Weekend Summary

Stocks Mixed Despite Bullish Economic Data in US and China


Markets were able to stage a comeback on the week, despite concerns about the health of governments globally and their debt levels. Today's action was boosted by a strong US retail sales report and an increase in consumer sentiment, as well as strong data from China, highlighted by a larger-than-expected increase in industrial production and new lending. A rise in the US dollar pressured commodity prices, as well as energy and materials shares, while consumer discretionary names rose on the bullish retail sales data. In energy news, Dow member United Technologies gave an upbeat 2010 forecast, and fellow Dow component Boeing suggested it may not delay its 787 Dreamliner test flight again. Elsewhere, National Semiconductor beat the Street but its outlook seemed to disappoint, Apple announced a countersuit against Nokia, and GameStop said it gained market share with an increase in sales in November.

The Dow Jones Industrial Average rose 65 points (0.6%) to close at 10,472 on Friday, the S&P 500 Index added 4 points (0.4%) to 1,106, while the Nasdaq Composite lost 1 point (0.0%) to 2,190. In light volume, 1.5 billion shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil was $0.67 lower at $69.87 per barrel, wholesale gasoline was flat at $1.84 per gallon, and the Bloomberg gold spot price decreased $15.70 to $1,115.30 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.7% to 76.56. For the week, the DJIA gained 0.8%, while the S&P 500 Index was flat, and the Nasdaq Composite decreased 0.2%.

Dow member United Technologies Corp. (UTX $69) was higher after the diversified US manufacturer said "Exceptional execution, aggressive restructuring, and strategic capital allocation have positioned UTC to resume earnings growth in 2010 even in the face of continuing difficult end markets." UTX added that it expects 2010 EPS to grow between 7-13%, or a range of $4.40-4.65, while revenues are expected to be between $54-55 billion, a 2-4% increase versus the prior year. Analysts are expecting the company to post 2010 EPS of $4.53 and revenues of $53.3 billion. UTX also reaffirmed its 2009 full-year earnings forecast.

Meanwhile, fellow Dow component Boeing (BA $55 1) was also higher after the company said it has opened the flight-test window for its 787 Dreamliner aircraft beginning December 15, soothing some concerns that the company may delay its latest forecast of executing a test flight by the end of the year. BA is already two years behind its initial schedule for its Dreamliner test flight.

National Semiconductor Corp. (NSM $15) reported fiscal 2Q EPS of $0.20, six cents above the Street consensus, with revenues gaining 10% versus 1Q to $345 million, exceeding the Street's $335 million forecast, but down from last year's revenue of $422 million. The analog semiconductor firm said its sequential improvement in revenues was driven mainly by increased demand in industrial markets, while its gross margin increased versus last quarter, benefiting from a combination of a stronger product mix, higher sales volume and improved manufacturing cost performance. The company said although the typical seasonal pattern is for 3Q revenues to decline sequentially, it expects sales next quarter to be "roughly flat," which would be better than analysts' forecasts of $331 million in revenue. However,shares were under pressure as some analysts said they expected a better revenue outlook and some noted that the company could face tough competition.

Responding to a lawsuit brought against the company by the world's largest cellphone maker Nokia (NOK $13), Apple Inc. (AAPL $195) announced that it has filed a countersuit claiming that NOK is infringing on 13 AAPL patents. A spokesman for NOK, which filed a lawsuit in October claiming AAPL infringed on 10 of its patents, said the countersuit does not change anything fundamental in the case and it will take time to study the countersuit. AAPL's General Counsel and senior vice president Bruce Sewell, which makes the iPhone, said, "Other companies must compete with us by inventing their own technologies, not just by stealing ours." NOK shares rose while APPL was lower.

GameStop Corp. (GME $22) rose after the world's largest video game retailer reported that it "saw a lift in new software sales that outpaced the industry." GME said that while some indicators say new software sales are declining, it bucked the trend and continued to gain market share, with its US stores posting a 15% rise in new software sales in November.

Retail sales, import prices, and consumer sentiment top forecasts

Advance retail sales for November rose 1.3% month-over-month (m/m), compared to the Bloomberg forecast of an increase of 0.6%, while October's 1.4% advance was revised to a 1.1% gain while September was positively revised to -2.0% from -2.3%. Sales ex-autos gained 1.2%, versus the expectation of an increase of 0.4%, and while October was negatively revised, September's upward adjustment more than offset October's modification. Excluding autos, gasoline and building materials, the figure the government uses to calculate the consumer spending component of GDP, sales increased 0.6% in November and 1.3% over the past three months.

While consumers will not be able to spend at the same level as before the crisis, it appears consumers are more comfortable with the outlook for the future - sentiment has recovered and the savings rate has abated to 4.4% in October after jumping to 6.4% in May from nearly 0% before the crisis - and retail sales ex-autos have been negative in only one of the seven past months. November sales were positive in all but 3 of 13 categories and auto sales posted the second-straight increase after falling in September, the month after the cash for clunkers program ended. Comparisons to the prior year are getting easier, with retail sales posting the first year-over-year increase since August 2008, of 1.9%.

Meanwhile, the Import Price Index increased 1.7% month-over-month for November, above the expected increase of 1.2%. Year-over-year, import prices are higher by 3.7%, also topping expectations, which called for prices to be 2.9% higher compared to last year. Petroleum imports jumped from 2.0% in October to a 6.2% advance in November, and industrial supplies rose by 4.8% from a 2.2% gain in October, to support the rise in the index. Elsewhere, food, feed, and drink prices increased from a 0.3% gain in the previous month to a 0.5% advance. Excluding petroleum, import prices increased slightly, rising 0.7% in November.

Elsewhere, the preliminary University of Michigan's Consumer Sentiment Index advanced more than expected, increasing from 67.4 in November to 73.4 in December, versus the Bloomberg forecast, which called for a slight increase to 68.8. The current conditions component of the report advanced from 68.8 in November to 79.1, and the expectations component also improved from 66.5 to 69.7. Inflation expectations moved lower with the one-year outlook dropping from 2.7 to 2.1, while the five-year expectation decreased from 3.0 to 2.6. The University's statement noted,"“Confidence improved in early December mainly due to widespread price discounting by merchants attempting to spark holiday sales as well as somewhat more positive expectations for economic growth and employment."

Additionally, October business inventories unexpectedly rose, increasing 0.2%, compared to the forecast of a drop of 0.2%, but September's decline was revised to a slightly larger drop of 0.5% from the previously reported 0.4% fall. Sales advanced 1.1%, following September's decline being revised to a gain, resulting in the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-ticking lower from 1.31 months in September to 1.30 months in October. Treasuries were under pressure amid the reports, but the 30-year managed to rise on the day, and the yield curve reversed some of the steepening experienced earlier this week. The yield on the 2-year note rose 3 bp to 0.80%, the yield on the 10-year note advanced by 4 bps to 3.54%, while the yield on the 30-year bond fell 1 bp to 4.49%.

International economic news highlighted by plethora of data out of China

The Chinese government reported a slew of economic data Friday, headlined by a 19.2% year-over-year (y/y) jump in industrial production for November, which exceeded the 18.2% gain that economists surveyed by Bloomberg had forecasted, and following the 16.1% rise that was seen in October. Other data out of China included an unexpected -1.2% y/y drop in exports, coupled with a larger-than-expected 26.7% y/y rise in imports, a smaller-than-forecasted 15.8% increase in retail sales, and consumer prices rising more than expected at 0.6%, versus a slower rate of decline in producer prices at 2.1%. Moreover, the nation's trade balance came in smaller than expected, urban fixed-asset investment rose 32.1%, short of the 33.0% forecast, while new loans unexpectedly increased month-over-month to 294.8 billion yuan.

China has led the economic recovery this year and its economy and moves by policymakers are closely watched. The Chinese government this week adjusted its stimulus policies to curb property speculation by extending the timeframe that home sales would be exempt from tax to five years of ownership instead of two years, while extending subsidies for rural purchases of consumer goods and pledging a "moderately loose" monetary policy in 2010.

In Europe, UK producer prices in November rose at the fastest annual pace in nine months, per Bloomberg, and Moody's Investors Service reiterated that it has no current plans to cut the triple-A ratings of the US and the UK, following comments it made earlier this week, when it said the ratings of the two nations may "test the Aaa boundries."

Second half supplies resiliency

Coming off of last Friday's labor report, which showed many fewer jobs were shed from nonfarm payrolls, boosting expectations that a rate hike by the Fed could come earlier than some anticipated, stocks began the week with uncertainty regarding how the economic recovery will hold up as the Federal Reserve begins to unwind its extremely loose monetary policy. However, rate hike expectations were tempered and the aforementioned uncertainty was placed on the back burner following a speech by Federal Reserve Chairman Ben Bernanke, in which he said, "we're still looking at the extended period" for keeping rates at an exceptionally low rate. Bernanke added that, "The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate." Meanwhile, festering fears regarding exposure to the debt out of Dubai did little to promote optimism earlier on, while Fitch's downgrade of its rating on Greece and Moody's slashed outlook on Spain exacerbated already shaky global debt sentiment to add to the sluggish start to the week. There were some economic reports from outside the US that added to the odds favoring a negative week in the equity markets, most notably unexpected drops in factory orders and industrial production out of Germany-Europe's largest economy-as well as a negative revision to Japan's 3Q GDP.

But as the week wore on, global government debt concerns waned and some support for the economic recovery emerged to help the equity markets stage a comeback, with the Dow and S&P 500 above the unchanged mark for the week, while the Nasdaq ended slightly lower on the week. Friday's deluge of favorable data from China and the US, which helped the resiliency in the equity markets, was complimented by Thursday's weekly jobless claims report. Although showing an unexpected increase in initial claims for unemployment, the report revealed that the four-week moving average-considered a smoother look at the overall trend-fell to the lowest level since September 2008, and continuing claims tumbled over 300,000. Moreover, a separate report this week showed the trade deficit unexpectedly narrowed as exports outpaced imports, adding to the late-week recovery. Even the economic front overseas contributed to the positive sentiment, with China outlining measures to maintain its stimulus programs in 2010, and the Bank of Japan announcing a 7.2 trillion yen ($81 billion) stimulus package.

Economic data to heat up next week

Several readings on inflation will be released next week with the Producer Price Index (PPI) on Tuesday expected to show prices at the wholesale level were up 0.8% m/m in November, after rising 0.3% in October. While food and energy are the smallest components of the inflation indexes, the volatility of their prices tends to explain a large portion of m/m changes. The core rate, which excludes food and energy, is expected to rise 0.2% after falling 0.6% the prior month. The Consumer Price Index (CPI) follows on Wednesday, anticipated to have risen 0.4% m/m in November, after increasing 0.3% October. Ex-food and energy, the core CPI rate is forecasted to have risen 0.1%, after a 0.2% increase in the prior month.

Industrial production will also be reported on Tuesday, anticipated to rise 0.5% m/m in November, after a 0.1% increase in October, while capacity utilization is expected to have risen to 71.1% from 70.7%.

On Wednesday, housing starts for November will be reported, expected to show a jump of 8.7% m/m in November to an annual rate of 575,000 units, after dropping 10.6% in October, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to increase 3.4% m/m after declining 4.2% m/m in October. This report has disappointed for the last two months, but was distorted by the initial November 30 expiration of the buyer tax credit, which has been extended to April 30, 2010.

The two-day Federal Open Market Committee (FOMC) meeting next week concludes with the release of the statement mid-day Wednesday. No changes are expected to interest rate policy at the meeting. Market participants continue to watch for any clues that indicate the timing of when the Fed expects to contemplate tightening, focusing on the language used by the Fed with regard to the "extended period" for keeping rates at an exceptionally low rate.

Fed Chair Bernanke in a speech to the Economic Club of Washington on Monday said that "we're still looking at the extended period." The Fed has the dual objective of full employment and stable prices, and has given a trio of reasons for keeping rates low, namely "low rates of resource utilization (the unemployment rate), subdued inflation trends and stable inflation expectations." This week, Bernanke noted that while commodity prices have risen, inflation on net "appears likely to remain subdued for some time," and even cited the potential that "inflation could move lower from here."

Other releases on the US economic calendar next week include the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Index of Leading Economic Indicators, and the Philadelphia Fed's Business Activity Index.

International economic releases include the Tankan sentiment survey and industrial production in Japan, the Bank of Japan's monetary policy meeting, consumer and wholesale prices and retail sales in the UK, the Zew survey of investor sentiment, CPI and PMI readings in the euro zone, retail sales and the unemployment rate in Brazil, and the minutes from Australia's central bank meeting.