Evening Update

Stocks Prove Resilient in the Face of Disappointing Jobs Data

The bulls managed to drive stocks higher, even after an unexpected drop in nonfarm payrolls for December soured early-morning sentiment. In equity news, UPS increased its 4Q EPS outlook and announced job cuts due to streamlined operations, Foot Locker reported a change to their organizational structure, and Best Buy posted an increase in revenue and same-store-sales, but failed to raise 2010 expectations. Additionally, Boeing announced that India expressed interest in purchasing C-17 aircraft and Apollo Group reported better-than-expected earnings that were overshadowed by a negative government review of its student loan procedures. Treasuries finished the day mixed after gaining ground early in the day on the jobs data and wholesale inventory figures.

The Dow Jones Industrial Average rose on Friday 11 points (0.1%) to close at 10,618, the S&P 500 Index added 3 points (0.3%) to 1,145, while the Nasdaq Composite gained 17 points (0.7%) to 2,317. In light volume, 995 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $0.17 higher at $82.90 per barrel, wholesale gasoline increased $.01 to $2.17 per gallon, and the Bloomberg gold spot price increased $5.18 to $1,136.78 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.57% to 77.47. For the week, the DJIA gained 1.8%, while the S&P 500 Index rose 2.7%, and the Nasdaq Composite increased 2.1%.

UPS (UPS $60 ) was higher after the package delivery firm increased its previous 4Q EPS outlook, as it now expects an EPS range of $0.73-0.75, compared to the previous guidance of between $0.58-0.65, and analysts are calling for 4Q EPS of $0.63. The company said the stronger-than-expected earnings stem from better-than-expected results in both domestic and international operations and savings through cost management. However, UPS added that it still anticipates a gradual economic recovery with improvement more evident as 2010 progresses.

Additionally, UPS said that, by leveraging technology and the management strengths of its people, it is streamlining its domestic management structure, reducing the number of districts and regions in its US small package operation, which will result in the elimination of approximately 1,800 management and administrative positions.

In other reorganization news, Foot Locker (FL $12) reported a change to its organizational structure and provided an update to its 2009 real estate plans, which includes plans to eliminate approximately 120 home office and field management positions, and the closure of 117 stores. FL expects to take a 4Q after-tax charge of $0.02 per share as a result.

Elsewhere in retail, Best Buy (BBY $40) reported that December revenues rose 13% to $8.5 billion up from $7.5 billion the same period last year, as same-store sales-sales at stores open at least a year-rose 8.2%. The electronics retailer said strong gains in notebook computers and mobile phones drove a 28.5% increase in same-store sales at its home office category. BBY reaffirmed its full-year guidance, but shares traded lower, suggesting some on the Street may have been expecting a stronger performance in December.

Meanwhile, Dow member Boeing (BA $61 ) announced that the Indian government has expressed interest in acquiring 10 C-17 Globemaster III aircraft from the company, aimed at modernizing its airlift capabilities, in a deal that is potentially worth more than $2 billion. BA has submitted two separate proposals to the Indian Air Force for helicopters worth $2 billion, and last year signed a separate $2.1 billion deal with the Indian Navy to deliver P-81 aircraft by 2013, according to Reuters. However, shares were lower on the heels of an analyst downgrade.

In earnings news, for-profit educator Apollo Group (APOL $61) reported fiscal 1Q EPS ex-items of $1.47, two cents above the consensus estimate of Wall Street analysts, while revenues jumped 31% versus last year to $1.3 billion, slightly above the $1.2 billion Street forecast. The company said the growth in revenues was helped by an 18.4% year-over-year (y/y) increase in University of Phoenix total degreed enrollment. However, shares ended the day lower after the company said it received a report from the US Department of Education, which contained "six findings and one concern" in regard to student loans.

Nonfarm payrolls drop unexpectedly but jobs growth comes in November

Nonfarm payrolls fell by 85,000 jobs in December, a surprising drop as the Bloomberg estimate called for an unchanged reading of nonfarm payrolls. Also, November was favorably revised to the first positive reading since December 2007, to a gain of 4,000 from -11,000, but October was unfavorably revised from -111,000, to -127,000. The unemployment rate remained at 10.0%, matching the consensus forecast, although 661,000 people exited the workforce, which may have kept that rate from rising. Average hourly earnings rose 0.2%, also matching the Street's forecast, while average weekly hours remained at 33.2, which was also expected. The Bureau of Labor Statistics' report showed employment fell in construction, manufacturing, and wholesale trade, while temporary help services and healthcare added jobs. Treasuries are mixed, after paring gains that followed the release.

Although the report did produce the first increase in jobs in almost two years as some on the Street had expected, the December data is offsetting any enthusiasm that may have arose from the November reading. However, as one month's worth of data should not be given too much weight, there are some potential leading indicators that remain intact and continue to point to the continuation of the trend of improving employment conditions, illustrated by the favorable trends in weekly initial jobless claims and the improvements noted in the employment components in ISM Manufacturing and Non-Manufacturing reports. Also, Friday's report noted that monthly job losses had "moderated substantially" in 2009, as employment losses in 1Q averaged 691,000 per month, compared with an average loss of 69,000 per month in 4Q. Moreover, the continued increase in average hourly earnings-which have risen 2.2% in the past 12 months-suggests that income for workers continues to tick higher and could lend some support to consumer spending. Meanwhile, the continued increase in temporary help-which gained 47,000 and is up 166,000 since reaching a low point in July-suggests demand for workers may be heating up as employers will likely first make adjustments to their workforce by adding temporary positions.

In other economic news, wholesale inventories unexpectedly rose, gaining 1.5% in November, versus the Bloomberg consensus, which called for a 0.3% decline, and October’s 0.3% increase was revised to a 0.6% advance. Petroleum inventories jumped 7%, computer equipment increased 2.2% and professional equipment gained 1.3%. Sales jumped 3.3%-the eighth-consecutive monthly increase-bringing the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-down to 1.14 months from 1.17.

Late Friday, a report from the Federal Reserve showed that US borrowers reduced consumer credit for the tenth-consecutive month in November, the longest streak of declines since record-keeping began in 1943. Total consumer debt outstanding was reduced by a record $17.5 billion, versus the $5 billion expected, and data for October was revised from the previously announced drop of $3.51 billion to $4.2 billion. Within the report, revolving debt, such as credit cards, accounted for a majority of the drop, falling $13.7 billion, while debt such as auto and mobile-home loans fell by $3.8 billion. The Fed's report doesn't cover lending secured by residential real estate.

Treasuries were mixed after moving to the upside early in the day. The yield on the 2-year note fell 6 bps to 0.96%, the yield on the 10-year note decreased by 1 bp to 3.82%, while the yield on the 30-year bond gained 2 bps to 4.71%.

Eurozone Employment Figures Highlight International Economic News

A plethora of international economic data was released today, including the unexpected deterioration in the employment report out the US. Employment data out of the Eurozone was also in focus as the unemployment rate rose to 10% in November, from 9.9% in October, reaching the highest level in more than 11 years. Economists surveyed by Bloomberg expected the jobless rate to come in at 9.9%. Reports out of Germany-Europe's largest economy-also made up the economic calendar across the pond, headlined by a report that showed industrial production increased 0.7% month-over-month (m/m) in November, versus October's 1.7% decline, but short of the consensus forecast, which called for output to increase 1.0%. Other reports out of Germany included a larger-than-expected positive trade surplus, with exports rising more than forecasted.. In other economic news, producer prices in the UK rose more that double the forecasts of economists. Rounding out the busy economic day, the final revision to Eurozone GDP was left unchanged at a 0.4% quarter-over-quarter (q/q) gain for 3Q, as expected, and the y/y rate was revised slightly better, to a 4.0% contraction, versus the previous reading of a 4.1% decline.

New Year brings cheer, but temperament too

Despite a solid start to the first week of the New Year, courtesy of the fifth-consecutive monthly increase in the US ISM Manufacturing Index in December, to 55.9, and the companion ISM Non-Manufacturing Index moving back into expansionary territory, "resiliency" was the word of the week for stocks, as markets had to rebound from other economic news that disappointed in order to keep its footing. Pending home sales for November surprised to the downside, with contracts to buy previously-owned homes falling 16.0%, worse than the expectation of a fall of 2.0%, and the much-anticipated labor report for December showed that nonfarm payrolls disappointed, however November's figure was favorably revised to the first positive reading since December 2007, helping to temper sentiment and aid in the market’s buoyancy.

The minutes from the December 15-16 Federal Open Market Committee (FOMC) meeting were released Wednesday, where the size and timing for the end of asset purchase programs were debated despite the affirmation of the end in March, and participants were still split over the medium-term outlook for inflation and the ability for the economy to generate a self-sustaining recovery without government support. While reaffirming the timing for the end of asset purchase programs, some participants said it might be desirable to provide more policy stimulus in the future by expanding the scale and timing beyond the end of March, if the economic outlook were to weaken or if mortgage market functioning deteriorated, while one person felt the program could end now. The Fed also said that low rates of resource utilization (a combination of factory utilization and the unemployment rate), subdued inflation trends and stable inflation expectations warranted "exceptionally low levels" of the federal funds rate for an "extended period."

Retailers were also in focus as a number of the nation's largest, namely Target (TGT $50), Costco Wholesale (COST $59), Macy's Inc. (M $17), Kohl’s (KSS $53), JC Penney (JCP $26) and Nordstrom (JWN $38), posted better-than-expected same-store sales-sales of stores open at least one year-during the month of December, the latter part of the critical holiday shopping season. However, gaming retailer GameStop (GME $20) said economic weakness, adverse weather, and product shortages negatively impacted sales during the period and it adjusted 4Q and full-year guidance downward, accordingly.

Elsewhere, the ongoing drama of Kraft Foods Inc.'s (KFT $29) hostile bid for UK confectioner Cadbury PLC (CBY $50) took another turn as Nestle SA (NSRGY $50) agreed to buy the North American pizza business from Kraft for $3.7 billion, putting itself out of bidding for Cadbury, while giving Kraft the necessary funds from the proceeds of the sale to raise the cash component of its offer. However, adding to the theatre, Berkshire Hathaway (BRK/A $99,950), Kraft's top shareholder at 9%, decided to vote against the food firm's proposal to issue new shares to fund the potential acquisition.

Another full slate of economic reports on tap

Next week will bring another full dose of economic reports for traders to digest in their quest to determine if the economy is healthy enough for the Fed to begin to withdraw stimulus efforts and whether enough cogs are in place for the economy continue down the recovery path when these "training wheels" come off. Key reports on inflation, manufacturing, and the consumer will highlight the economic calendar.

Thursday and Friday will bring the releases of the Import Price Index and Consumer Price Index, respectively, with import prices forecasted to decline 0.1%, while prices at the consumer level are forecasted to remain subdued, rising 0.2% on a headline level and 0.1% at the core rate-excluding food & energy. Inflation has not shown any meaningful signs of becoming a threat to the price pressure side of the Federal Reserve's dual mandate, which has given them wiggle room to fight the promoting full employment side of its dual mandate and allowing them to keep the fed funds rate at "exceptionally low" levels for an "extended period."

Manufacturing will be in focus on Friday, with the releases of the Empire Manufacturing Index, expected to improve from 2.55 in December to 11.00 in January, along with industrial production and capacity utilization, with production forecast to increase 0.6% for December after November's respectable gain of 0.8%, while utilization is expected come in at 71.7%, remaining almost 10 percentage points below historical average.

However, the keynote report next week will likely be Thursday's report of advance retail sales for the pivotal month of December for the sector. Sales are forecast to rise 0.4% and excluding autos, sales are expected to increase 0.3%. These projected advances will come on the heels of November's much stronger-than-expected report, which showed sales more than doubled economists estimates on a headline level, while stripping out the more volatile component of auto, sales tripled the Street’s forecast. Based on this week’s generally better-than-expected reports in the sector as traffic in stores for the month was strong and internet sales soared, the report could help confirm that the consumer caught the shopping spirit and could be poised to contribute further to the economic recovery.

Other reports on next week's US economic calendar that deserve a mention include the trade balance on Tuesday, MBA mortgage applications on Wednesday, weekly initial jobless claims and business inventories on Thursday, with the preliminary University of Michigan Consumer Sentiment Index rounding out the day on Friday.

The international economic calendar will also yield some key reports, including industrial production out of France, Italy and the UK, Japanese machine orders, new yuan loans out China, the employment change in Australia, and inflation out of Germany and the Eurozone, as well as the trade balance out of the Eurozone. The European Central Bank will also announce its monetary policy decision, expected to keep its benchmark lending rate at 1.0%.