Evening Update

Retailers Help to Boost Stocks

After beginning the day in the red, stemming from an unexpected increase in interest rates by China’s central bank, stocks rebounded to finish mixed and well off the lows of the day on the back of generally better-than-expected December same-store sales results from US retailers, namely Target and Sears Holdings, and after Bed Bath & Beyond handily beat profit expectations and issued favorable guidance. Housing shares were also higher, supported by an unexpected profit from homebuilder Lennar. A smaller-than-expected increase in weekly initial jobless claims also helped to calm sentiment. In other equity news, Dow member Verizon Communications’ CEO offered a full-year profit warning, while disappointing holiday sales prompted GameStop to reduce its guidance. Treasuries were unchanged.

The Dow Jones Industrial Average rose 33 points (0.3%) to close at 10,607, while the S&P 500 Index added 5 points (0.4%) to 1,142, but the Nasdaq Composite was down 1 point (0.05%) to 2,300. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $0.52 lower at $82.66 per barrel, wholesale gasoline was unchanged at $2.13 per gallon, and the Bloomberg gold spot price fell $6.80 to $1,131.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 77.96.

Verizon Communications’ (VZ $32) CEO Ivan Seidenberg warned yesterday that 2009 profits would be roughly $0.13-0.15 per share lower year-over-year, after the company posted $2.54 per share in earnings for 2008, due mainly to pension costs. This was a larger drop than analysts’ forecasts, which are calling for the company to report a full-year profit of $2.45 per share. The company’s chief did say that 2009 was a good, solid year for the Dow member and it added more subscribers than the 1 million that the company had forecasted for 4Q. Seidenberg also hinted that he would be interested in taking full ownership of Verizon Wireless through a buyout of joint venture partner Vodafone (VOD $22). Shares were slightly lower on the day.

Bed Bath & Beyond (BBBY $42) reported fiscal 3Q EPS of $0.58, much higher than the $0.42 that Wall Street analysts had expected, with revenues of $1.98 billion, an increase of 10.8% versus last year and just above the $1.9 billion that had been expected. The company said its same-store sales jumped 7.3% during the quarter, compared to a 5.6% drop the same period a year ago. BBBY issued full-year and 4Q EPS guidance that exceeded analysts’ expectations. Shares were higher.

Sears Holdings Corp. (SHLD $99) was sharply higher after the company issued 4Q EPS guidance that topped the Street’s forecast, as it expects to post adjusted earnings between $3.36-4.06 per share, compared to $2.65 per share expectation of analysts. Additionally, SHLD said December same-store sales—sales at stores open at least a year—eked out a small gain of 0.4%, as a 5.3% jump in Kmart sales offset a 4.3% drop in sales at its US Sears stores. The company said its Kmart sales benefited from increases in toys, home and apparel categories.

Lennar Corp. (LEN $16) reported an unexpected profit of $0.19 per share for fiscal 4Q, compared to the loss of $0.48 per share that the Street had forecasted, with revenues declining 29% versus last year to $914 million, but that topped the $863 million forecast. The homebuilder delivered 3,496 homes during the quarter, down 23% from the same period last year but up 30% versus last quarter. Additionally, LEN said its new orders rose 3% versus last year, and the cancellation rate improved from 32% to 20%. The company said it benefited from housing affordability and the government’s tax credit for home buyers, and it is optimistic that homebuyers have recognized that the residential housing market is improving and will continue to take advantage of the extended housing stimulus. Shares were higher.

Target (TGT $50) headlined a plethora of retail industry reports of same-store sales as the company said its sales unexpectedly rose, gaining 1.8%, versus the Reuters estimate, which called for a 0.2% decline. TGT said December’s stronger-than-expected sales were due to better-than-anticipated guest traffic throughout the month. Shares were higher.

Costco Wholesale (COST $60) reported December same-store sales rose 9%, including the impact of fuel, compared to the 7.9% increase that analysts had forecasted. Excluding fuel and the impact of foreign exchange, sales would have rose 4%. COST traded lower.

Macy’s Inc. (M $17) announced that its December comparable store sales rose 1.0%, just above the 0.8% increase that analysts had forecasted. In other department stores results, Kohl’s (KSS $53) said its sales rose 4.7%, which was above the 3.6% increase that analysts had expected, JC Penney (JCP $27) posted a 3.8% decline in its sales, slightly smaller than the 4.0% drop that hade been anticipated, and Nordstrom (JWN $39) reported a 7.4% increase in sales for December, easily topping the 2.5% that analysts had forecasted. Shares of M and JWN were higher, but KSS and JCP were lower.

Inside the mall, Gap Inc. (GPS $20) posted a 2% increase in same-store sales, versus the 2.6% gain that the Street had anticipated, Limited Brands (LTD $19) said its sales fell 2.0%, larger than the 1.5% decline that was expected, and Abercrombie & Fitch (ANF $33) said its sales tumbled 19% in December, compared to the 12.5% drop that the Street anticipated. Shares of all three companies were lower.

Meanwhile, gaming retailer GameStop (GME $20) was sharply lower after the company cut its 4Q EPS forecast to $1.25-1.29 from a previous forecast of $1.47-1.65, and slashed its full-year profit outlook from $2.45-2.63 to $2.23-2.27. Analysts are expecting the company to report 4Q EPS of $1.57 and $2.55 for the full year. The lowered guidance came as the company said its total sales for the nine-week holiday period ended January 2nd were flat from the prior year and same-store sales dropped 8.6%. GME said, “Despite a kick start to this year’s holiday selling season with several major title launches, sales momentum was impacted in December by economic weakness in all global operating segments, winter storms at peak shopping periods in December, and unexpected shortages of key products.”

Jobless claims tick higher to a level below forecast

Weekly initial jobless claims rose by 1,000 to 434,000, versus last week's figure which was revised slightly higher to 433,000. The Bloomberg consensus called for claims to increase to 439,000 following last week’s unexpected drop. The four-week moving average, considered a smoother look at the trend in claims, fell to 450,250 from 460,500, and continuing claims tumbled by 179,000 to 4,802,000, compared to the 4,975,000 forecast. Treasuries are modestly lower, paring losses that followed the data.

Treasuries finished unchanged, with the yield on the 2-year note flat at 1.02%, the yield on the 10-year note even at 3.83%, and the yield on the 30-year bond steady at 4.70%.

Tomorrow, the economic calendar will yield the headline release of the week in the form of the Bureau of Labor Statistics’ nonfarm payrolls report for December. Given the many fewer-than-expected job losses seen in the November report—11,000 versus a 125,000 drop forecast—along with the favorable trend forming in initial jobless claims and improvements in the employment components seen this week in both the ISM Manufacturing and Non-Manufacturing Indexes, forecasts have been whittled down and the consensus is now calling for no change in jobs to nonfarm payrolls, with several economists projecting December as the first month of positive job growth since December 2007. Additionally, the unemployment rate, which was expected tick higher to 10.1% according to forecasts as recent as Wednesday, is now also expected to remain at 10.0%.

The labor report is closely followed as it encompasses data obtained from two separate surveys as the unemployment rate comes from responses from actual households, while the change in jobs comes from surveys of business establishments. Traders also pay close attention to this report for its implications about the health of the consumer, which account for the lion’s share of the growth in the economy. Average hourly earnings and the average workweek are components that are included in the report that carry some weight on the Street, with strength in these figures pointing to the possibility of wage increases, which can boost consumption. Another aspect of the report that is also scrutinized by economists is the change in temporary help as strength in this can foreshadow potential job growth as employers will likely first make adjustments to their workforce by adding temporary positions.

Also on tomorrow’s economic calendar, wholesale inventories for November will be reported, forecast to decline 0.3%, as well as consumer credit, which is expected to have fallen $5.0 billion during November.

China increases interest rates

The People’s Bank of China (PBOC), China’s central bank, increased the interest rate on its three-month bills for the first time since mid-August, as it follows through on recent pledges to keep loan growth under control and curb price increases. The move sparked concern in the region that the PBOC may be getting close to raising its benchmark lending rate, potentially impeding growth in the nation that has led the global economy out of the recession. New loans in the country surged during 2009, prompting Chinese Premier Wen Jiabao to say last year that the unprecedented rise had caused property prices to “rise too quickly.” In other central bank news, the Bank of England left its benchmark interest rate unchanged at a record low of 0.5% and maintained its 200 billion pound asset purchase plan, as expected by economists surveyed by Bloomberg.

Elsewhere in the Asia/Pacific region, Australia’s retail sales soared 1.4% in November, more than four times the forecast of economists surveyed by Bloomberg, exacerbating concerns that the Reserve Bank of Australia could bump interest rates for a fourth-consecutive time next month.

Economic news in the eurozone did little to help sentiment in early trading, as November retail sales in Germany—Europe’s largest economy—unexpectedly fell 1.1%, well below the 0.3% increase expected by economists, and factory orders in the country rose just 0.2% in November, a smaller rise than anticipated. However, some positive economic reports in the region helped to soothe sentiment, as UK home prices rose more than expected, and eurozone consumer confidence improved for the ninth-straight month in November to 91.3, a level not seen since before the collapse of Lehman Brothers. As well, eurozone retail sales surprised to the downside, falling 1.2% month-over-month in November, compared to the flat reading that was forecast.