Weekend Update

Tech Leads Way as Markets Finish Higher

Stocks finished in positive territory in a high volume day Friday, highlighted by options expiration. The tech sector lifted the Nasdaq after positive results were reported by Oracle and Research In Motion, while Palm posted a larger loss than analysts expected. In other earnings news, Nike and Darden both beat Street estimates, and Take-Two Interactive Software posted better-than-expected profits and announced that activist investor Carl Icahn has increased his stake in the company. Shares of CarMax rose as the auto retailer reported an unexpected profit, and General Motors announced that it will discontinue Saab after negotiations to sell the brand failed. There were no major US economic releases today and Treasuries were lower.

The Dow Jones Industrial Average rose 21 points (0.2%) to close at 10,329, the S&P 500 Index added 6 points (0.6%) to 1,102, while the Nasdaq Composite gained 32 points (1.5%) to 2,212. In heavy volume on a quadruple-witching day, 2.7 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil was $0.34 higher at $74.42 per barrel, wholesale gasoline was down $0.04 at $1.89 per gallon, and the Bloomberg gold spot price increased $12.88 to $1,111.78 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was flat at 77.73. For the week, the DJIA lost 1.4%, the S&P 500 Index fell 0.4%, while the Nasdaq Composite gained 1.0%.

Oracle(ORCL $24) reported fiscal 2Q EPS ex-items of $0.39, three cents above the consensus of Wall Street analysts, as revenues grew 3% versus last year to $5.9 billion, topping the Street's $5.7 billion forecast. The business software company said it took market share in every region in the world from rival SAP (SAP $46) for the fourth-straight quarter, on strength in software sales. ORCL added that it expects the European Commission to "unconditionally" clear its acquisition of Sun Microsystems(JAVA $9) in January. ORCL executives told the audience on a conference call that the company was seeing strong demand from customers, "Even the banks seem to be coming back," Reuters quoted the company's president. Shares of all three companies were higher.

Research in Motion (RIMM $70) finished higher after the maker of the BlackBerry device reported 3Q EPS of $1.10, six cents above the Street's forecast. RIMM’s revenues rose 11% versus the previous quarter to $3.92 billion, above the $3.8 billion forecast of analysts, and 41% higher than last year. The company said it shipped a record amount of BlackBerry smartphones, which topped 10 million units during the quarter. RIMM said it is experiencing a "great start" to the holiday buying season. RIMM added that its results and subsequent guidance reflect its efforts to expand into broader customer segments and new geographies while maintaining its "strong position" in North America. RIMM issued 4Q guidance that topped analysts’ expectations.

In related industry earnings news, Palm Inc.(PALM $120 was down sharply after it reported a fiscal 2Q net loss ex-items of $0.37 per share, compared to the loss of $0.32 that analysts had expected, as adjusted revenues totaled $302 million, which topped the Street's forecast of $266 million. The company said it shipped a total of 783,000 smartphone units during the quarter, representing a 5% decrease from the previous quarter, but up 41% compared to the same period last year. However, PALM's smartphone sellthrough-the gauge of how many devices are obtained by customers-fell 29% from 1Q and down 4% versus last year to 573,000 units, and the company noted lower-than-expected demand among Sprint Nextel (S $4) customers. The company's CEO said the firm plans to spend aggressively and ramp up marketing in order to stimulate sales.

General Motors Co, announced that it will discontinue the Saab brand after negotiations to sell the brand to Dutch carmaker Spyker Cars collapsed. This marks the third time this year that a deal by GM to sell a brand has failed, including an attempt to sell Saab to Swedish sports car maker Koenigsegg Group AB.. The Saab brand has 1,100 dealers and employs 3,400 people worldwide, most of whom work in Sweden.

In other auto news, CarMax Inc. (KMX $23), the number one U.S. retailer of used cars, reported a third quarter profit of $74.6 million, or $0.33 per share, compared to previous year loss of $21.9 million, or $0.10 per share. The results beat analysts estimates of $1.66 billion in revenue and earnings of $0.16 per share. New vehicle sales fell 34%, while sales of used-vehicles, which make up 80% of the companies business, rose 20%.

Nike Inc.(NKE $64) reported fiscal 2Q earnings of $0.76 per share, five cents above the expectations of analysts, with revenues falling 4% versus last year to $4.4 billion, inline with expectations. The athletic apparel company said its worldwide futures orders scheduled for delivery from December 2009 through April 2010 totaled $7 billion, 4% higher than last year, but down 1% after excluding currency changes. Orders were 4% lower in North America, but Western Europe and Emerging Markets posted solid gains of 12% and 38%, respectively. Shares were higher.

Take-Two Interactive Software (TTWO $9) was nicely higher after activist billionaire investor Carl Icahn disclosed that he had increased his stake in the company to over 11%, according to a regulatory filing with the SEC. The filing also noted that Icahn and other related investors may seek talks with the company, but no other details were disclosed. The news followed the video-game publisher's earnings report, in which the publisher of the "Grand Theft Auto" franchise posted 4Q EPS ex-items of $0.09, one penny above the Street's forecast, with revenues rising 6% to $343.4 million, which also exceeded the $338 million forecast of analysts.

Darden Restaurants (DRI $35) reported fiscal 2Q EPS of $0.43, above the Street's $0.42 estimate, with revenues dipping 1.6% versus last year to $1.6 billion, inline with analysts' forecasts. The parent of Olive Garden and Red Lobster said its same-store sales declined 4.7% for the quarter. DRI narrowed its full-year EPS guidance, saying sales trends within the industry improved in 2Q versus 1Q, but sales trends were still a little more sluggish than it expected. Shares finished higher.

No major US economic reports today

Treasuries were weaker today as there were no major economic reports released. The yield on the 2-year note rose 4 bps to 0.79%, the yield on the 10-year note advanced by 6 bps to 3.54%, while the yield on the 30-year bond increased 4 bps to 4.46%.

China moves to slow rise in property prices

In Asian news, the Chinese government moved to slow their potentially overheating property market by tightening land-sale regulations for developers. New rules posted on the Ministry of Finance's web site include a minimum down payment of 50% on land purchases from the government (up from current levels of 20-30%) and also requires developers to completely pay off land purchases within one year of a purchase, with a one-year extension allowed for certain "special projects". The change comes after China's urban property prices grew at their fastest pace in sixteen months, rising 5.7% from the previous November reading.

In banking news, the Basel Committee on Banking Supervision-comprised of central bankers and regulators from about 30 countries-announced that global banks need to strengthen capital quality and liquidity by implementing standards that the Committee will develop by the end of 2010, with an aim of implementation by the end of 2012. In Europe, the ECB released its Financial Stability Review, which showed the central bank raised its forecast for bank writedowns through 2010 from the 488 billion euros it estimated in June to 553 billion euros.

Elsewhere in Europe, a reading on business confidence in Germany-Europe's largest economy, the German Ifo Business Climate Index increased to the highest level since July 2008, rising from 93.9 in November to 94.7 in December, above the 94.5 consensus forecast of economists surveyed by Bloomberg. Additionally, the German upper house approved a stimulus bill that will infuse 8.5 billion euros ($12.19 billion) of fiscal stimulus into the economy in 2010. The bill includes tax relief for companies, hotels, heirs and families, which is contrary to tax increases being implemented in other European countries such as Spain and the UK. Other economic data that was released in Europe included German producer prices rising by a smaller amount than expected, UK consumer confidence unexpectedly falling, French business confidence missing forecasts, and Italian industrial orders increasing at a slower pace than anticipated.

Elsewhere, the Japanese economic calendar commanded attention as the Bank of Japan vowed to fight deflation as it kept its target interest rate unchanged at 0.1%, saying that the BoJ "does not tolerate a year-over-year rate of change in the CPI equal to or below zero percent," suggesting that the central bank will keep its accommodative monetary policy until the threat of deflation wanes. Japan's department store sales for November fell almost 12% year-over-year.

Mixed signals stymie sentiment

This week the markets went through some mixed emotions as traders digested conflicting reports while trying to determine the sustainability of the economic recovery. Inflation painted a confusing picture as producer prices came in hotter than expected but failed to be passed on as consumer prices came in tame. Moreover, regional manufacturing reports also painted different landscapes as the Empire Manufacturing Index-depicting business activity in New York-deteriorated much more than expected in December, while the Philly Fed Manufacturing Index showed Mid-Atlantic activity unexpectedly improved.

However, not all this past week's data sent mixed signals as some reports added to the argument that the wheels of the economic recovery may still have tread on them. Leading indicators posted the eighth consecutive monthly increase, while housing starts and building permits gained ground, providing aid to the ailing sector that is vital to economic growth. Meanwhile, industrial production rose more than anticipated and capacity utilization moved higher, and the 71.3% utilization rate, which remains about 10 basis points below the historical average.

With all the attention seemingly on the economic front, there was news from the corporate sector that is worth a mention. Citigroup (C $3) and Wells Fargo & Co.(WFC $27) both announced that they will exit the Treasury's Troubled Asset Relief Program (TARP), but the pricing of a stock offering by Citigroup disappointed the Street as the price came in below the level that the government initially invested in the company. Dow member Exxon Mobil(XOM $68) announced that it will acquire natural gas producer XTO Energy(XTO $47) in a deal valued at $41 billion-including $10 billion in debt-aimed at enhancing XOM’s position in the development of unconventional natural gas and oil resources.

Holiday-shortened week will be full of economic data

The third and final reading on 3Q Gross Domestic Product (GDP) will be out on Tuesday, and the Bloomberg survey of economists expects no change from the 2.8% second reading and the component estimates provided by the survey show no change forecasted for personal consumption at 2.9%, the GDP Price Index at 0.5%, and the core PCE Index, which excludes food and energy, at 1.3%.

Tuesday also brings the November report on existing-home sales, expected to have increased 2.5% month-over-month (m/m) to an annual rate of 6.25 million units after surging 10.1% to 6.1 million units in October and 8.8% in September. New home sales, which have represented a small 7% of sales in 2009, will be reported on Wednesday, forecasted to increase 1.9% m/m in November to an annual rate of 438,000 units.

Durable goods orders will be reported on Thursday, expected to rise 0.5% m/m in November, after unexpectedly falling 0.6% in October, while ex-transportation, orders are forecasted to have grown 1.0% m/m, after surprising to the downside in October, dropping 1.3%. This series is volatile on a month-to-month basis.

While pessimists argue the economy is growing only due to stimulus measures, we've seen increases in a broad range of categories of consumer spending and production, and believe a positive feedback loop could be developing, which could become self-sustaining. Many have remained incredulous at the optimists, but with each successive piece of better news, a little more confidence creeps into the picture. However, sentiment is a contrary-indicator, with the stock market enjoying the best returns after a period of extreme pessimism. We've been discussing for some time the possibility of a short-term counter-trend rally in the dollar (despite the longer-term secular decline that started in early 2002), and the dollar has posted a sharp rally over the past month. The test for the market will be if stocks can rise in the face of a rising dollar, as the two have moved in opposite directions in 2009, as the dollar declined as appetites for risk (and stocks, emerging markets, and commodities) increased.

Other reports on next week's economic calendar include the Chicago Fed National Activity Index, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, personal income and spending, the University of Michigan consumer sentiment survey and initial jobless claims.

US markets will be closed next Friday in observance of Christmas and will close early on Thursday.

International economic releases next week include Canadian retail sales and October GDP, French producer prices, consumer spending and jobseekers, and the final reading on UK 3Q GDP. In Asia/Pacific the Australian version of the Leading Economic Indicators Index and Chinese wholesale prices will be reported, and Japan releases the jobless rate, household spending, consumer prices and vehicle production. Lastly, central banks release the minutes from the latest monetary policy meetings of the Bank of Japan and the Bank of England.