Evening Update

Modest Moves as Traders Await Friday’s Jobs Report

Stocks ended mixed, with the Dow modestly lower, the Nasdaq higher and the S&P 500 flat on the day, as traders digested a private sector employment report that showed a smaller-than-expected improvement, mortgage applications rose and the Fed indicated that economic conditions are generally improving. Trading was tepid ahead of Friday’s Labor Department read on the state of the job market, as investors lacked conviction about the next move for the market. Energy shares led to the downside after an industry report showed a larger-than-expected increase in inventories, while online retailers were boosted by a report that the holiday season was off to a strong start. In equity news, General Motors announced that CEO Fritz Henderson left the company, Walgreen reported disappointing November sales, Jos. A. Bank Clothiers reported an earnings beat, Nokia said it expects flat market share next year and Delta Air Lines and Continental Airlines both reported increases in operating metrics. Treasuries were mixed, with the yield curve flattening.

The Dow Jones Industrial Average lost 19 points (0.2%) to close at 10,453, while the S&P 500 Index was flat at 1,109, and the Nasdaq Composite increased 9 points (0.4%) to 2,185. In relatively light volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $1.77 to $76.60 per barrel, wholesale gasoline lost $0.04 to $2.00 per gallon, while the Bloomberg gold spot price increased $19.10 to $1,215.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.4% to 74.63.

Former Dow member and largest US automaker General Motors announced that it has fired CEO Fritz Henderson, as a spokesperson from the company, which recently emerged from bankruptcy, said, “The board decided—and Fritz agreed—that given where we are, it was time to make some changes.” Chairman Ed Whitacre will become interim CEO as the company searches for a replacement. Henderson, who had been with GM for 25 years, took over as CEO in March after the government forced out former CEO Rick Wagoner.

Walgreen Co. (WAG $38) was under pressure after reporting that November same-store sales—sales at stores open at least a year—increased 3.9%, short of the 6.1% gain that analysts had expected according to Reuters. Same-store sales in its pharmacy segment gained less than expected at 5.7%, hampered by generic drug introductions in the last 12 months. Meanwhile, front-end same-store sales—sales outside the pharmacy including general merchandise—gained 0.8%, missing the 3.8% increase that had been expected. WAG said its front-end sales were negatively impacted by the Thanksgiving weekend being “notably softer,” while it saw slower demand for cough, cold and flu products and continued weakness in demand for discretionary goods.

Online data measurement provider comScore (SCOR $16) said that sales online were up 11% year-over-year on Black Friday, 5% on Cyber Monday, and 3% for the month of November. The figures were driven by a 6% increase in the number of buyers, while the average spent per buyer fell 1%, and demonstrate that while online retailers continue to gain market share, consumer spending continues to be constrained. Shares of SCOR were lower, but shares of leading online retailer Amazon.com (AMZN $142) were higher.

Meanwhile, Dow component McDonald’s Corp. (MCD $63) also announced that a key executive is leaving the firm, as the world’s largest fast-food chain reported that its President and Chief Operating Officer Ralph Alvarez has decided to retire due to health reasons. Shares are modestly lower.

Delta Air Lines (DAL $9) was higher after the company’s CFO said at an investor conference that he is seeing sequential monthly revenue improvement. He added that if there is a modest recovery next year, DAL would expect revenue per passenger per mile to turn positive around the middle of 2010. Elsewhere, Continental Airlines (CAL $16) also gained ground after the air carrier reported a consolidated traffic increase of 2.9% versus last year for the month of November. CAL said the improvement came as it reduced its overall capacity – down 1.2% - but its planes carried more passengers, with its load factor – measuring how many seats were full – increasing 3.2 points to 80.5%. At the same time, passengers spent less on average per ticket, as Continental said its revenue per available seat mile fell an estimated 7-9%, an improvement from the 15.2% decline in October.

Men’s retailer Jos. A. Bank Clothiers (JOSB $44) rose after it reported 3Q EPS of $0.63, 26% higher year-over-year and beating the $0.55 estimate from analysts. Sales were 8% higher at $161 million, also topping the $160 million expectation on Wall Street. Same-store sales rose 3%. The company noted that it was the 14th-consecutive quarter – and the 32nd quarter out of the past 33 – that earnings have risen from prior-year levels. "Despite the continued pressure we are facing from the difficult national economy, our business model is performing very well," the CEO said.

Cell phone maker Nokia Corp. (NOK $13) said it expects volumes in the mobile phone industry to increase 10% in 2010 and maintain its market share. While highlighting improvements in its Symbian user interface, Nokia’s CEO added “We have measures in place to push smart phones down to new price points globally, while growing margins.” According to research firm Gartner, Nokia’s share of the smart-phone market, the fastest-growing portion of the industry, slipped to 39.3% in 3Q from 42.3% last year, while Apple (AAPL $196) and BlackBerry-maker Research In Motion (RIMM $60), both gained. Nokia had to lower its guidance for its devices and services division twice in the past year as it lost buyers to the iPhone. Shares of NOK and AAPL were under pressure, while RIMM was higher.

Private sector jobs fall, Beige Book shows continued improvement

Treasuries were mixed on the day while the yield curve flattened. The yield on the 2-year note rose 4 bps to 0.71%, the yield on the 10-year note gained 3 bps to 3.31%, while the yield on the 30-year bond fell 2 bps to 4.25%.

ADP reported that private sector jobs fell 169,000 in November, more than the Bloomberg estimate of a loss of 150,000 jobs, but October’s 203,000 decline was favorably revised to a 195,000 decrease. The ADP report is the first read on employment conditions this week, which will culminate with the labor report from the Bureau of Labor Statistics, which is scheduled for release on Friday and expected to show 123,000 jobs were shed from nonfarm payrolls in November, and the unemployment rate to remain at 10.2%. However, the ADP report has not been a reliable gauge of the labor report, although adjustments have been made recently.

The Federal Reserve Beige Book was released today, showing that economic conditions have generally improved modestly since the last report in October. Eight of the twelve Districts indicated some pickup in activity, while only four—Philadelphia, Cleveland, Richmond, and Atlanta—reported that conditions were little changed and/or mixed. Investors should keep in mind that the Beige Book is not a formal survey or index like most other economic reports, but rather it is a compilation of anecdotal pieces of information gathered from the Fed’s various contacts in local businesses.

In terms of bright spots, residential real estate conditions were said to be somewhat improved from their very low levels, led by the lower end of the market. Manufacturing conditions were also said to be “steady to moderately improving across most of the country,” with similar comments given about the state of consumer spending. Once again, few signs of inflation were seen across the economy. “While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods,” the report showed.

On the negative end of the spectrum, commercial real estate markets and construction activity were again depicted as “very weak and, in many cases, deteriorating.” Low loan demand and tight credit conditions were also singled out as weak spots, while job market conditions in general were characterized as “weak” although some signs of stabilization were noted. The report will be used by the Federal Open Market Committee (FOMC) in its next meeting in two weeks to gauge whether any changes in monetary policy are necessary.

US economic release on the service sector and health of employment on tap

The ISM Non-Manufacturing Index will be released tomorrow, and is forecasted to have increased to 51.5 in November after falling to 50.6 in October from September’s level of 50.9. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Tuesday and fell more than expected, to 53.6 in November after jumping to 55.7 in October from September’s level of 52.6. The separation point between contraction and expansion is a reading of 50, so while the reported levels of both indices are moving in an uneven monthly trend, they continue to indicate economic expansion. Additionally, components of the ISM Manufacturing Index exhibited the building blocks for continued expansion, as new orders rose to 60.3 in November and inventories fell to 41.3, signaling the potential for further increases in production.

Other releases on tomorrow’s economic calendar include the final reading on 3Q nonfarm productivity, expected to be revised to an 8.5% increase from the originally reported 9.5% rise, and weekly initial jobless claims, expected to rise to 480,000 after falling more than expected the prior week to 466,000.

International divergence, stimulus ending in Vietnam but expansion mulled in Japan

The eurozone Producer Price Index rose 0.2% month-over-month in October, compared to the expectation of economists for producer prices to be flat for the month. Year-over-year, the eurozone PPI is down 6.7%, versus forecasts of a 6.8% decline in the index. The European Central Bank (ECB) meets tomorrow to discuss monetary policy, and while no changes are expected to interest rates, the council will be discussing plans for the next one-year repo operation, planned for December 15. The ECB announces decisions upon the end of the meeting, but traders will be paying attention to the post-meeting conference call later in the day from ECB President Trichet.

Elsewhere in Asia, the yen gained strength, buoying shares of Japanese companies that remain heavily dependent on exports, after the Nikkei newspaper cited the Japanese Prime Minister as saying the strength in the yen can’t be left as it is, ramping up some speculation that the government may be mulling an intervention to stem the upward momentum of the Japanese currency which has hampered exports. The day’s action followed news that the Bank of Japan held an emergency monetary policy meeting the day before, where it announced after the close in trading on Monday that it will offer 10 trillion yen ($115 billion) in short term loans to help the economic recovery and comes amid reports that the government may be moving closer to extending fiscal stimulus plans.

Vietnam decided to end a stimulus program that provided subsidized loans after bank credit growth reached 36% in the first 11 months of the year. The move follows last week’s announcement of a 5% devaluation of its tightly controlled currency and a 1% increase in its key interest rate from 7% to 8%, as the government is seeking to ease speculative pressures and stave off inflation.