Evening Update

Stocks Dip Ahead of Labor Report

Stocks finished lower despite a surprising fall in jobless claims, as an unexpected decline in the service sector served to dampen sentiment somewhat. Perhaps the biggest economic report of the week is still yet to come, however, as the labor report will be announced tomorrow morning. Today’s equity news flow was heavier than normal to give traders many reports to consider. GE and Comcast announced a tie-up bringing together content and distribution as the two will share ownership of NBC Universal in one of the biggest media deals since the merger between AOL and Time Warner. Elsewhere, Bank of America announced that it will repay the entire $45 billion it received under Treasury’s TARP program and many retailers reported same-store sales data for the month of November, with generally weak results. Treasuries were lower following the flood of reports.

The Dow Jones Industrial Average lost 87 points (0.8%) to close at 10,366, while the S&P 500 Index was off 9 points (0.8%) to 1,100, and the Nasdaq Composite decreased 12 points (0.5%) to 2,173. In relatively light volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $0.14 to $76.46 per barrel, wholesale gasoline was unchanged at $1.99 per gallon, while the Bloomberg gold spot price decreased $5.00 to $1,210.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 74.68.

Dow member Bank of America(BAC $16 ¹) was higher after the firm announced that it will repay US taxpayers the entire $45 billion investment under the government’s Troubled Asset Relief Program (TARP). The repayment will be made after the company completes an offering of $18.8 billion in “common equivalent securities,” using the proceeds together with $26.2 billion in excess liquidity to pay the TARP balance in full. This move will also free Bank of America from the government’s salary restrictions on its executives, which could aid the bank as it attempts to replace outgoing CEO Kenneth Lewis, who has said that he will retire from his post by the end of the year. Lewis had said that repaying the government was something he wanted to accomplish before stepping down.

Elsewhere, fellow Dow component General Electric(GE $16 ¹) and Comcast(CMCSA $16) announced that they have signed a definitive agreement to form a joint entertainment venture consisting of NBC Universal (NBCU) and CMCSA’s cable networks, in which CMCSA will own 51%, while GE will control the remaining 49%. The deal, which had been expected for some time, came as Vivendi(VIVDY $30) agreed to sell its 20% stake in NBCU to GE for $5.8 billion. NBCU’s business is valued at $30 billion and CMCSA’s business contribution is valued at $7.25 billion. "Being able to partner in cable and digital makes NBC Universal more valuable for investors, for Comcast investors and for the NBCU team," GE CEO Jeff Immelt said. Comcast Chairman Brian Roberts added that the agreement “brings real benefit at a time when distribution is going from physical to electronic in the digital age. This vertical integration tends not to present some of those challenges that a horizontal integration might." The deal still needs approval from government regulators before it can be finalized. GE and VIVDY were lower, while CMCSA was higher, benefitting from an announcement that it raised its annual dividend by 40%.

Retailers are in focus, with many key firms reporting November same-store sales—sales at stores open at least a year—headlined by Target(TGT $46), which announced that its sales for the month were 1.5% lower, a larger decrease than the Reuters estimate of a 0.5% decline. TGT said its sales were “slightly below” its expectations for November, as softer results in the first three weeks of the month were substantially offset by better-than-expected sales during its post-Thanksgiving two-day sale. Shares were lower.

Moreover, Costco Wholesale (COST $59) was under pressure after reporting November total same-store sales rose 6%, including the impact of fuel, short of the 8.1% expectation of Wall Street analysts—which includes fuel sales—as US sales rose 2%, while international sales jumped 21%. Excluding fuel, sales were up 2%. Fellow warehouse club operator BJ’s Wholesale(BJ $33) also missed the mark when its monthly same-store sales increased 1%, below the 4.7% forecast, and its shares were also lower.

Meanwhile, department stores reported mixed results with Macy’s(M $16) saying its November same-store sales fell 6.1%, a larger decline than the 3.1% drop that had been expected. Macy’s said the weaker November results were not a surprise and that it expected a shift of some holiday sales from November into December due to unseasonably warm weather and the timing of some of its promotions. The company reaffirmed its 4Q guidance of same-store sales down 1-2%. Elsewhere, JC Penney (JCP $28) reported that its sales fell 5.9%, compared to the 4.4% drop that was anticipated. The company echoed comments from Target that weak results earlier in the month were partially offset by strong sales for the Black Friday weekend. Rounding out the sector’s results, Kohl’s (KSS $54) posted a 3.3% gain in sales, which topped the 1% increase that the Street expected. M and JCP were lower, but KSS was higher.

Specialty retailers’ results were also mixed as Limited Brands (LTD $18) achieved a 3% gain in sales, much better than the 2.5% decline that was expected, Gap Inc. (GPS $22) posted a flat reading in sales for the month, just shy of the 0.1% advance that was forecast, as strong performance at the company’s lower-priced Old Navy stores offset declines at Banana Republic, Gap, and international locations. Meanwhile, Abercrombie & Fitch(ANF $36) reported a 17% fall in its sales, a larger decline than the 9.3% that analysts had expected. LTD was higher, while GPS and ANF were lower.

In terms of high-end fashion retailers, JW Nordstrom (JWN $35) was higher after it matched forecasts with a 2.2% monthly same-store sales increase, while Saks(SKS $6) fell short, notching a 26.1% fall, worse than the 20.8% predicted drop, and its shares were under pressure. Saks said the performance matched its expectations and the company continues to believe that same-store sales will decline in the “high-single digit range” for the full 4Q period.

Service sector gauge disappoints, jobless claims fall, and productivity revised lower

The ISM Non-Manufacturing Index unexpectedly fell to 48.7 in November from 50.6 in October, marking the second month the index weakened after the index rose in September above the level of 50 that marks the separation point between expansion versus contraction in economic activity. 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, although remained in expansion territory. The recovery in the manufacturing sector has been aided by “cash-for-clunkers” production and export strength, and due to its more cyclical nature, tends to lead changes in the service sector. While non-manufacturing new orders fell to 55.1 from 55.6, new export orders rose to 54.5 from 53.5, and the employment component rose to 41.6 from 41.1.

Weekly initial jobless claims fell by 5,000 claims to 457,000, versus last week's figure that was downwardly revised by 4,000 to 462,000. The number was favorable as the Bloomberg consensus called for claims to increase to 480,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 14,250 to 481,250. However, continuing claims increased, rising by 28,000 to 5,465,000, versus the forecast of 5,400,000.

Elsewhere, final nonfarm productivity rose at an 8.1% annual rate in 3Q, below the Bloomberg forecast of 8.5%, and well below the 9.5% that was previously reported. Productivity still rose at the fastest pace since 3Q of 2003. Unit labor costs fell 2.5%, versus a drop of 4.1% that was estimated, and compared to the 5.2% drop that was initially announced.

In other economic news, Fed Chief Ben Bernanke gave his Congressional testimony today as part of his confirmation process for a second term. His first four-year term as Chairman expires January 31, 2010, although he has already been appointed as a member of the Board through January 31, 2020. During his testimony, Bernanke defended his record and the strong actions the Fed took to fight the recession under his watch. "As serious as the effects of the crisis have been ... the outcome could have been markedly worse without the strong actions," he said. Bernanke also assured lawmakers that he has the knowledge and tools to successfully reverse those policies when the time is right – although he failed to give any clues as to how soon that action will be initiated. Moreover, Bernanke reported that he did not see any bubbles in the US at present, and he did not feel it is the United States' "responsibility" to prevent speculative bubbles in other parts of the world.

Treasuries were lower following the reports. The yield on the 2-year note remained at 0.71%, while the yield on the 10-year note gained 6 bps to 3.37%, and the yield on the 30-year bond increased 8 bps to 4.33%.

ECB announcement dominates full slate of international economic reports

The European Central Bank left its main lending rate unchanged at 1.00%, as expected by economists. ECB President Jean-Claude Trichet held a press conference that followed the announcement, where he noted that the current rate remains appropriate, price developments are expected to remain subdued over the policy-relevant horizon, and economic activity in the euro area has improved further. He also signaled that the ECB is moving towards reining in some of its stimulus measures after he said, “Improved conditions in financial markets have indicated that not all our liquidity measures are needed to the same extent as in the past.” However, he did add that the Eurosystem continues to provide liquidity support to the banking system of the eurozone for an extended period. The ECB chief said the central bank’s staff increased its 2010 GDP growth forecast and that the risks to this outlook are viewed as balanced.

In economic news outside of the ECB’s interest rate announcement, eurozone retail sales came in flat for October on a month-over-month basis, compared to the forecast of a 0.2% gain. On a year-over-year basis, sales fell by 1.9%. Elsewhere, 3Q eurozone GDP remained at a 0.4% quarter-over-quarter gain. The data showed a jump in inventories and exports helped pull the group of 16 nations out of recession in the third quarter, although falling investment and household consumption showed that pockets of weakness remain.

In other European news, the Financial Times reported that UK banks have a total exposure to Dubai World debt of about $5 billion, citing people familiar with the matter. While details about the situation are still emerging a week after Dubai’s debt crisis first emerged, the report said that Royal Bank of Scotland (RBS $12) was the most exposed of the UK banks, followed by HSBC (HBC $60), Standard Chartered (SCBFF $26) and Lloyds Banking Group (LYG $5). The report also noted that the majority of the loans are to the still-performing segments of Dubai World, leaving the exposure to the $26 billion in debt that is being restructured to just $700 million for Royal Bank of Scotland and $350m for Standard Chartered, for example – far lower than many had initially feared. The banks all declined to comment.

On the economic front in the Asia/Pacific region, 3Q Japanese capital spending fell more than anticipated by economists. Capital spending fell 24.8% in the quarter from the same period last year, faster than the 21.7% decline last quarter. The data is used to calculate revised GDP figures, which Japan will report on December 9. The preliminary estimate showed that the world's second largest economy expanded 1.2% in 3Q, its second straight quarter of expansion, but today’s data increases the likelihood that the figure will be revised lower when the government releases its adjusted data next week.

In other Asia/Pacific news, Australian retail sales in October rose by 0.3%, matching expectations. On a year-over-year basis, sales were 5.6% higher. The results came in spite of the country’s central bank lifting interest rates by 25 basis points in October, November and December although, at 3.75%, rates are still historically low.

Job loss pace expected to slow

The much-anticipated nonfarm payrolls report will be released tomorrow, with the Bloomberg survey of economists forecasting payrolls fell 125,000 in November after declining by 190,000 in October, and the expectation is that the unemployment rate remained flat at 10.2%. Employment related data this week have been mixed, with ADP showing that while private sector job losses slowed, the improvement was smaller than expected, the ISM surveys were mixed, while initial jobless claims have had two weeks of significantly better results.

In addition to the headline number, traders will be examining whether the temporary help sector will continue to show job gains, as well as any improvement in the work-week and status of part-time workers, as employers will likely first make adjustments to their workforce by adding temporary positions and by shifting part-time workers to full-time, and these components of the labor report are leading indicators of progress toward increases in jobs.

The other US release on tomorrow’s economic calendar is factory orders, expected to be flat in October.