Evening Update

Stocks Rise as Fears Ease

Stocks were higher today, breathing a sigh of relief after concerns were raised earlier this week about the health of global governments and their ability to payback debt, while volume was relatively light ahead of the Hanukkah holiday weekend. Today’s action was aided by an unexpected narrowing of the trade deficit and a more than 300,000 decline in continuing jobless claims and a decrease in the four-week moving average, despite an increase in initial claims this week. In equity news, Costco Wholesale met the Street’s earnings estimate, Eli Lilly & Co. gave inline guidance but did not comment on the impact of the pending loss of patent protection on some drugs, Ciena Corp. reported a larger-than-expected loss, Anadarko Petroleum announced a new deepwater discovery, and Goldman Sachs suspended 2009 cash bonuses for top executives. Elsewhere, Citigroup is reported to be negotiating repayment of some of the Treasury’s TARP money, while a separate report suggested Hershey is close to a decision on a bid for Cadbury. Treasuries were lower.

The Dow Jones Industrial Average rose 68 points (0.6%) to close at 10,406, the S&P 500 Index increased 6 points (0.6%) to 1,102, and the Nasdaq Composite was 7 points higher (0.3%) to 2,191. In moderately light volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $0.13 lower at $70.54 per barrel, wholesale gasoline fell $0.02 to $1.84 per gallon, and the Bloomberg gold spot price rose $2.00 to $1,130.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 76.00.

Costco Wholesale (COST $59) reported fiscal 1Q EPS of $0.60, matching the consensus estimate of Wall Street analysts, as net sales rose 6% to $16.9 billion, and including membership fees, total revenues came inline with the $17.3 billion that had been forecasted. Same-store sales—sales at warehouses open at least a year—rose 3% as the strengthening of foreign currencies relative to the US dollar and deflation in the selling price of gasoline had offsetting impacts on same-store sales. Shares fluctuated around the unchanged line and closed modestly higher.

Eli Lilly & Co. (LLY $35) was under pressure after the drug company issued 2010 EPS guidance that matched the Street’s forecast, but disappointed some as it failed to address the impact on profits of the impending loss of patent protection of key drugs between 2011-2014. LLY faces generic competition beginning in 2011 for some of its key drugs such as its schizophrenia medicine Zyprexa, antidepressant treatment Cymbalta, cancer drug Gemzar, and Evista, which is used for osteoporosis.

CNBC updated its report that Citigroup (C $4) plans to pay back some of the $45 billion in taxpayer funds received from the Treasury’s Troubled Assets Relief Program (TARP), by raising between $10-15 billion, instead of the $20 billion initially reported, through a stock offering. Citigroup did not confirm that report but its Chairman Dick Parsons told the financial news outlet that the company believes it is “in a position to repay TARP money, but there is an active discussion we have to have with regulators.” Meanwhile CNBC said a Treasury official told it that Citigroup’s negotiations to exit TARP are uncertain, but headed in the right direction. However, the government official said negotiations with the Treasury to repay the bailout money might not be resolved until after the holidays. The Treasury did not comment officially on the matter. Shares closed higher.

In related news, Treasury Secretary Timothy Geithner told Congress, while testifying following his decision this week to extend the TARP program, that history suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn. Geithner extended the TARP program from its December 31 initial expiration until October 2010. He added that it is a good thing for the country that banks are eager to get out of TARP, but “we are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead.”

Goldman Sachs (GS $167) said that its top 30 executives would not receive a cash bonus for 2009, after coming under pressure after an earlier announcement that an allocation of incentive pay amounted to an average of $700,000 per employee for the firm’s 31,000 employees. In today’s announcement, GS said shareholders will get an advisory vote on compensation policies, and changes to compensation for the 30-person management committee would be better aligned with long-term performance and the interests of the firm, with discretionary compensation being paid in the form of “shares at risk,” which must be held for five years. GS shares were higher.

The Wall Street Journal reported that Hershey (HSY $36) and the philanthropic trust that controls the chocolate maker are nearing a final decision on whether to make a bid for UK confectionary firm Cadbury (CBY $51), citing people familiar with the matter. The report notes that HSY management and the trust’s board are leaning toward making a bid—challenging an existing $16.5 billion bid by Kraft Foods (KFT $27). None of the entities commented on the report. Meanwhile, Britain’s largest trade union, Unite, said that a “Keep Cadbury Independent” campaign will be launched on December 15, aimed at fending off KFT’s hostile takeover bid and saving jobs. HSY and CBY were higher while KFT was lower.

Ciena Corp. (CIEN $12) fell over 10% after the communications networking equipment provider posted a wider-than-expected loss in 4Q, reporting an adjusted $0.12 per share loss, compared to the $0.07 shortfall that analysts had expected. Revenues, which grew 7% versus 3Q to $176 million, exceeded the $168 million that had been expected, but the better-than-expected sales did little to soften the blow to its shares.

Anadarko Petroleum (APC $58) rose after the oil and gas exploration firm announced a discovery at the Lucius exploration well, which was the fifth deepwater Gulf of Mexico discovery in 2009. APC operates the well with a 50% working interest, with Plains Exploration & Production (PXP $27) having a 33% interest, and the remaining 17% belonging to Mariner Energy (ME $13). Shares of PXP and ME were also nicely higher on the news.

Jobless claims move higher but trade deficit narrows

Weekly initial jobless claims (chart) increased by 17,000 claims to 474,000, versus last week's figure that was left unrevised at 457,000. The Bloomberg consensus called for claims to decrease slightly to 455,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 7,750 to 473,750—the lowest level since September 2008—and continuing claims also dropped, tumbling by 303,000 to 5,157,000, versus the forecast of 5,450,000. The Wall Street Journal reported that an economist at the Labor Department said that an increase in claims is generally expected during this time of year because it reflects data from the week after Thanksgiving and because construction layoffs tend to occur in that week. "Generally...that week sees the biggest percentage increase in initial claims over the year, and this year was no exception," the unnamed official was quoted as saying.

The trade deficit narrowed from a favorably revised $35.7 billion in September to $32.9 billion in October, versus the Bloomberg estimate calling for the deficit to widen to $36.8 billion. U.S. exports in October rose 2.6%, while imports rose by just 0.4%. The U.S. paid $17.44 billion for crude oil imports in October, down from $19.51 billion the month before, as the average price for crude oil fell and volumes declined to 258.83 million barrels from 286.22 million barrels.

Treasuries were lower following the jobs and trade data, and the 30-year bond extended losses after a $13 billion auction drew a higher yield than expected to draw demand. As a result, the yield curve (the difference between yields for the 30-year less the yield on the 2-year) rose above the last high of 369 basis points reached in 1992, as the Fed’s target rate remains nearly zero for an extended period, while the Treasury is extending the average maturity of government debt being sold. The yield on the 2-year note rose 1 bp to 0.75%, the yield on the 10-year note advanced by 5 bps to 3.40%, and the yield on the 30-year bond increased 7 bps to 4.49%.

Raft of central banks meetings overseas, all decide to leave rates unchanged

Traders digested a slew of economic data across the pond, headlined by the Bank of England keeping its key interest rate at a record low of 0.5%, while maintaining its 200 billion pound ($326 billion) bond purchase program, although both announcements were expected by economists surveyed by Bloomberg. Elsewhere in eurozone central bank announcements, Switzerland kept its key interest rate unchanged as well at 0.25%, while announcing that it will stop corporate bond purchases as it reins in some emergency stimulus measures that it deployed to combat the recession. In other economic data in the eurozone, France’s industrial production unexpectedly declined, and the nation’s nonfarm payrolls fell 0.6%, while Italy’s industrial production rose by a smaller amount than forecasted.

In the Asia/Pacific region, the Bank of Korea kept its main lending rate unchanged at 2% for the tenth-straight month, while lifting expectations that the central bank may be preparing to increase its rate after the BOK governor said, “The current 2% rate is too low given the 5% economic growth (seen for 2010).” Elsewhere, New Zealand policymakers left its key interest rate unchanged at 2.5%, while the nation’s central bank governor said, “If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010.” Australia reported the nation’s employment change increased by 31,200—the third-consecutive monthly rise—topping the advance of 5,000 that had been forecasted, while the unemployment rate unexpectedly fell from 5.8% to 5.7%, which was expected to increase to 5.9%.

In Latin America, Brazil’s central bank voted to keep the benchmark rate at 8.75%, as expected, citing “The remaining margin of idleness in productive factors.” Policymakers said the rate was “consistent” with a non-inflationary recovery “at the moment.” Market participants remain mixed on the timing of the next rate hike while forecasting inflation to end 2010 at 4.48%, below the 4.5% midpoint of policymaker’s target range. 3Q GDP grew 1.3% quarter-over-quarter (q/q), lower than the expectation of 2.0%, and 2Q GDP was revised down to 1.1% q/q from the 1.9% initially reported. President Luiz Inacio Lula da Silva’s government yesterday extended tax breaks that were set to expire on consumer and capital goods for at least six months, intended to spur investment and consumption.

Economic data tomorrow highlights retail sales in the US and plentiful Chinese data

Advance retail sales for November will be reported tomorrow, expected to rise 0.6% month-over-month (m/m), after increasing 1.4% in October, while sales ex-autos are forecasted to increase 0.4%, after expanding by 0.2% the prior month. Last month’s report showed increases in spending across a majority of categories and automobile sales rose, reversing a negative reading in vehicles sales in September, confounding the bearish case that the “cash for clunkers” program simply pulled forward sales.

Sales have been surprisingly resilient despite the chorus that US consumers will be unable to contribute to the economic recovery. Consumers responded to the credit crisis by pulling back on spending and the savings rate jumped from nearly 0% to a high of 6.4% in May, but has now pulled back to 4.4% in October, as consumers begin to spend again.

Other releases on tomorrow’s US economic calendar include the import price index, expected to increase 1.2% m/m and 2.9% year-over-year, while the preliminary December reading of the University of Michigan Sentiment Index is expected to rise to 68.8 after dipping for the second-straight month to 67.4 in November, as consumers continue to fret about job losses.

In international economic releases, tomorrow will yield a slew of data out of China, including the producer price and consumer price index readings, retail sales, industrial production, fixed asset investment and the trade balance. Chinese banking information is anticipated this week, and is possible for tomorrow, which includes new lending data and the money supply. Elsewhere, the Japanese consumer confidence reading, UK producer price index data and the Canadian house price index are scheduled to be reported.