Evening Update

Turkey Dreams Lull Traders in Drowsy Session

Shares were modestly higher amid light volume despite a day stuffed with economic and earnings data, as traders viewed the day as an extension of the Thanksgiving holiday that begins with market closures tomorrow and a shortened session on Friday. Traders feasted on positive indicators for improvement in the consumer sector, with weekly jobless claims falling below the 500,000 mark, new home sales rising more than expected, an increase in personal spending and consumer sentiment, as well as better-than-forecasted earnings reports from Tiffany & Co. and J Crew Group. The materials sector was the standout on the day as the US dollar continued to fall, lifting commodity prices, with gold hitting a new record intraday. Elsewhere, Deere & Co beat profit estimates, Toyota Motor announced another recall and Halliburton cut its 4Q earnings after Mexican state-owned Pemex cut its capital spending. In other economic news, durable goods orders and mortgage applications fell. Treasuries were mixed, with the yield curve flattening.

The Dow Jones Industrial Average rose 31 points (0.3%) to close at 10,464, the S&P 500 Index advanced 5 points (0.5%) to 1,111, and the Nasdaq Composite increased 7 points (0.3%) to 2,176. In light volume, 795 million shares were traded on the NYSE and 1.4 billion shares were traded on the Nasdaq. Crude oil was $1.96 higher at $77.96 per barrel, wholesale gasoline rose $0.06 to $2.00 per gallon, and the Bloomberg gold spot price increased $21.20 to $1,188.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 1.1% to 74.24.

Deere & Co. (DE $54) reported fiscal 4Q EPS ex-items of $0.23, easily topping the $0.03 that Wall Street analysts had expected. DE reported worldwide net revenues declined 28% to $5.3 billion, and net sales of equipment operations of $4.7 billion, also exceeding the $4.4 billion Street estimate. DE is forecasting 2010 equipment sales to be 1% lower than the $20.75 billion reported in 2009 and earnings of $900 million, lower than the consensus estimate of $20.25 billion in sales and $1.12 billion profit. Some of the disparity in next year’s profit estimates are related to pension expense. By division, DE is expecting that an increase in South American agriculture sales will be offset by declines in other geographies for a decrease of 2% in total, while construction and forestry will rise 18% due to prior aggressive inventory reductions, a rebound in housing starts and higher demand for pulp and paper globally. Shares were higher, erasing an early loss.

Tiffany & Co. (TIF $44) was nicely higher after reporting 3Q EPS of $0.34, ten cents above the estimate of Wall Street analysts, with revenues falling 3% to $598 million, also topping the Street’s $575 million estimate. The upscale jeweler said that the rate of sales declines in the US lessened as the quarter progressed and many countries in Asia/Pacific and Europe achieved considerably better-than-expected sales. TIF said it expects 4Q worldwide sales to increase by a mid-single-digit percentage, and it raised its full-year guidance.

J Crew Group (JCG $44) also gained solid ground after the specialty retailer reported 3Q EPS of $0.67, compared to the Street’s forecast of $0.58, with revenues increasing 14% year-over-year (y/y) to $414 million, versus $408 million that analysts had expected, and comparable store sales up 8% y/y. JCG issued 4Q EPS guidance that was inline with analysts’ forecasts. Analysts are crediting the combination of better inventory control and a compelling product selection for the ability to charge full-price, contributing to better gross margins.

Toyota Motor (TM $77) was higher despite announcing that it will reconfigure the accelerator pedal in certain vehicles, which have been suspected in some deadly automobile accidents involving sudden acceleration, as part of the company’s largest-ever recall involving approximately 4 million Toyota and Lexus vehicles. This is the second recall in two days for the company, as it said yesterday it would recall over 100,000 older model Tundra pickup trucks due to corrosion problems.

Halliburton (HAL $30) was lower after announcing that Mexico’s state-owned Pemex decided to “significantly reduce activity due to low natural gas prices and other constraints,” confirming earlier suspicions of possible budget constraints on capital spending that have impacted the stock prices of oil service companies in recent weeks. Halliburton said the impact of the activity reduction will cut 4Q EPS by $0.02, versus the Street’s estimate of $0.28 per share.

Jobless claims fall below the 500,000 mark to highlight heavy economic docket

Weekly initial jobless claims (chart) fell by 35,000 claims to 466,000, versus last week's figure that was downwardly revised by 4,000 to 501,000. The number was lower than the Bloomberg consensus, which called for claims to come in at 500,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 16,500 to 496,500. Continuing claims also dropped, falling sharply by 190,000 to 5,423,000, versus the forecast of 5,565,000, and exclude those who are receiving extended benefits. Claims data can be volatile toward the end of the year as the government adjusts the data to smooth out seasonal fluctuations.

Elsewhere, durable goods orders (chart) fell by 0.6% month-over-month (m/m) in October, versus the 0.5% rise that had been forecast, and September’s 1.0% increase in orders was revised to a 2.0% gain. Ex-transportation, orders were down 1.3%, compared to the 0.7% growth forecast, and September’s figure was upwardly revised from a 0.9% increase to a 1.8% advance. Monthly orders data of goods intended to last at least three years can be very volatile. Excluding transportation and defense, orders grew 0.4%, after rising 1.8% in September. However, nondefense capital goods ex-aircraft, considered a good proxy for business spending, dropped 2.9% after rising 2.0% in September.

The housing sector remained in focus this week as new home sales (chart) rose a better-than-expected 6.2% m/m in October to an annual rate of 430,000 units, versus the 0.4% gain to 404,000 units forecasted. The rise comes on the heels of a 2.4% decline in September, revised positively from the initially reported 3.6% decrease. The median price of a new home fell 0.5% year-over-year (y/y) to $212,200, while rising 6.2% m/m. Inventory of new homes for sale continued to fall in October, to 212,200 units, representing 6.7 months of supply at the current sales rate. New home sales have averaged only 7% of the total market in 2009, but are viewed as a timely indicator of sales, as they are based on signings, while existing home sales are tallied from closings, and reflect contracts signed one to two months earlier.

Consumer outlays seemed to improve with personal income moving 0.2% higher in October, above the Bloomberg estimate of 0.1%, and September was revised from a flat reading to a 0.2% gain. Additionally, personal spending increased 0.7% in October, topping the 0.5% Bloomberg expectation, while September’s 0.5% decline was unfavorably revised to a 0.6% drop. The savings rate dipped from an upwardly revised 4.6% in September to 4.4% in October.

Also, the PCE Price Index, which is released with the income and spending data, rose 0.2% year-over-year in October, above the consensus forecast of 0.1%, and September’s decline was downwardly revised to -0.6%. The core PCE Price Index, which excludes food and energy, rose 0.2%, compared to expectations of 0.1%. Year-over-year, core prices moved 1.4% higher, inline with the consensus of economists surveyed by Bloomberg.

Meanwhile, the final revision to the University of Michigan Consumer Sentiment Index (chart) showed a larger-than-expected upward adjustment from 66.0 in the preliminary report to 67.4 in November, but declined from the 70.6 reading in October. Economists expected the index to be revised higher to 67.0. The favorable revision was attributed to an increase in the expectations component from 63.7 in the initial report to 66.5.

In other economic news to round out the busy day, the US MBA Mortgage Application Index fell 4.5% last week, after the index was favorably revised from a 2.5% decline to a 0.3% advance in the previous week.

Treasuries were mixed despite gains in equities, as the mid- and long-end of the yield curve flattened after today’s $32 billion auction drew higher-than-expected demand, to cap off the week’s record $118 billion in sales. The yield on the 2-year was up 1 bp to 0.73%, while the yield on the 10-year note fell 4 bps to 3.26% and the yield on the 30-year bond declined 2 bps to 4.23%.

All US markets will be closed tomorrow for Thanksgiving and will have shortened sessions on Friday. There are no major US economic releases scheduled for the remainder of the week.

International economic data higher and Vietnam becomes the latest to raise rates

The British government favorably revised its 3Q GDP figure from a 0.4% quarter-over-quarter decline to a 0.3% contraction, as consumer spending stopped falling for the first time in 1 ½ years and the decline in the service industry was smaller than previously reported. The UK economy has lagged that of the US and the euro area, and Prime Minster Gordon Brown earlier this week called for stimulus to remain to avoid “choking off recovery.” The UK central bank, the Bank of England, has expanded its bond purchase plan three times since March in an attempt to stave off further contraction in economic activity.

In other economic news, Bloomberg reported that European Central Bank officials are debating whether to put an adjustable interest rate on 12-month loans, which risks being interpreted as a signal they will tighten monetary policy in 2010, according to people familiar with the matter. The ECB declined to comment on the matter. The ECB has offered banks unlimited funds for 12 months in hopes to spur lending.

In the Asia/Pacific region, Japanese exports fell at the slowest pace in a year, after falling 23.2% in October, following a 30.6% decline in September, and smaller than the 26.8% drop that economists surveyed by Bloomberg had expected. Elsewhere, Vietnam became the latest nation to raise rates, citing the risk of inflation heating up, boosted by credit growth of 33% in the first ten months of 2009.

Lastly, China’s leaders may hold their annual central economic work conference by the end of November, where they will set economic priorities for 2010, according to the state-run China Securities Journal and the Hong Kong Economic Times. The government did not comment on the report.