Evening Update

Stocks Finish Slightly Lower as GDP is Revised Down

Stocks traded modestly lower amid a particularly heavy day for the economic calendar. Trading volume was light again though, which may have exaggerated price moves. The nation’s 3Q GDP growth was revised down from 3.5% to 2.8%, reflecting a smaller gain in consumer spending and a bigger trade deficit. Additionally, the FOMC meeting minutes were released, giving investors a better idea of what the Fed is looking at as it sets monetary policy. Rounding out the economic data, the S&P/Case-Shiller Home Price Index showed further moderations of the declining home price trend, and consumer confidence unexpectedly increased. Treasuries finished higher following the reports. In equity news, Hewlett-Packard, HJ Heinz, Analog Devices, and Brocade Communications all reported stronger-than-anticipated earnings, while Barnes & Noble matched expectations and said it is ramping up production of its e-reader to meet strong demand. Elsewhere, Qualcomm said the European Commission is closing its antitrust investigation with no fine, two more newspapers said they may block their articles from Google’s search engine, and General Motors said its deal to sell the Saab brand fell through.

The Dow Jones Industrial Average fell 17 points (0.2%) to close at 10,434, the S&P 500 Index dropped 1 point (0.1%) to 1,106, and the Nasdaq Composite declined 7 points (0.3%) to 2,169. In light volume, 949 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $1.54 lower at $76.02 per barrel, while wholesale gasoline was down $0.04 at $1.96 per gallon, and the Bloomberg gold spot price rose $3.53 to $1,169.63 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 75.12.

Dow member Hewlett-Packard (HPQ $50) reported fiscal 4Q EPS ex-items of $1.14, one penny ahead of the expectations of Wall Street analysts, with revenues falling 8% versus last year to $30.8 billion, but up 12% compared to last quarter and just above the $30.4 billion Street forecast. HPQ’s performance matched the company’s preliminary report that was released two weeks ago. The company’s CEO said on a conference call with analysts that the economy remains challenging but it does see encouraging signs of recovery in certain markets. He also cautioned that Europe remains weak, albeit stable, and it was not clear when a recovery will take hold in the region. HPQ reaffirmed its 1Q outlook and raised its full-year 2010 guidance. Shares were under pressure.

HJ Heinz (HNZ $44) reported 2Q EPS ex-items of $0.76, six cents above the Street’s forecast, as revenues grew 2.5% versus last year to $2.7 billion, slightly above the $2.6 billion that analysts had expected. The condiment company said its revenue growth was led by double-digit organic growth in emerging markets, and it had its 18th consecutive quarter of overall organic sales growth—sales that result from core business activities, instead of through mergers and acquisitions. HNZ raised its full-year EPS outlook and shares were higher.

Qualcomm (QCOM $46) was higher after the European Commission closed a four-year antitrust investigation into the wireless chipset maker, with no fine or ruling, helped by Ericsson (ERIC $10) withdrawing a complaint regarding QCOM’s licensing practices.

Analog Devices (ADI $30) reported fiscal 4Q EPS ex-items of $0.36, ten cents above the Street’s forecast, and even as revenues fell 13% compared to last year, they increased 16% from 3Q to $572 million, topping analysts’ $524 million forecast. The chip maker said the quarter was strong across all dimensions of the company, driven by continued momentum in automotive and consumer sales as well as a solid increase in revenue from its broad base of industrial customers. ADI issued 1Q EPS guidance that easily exceeded analysts’ forecasts and shares were up solidly.

Brocade Communications (BRCD $7) reported fiscal 4Q EPS ex-items of $0.15, two pennies above the Street’s forecast, with revenues increasing sequentially and versus last year by 6% and 31%, respectively, to $522 million, roughly inline with the Street’s estimate. The network solutions provider said along with its strong year-over-year revenue growth, it increased its account penetration in the Ethernet networking market while growing market share in the storage networking market. However, shares were under solid pressure after the company’s CEO denied rumors that BRCD has put itself on the block and Hewlett-Packard was a possible buyer.

General Motors announced that its deal to sell its Saab unit has fallen through. Swedish manufacturer Koenigsegg is reportedly no longer interested in buying the division. “Time always played a critical factor in our strategy for reviving the company,” the Swedish manufacturer said in a statement. “Unfortunately, delays in closing this acquisition have resulted in risks and uncertainties that prevent us from successfully implementing the new Saab business plan.” As for GM, CEO Fritz Henderson said "We're obviously very disappointed with the decision to pull out of the Saab purchase." GM said that it has not yet decided what it plans to do with the brand now, although an unnamed source reported that the company is leaning toward scrapping the brand altogether. GM chose to scrap its Saturn brand after the sale to Penske Automotive Group (PAG $15) fell through in September.

Barnes & Noble (BKS $22) was down solidly after its 2Q operating loss widened to $0.30 per share, matching analyst estimates. Revenue was 4% higher at $1.2 billion, while same-store sales at the company’s namesake stores dropped 3.2% and same-store sales at the company’s college book stores fell 0.2%. BKS also lowered its full-year guidance, now expecting to earn between $0.33-$0.63 per share, much lower than the analyst prediction of $0.99. The explanation for the lower earnings is higher production costs, as BKS said it plans to accelerate production of its recently launched e-reader Nook due to strong demand. Barnes & Noble launched the e-reader, a competitor with Amazon.com's (AMZN $133) Kindle, last month and said the device would begin to ship in late November. Last week, it said the device had already sold out and orders placed beginning November 20 will not be filled until January.

Two more newspaper groups said they are considering blocking their articles from appearing in Google’s (GOOG $581) search engine, following a story yesterday that Microsoft (MSFT $30) may pay News Corp. (NWS $14) to post its content on MSFT’s Bing search engine instead. MediaNews Group, publisher of the Denver Post, said it plans to start charging customers for online content next year and once that happens, it will likely block that content from Google. “The things that go behind pay walls, we will not let Google search to, but the things that are outside the pay wall we probably will, because we want the traffic,” the company said. The owner of the Dallas Morning News said it was mulling similar plans, although the company stressed that no change is imminent and that the company is considering different strategies to monetize internet traffic to its website. “This is traffic that’s not being monetized to any great degree,” the company said. “It’s akin to a person who drops into town, buys one copy of your newspaper and leaves town again and yet you spend a whole bunch of time building your business around that type of customer.” Google said that fewer than 1% of publishers have opted out of the service. “There’s value in that traffic and I think publishers recognize that value,” a Google representative said. “The reason they’re not opting out is they’re getting something from that relationship.” GOOG was almost unchanged in today’s session.

3Q GDP revision matches expectations, home prices fall, and consumer confidence jumps

The S&P/Case-Shiller Home Price Index this morning showed that the pace of home price declines continued to moderate in September, although somewhat less than expected. Following a slightly revised 11.3% year-over-year (y/y) drop in August, the data for September showed a 9.4% y/y fall, below the average economist prediction of a 9.1% y/y drop. On a month-over-month (m/m) basis, homes in September were 0.3% higher than August, which marked a slowdown from the 1.1% m/m gain in August. “We have seen broad improvement in home prices for most of the past six months,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “However, the gains in the most recent month are more modest than during the seasonally strong summer months. Fewer cities saw month to month improvements in September than in August in both seasonally adjusted and unadjusted figures.” The report also showed that average home prices across the US are now at similar levels to what they were in autumn 2003. On a geographic basis, San Francisco was the strongest market, notching a 1.7% seasonally-adjusted m/m increase, while Las Vegas was again at the bottom of the list, dropping a further 1.2% m/m in September.

Elsewhere, a revised reading on the nation’s economic output was released, and Gross Domestic Product in 3Q now shows a 2.8% annualized growth, which was inline with expectations and somewhat lower than the 3.5% growth that was reported last month in the initial reading. A third and final 3Q GDP revision will be released in December. At the same time, personal consumption was revised lower than expected, from 3.4% to 2.9%, missing the 3.2% forecast. Meanwhile, the GDP Price Index came in at 0.5%, showing even less inflation than the 0.8% expected figure, and the core PCE Index was adjusted from 1.4% to 1.3%, matching expectations.

Meanwhile, the minutes from the November 4 Federal Open Market Committee (FOMC) meeting were released midday, where 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 (a combination of factory utilization and the unemployment rate), subdued inflation trends and stable inflation expectations.

The Fed issued an updated outlook, with nearly all participants now judging the risks to their forecasts as being balanced, but noted that they were subject to unusually high degree of uncertainty. The forecast for real GDP growth in 2009 and 2010 was revised upward and the unemployment rate estimate was lowered, however the estimates for GDP growth in 2011 were decreased. Core personal consumption expenditure (PCE) inflation, the Fed’s preferred measure of pricing, is forecasted to be 1.0-1.5% in 2010 and 1.0-1.6% in 2011.

The Fed believes that one of its policy tools is communication, which has the ability to influence inflation expectations, and the Fed noted at the meeting that it was important for policy to be responsive to changes in the economic outlook and for the Fed to clearly communicate its ability and intent to begin withdrawing accommodation at the appropriate time and pace. While risks to inflation forecasts were believed to be balanced, some members saw downside near-term, while others felt risks were to the upside longer-term.

Participants noted that the recent fall in the US dollar had been orderly and appeared to reflect an unwinding of safe-haven demand, but that any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching. Members noted that the maintenance of very low short-term interest rates for an extended period could fuel “excessive risk-taking in financial markets or an unanchoring of inflation expectations.” While members currently saw the likelihood of such effects as relatively low, they said they would remain alert to these risks.

While market participants are concerned about potential asset bubbles, the market tends to have some indigestion as rates are set to rise, and the “extended period” language could keep the market trend higher, while the pace is likely to be more muted. Global savings rates have ticked up, exemplified by Trim Tabs reporting inflows into fixed income mutual funds of over $300 billion in 2009, versus $13 billion out of domestic equity mutual funds and $18 billion into international equity mutual funds. Liz Ann concludes that the Fed would be more willing to pull the trigger if we saw an acceleration in private sector demand for debt and details the effects of normalizing rates, including stabilizing the US dollar.

In other economic news, the Conference Board released its consumer confidence report, which unexpectedly increased to 49.5 in November, above the upwardly revised 48.7 level seen in October and the consensus estimate that predicted a reading of 47.3. The upbeat report was a result of improving survey respondents’ depiction of both the present situation and expectations for six months. The percentage of respondents saying business conditions were “good” increased from 7.8% to 8.1%. Looking ahead, the percentage of people who said they expect the employment arena to show “fewer jobs” in six months fell from 26.1% to 23.1%, with business conditions expected to be “worse” declining from 18.2% to 15.1%.

Treasuries finished higher following the aforementioned reports. The yield on the 2-year fell 5 bps to 0.73%, while the yield on the 10-year note dropped 4 bps to 3.31% and the yield on the 30-year bond dipped 2 bps to 4.26%.

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 0.6% m/m, after an upwardly adjusted 1.2% advance in September. New home sales will also be reported, forecasted to increase 0.4% m/m in October to an annual rate of 404,000 units. Other reports on the economic agenda include personal income and spending, initial jobless claims, and University of Michigan consumer sentiment.

German business confidence rises, Russia cuts rates, Japanese government asks BOJ to attack deflation

The German Ifo Business Climate Index rose from an upwardly revised 92.0 in October to 93.9 in November, besting the 92.5 forecast of economists and reaching a level not seen since August 2008. It marked the eighth consecutive rise in the index of German business morale.

Elsewhere, Russia’s central bank cut its key interest rate for the ninth time since April from 9.5% to 9.0%, to try to spur lending. Interest rates are now at a record low in Russia, as it is the only member of the four so-called BRIC nations still cutting rates. China last reduced its lending rate in December, India lowered its reverse repo and repo rates for the last time in April, and Brazil hasn’t cut its overnight rate since July. “The lending activity of Russian banks is still at a low level, and domestic demand remains insufficient to assure stable growth in output, which determined the necessity of lowering the level of interest rates,” the Russian central bank said.

In Asian news, Japanese government officials increased their pressure on the Bank of Japan to respond to deflation in the country. "Monetary policy is principally responsible for price trends," Finance Minister Hirohisa Fujii said. "Fiscal policy cannot be the main tool to make up for Japan's lack of demand." Japan’s banking minister also added to the chorus of calls for action from the central bank. "The BOJ is asleep at the wheel as usual," he told reporters. The Japanese government recently published a report pronouncing the economy officially in deflation for the first time since 2006. Meanwhile, central bank Governor Masaaki Shirakawa said last week that "The cause of sustained price falls is a lack of demand," and "when demand itself is weak, prices won't rise just through liquidity provision."