Evening Update

Stocks Rise Despite Global Government Debt Concerns

Stocks were higher, shrugging off early concerns after a downgrade in the outlook for the government debt of Spain, as it became the “country du jour,” joining Greece yesterday and Dubai in recent weeks. Treasuries were lower following an unexpected increase in wholesale inventories and a rise in mortgage applications. In equities, technology shares were strong after Texas Instruments increased the lower end of its 4Q guidance in a mid-quarter update, and Corning said LCD TV glass volumes were higher than expected. Materials shares got a boost from AK Steel announcing another price increase and amid a decline in the US dollar. However, energy shares were mixed despite the fall in the US dollar and a drop in inventories, as government data showed that energy demand continues to fall. In other equity news, Men’s Wearhouse issued a disappointing forecast, PepsiCo lowered 4Q guidance and announced a licensing agreement with Dr Pepper Snapple Group, while Rambus announced that it has agreed to a settlement with the European Commission.

The Dow Jones Industrial Average rose 51 points (0.5%) to close at 10,337, the S&P 500 Index increased 4 points (0.4%) to 1,096, and the Nasdaq Composite was 11 points higher (0.5%) to 2,184. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $1.95 lower at $70.67 per barrel, wholesale gasoline fell $0.06 to $1.86 per gallon, and the Bloomberg gold spot price rose $0.80 to $1,129.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 75.98.

Texas Instruments (TXN $26) released its scheduled mid-quarter business outlook for 4Q, in which the chipmaker increased the lower end of its previous forecast. Citing growth from diverse sources, TXN now sees earnings for the final quarter of the fiscal year to be in a range of $0.47-0.51 per share, versus its prior view of $0.42-0.50, and revenues to come in between $2.90-3.02 billion, compared to its prior range of $2.78-3.02 billion. Analysts are calling for the company to post EPS of $0.47 and revenues of $2.9 billion, but shares were under pressure, suggesting that the Street may have expected a larger increase in the company’s EPS and sales targets. However, the company’s head of investor relations told analysts on a conference call that the company was having difficulty keeping up with increasing demand, but these pressures are “not dissimilar from what many of our competitors are seeing as well.”

Corning Inc. (GLW $18) announced that continued strength in worldwide LCD television sales has led to an increase in its 4Q glass volume expectations, and an improved outlook on 2010 glass market growth. The company’s CFO said “lights are green in display,” pointing out that worldwide LCD TV year-over-year October sales increased 45%—the second highest monthly growth rate of the year—on sales strength in October for all major TV markets. GLW’s finance chief added that US LCD TV sales remained strong throughout all of November, including the week of Black Friday, and as a result, panel makers continue to run at high utilization rates in 4Q and glass supply is “very tight.” Therefore GLW raised its 4Q volume estimates from flat to down slightly, to flat to up slightly. Shares recovered an early loss and closed higher.

PepsiCo (PEP $62) slightly lowered its 2009 EPS forecast, and announced an extension of a previous licensing agreement with Dr Pepper Snapple Group (DPS $27) for certain brands after PepsiCo completes its acquisition of its two biggest bottlers early next year. The new license covers 20 years and is valued at $900 million, and will be used by Dr Pepper Snapple to pay down debt. PepsiCo lowered its 2009 forecast to 5% revenue growth and 5-6% EPS growth, from “mid- to high-single digit growth” guidance previously given, but reiterated its 2010 forecast. Shares of PEP were lower, while DPS shares rose.

AK Steel (AKS $20) shares were higher after the company announced another price increase for carbon steel products, used in automotive, appliance, construction and manufacturing, for all new orders accepted for shipment on January 1st, 2010 and later. The company said the price increase was in response to increased demand for carbon steel products, as well as the need to recover higher costs for steelmaking inputs.

Men’s Wearhouse (MW $20) reported 3Q EPS of $0.37, four cents above the consensus estimate of Wall Street analysts, and revenues rose 0.5% versus last year to $462 million, topping the $454.5 million that was expected. The company said its clothing product sales—representing over 70% of total sales—declined 0.2% due to decreases in the company’s comparable store sales primarily driven by a reduction in store traffic levels, offset by a higher average ticket. Additionally, clothing gross margins decreased by 114 basis points, driven by promotional activities. However, shares were under sharp pressure after the clothing retailer issued a loss forecast for 4Q, which compared to the Street’s expectation for the company to post a profit.

Rambus Inc. (RMBS $22) announced that the European Commission (EC) has accepted commitments proposed by the technology licensing firm to resolve a matter regarding royalties. RMBS has pledged to offer licenses with maximum royalty rates worldwide on computer memory chip patents for five years to settle antitrust charges and avoid a fine. Shares rose.

Wholesale inventories surprise to the upside

Treasuries were lower with the yield on the 2-year note rising 2 bps to 0.74%, the yield on the 10-year note increasing 4 bps to 3.42%, and the yield on the 30-year bond advancing 3 bps to 4.40%.

The economic calendar was relatively light today, with the major release being wholesale inventories (chart), which unexpectedly snapped a thirteen-consecutive monthly decline streak after advancing by 0.3% October. Economists surveyed by Bloomberg had expected a 0.5% decline. Additionally, September’s 0.9% decline was revised to a 0.8% decrease. Wholesalers’ stockpiles in automotive and computer equipment aided the surprising advance, somewhat offsetting declines in machinery and professional equipment. Total sales rose 1.2%—the seventh-straight increase—boosted by computer equipment, automotive, and professional equipment sales. The strength in sales resulted in the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dropping from 1.17 months in September to 1.16 in October, the lowest level since August 2008.

In other economic news, the US MBA Mortgage Application Index rose 8.5% last week after the index, which can be quite volatile on a week-to-week basis, gained 2.1% in the previous week. The increase came despite a 9 basis-point gain in the average 30-year mortgage rate to 4.88% versus the previous week, as advances in both the Refinance and Purchase indexes of 11.1% and 4.0%, respectively, supported the rise in the overall application gauge. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Government debt concerns continue, China extends stimulus albeit at a lower rate

After Fitch Ratings downgraded the sovereign debt of Greece yesterday, and warned that the triple-A credit rating on the US and UK may “test the boundaries” on growing deficits of the two nations, Standard & Poor’s revised downward its outlook on Spain from stable to negative, saying the country will see a “more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers.” S&P downgraded Spain’s credit rating from AAA to AA+ in January. The news exacerbated persistent fears about the health of government finances globally that intensified at the end of November when Dubai’s debt issues came into focus.

Facing the need to lower fiscal deficits as well as capitalizing on populist outrage, British finance minister Alistair Darling announced that banks would be charged a 50% tax rate on bonuses they pay to their staff above 25,000 pounds (US$40,725) starting today until April 5, 2010. Employees also have to pay tax on the bonus at their marginal rate, already due to rise to 50% from 40% on wages over 150,000 pounds in April. Darling said he was giving banks a choice – “They can use their profits to build up their capital base. If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.” The government is the majority shareholder of the largest banks in the UK. Darling also confirmed he’s returning the value-added tax (VAT) to 17.5% at the end of this year after cutting the sales tax to 15% in the wake of the credit crisis. Darling renewed his promise to halve the budget deficit within four years, and defended his position not to speed up debt reduction saying the four-year target is an “orderly” reduction.

The Japanese government reported that 3Q real GDP in the nation was downwardly revised to an annualized rate of 1.3%, compared to the initial reading of 4.8% and the expectation of economists surveyed by Bloomberg, which called for a revision to 2.8%. Business investment was the biggest reason for the revision as capital spending fell versus the initial report, which showed the component grew. However, Japan only achieved growth on an inflation-adjusted (real) basis, as falling prices boosted the real rate of growth, while nominal growth was negative.

China announced steps to maintain stimulus programs in 2010, while guarding against excess. The sales tax on vehicles was raised slightly, but less than originally planned, and the government expanded subsides for alternative-fuel cars, purchases in rural areas and for consumers trading in older vehicles. Additionally, incentives to purchase appliances will continue. With regard to residential real estate, the sale of homes would be exempt from tax after five years of ownership instead of two years, while other stimulus measures will continue, such as smaller down-payment requirements and discounted loan rates for first-time buyers.

Bloomberg reported that China’s banking regulator plans to slow new lending to 7-8 trillion yuan next year, citing a person familiar with the matter, while saying calls to the China Banking Regulatory Commission were not answered. This level of lending compares to 8.9 trillion (US$1.3 trillion) in the first 10 months of 2009, 4.9 trillion yuan in 2008 and 3.6 trillion yuan in 2007.

US calendar light, Bank of England in focus tomorrow

The US economic agenda is light tomorrow, with the releases of the trade balance, expected to be -$36.8 billion and initial jobless claims, expected to drop to a rate of 455,000 from 457,000 the prior week.

Eyes will be across the pond, with the Bank of England monetary policy meeting, industrial production from Italy and France, France non-farm payrolls, Japanese machine orders, and the employment change in Australia.