Evening Update

Stocks Finish on a Losing Streak

Markets finished modestly lower on Friday, extending their losing streak to three as stocks gave back some gains and ended the week mixed. Technology shares came under pressure after disappointing results from Dell, while Gap and Ann Taylor added to the downbeat sentiment by warning that they expect to see heavy price discounting this holiday season. Alcoa was also under pressure after announcing it will idle its Italian operations. Other news was more positive though as J.M. Smucker and Intuit both beat analyst EPS forecasts and Proctor & Gamble issued upbeat commentary. Treasuries finished today lower as there were no major economic reports released today.

The Dow Jones Industrial Average fell 14 points (0.1%) to close at 10,318, the S&P 500 Index dropped 4 points (0.3%) to 1,091, and the Nasdaq Composite declined 11 points (0.5%) to 2,146. In light volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $0.58 lower at $77.47 per barrel, while wholesale gasoline was up $0.01 to $1.98 per gallon, and the Bloomberg gold spot price added $6.13 to $1,150.72 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.4% to 76.72. For the week, the DJIA gained 0.5%, while the S&P 500 Index lost 2.3%, and the Nasdaq Composite was down by 1.0%.

Dell Inc. (DELL $14) reported 3Q EPS ex-items of $0.23, which fell short of the $0.28 that Wall Street analysts had expected. Revenues increased 1% versus last quarter to $12.9 billion, but represented a decline of 15% versus a year ago and also came up short of the Street’s forecast, which called for the computer maker to post revenue of $13.1 billion. DELL said shipments were flat sequentially and down 5% versus the same period a year ago, though its large enterprise and small and medium business segments posted sequential improvements in shipments, revenue and operating income. The company's CEO Michael Dell said, "We are seeing improvement in overall underlying IT demand that is continuing into the fourth quarter." Looking ahead, DELL said it expects 4Q revenue to improve over 3Q and recent technology introductions, indications of improving economic activity and the prospect of a lift in associated IT spending position the company well. Shares were sharply lower.

D.R. Horton (DHI $11) reported that its net loss for 4Q narrowed from $2.53 per share last year to $0.73 per share, but larger than the $0.30 loss that analysts had expected. The company's results included charges for losses on land values and write-offs of costs from land it decided not to acquire. Homebuilding revenue totaled $1 billion, compared to the $1.1 billion that had been anticipated by analysts, but DHI's sales backlog of homes under contract increased from 5,297 to 5,628, and sales orders increased 26% to 5,008 homes. The company's cancellation rate-canceled sales orders divided by gross sales orders-was 27%. DHI's Chairman said, although sales jumped, "market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence." Shares were sharply lower.

Gap Inc.(GPS $22) reported 3Q net earnings increased 25% to $0.44 per share, above the $0.37 per share that analysts had forecasted, with revenues increasing 1% versus last year to $3.6 billion, slightly higher than the $3.5 billion that the Street expected. Same-store sales at the company were flat compared to a 12% drop that it posted last year, led by a 10% increase in its lower-priced Old Navy North American stores. Gap announced that it successfully kept a tight lid on costs and as a result, recorded its highest operating margin in a decade at 13.9% - up from 11.1% in 3Q 2008. Looking ahead to the holiday season, the company noted that it will continue to be aggressive on price in order to attract shoppers looking for bargains. "We know the customer is really looking for value," CFO Sabrina Simmons told investors. "So we're going to play hard and you'll see us really competing over Black Friday for those dollars." CEO Glenn Murphy echoed similar sentiments. "Today the customer's psyche is, 'Give me a reason. Give me a reason to drive to the mall. Give me a reason to get out of my house,' " he said. "We have to find that reason." Separately, GPS announced a new $500 million share repurchase program. GPS traded lower.

Fellow retailer Ann Taylor Stores(ANN $13) announced 3Q EPS of $0.20, well above the Street's view of $0.07. Sales during the quarter fell 12% though to $462 million, missing analysts' estimate of $474 million, as same-store sales plunged 13.7%. The company said the weak sales performance and strong margins was partially by design. "Our third-quarter strategy was focused on maximizing gross margin dollars, not comp performance, while mitigating inventory risk," the CFO said. As a result, the company's gross margin was 8.5 percentage points higher than last year at 57.3%. Looking ahead, the company was cautious on its future prospects, saying 4Q sales and earnings are likely to be slightly below those achieved in 3Q as it expects a difficult market environment with "heightened promotional activity to drive traffic and sales volume throughout the holiday season." Shares were under solid pressure.

J.M. Smucker (SJM $56) said it earned $1.22 per share in 2Q after excluding integration costs related to its acquisition of Folgers. That was well above the $1.04 that analysts had forecasted. Meanwhile, sales rose 52% to $1.28 billion, also above the $1.24 billion that had been expected. Excluding the impact of foreign exchange and Folgers, which was acquired last November from Proctor & Gamble, sales were down 6%. Nevertheless, the company said it saw volume increases across most of its business, and it will continue to invest heavily in marketing to promote its products during the holiday baking season. For the full year, SJM increased its earnings guidance to a range of $3.95-$4.05 per share, up from a previous view of $3.65-$3.80. Analysts expect $3.83. Shares were solidly higher.

Intuit Inc. (INTU $30) reported a fiscal 1Q net loss ex-items of $0.10 per share, compared to the loss of $0.16 that analysts had expected, with revenues increasing 2% to $493 million, above the $488 million that the Street had expected. The maker of business and accounting software such as TurboTax and QuickBooks said its revenue growth was led by its employee management solutions’ payroll service and its financial institutions unit. However, shares were under pressure after it issued EPS guidance for 2Q that missed analysts' expectations.

Dow member Procter & Gamble's (PG $62) Chief Financial Officer noted he sees foreign exchange turning into a modest tailwind in the second-half of the fiscal year, and that he sees market growth of 1-2% in value, which is higher than his prior estimate. However, he did warn that uncertainty remains regarding market growth. The executive also said that acquisitions are not a core aspect of the company's growth strategy and it does not pursue hostile acquisitions, in response to some "continuous speculation" about the company making acquisitions. PG's CFO also said the company is targeting a "meaningful" level of share buybacks, but that level is likely to be below the $8 billion annual threshold set before the global market meltdown. Shares were lower.

Fellow Dow component Alcoa(AA $13) was under pressure after the aluminum producer announced that it will temporarily idle production at its two smelters in Italy. AA said the announcement is a result of uncertainty in obtaining future power supply for the smelters at competitive rates and the financial impact of today's European Commission decision that Italy's extension of its electricity tariff after 2005 did not comply with state aid rules and that a portion of the benefit received by AA must be refunded. AA said it is appealing the decision.

Treasuries move lower as economic calendar is dormant

Treasuries finished lower, giving back some of Thursday's gains as there were no major economic reports on Friday's economic calendar. The yield on the 2-year was up 1 bp to 0.72%, the yield on the 10-year note inched 2 bps higher to 3.36%, and the yield on the 30-year bond rose 1 bp to 4.29%.

Monetary policy in focus across the globe

In economic news in Asia, the Bank of Japan left its key interest rate unchanged at 0.1%, saying, "Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although the momentum of a self-sustaining recovery in domestic private demand remains weak."

In other Asian economic news, a Chinese central bank official said at the BusinessWeek CEO Forum in China that the nation must remain vigilant against excessive production capacity after its $586 billion economic stimulus plan helped spur urban investment, per Bloomberg news.

Meanwhile, European stocks erased an early advance to finish lower following comments from European Central Bank President Jean-Claude Trichet regarding reining in stimulus measures to stave off a flare up in inflation. The ECB chief said, "Not all our liquidity measures will be needed to the same extent as in the past," and he added that "Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally."

In other eurozone economic news, Germany reported that producer prices came in unchanged month-over-month in October, but the year-over-year decline of 7.6% for prices at the wholesale level came in slightly larger than the -7.5% that economists had expected.

Stocks come in like a lion, out like a lamb

Stocks started out the week with a bang as the Dow soared over 100 points higher on Monday in a continuation of the strong rally from the prior two weeks. Stocks ran out of steam mid-week though, and ended on a three day skid. The Dow was still slightly higher for the week as a whole, although the S&P 500 and Nasdaq each suffered modest declines. Much of the weakness appeared to stem from profit taking as some of the best performing sectors in the recent rally - such as technology and materials - endured the heaviest selling pressure.

Equity news during the week was heavy on retailer earnings, with the home improvement duo of Lowe's Companies (LOW $21) and Home Depot (HD $27) both beating forecasts and pointing out some signs of improvement in the housing sector. The general theme among other retailers was one of better-than-expected 3Q earnings, but with lingering hesitancy as to the important upcoming holiday shopping season. Target (TGT $47) and Saks Inc. (SKS $7) were typical of this trend, using terms such as "fragile," "cautious," and "highly promotional" in describing their expectations for the holiday quarter.

In economic data released during the week, retail sales showed a small increase ex-autos for the second consecutive month, giving investors some hope that consumers are starting to spend again. Elsewhere, more weak housing data was released as housing starts and building permits both unexpectedly fell in October, showing that homebuilders held off on construction while the government debated extending its tax credits for first-time homebuyers, which were eventually extended and even expanded in early November. Meanwhile, traders got an abundance of Fed speak during the week, with many central bankers delivering speeches which Fed watchers analyzed for potential clues into future monetary policy. Chairman Ben Bernanke's speech drew the most attention, as he affirmed his belief that the tentative economic recovery will prove enduring, and that inflation will remain in check. In a somewhat surprising development, Bernanke also commented on the dollar's recent weakness, which he attributed merely to a resumption of risk-taking by global investors, rather than a reflection of fundamental problems in the US currency.

Heavy helping of economic data in Thanksgiving shortened week

The week starts off with the report on existing-home sales, expected to have increased 2.3% month-over-month (m/m) to an annual rate of 5.70 million units in October after surging 9.4% to 5.57 million units in September. New home sales will be reported on Wednesday, forecasted to increase 0.8% m/m in October to an annual rate of 405,000 units.

While new home sales are a small percentage of the total market, they are viewed as a timelier indicator of sales, as they are based on signings, while existing home sales reflect contracts signed one to two months earlier. A rush by buyers to enter contracts and close before the looming November 30 expiration of the $8,000 tax credit drove some distortions in this data. Before the extension of the credit, homebuilder activity began to slow when it became too late to start and complete construction in time to qualify for the credit. It is unclear how the housing market will fare over the next few months, as earlier sales may have borrowed from the future, negative seasonality effects kick in, and the impact rising delinquencies and foreclosures have on inventory.

The S&P/Case-Shiller Home Price Index will be reported on Tuesday, expected to show a continued improvement in the pace of price declines to -9.2% year-over-year (y/y) in September, after falling 11.3% in August. This series lags the existing home and new home sales data by a month and is a three month average of prices in 20 cities.

Durable goods orders will be reported on Wednesday, expected to rise 0.5% m/m in October, after increasing a revised 1.4% in September, while ex-transportation, orders are forecasted to have grown 0.7% m/m, after an upwardly adjusted 1.2% advance in September.

The second reading on 3Q Gross Domestic Product (GDP) will be out on Tuesday, expected to be revised down to 2.9% versus the initially reported 3.5% increase. The first reading on GDP makes estimates for some data that is released after the initial report. A surge in imports, which outpaced the gain in exports in September due to rising gasoline prices, will subtract from growth and account for some of the downward revision and personal consumption is expected to be adjusted down to 3.2% from the initial 3.4% advance reported. The GDP Price Index is expected to have advanced 0.8%, with the core PCE Index, which excludes food and energy, increasing 1.4%. The strong reading for the quarter has been dismissed as being driven by stimulus measures, but economic activity expanded excluding the stimulus, with auto sales contributing 1.6%, residential construction adding 0.5%, and government excluding defense spending being nearly neutral to growth.

The minutes from the September Federal Open Market Committee (FOMC) meeting will be released mid-day Wednesday. At the November meeting the Fed decreased the smallest asset purchase program, for agency debt, to $175 billion from $200 billion due to the limited size of the market. The Fed explicitly outlined three conditions 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.

Other reports on next week's economic calendar include the Conference Board's Consumer Confidence Index, the Richmond Fed Manufacturing Index, MBA Mortgage Applications, initial jobless claims, personal income and spending, and University of Michigan consumer sentiment.