success of sales of Activision Blizzard’s (ATVI $12) recent release of “Call of Duty: Modern Warfare 2,” and it is optimistic that the huge success of this game will serve as a bellwether for what it can expect for the remainder of its holiday game sales. GME reaffirmed its 4Q EPS guidance, but lowered its full-year profit forecast. Shares rose.

In other retailer news, PetSmart (PETM $26) reported 3Q EPS of $0.31, up 11% year-over-year and beating analyst forecasts of $0.27. Revenues were 3% higher at $1.3 billion, as same-store sales edged up 0.3% during the quarter. “Although many fundamentals in the economy remain weak, we continue to be cautiously optimistic,” CEO Robert Moran said. He added that it is too early to read the strength of holiday spending, although the company was pleased with consumer spending patterns during the Halloween period, which may be a good indication of the potential for November and December. The company also increased its full-year guidance from $1.43-$1.51 to a new range of $1.50-$1.54. On average, analysts were expecting $1.50. Shares were lower.

Meanwhile, Microsoft (MSFT $30) said its new Windows 7 software continues to see strong demand since its launch nearly one month ago. CEO Steve Ballmer remarked that Windows 7 has outsold by two times any previous version of the operating system in the same length of time. Speaking at the company’s annual shareholder meeting, Ballmer responded to a question about how Microsoft is competing with Apple (AAPL $201) among college students by stating “Window 7 gives us a real opportunity to come back again at audiences that have been tougher for us.” Shares of both companies were lower.

Aetna (AET $29) fell after it announced that it is reducing its workforce by approximately 1.8% or 625 positions, as part of its goal of aligning its cost structure with the company’s membership outlook for 2010. The health care benefit provider has about 35,500 employees and said it anticipates making a similar number of workforce reductions by the end 1Q 2010. “The economic downturn has had a significant impact on our customers. In addition, we must prepare for the impact that health care reform and regulatory changes may have on our business,” AET’s CEO added.

Similarly, internet firm AOL, which is set to be spun off by its parent company Time Warner (TWX $32), announced that it will ask for 2,500 volunteers to be laid off as part of its cost-cutting plan to prepare for its planned spin off. That would reduce its staff by approximately one-third and leave it with approximately 4,400 employees – down sharply from the 15,000 head count at the time of the Time Warner merger in 2001. AOL said it will perform involuntary layoffs if enough workers do not volunteer. TWX was under pressure.

In deal news, Vivendi (VIVEF $29) said it does not intend to continue its participation in NBC Universal if General Electric (GE $16 ¹) sells a portion of its stake to Comcast(CMCSA $15), as rumored. "We are not interested in staying onboard a new GE-Comcast ownership of NBCU," Vivendi CFO Philippe Capron said. "[W]e will exit and it will give us more headroom." Vivendi currently has a 20% stake in NBC, with the remaining 80% controlled by GE. All three stocks were lower.

Elsewhere, JPMorgan Chase (JPM $43) announced it will acquire the half of UK investment bank Cazenove that it doesn’t yet own, in a deal valued at approximately $3.4 billion. JPM purchased its initial 50% stake in the 190-year old British broker five years ago. The deal was priced at 21 times 2008 earnings, but is likely to be less than 13 times current year profits, according to Reuters. JPM was lower.

Jobless claims remain above the 500,000 mark, leading indicators and Philly Fed increase

Weekly initial jobless claims (chart) came in unchanged at 505,000, versus last week's figure that was upwardly revised by 3,000 to 505,000. The number was roughly inline with the Bloomberg consensus calling for claims to come in at 504,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 6,500 to 514,000. Continuing claims also declined, falling 39,000 to 5,611,000, versus the forecast of 5,598,000.

The Index of Leading Economic Indicators (LEI) rose 0.3% in October, just shy of the 0.4% increase that economists surveyed by Bloomberg expected, and September’s 1.0% advance was unrevised. Of the ten subcomponents that make up the LEI, the largest negative contributors were consumer expectations and building permits but they were offset by a favorable interest rate spread, along with initial jobless claims and stock prices. This was the seventh-straight gain in the index and it sits at the highest level since September 2007. The Conference Board said, “The data indicate that economic recovery is finally setting in. We can expect slow growth through the first half of 2010.”

The Philly Fed Manufacturing Index gave a mixed manufacturing picture compared to Monday’s larger-than-expected deterioration in the Empire Manufacturing Index. The gauge of business activity in the Mid-Atlantic region rose from 11.5 in October to 16.7 in November, above economists’ forecast, which called for the index to increase slightly to 12.2 in the current month. Shipments increased from 3.3 in October to 15.7 in November and new orders increased from 6.2 to 14.8.

Treasuries finished higher following the reports. The yield on the 2-year was down 3 bps to 0.71%, while the yield on the 10-year note fell 2 bps to 3.35%, and the yield on the 30-year bond was 2 bps lower at 4.28%.

Looking ahead to tomorrow, there are no major reports on Friday’s economic calendar.

OECD raises global growth forecast, UK retail sales disappoint, Singapore 3Q GDP revised down

In international economic news, the Organization for Economic Cooperation and Development (OECD) more than doubled its previous 2010 growth forecast. The group said it now expects output of its 30 developed country members to expand at a 1.9% pace next year, above its forecast in June that called for 0.7% growth. Meanwhile, 2011 growth is expected to reach 2.5%, while it won’t be until 3Q of 2011 that global output reaches the same level as in 1Q 2008. "The recovery began a quarter earlier than we thought, and has more short-term strength," the group’s Chief Economist said. "But tightening here and now could be detrimental: the economy is still weak and monetary policy is not in a position to offset a stricter fiscal policy." At the same time, five of the member countries are expected to remain in recession through 2010, with Greece, Hungary, Iceland, Ireland and Spain not expected to start growing again until 2011.

In economic news in the eurozone region, UK retail sales rose less than expected on a month-over-month basis in October. Sales were 0.4% higher than in September, slightly behind the 0.5% forecast, while September’s figure was actually revised up from a previously reported flat reading to a 0.4% growth. Meanwhile, retail sales were 3.4% higher on a year-over-year basis. The best performing sector was non-store retailing and repair, a category including internet sales, which was up 15.8% year-over-year. The group conducting the survey said there was some evidence that shoppers rushed to complete their online purchases, fearing a potential postal strike in the country later this year.

In Asia, Singapore announced an unfavorable revision to the nation’s 3Q GDP, which was revised from an annualized 14.9% to a 14.2% expansion, inline with economist expectations. The nation’s trade ministry also said the economy will grow between 3-5% next year, although it warned that the recovery in developed economies remains fragile and the boost from stimulus measures and inventory cycle adjustments is likely to wane in the second half of next year. Meanwhile, Singapore's central bank increased its 2010 inflation forecast to between 2.5-3.5% and said it is carefully watching property and asset prices, although it said it has seen no significant change in underlying price pressures since its last meeting in October.

In Japan, a media report speculated that the government may need to issue 52 trillion yen ($583 billion) in new bonds in the current fiscal year ending March 2010. That would be 18% higher than the government’s current forecast of 44 trillion yen. The Mainichi newspaper, without citing sources, said there was a growing likelihood that tax revenue could come in 8 trillion yen short of initial estimates, due to the weak economy. The paper said Japan’s tax revenues are expected to be around 38 trillion yen this year – less than half the level of government spending. Fitch Rating warned last week that Japan’s sovereign debt rating could be at risk of a downgrade if government finances deteriorate further. The country’s total public debt is expected to reach 200% of GDP next year, the highest in the developed world, according to the OECD.