Evening Update

Economic Recovery Anxiety Hampers Sentiment

Stocks were under pressure, but off the lows of the day, after several pieces of data reignited concerns of the sustainability of the economic recovery. Sentiment was weak early after Fed Chief Ben Bernanke’s cautious tone in a speech yesterday and financial concerns overseas courtesy of Dubai debt worries and a sovereign ratings downgrade of Greece by Fitch. That was followed by Dow member 3M Company’s disappointing 2009 EPS guidance and the second-consecutive monthly drop in same-store sales by fellow Dow component McDonald’s further souring the mood on the Street. President Barack Obama gave a speech outlining several measures meant to combat the weak employment market. Moreover, Procter & Gamble announced its chairman will retire, Morgan Stanley named a new CEO, and UAL Corp announced it will purchase 25 aircraft from both Boeing and Airbus. In earnings news, FedEx raised its 2Q EPS forecast, H&R Block posted a smaller-than-expected loss, while Kroger missed its 3Q earnings expectations and issued disappointing guidance. Treasuries were higher amid equity market weakness and as there were no major economic reports released today.

The Dow Jones Industrial Average fell 104 points (1.0%) to close at 10,286, the S&P 500 Index slipped 11 points (1.0%) to 1,092, and the Nasdaq Composite was 17 points lower (0.8%) to 2,173. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $1.31 lower at $72.62 per barrel, wholesale gasoline fell $0.02 to $1.92 per gallon, and the Bloomberg gold spot price decreased $28.20 to $1,129.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 76.25.

3M Company (MMM $77) was under pressure after the Dow member issued full-year 2009 earnings guidance that came in short of analysts’ expectations. The company said it expects 2009 earnings ex-items to be in a range of $4.50-4.55 per share, short of the $4.57 that the Street had expected. Additionally, MMM said it expects sales in 2010 to be between $24.5-25.5 billion and earnings for next year to be in a range of $4.85-5.00 per share. Analysts are expecting the company to post 2010 EPS of $4.94 and sales of $24.5 billion.

Fellow Dow component McDonald’s Corp. (MCD $61) was also lower after the world’s largest fast-food chain reported US same-store sales—sales at established restaurants—fell 0.6%, in November, which was the second-straight monthly decline. MCD’s total same-store sales rose 0.7% in November, aided by a 2.5% increase in sales in Europe, which helped offset the soft US sales and a 1% decline in sales at restaurants out of Asia Pacific, Middle East and Africa.

In other Dow member news, Procter & Gamble (PG $62) announced that its chairman of the board, A.G. Lafley, will retire from the company, effective February 2010. PG said that Robert McDonald—the company’s current president and chief executive officer—has been elected as chairman of the board, effective January 1, 2010. Shares were lower.

In other restructuring news, Morgan Stanley (MS $30) announced key leadership appointments, headlined by the naming of James P. Gorman as the financial firm’s CEO and president, replacing John J. Mack, who will step down as chief executive, while continuing to serve as chairman of MS. The change will take effect on January 1, 2010 and the company also named a new CFO. MS was modestly lower.

FedEx Corp. (FDX $90) was higher after it raised its 2Q EPS guidance from a range of $0.65-0.95 to an expectation of earnings to be $1.10 per share, compared to analysts’ forecast calling for $0.85. The package delivery firm said the increased outlook is primarily due to better-than-expected growth in international priority and ground volumes, coupled with benefits from ongoing cost control programs.

Kroger Co. (KR $20) was sharply lower after the supermarket operator reported 3Q EPS ex-items of $0.27, ten cents short of the consensus estimate of Wall Street analysts. Total sales at the company rose slightly from $17.6 billion last year to $17.7 billion, inline with the Street’s forecasts, while same-store sales increased 1.3%, excluding the impact of fuel sales. The company said the operating environment it saw during 3Q was “more challenging than we anticipated,” and in the near term, KR said its financial results are being pressured by factors including persistent deflation, unusually intense competition and the cautious mindset of customers. Added pressure on the company’s shares came from a lowered full-year earnings outlook from the company that came in well below analysts’ forecasts.

UAL Corp. (UAUA $10)—the parent of United Airlines—announced a widebody aircraft order, in which it will purchase 25 787 Dreamliner aircraft from Dow member Boeing (BA $56 ¹) and 25 Airbus A350 XWB aircraft from European Aeronautic Defence and Space Co. (EADSY $18). UAUA added that the order will reduce operating costs and will require minimal capital over the next few years but ensure that it will have the right planes to strengthen its global network over the next decade. UAUA expects to take delivery of the aircraft between 2016-2019 and it has future purchase rights for 50 of each aircraft. Shares of UAUA were higher, but BA and EADSY were lower.

H&R Block (HRB $20) reported a fiscal 2Q loss of $0.38 per share, smaller than the $0.40 per share loss that was expected, as revenues declined 7.2% to $326.1 million, short of the $347 million that the Street forecasted. The tax preparer said it typically reports a loss in 2Q due to the seasonality of its business but it benefited from expense control efforts. HRB said it continues to expect full-year EPS to be in the range of $1.60-1.80, compared to the $1.62 that analysts are expecting. Shares were lower.

Obama speech grabs traders’ attention, as economic calendar was empty

Treasuries were higher as the equity markets came under pressure, and as there were no major reports scheduled for release today. The yield on the 2-year note fell 5 bps to 0.72%, the yield on the 10-year note declined by 3 bps to 3.40%, and the yield on the 30-year bond was unchanged at 4.38%.

President Barack Obama gave a speech outlining policy proposals aimed at jumpstarting the weak employment market where he laid out plans which included three key areas of focus—tax credits to encourage hiring by small businesses, infrastructure, and incentives to make homes more energy efficient. While the speech lacked details, Obama emphasized that the $200 billion in savings from the Treasury’s Troubled Asset Relief Program (TARP) would be used for the proposals he outlined, as well as deficit reduction. Obama added that “mobilizing” funds from the financial-system bailout fund would be needed to increase the credit available to small businesses in order to boost business lending.

Tomorrow’s economic calendar will yield MBA Mortgage Applications and wholesale inventories, forecast to fall 0.5%.

Canada holds rates steady, Japan deploys stimulus, economic uneasiness in Europe

The Bank of Canada (BoC) opted to hold its benchmark overnight rate at a record low 0.25%, as expected, saying, “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.” The BoC said it expects the inflation target to return to 2% in the second half of 2011 with stronger-than-expected domestic and global demand as the upside risks to inflation, while on the downside, risks of “a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth,” could put additional downward pressure on inflation.

In Asian news, the Japanese government announced a 7.2 trillion yen ($81 billion) stimulus package, aimed at strengthening regional economies, employment, and environmental projects.

In Europe, increased economic uneasiness came courtesy of a number of disappointing reports, headlined by an unexpected drop in industrial production in Germany. Industrial production in Europe’s largest economy fell in October, the first time in three months, dropping 1.8% month-over-month, compared to the 1.0% advance that economists surveyed by Bloomberg expected. As well, October industrial production in the UK came in unexpectedly flat, versus the expectation of a 0.5% increase, and in a separate report UK retail same-store sales—sales at stores open at least a year—increased at a slower pace, after rising at a 1.8% year-over-year rate in November, compared to the 3.8% gain that was seen in October.

Elsewhere, Fitch Ratings downgraded the sovereign rating of Greece, lowering its long-term foreign currency and local currency ratings to BBB+ from A-, citing “concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece.” The ratings decision by Fitch follows Standard & Poor’s move yesterday of placing the country’s rating on watch for a possible downgrade.

Dubai worries continue

Debt concerns out of Dubai were on the radar screen again after a property developing unit of Dubai World—a privately-held holding company for the government of Dubai—posted a $3.65 billion first half loss, which was exacerbated by reports that Dubai World is discussing a new date with banks for $3.5 billion in debt coming due on December 14, but no deal has been announced. Adding fuel to the fire, Moody’s Investor Service downgraded the credit worthiness of several Dubai government controlled companies.