Evening Update

Dollar Strength Restrains Early Rally

Stocks finished with small gains as a larger early rally was partially wiped out on weakness in basic materials and energy issues. The unemployment rate was reported this morning to have actually decreased slightly to 10.0% as fewer jobs (11,000) were lost last month. A separate report showing factory orders unexpectedly increased also served to reassure investors that the economy is on the road to recovery. However, the dollar enjoyed buying support – potentially because traders bet that the rosy labor report means the Fed will hike interest rates sooner than expected – which weighed on commodity prices. Treasuries moved solidly lower amid the improved economic outlook. Equity news meanwhile was more mixed as Take-Two Interactive Software, Smith & Wesson, and Dow member Dupont were all lower after negative announcements. Other news was more positive, however, as Bank of America successfully raised the capital it will need to repay the Treasury, Cisco Systems gained control of Norwegian videoconference firm Tandberg, FedEx will raise its shipping rates, and Marvell Technology and Big Lots both beat profit forecasts.

The Dow Jones Industrial Average rose 22 points (0.2%) to close at 10,388, the S&P 500 Index added 6 points (0.5%) to 1,106, and the Nasdaq Composite climbed 21 points (1.0%) to 2,194. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $0.99 lower at $75.47 per barrel, wholesale gasoline fell $0.01 to $1.98 per gallon, and the Bloomberg gold spot price decreased $45.60 to $1,162.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.6% to 75.82. For the week, the DJIA gained 0.8%, while the S&P 500 Index was up 1.3%, and the Nasdaq Composite increased 2.6%.

Take-Two Interactive Software (TTWO $8) was down approximately 30% after the video game producer issued preliminary 4Q and full-year results, where it said both figures will be below its prior guidance. TTWO said several factors contributed to the lowered outlook, with the largest being the performance of its Major League Baseball titles, inventory write-downs, and realized lower- than-expected initial performance of several of its key holiday releases. TTWO now expects 4Q revenue to be between $325-350 million and EPS in a range of $0.05-0.10, compared to the expectations of Wall Street analysts, which are calling for the company to post revenue of $370 million and earnings of $0.33 per share. For the full year, TTWO forecasts revenue of between $950-975 million, and a loss for the period of between $1.10-1.15, compared to the Street’s expectations of $995 million in revenue and a loss of $0.84 per share. Also, the company issued a 1Q loss forecast that was larger than analysts had expected, and a loss for 2010, while the Street had expected TTWO to post earnings for the year.

As part of its plan to pay back the entire $45 billion in taxpayer funds that its received from the Treasury’s Troubled Asset Relief Program (TARP), Dow member Bank of America (BAC $16 ¹) announced that it has raised $19.3 billion through the sale of common equivalent securities—securities that will be converted fully or partially into common stock if investors approve the increase in outstanding shares. BAC sold 1.286 billion securities at a price of $15 per share, about a 4.8% decline from yesterday’s closing price. BAC was higher.

FedEx (FDX $88) reported late Thursday that it would increase its ground and home delivery shipping rates by an average of 4.9%, effective January 4, 2010. The package delivery company previously announced that it would increase rates for its express deliveries by an average of 5.9% for US domestic and export services also effective on the same date. FDX was higher.

Big Lots (BIG $28) was almost 20% higher after reporting 3Q adjusted earnings of $0.27 per share, well above the $0.18 per share forecast of analysts, with revenues increasing 1.3% to $1 billion, roughly inline with the Street’s expectation. The closeout retailer that specializes in selling excess inventory said its gross margin rate improved by 60 basis points, due to improved initial markup, lower inbound freight expense, and the favorable resolution of an import duty contingency related to a prior year. BIG also raised its 4Q and full-year earnings guidance, while also reporting that it has authorized a new share repurchase program, up to $150 million.

Dow member Cisco Systems (CSCO $24) was higher after it gained control of more than 90% of shares of Norwegian firm, Tandberg (TADBY $29), in a voluntary public cash offer concluding a battle with TADBY shareholders, who rejected CSCO’s original bid. CSCO said it plans to acquire the remaining shares of TADBY and proceed with an application for a de-listing of the shares of the company.

Dow member DuPont (DD $32) was down solidly after the seed producer said its Optimum GAT corn did not meet its standards for crop yields and as a result the seed will not be released next year as originally planned. Instead, Dupont’s Pioneer Hi-Bred division will intensify its research efforts and “work toward commercialization in the middle of the next decade.” Meanwhile, Optimum GAT soybeans are now expected to reach the marketplace “about two to three years later than the anticipated 2011 introduction,” partially due to changes in regulatory policy, the company said. In spite of this setback, DuPont reaffirmed its guidance for greater than 15% compounded annual earnings growth in its Agriculture & Nutrition business segment through 2013.

Marvell Technology Group (MRVL $18) was solidly higher after the chipmaker reported adjusted 3Q EPS of $0.35, well above the average analyst forecast of $0.27. Sales were higher by 2% to $803 million, also besting the consensus estimate of $770 million. The company, which makes chips used in data storage and communications products, said it is seeing improving orders across all of its markets and as a result it forecast 4Q EPS ex-items of $0.33-$0.39 on revenue of $820-$850 million, above Wall Street’s expectation for $0.27 per share in earnings on sales of $780 million. "The last year has been a tough one for everyone. However, Marvell has emerged out of this in very good shape," the CEO reported.

Smith & Wesson (SWHC $4) was down sharply after the gun maker said it earned $0.01 per share in adjusted operating earnings in 2Q, below the $0.09 that Wall Street had forecasted. Sales during the period were 49% higher at $109 million, above the $105 million forecast, led by large gains in sales of pistols, revolvers, and tactical rifles, as sales of hunting rifles were roughly flat year-over-year. However, the company lowered its 3Q revenue forecast to $95 million at most, lower than the average analyst estimate of $105 million. The company said its outlook reflects “more normalized levels of demand and production versus the spike that we experienced” earlier in the year.

Labor report shows much fewer jobs were shed from nonfarm payrolls than expected

Nonfarm payrolls fell by 11,000 jobs in November, much fewer than the Bloomberg estimate that called for a 125,000 decline. Also, October was favorably revised to -111,000 from -190,000, and September was positively revised from -219,000, to -139,000, for a total revision of 159,000 fewer jobs lost than previously reported. The unemployment rate fell from 10.2% to 10.0%, compared to the consensus forecast, which called for the rate to remain unchanged. Average hourly earnings rose 0.1%, versus the Street's forecast of 0.2%, and the average workweek rose to 33.2 hours from 33.0 hours, versus the estimate of 33.1 hours. Job gains were reported in the service sector, driven by temporary help services, healthcare and education.

Treasuries moved much lower after the report. The yield on the 2-year note rose 12 bps to 0.84%, while the yield on the 10-year note gained 9 bps to 3.47%, and the yield on the 30-year bond increased 7 bps to 4.40%.

The unemployment rate is based on a survey of households, and this portion of the report tends to be more volatile and has been showing larger job losses than the payroll survey, and today’s decline in the unemployment rate is in line with improvements seen in the payrolls numbers, and reverses some of the jump in the rate reported in October to 10.2% from 9.8% in September.

However, there are many positive indicators in the report that show the ability of the job market to potentially sustain an improving trend, despite month-to-month volatility. Most notable among these leading indicators is the improvement in temporary help services, which added 52,000 seasonally-adjusted in the month, and including upward revisions to prior months, has added 117,000 jobs in the past 4 months. As uncertainty about sales declines, employers tend to first make adjustments to their workforce by increasing hours worked and shifting part-time workers to full-time, as well as adding temporary positions, all of which improved in this month’s labor report.

Factory orders (chart) unexpectedly increased in October, rising 0.6%, compared to the consensus of economists surveyed by Bloomberg, which called for orders to be flat. This was the sixth advance in orders in seven months, and September’s 0.9% advance was revised to a 1.6% gain. Excluding transportation, orders rose 0.5%. October’s durable goods orders—which posted an unexpected decline last week—were left unrevised at a 0.6% decline.

South Korea GDP revised, Japan considers additional stimulus, UK bank lending likely to miss targets

The South Korean economy grew faster than initially estimated in 3Q. GDP figures for the period now show a 3.2% quarter-over-quarter increase, compared to the previous report of a 2.9% increase. The revised figure was the fastest growth in more than seven years and the third consecutive quarterly gain. On a year-over-year basis, Asia's fourth-largest economy grew by 0.9%. The surprising third-quarter growth was mostly driven by inventory adjustments, with domestic and global demand still weak, according to Reuters. The Bank of Korea, which has maintained interest rates at a record-low 2.0% for nine straight months, will next review them on December 10.

In other Asian economic news, the Japanese yen moved sharply lower versus the dollar after a local media outlet reported that policymakers are considering additional stimulus measures in an attempt to jumpstart the economy, citing people familiar with the matter. According to the report, a package totaling 24 trillion yen ($272 billion), including about 4 trillion yen for programs requiring immediate fiscal spending, is being discussed. The fiscal spending in the package could reach 7.1 trillion yen, including 3 trillion yen in tax grants to local governments, it said. Japan's public debt is already expected to balloon to 227% of GDP next year, which could limit the choices available to lawmakers, however, according to Reuters. Revised GDP figures are scheduled to be released next week, with economists expecting Japan’s output growth to be revised lower than originally reported and Japan’s Democratic Party, which was brought into power two months ago in a landmark election, is searching for ways to accelerate economic growth.

Meanwhile, European news was relatively light although a British spending watchdog, the independent National Audit Office (NAO), estimated that the price tag to UK taxpayers from bank bailouts has reached 850 billion pounds ($1.4 trillion). It noted, however, that the final cost will not be known for years. The group said that government support for the industry was justified though. "It is difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse," the NAO said. The group pointed out though that bank lending is still likely to fall short of targets. Bailed-out lenders Royal Bank of Scotland (RBS $11) and Lloyds Banking Group (LYG $5) have both agreed to lend more to consumers and businesses as part of their rescue. RBS agreed to lend an additional 25 billion pounds in 2009-2010, while Lloyds agreed to lend an additional 14 billion to help businesses and consumers weather the credit crisis.

Stocks recover from Dubai tremors, in spite of weak retail data

Stocks got the final month of the year off to a positive start, in spite of generally weak retail sales results from last weekend’s important “Black Friday” period. According to a survey, Black Friday sales as a whole were 0.5% higher than last year as stores saw 13% higher traffic but customers on average spent 8% less than in 2008. Many retailers saw their same-store sales for the month of November as a whole come in short of expectations as well with Target (TGT $46) suffering a 1.5% drop, Macy’s (M $16) and JC Penney (JCP $28) witnessing declines of 6.1% and 5.9%, respectively, and Abercrombie & Fitch (ANF $36) and Saks (SKS $6) figures down 17% and 26%. All of those results were below forecasts. Even discounters such as Costco Wholesale (COST $59) and BJ’s Wholesale (BJ $33), although their same-store sales were higher year-over-year, failed to match expectations.

In economic news, the Federal Reserve Beige Book was released midweek and showed that economic conditions have generally improved modestly since the last report in October, with manufacturing and consumer spending trends improving “modestly,” although weak spots in commercial real estate, bank lending, and labor markets were still evident in the report. Also released this week was the ISM Manufacturing Index, which missed forecasts and showed a deceleration from last month, while its sister index the ISM Non-Manufacturing Index also disappointed economists and showed that the US service sector had dipped back to a level depicting contraction rather than expansion.

Measure of consumer spending on tap

Advance retail sales for November will be released next Friday, forecasted to rise 0.7% month-over-month (m/m), after growing 1.4% in October, while sales ex-autos are estimated to increase 0.4%, on the heels of a rise of 0.2% in October. Results for October showed broad-based improvement in a typically slower month. Today’s improvement in the rate job losses as well as less dire consumer net worth expectations this year with the stock market rally and stabilization of the housing market have improved consumer sentiment.

Other releases on the economic agenda next week include consumer credit, the MBA Mortgage Application Index, wholesale inventories, trade balance, initial jobless claims, import prices, business inventories and the University of Michigan consumer sentiment.